What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-10-29 compared with 2021-07-30 · 151 added, 143 removed, 413 unchanged (42% of the section changed)

1 unchanged sentence

Overview and Outlook

Housing market conditions in the second quarter of 2021 remained strong, driven by the demand created by continuing low interest rates, a limited supply of available homes, and an increased desire for healthier, safer homes with indoor space to accommodate work and school from home needs.

We believe the needs of both the millennial and baby boomer generations support a continued elevated level of demand over the next several years, although individual market results will vary in response to each respective market's economic factors but will likely taper to a normalized pace in the near term.

Our strategy to provide buyers with affordable, quick move-in ready homes has positioned us to take full advantage of the current market, resulting in the highest second quarter closing volume and the highest quarterly home closing gross margin in the Company's history.

In addition to our strong growth in closings and profitability during the second quarter of 2021, we made notable progress on our goals for community count growth.

As of June 30, 2021, we had 226 active communities, up from 203 at March 31, 2021, although down from June 30, 2020 due to the sustained accelerated orders pace throughout 2020 and into 2021.

Ongoing pandemic-related supply chain disruptions combined with over a year of sustained demand have resulted in some production constraints for the homebuilding industry.

As a result of these constraints, we experienced construction cycle delays of approximately four weeks from our typical construction cycle times during the current quarter, which impacted both orders and closings.

We were able to successfully navigate these supply-chain challenges by working with our long-term trade partners to minimize the impact on our production, where possible, and were able to close 3,273 homes, our highest second quarter closing volume in history, while also seeing an increase in our average absorption pace year-over-year, even as we metered the number of homes available for sale to align with the current production constraints.

The housing market remained solid during the third quarter of 2021 as it continues to benefit from still low interest rates, a limited supply of available homes, and ongoing demand, particularly with the millennial and baby boomer generations who are experiencing life events that align with a change in home ownership.

We believe that these underlying economic and demographic factors will continue in the near to mid-term, but will likely taper to a normalized pace over time.

Our operating model to provide buyers with affordable, healthy, and quick move-in ready homes has positioned us to take full advantage of the current market, resulting in the highest third quarter closing volume and the highest quarterly home closing gross margin in the Company's history.

In addition to our strong growth in closings and profitability during the third quarter of 2021, we continued to make progress on our goals for community count growth.

As of September 30, 2021, we had 236 active communities, up both sequentially and year-over-year from 226 at June 30, 2021, and 204 at September 30, 2020.

We were able to close 3,112 homes in the third quarter of 2021 despite supply chain constraints that impacted our production.

Through long-cultivated relationships with our national and local partners, we were able to navigate the current limitations and expect to continue to utilize our spec-heavy, limited SKU operating model to manage the continuing supply chain concerns that are expected to last into 2022.

We metered the number of homes available for sale to align with the current production constraints, causing our average absorption pace to decrease year-over-year during the third quarter, although it remains strong compared to historical trends.

Summary Company Results

Total home closing revenue was $1.3 billion on 3,273 homes closed for the three months ended June 30, 2021 compared to $1.0 billion on 2,770 homes closed for the second quarter of 2020, 22.6% and 18.2% increases, respectively.

In addition to higher home closing revenue, we achieved our highest home closing gross margin in Company history of 27.3%, a 590 basis point increase year-over-year that resulted in a $124.6 million increase in home closing gross profit to $345.3 million compared to $220.7 million in the second quarter of 2020.

This improvement was due to pricing power from strong buyer demand, combined with leverage of overhead costs on higher volumes, which have more than offset the impact of rising material costs, particularly lumber.

As a result of rising sales prices, our consolidated average sales price ("ASP") on home closings is up 3.8% year-over-year, despite our shift in product mix toward entry-level homes.

Total home closing revenue was $1.3 billion on 3,112 homes closed for the three months ended September 30, 2021 compared to $1.1 billion on 3,004 homes closed for the third quarter of 2020, increases of 10.4% and 3.6%, respectively.

In addition to higher home closing revenue, we achieved our highest home closing gross margin in Company history of 29.7%, an 820 basis point increase year-over-year that contributed to a $128.1 million increase in home closing gross profit to $371.7 million compared to $243.6 million in the third quarter of 2020.

This improvement was due to pricing power from strong buyer demand and leveraging of our fixed costs on higher home closing volumes, more than offsetting higher lumber costs and other rising commodity costs.

General and administrative expenses were $47.2 million in the three months ended September 30, 2021, a $6.5 million increase from $40.7 million during the third quarter of 2020, driven by higher performance related compensation expenses and a higher employee headcount.

Earnings before income taxes improved by $126.2 million year-over-year to $261.7 million for the third quarter of 2021.

These improved year-over-year results combined with our higher effective income tax rate of 23.3% as compared to 19.5% in the prior year period led to net earnings of $200.8 million in the third quarter of 2021 versus $109.1 million in the third quarter of 2020.

The higher effective tax rate in the third quarter of 2021 reflects increased profit in states with higher tax rates and the reduced benefit of federal energy efficient home tax credits on higher net earnings before income taxes.

For the nine months ended September 30, 2021, home closing revenue was $3.6 billion on 9,275 homes closed, 17.7% and 14.6% increases over 2020, respectively.

Year-to-date results reflect an increase of $341.0 million in home closing gross profit versus the nine months ended September 30, 2020.

Interest expense decreased year-over-year by $1.9 million as we benefited from lower interest rates as a result of our debt refinancing in April 2021.

As a result of this refinancing transaction, we recognized an $18.2 million loss on early extinguishment of debt (see Note 6 in the accompanying unaudited financial statements for additional information).

Earnings before income taxes improved by $99.8 million year-over-year to $215.7 million for the second quarter of 2021.

These improved year-over-year results combined with our effective income tax rate of 22.4% as compared to 21.7% in the prior year period led to net earnings of $167.4 million in the second quarter of 2021 versus $90.7 million in the second quarter of 2020.

For the six months ended June 30, 2021, home closing revenue was $2.3 billion on 6,163 homes closed, 22.0% and 21.2% increases over 2020, respectively.

Similar to the second quarter, year-to-date results reflect an increase of $212.9 million in home closing gross profit versus the six months ended June 30, 2020.

Higher gross profit and lower interest expense were partially offset by the loss on early extinguishment of debt and a slightly higher effective tax rate of 21.6%, leading to net income of $299.2 million for the six months ended June 30, 2021 compared to $161.8 million for the 2020 period.

Order volume declined slightly by 1.5% in the three months ended June 30, 2021 compared to the same period in 2020, due to 10.3% fewer active communities open for sales, which was almost fully offset by an increase in per community orders pace of 5.5 in the second quarter 2021 compared to 5.0 in the second quarter 2020.

Due to an 18.0% increase in ASP, order value increased $209.2 million, or 16.2%.

Our order cancellation rate dropped to 8% for the second quarter of 2021 compared to 15% for the prior year period.

For the six months ended June 30, 2021, home orders and home order value increased 4.5% and 15.3%, respectively, over the prior year, and our order cancellation rate dropped to 9% compared to 14% for the prior year period.

We ended the second quarter of 2021 with 5,509 homes in backlog valued at $2.3 billion, a 25.3% increase in units and a 40.6% increase in value over June 30, 2020.

In connection with this refinancing transaction, we recognized an $18.2 million loss on early extinguishment of debt (see Note 6 in the accompanying unaudited financial statements for additional information).

Higher pre-tax income was reduced by an effective tax rate of 22.3%, leading to net income of $500.0 million for the nine months ended September 30, 2021 compared to $270.9 million for the 2020 period.

Order volume declined 10.6% in the three months ended September 30, 2021 compared to the same period in 2020, as a result of metering our orders to align with production and a slight return of traditional seasonality.

The third quarter of 2021 orders pace remained elevated at 5.0 per month, down from 5.8 in the third quarter of 2020, which represented the highest third quarter pace in Company history.

This was partially offset by a 4.8% increase in average active communities over the prior year comparable period.

Order value remained flat as a 12.0% increase in average sales price ("ASP") offset the volume decrease.

We were able to open 40 communities during the third quarter of 2021 despite delays in permitting, zoning and entitlement as well as land supply chain constraints.

Our order cancellation rate dropped to 10% for the third quarter of 2021 compared to 13% for the prior year period.

For the nine months ended September 30, 2021, home order volume decreased 1.0% while home order value increased 9.6% over the prior year, and our order cancellation rate dropped to 10% compared to 14% for the prior year period.

We ended the third quarter of 2021 with 5,838 homes in backlog valued at $2.6 billion, an 11.4% increase in units and a 27.5% increase in value over September 30, 2020.

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.

We believe that our ongoing investments in new communities designed for the first-time and first move-up homebuyer, our commitment to an all-spec strategy for our entry-level homes, our simplified first move-up design studio process, 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:

2 unchanged sentences

Studio M streamlines the option selection process for move-up buyers, while 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;

• Leveraging and expanding on technological solutions through 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, and online scheduling for in-person model home tours and self-guided tours in select locations.

Our website also provides a comprehensive online suite of financial services such as mortgage pre-qualifications, on-demand homeowners’ insurance quotes and a warranty portal for our homeowners to submit and track warranty-related matters;

• Leveraging and expanding on technological solutions through digital offerings.

During the third quarter of 2021, we launched our chat bot, Virtual Assistant Liaison ("VAL"), which provides customers and owners with around-the-clock information and support on our website.

We also offer virtual tours, partial or fully virtual closings in states where such services are permitted, and online scheduling for in-person model home tours and self-guided tours in select locations.

Our website provides a warranty portal for our homeowners to submit and track warranty-related matters and a comprehensive online suite of financial services such as mortgage pre-qualifications and on-demand homeowners’ insurance quotes;

• Increasing homeowner satisfaction by setting industry standards for energy-efficiency and offering healthier homes with enhanced security features.

Every new home we construct meets or exceeds ENERGY STAR ® standards and comes standard with the MERV-13 air filter, one of the most advanced air filtration systems offered today for residential construction, and a multispeed HVAC system, allowing owners to better manage the comfort of their home while reducing their environmental impact and operating costs.

In addition, each of our newly constructed homes includes home automation features through our M.Connected Home™ Automation Suite which includes the Honeywell Pro Series Hub ("the Hub") that allows homeowners to monitor and control key components of their homes, such as Wi-Fi enabled thermostats, garage doors, a video doorbell and smart door locks.

We recently partnered with SafeStreets to provide our homebuyers professional installation of various smart home technologies and connectivity to the Hub, training and expanded security options.

• Simplifying our production process to allow us to more efficiently build our homes and reduce our construction costs, which in turn allows us to competitively price our homes and deliver them on a shortened timeline;

• 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:

• Maintaining a healthy order pace through the use of our consumer and market research to build homes that offer our buyers their desired features and amenities;

Every new home we construct meets or exceeds ENERGY STAR ® standards and comes standard with the MERV-13 air filter and a multispeed HVAC system, allowing owners to better manage the comfort of their home while reducing their environmental impact and operating costs.

• Improving our home closing gross profit by growing closing volume, allowing us to better leverage our overhead;

In order to maintain focus on growing our business, we remain committed to the following long-term objectives:

• Maintaining a healthy orders pace through the use of our consumer and market research to 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;

4 unchanged sentences

• Maximizing returns to our shareholders, most recently through our improved financial performance and share repurchase program;

• 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.

• Promoting a positive environment for our employees through our commitment to foster 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.

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 six months ended June 30, 2021 compared to those disclosed in Item 7.

There have been no significant changes to our critical accounting policies during the nine months ended September 30, 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.

5 unchanged sentences

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 June 30, Quarter over Quarter

Three Months Ended September 30, Quarter over Quarter

2021 2020 Change $ Change %

42 unchanged sentences

Average sales price $ 369.0 $ 348.7 $ 20.3 5.8 %

Six Months Ended June 30, Quarter over Quarter

Nine Months Ended September 30, Quarter over Quarter

2021 2020 Change $ Change %

42 unchanged sentences

Average sales price $ 358.1 $ 357.0 $ 1.1 0.3 %

Three Months Ended June 30, Quarter over Quarter

Three Months Ended September 30, Quarter over Quarter

2021 2020 Change $ Change %

44 unchanged sentences

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.

Six Months Ended June 30, Quarter over Quarter

Nine Months Ended September 30, Quarter over Quarter

2021 2020 Change $ Change %

44 unchanged sentences

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.

Three Months Ended June 30,

Three Months Ended September 30,

Ending Average Ending Average

13 unchanged sentences

East Region Totals 96 91.5 80 85.0

Six Months Ended June 30,

Nine Months Ended September 30,

Ending Average Ending Average

13 unchanged sentences

East Region Totals 96 83.9 80 88.4

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

14 unchanged sentences

(1) Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.

At June 30, Quarter over Quarter

At September 30, Quarter over Quarter

2021 2020 Change $ Change %

45 unchanged sentences

Companywide .

In the second quarter of 2021, we achieved our highest second quarter home closing volume in Company history, with an 18.2% improvement over the second quarter of 2020, to 3,273 closings valued at $1.3 billion compared to 2,770 closings valued at $1.0 billion.

The increase in closings year-over-year was driven by entering the quarter with a higher backlog as compared to prior year, as well as an accelerated orders pace of spec homes during the quarter that were able to close by June 30, 2021.

Home closing revenue increased by 22.6% over the second quarter of 2020 due to the higher closing volume and a 3.8% increase in ASP.

Home order volume declined slightly by 1.5% to 3,542 homes as compared to 3,597 homes in the second quarter of 2020, due to a 10.3% decrease in average active communities that was partially offset by an increased orders pace.

Higher ASP on orders as we continue to experience pricing power drove a 16.2% increase in order value to $1.5 billion in the second quarter of 2021, up from $1.3 billion in the second quarter of 2020.

Orders pace improved by 9.3% year-over-year to 5.5 homes ordered per average active community per month during the second quarter of 2021, up from 5.0 homes in the second quarter of 2020.

This increase demonstrates the continuing demand for homes in the current market.

Our focus on entry level and first move-up buyers, with our entry-level communities offering only spec homes for sale and shorter construction cycle times than other higher-end product, allows for quicker move-ins for our customers, increasing the desirability of our products, as reflected in our higher orders and closing volumes.

Although community count is down 4.6% year-over-year due to sustained high orders pace over the last 12 months, community count grew sequentially, ending the second quarter with 226 actively selling communities at June 30, 2021, up from 203 at March 31, 2021.

Our order cancellation rate improved to 8% and 9% for the three and six month periods in 2021, respectively, as compared to 15% and 14% during the three and six month periods in 2020, respectively, a further indication of strong demand in the market.

For the six months ended June 30, 2021, home closing volume grew by 1,077 units, or 21.2%, and home closing revenue improved by $422.6 million on 6,163 closings valued at $2.3 billion.

Orders also increased year-over-year by 301 units and $0.4 billion to 7,000 orders valued at $2.8 billion for the six months ended June 30, 2021, 4.5% and 15.3% higher, respectively from prior year results.

Demand for our affordable entry-level homes drove the increase in orders, resulting in a 20.8% higher orders pace than in 2020.

We ended the quarter with 5,509 homes in backlog valued at $2.3 billion, compared to 4,395 units valued at $1.6 billion at June 30, 2020.

The year-over-year increase in backlog value was positively impacted by rising ASP on orders as discussed above.

The West Region closed 944 homes and generated $439.2 million in home closing revenue in the second quarter of 2021, compared to 858 homes and $381.8 million in home closing revenue in the comparable 2020 period.

Order volume decreased 10.1% to 1,149 homes in the second quarter of 2021 compared to 1,278 in 2020, due almost entirely to the 9.7% decline in average active community count.

Strong demand and pricing power resulted in a 22.1% increase in ASP and contributed to the overall 9.8% higher order value in the second quarter of 2021 of $578.2 million, up from $526.5 million in the 2020 period.

Orders pace was consistent year-over-year at 5.5 homes per average community per month during both the three months ended June 30, 2021 and 2020.

As discussed previously, the year-over-year drop in community count is due to the accelerated close-out of communities in 2020.

The West Region ended the second quarter of 2021 with 2,045 homes in backlog valued at $954.7 million, up from 1,540 units valued at $650.2 million at June 30, 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 supply chain constraints.

Year-to-date results in the West Region were similar to those of the second quarter.

The number and value of homes closed versus prior year increased by 5.6% and 9.6%, respectively, and ASP increased 3.9%.

Order volumes for the Region declined 8.0% year-to-date, due to a 12.9% decline in the average number of actively selling communities, partially offset by a 5.4% year-to-date orders pace improvement.

Order value was positively impacted by a 12.0% increase in ASP, which resulted in 2.9% higher order value for the six months ended June 30, 2021.

In the second quarter of 2021, the Central Region, made up of our Texas markets, closed 1,154 homes and generated $403.8 million in home closing revenue, up 26.3% and 36.4%, respectively, from prior year comparable period results of 914 homes and $296.0 million of home closing revenue.

Order volume declined 9.4% due to a 15.8% decrease in average community count, offset by an increase in orders pace of 7.8%.

Despite the lower volume, order value increased 9.1% to $428.4 million in the second quarter of 2021, compared to $392.5 million in the prior year quarter, due to pricing power that drove ASP up by 20.5% in the Region.

We also experienced improvements in the Region for the six months ended June 30, 2021.

Home closings and home closing revenue were up 25.4% and 30.9%, respectively.

Order value and ASP on orders was up 11.5% and 14.5%, respectively, year-over-year.

Similar to the second quarter, order volume decreased 2.6% due to a lower average active community count, mostly offset by increased orders pace.

In the third quarter of 2021, we achieved our highest third quarter home closing volume and revenue in Company history, providing a 3.6% improvement in units over the third quarter of 2020, with 3,112 closings valued at $1.3 billion compared to 3,004 closings valued at $1.1 billion in the prior year.

This increase in closing volume was attributable to entering the quarter with a higher backlog as compared to prior year, despite a lower backlog conversion rate.

Home closing revenue increased by 10.4% over the third quarter of 2020 due to the higher closing volume combined with a 6.6% increase in ASP.

Home order volume declined by 10.6% to 3,441 homes as compared to 3,851 homes in the third quarter of 2020, due to a 14.9% decrease in orders pace that was partially offset by a 4.8% increase in average active communities.

We metered the number of homes available for sale during the third quarter of 2021 to align with our starts and the current production constraints.

Orders pace was still strong at 5.0 homes ordered per average active community per month during the third quarter of 2021, but down from the Company's all time third quarter high of 5.8 homes in 2020.

Home order value of $1.5 billion was flat compared to the third quarter of 2020, as the decrease in order volume was entirely offset by a 12.0% increase in ASP on orders.

This increase in ASP demonstrates the continuing market demand for homes, providing us pricing power.

Our focus on first-time and first move-up buyers, with our entry-level communities offering only spec homes for sale, allows for quicker move-ins for our customers, increasing the desirability of our products.

Community count increased 15.7% year-over-year, ending the third quarter with 236 actively selling communities at September 30, 2021, up from 204 at September 30, 2021.

Our order cancellation rate improved to 10% for both the three and nine month periods in 2021, as compared to 13% and 14% during the three and nine month periods in 2020, respectively, a further indication of strong demand in the market.

For the nine months ended September 30, 2021, home closing volume grew by 1,185 units, or 14.6%, and home closing revenue improved by $540.8 million on 9,275 closings valued at $3.6 billion.

Order volume for the nine months ended September 30, 2021 decreased 1.0% year-over-year, to 10,441 orders, while value increased 9.6%, to $4.3 billion for the nine months ended September 30, 2021.

Demand for our affordable entry-level homes has provided us with pricing power, resulting in a 10.7% increase in ASP on orders for the nine months ended September 30, 2021.

We ended the quarter with 5,838 homes in backlog valued at $2.6 billion, compared to 5,242 units valued at $2.0 billion at September 30, 2020.

Despite the decrease in order volume, backlog units and backlog value increased year-over-year from the impacts of rising ASP on orders and cycle time delays.

The West Region closed 971 homes and generated $451.6 million in home closing revenue in the third quarter of 2021, up from 944 homes and $434.3 million in home closing revenue in the comparable 2020 period.

Order volume decreased 23.5% to 1,076 homes in the third quarter of 2021 compared to 1,407 in 2020, most notably in California, due in part to a 20.8% decrease in average active communities.

Strong demand and pricing power resulted in a 15.1% increase in ASP on orders and helped to partially offset the decreased volumes, resulting in a net 12.0% decrease in order value in the third quarter of 2021 to $570.9 million, down from $648.8 million in the 2020 period.

Orders pace declined year-over-year to 4.9 homes per average community per month during the three months ended September 30, 2021 compared to 6.5 homes in the same period of 2020.

As discussed previously, the year-over-year decline in orders pace is due mainly to metering of homes available for sale in order to keep pace with production cycle times.

Year-to-date results in the West Region were similar to those of the third quarter.

The number and value of homes closed versus prior year increased by 4.6% and 7.6%, respectively, and ASP improved 2.9%.

Order volumes for the Region declined 13.8% year-to-date, due to a 7.6% decline in the average number of actively selling communities and a 6.7% decline in orders pace.

Order value was 2.8% lower for the nine months ended September 30, 2021, due to the decreased volume partially offset by a 12.7% increase in ASP.

The West Region ended the third quarter of 2021 with 2,150 homes in backlog valued at $1.1 billion, up from 2,003 units valued at $865.0 million at September 30, 2020.

Despite the decrease in order volume, backlog increased year-over-year due to entering the period with a higher backlog and closing delays caused by supply chain constraints.

In the third quarter of 2021, the Central Region, made up of our Texas markets, closed 1,012 homes and generated $383.2 million in home closing revenue, up from the prior year comparable period results of 1,059 homes and $349.9 million of home closing revenue.

The 9.5% increase in revenue was due entirely to the 14.6% increase in ASP, as closing volume decreased 4.4% year-over-year.

Order volume declined 9.6% due to a 13.8% decrease in orders pace, partially offset by an increase in average active community count of 4.8%.

Despite the lower volume, order value increased 8.2% to $427.7 million in the third quarter of 2021, compared to $395.5 million in the prior year quarter, due to pricing power that drove ASP up by 19.6% in the Region.

The Central Region experienced improvements in home closings and home closing revenues for the nine months ended September 30, 2021, which were up 13.9% and 22.6%, respectively.

Order volume decreased 4.9% due to a lower average active community count, offset by increased orders pace.

Order value and ASP on orders improved 10.4% and 16.1%, respectively, year-over-year.

The Region ended the quarter with 1,787 units in backlog, up 1.6%, and backlog value of $715.2 million, up 18.7% compared to the prior year.

During the three months ended June 30, 2021, the East Region delivered 1,175 closings and $421.6 million in home closing revenue compared to 998 closings and $353.8 million in home closing revenue in the comparable prior year period, improvements of 17.7% and 19.2%, respectively.

The East Region also generated an increase in order volume in the second quarter of 2021, with an improvement in both volume and value of 17.0% and 32.8%, respectively, with 1,292 units valued at $493.1 million compared to 1,104 units valued at $371.4 million in the prior year period.

The improvement in orders reflected a 25.0% increase in orders pace per community which more than offset the 6.2% decrease in average active communities, while the improvement in order value benefited from both the increase in volume as well as a 13.5% higher ASP.

The year-to-date results of the East Region were similar to those of the second quarter, with 32.8% and 29.3% improvements in home closing volume and revenue, respectively, compared to 2020, providing 2,240 closings and $789.8 million in home closing revenue for the six month period ending June 30, 2021.

The number and value of orders improved by 27.2% and 37.5%, respectively, due to a 47.3% increase in orders pace for the six months ended June 30, 2021 compared to prior year, which more than offset the 13.5% decrease in average active communities.

The East Region ended the quarter with 1,735 homes in backlog valued at $692.3 million compared to 1,221 homes valued at $441.5 million at June 30, 2020, a 42.1% increase in units and 56.8% in order value from strong demand and pricing power.

Land Closing Revenue and Gross (Loss)/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 the specific geography.

As a result of such sales, we recognized land closing revenue of $13.0 million and $1.5 million for the three months ending June 30, 2021 and 2020, respectively, and losses of $0.3 million and $1.4 for the second quarter of 2021 and 2020, respectively.

Year-to-date land sales resulted in a profit of $0.2 million for the six months ended June 30, 2021 and a loss of $1.1 million loss in the prior year.

During the three months ended September 30, 2021, the East Region delivered 1,129 closings and $416.6 million in home closing revenue compared to 1,001 closings and $349.0 million in home closing revenue in the comparable prior year period, improvements of 12.8% and 19.4%, respectively.

The East Region was the only region in the Company to generate an increase in order volume in the third quarter of 2021, with an improvement in both volume and value of 2.7% and 10.4%, respectively, reporting 1,295 units valued at $490.3 million compared to 1,261 units valued at $444.2 million in the prior year period.

The higher orders reflect a 7.6% increase in average active communities, which offset the 4.1% decrease in orders pace, while the improvement in order value benefited from both the increase in volume as well as the 7.5% higher ASP.

The year-to-date results of the East Region were similar to those of the third quarter, with 25.3% and 25.7% improvements in home closing volume and revenue, respectively, compared to 2020, providing 3,369 closings and $1.2 billion in home closing revenue for the nine month period ending September 30, 2021.

The number and value of orders rose by 17.8% and 27.0%, respectively, due to a 24.2% increase in orders pace for the nine months ended September 30, 2021 compared to prior year, which more than offset the 5.1% decrease in average active communities.

The East Region ended the quarter with 1,901 homes in backlog valued at $766.1 million compared to 1,481 homes valued at $537.2 million at September 30, 2020, a 28.4% increase in units and 42.6% in order value from strong demand and pricing power.

Land Closing Revenue and Gross Profit/(Loss)

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 development or home construction or where we are looking to diversify our land positions in the specific geography.

As a result of such sales, we recognized land closing revenue of $8.5 million and $4.9 million for the three months ending September 30, 2021 and 2020, respectively, and profit of $0.8 million and $0.5 for the third quarter of 2021 and 2020, respectively.

Year-to-date land sales resulted in a profit of $1.0 million for the nine months ended September 30, 2021 and a loss of $0.6 million loss in the prior year.

Other Operating Information (dollars in thousands)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

8 unchanged sentences

Companywide .

Home closing gross margin for the second quarter of 2021 improved 590 basis points to our highest quarterly home closing gross margin in company history of 27.3%, compared to 21.4% in the second quarter of 2020.

The higher margin combined with higher revenue contributed to a $124.6 million improvement in home closing gross profit to end the quarter with $345.3 million compared to $220.7 million in 2020.

Gross margin was up 530 basis points to 26.1% versus 20.8% for the six months ended June 30, 2021 and 2020, respectively.

The improved margins in 2021 are due to pricing power from strong buyer demand and leverage of overhead costs on our all-spec strategy for entry-level homes, which have more than offset the impact of rising material costs, particularly lumber.

Margins for the second quarter 2020 were negatively impacted by 30 basis points due to terminated land contract costs for exiting non-core communities, with a charge of $3.3 million compared to $0.6 million of such charges in the 2021 period.

Home closing gross margin for the West Region improved by 500 basis points to 26.0% for the second quarter of 2021 versus 21.0% in the second quarter of 2020.

For the six months ended June 30, 2021, home closing gross margin also improved by 500 basis points to 25.4% versus 20.4% for the same period in the prior year.

The improvements in the West Region's gross margins are due to pricing power from strong market demand and streamlined operations which allowed us to leverage our overhead costs on higher revenue and offset the impact of rising commodity costs.

The Central Region provided the highest home closing gross margin in the Company, which at 29.6% for the second quarter of 2021 was our most notable improvement and was up 670 basis points from 22.9% in the prior year quarter.

Pricing power generated higher ASP combined with higher closing volume which expanded our leverage of overhead costs to improve gross margin.

For the six months ended June 30, 2021, gross margin was up 630 basis points to 28.4% as compared to 22.1% for the same 2020 period.

Home closing gross margin in the East Region was up 590 basis points year-over-year to 26.5% in the second quarter of 2021 versus 20.6% for the comparable 2020 period.

For the six months ended June 30, 2021, gross margin was up 470 basis points to 24.8% versus 20.1% for the same period in the prior year.

The improvement in gross margin for both the three and six months ended June 30, 2021 compared to the respective 2020 periods, is the result of pricing power and greater leverage of overhead costs on higher closing volume.

Home closing gross margin for the third quarter of 2021 improved 820 basis points to our highest quarterly home closing gross margin in Company history of 29.7%, compared to 21.5% in the third quarter of 2020.

The improved margin combined with higher revenue contributed to a $128.1 million improvement in home closing gross profit to end the quarter with $371.7 million compared to $243.6 million in 2020.

Gross margin was up 640 basis points to 27.4% versus 21.0% for the nine months ended September 30, 2021 and 2020, respectively.

The improved margins in 2021 in both the three and nine month periods are due to pricing power from strong buyer demand combined with leverage of fixed costs on greater home closing revenue, which have more than offset the higher lumber prices and increases in other commodity costs.

Home closing gross margin for the West Region improved by 790 basis points to 28.3% for the third quarter of 2021 versus 20.4% in the third quarter of 2020.

For the nine months ended September 30, 2021, home closing gross margin improved by 600 basis points to 26.4% versus 20.4% for the same period in the prior year.

The improvements in the West Region's gross margins are due to pricing power from strong market demand and leverage of fixed costs on higher home closing revenue.

The Central Region provided the highest home closing gross margin in the Company, which at 32.1% for the third quarter of 2021 was up 830 basis points from 23.8% in the prior year quarter.

The improvement in gross margin was due to pricing power that generated the highest ASP increase in the Company of 14.6% combined with leverage of fixed costs and overhead.

For the nine months ended September 30, 2021, gross margin was up 680 basis points to 29.6% as compared to 22.8% for the same 2020 period.

Home closing gross margin in the East Region was up 850 basis points year-over-year, our most notable improvement, at 29.0% in the third quarter of 2021 versus 20.5% for the comparable 2020 period.

For the nine months ended September 30, 2021, gross margin was up 610 basis points to 26.3% versus 20.2% for the same period in the prior year.

Pricing power and leverage of fixed costs on higher closing revenues contributed to improvements in gross margin for both the three and nine months ended September 30, 2021 compared to the respective 2020 periods.

Financial Services Profit (in thousands)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Financial services profit $ 4,224 $ 4,315 $ 12,599 $ 10,942

and Meritage Homes Insurance Agency, Inc., as well as our portion of earnings from our mortgage joint venture.

Financial services profit increased $0.8 million in the second quarter of 2021 to $4.6 million versus $3.8 million in 2020, and by $1.8 million for the six months ended June 30, 2021 to $8.4 million versus $6.6 million for the same period in 2020, due to the year-over-year higher closing volumes.

Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title Agency and Meritage Homes Insurance Agency, as well as our portion of earnings from our mortgage joint venture.

Financial services profit was $4.2 million and $4.3 million for the three months ended September 30, 2021 and 2020, respectively, and $12.6 million and $10.9 million for the nine months ended September 30, 2021 and 2020, respectively.

The nominal decrease in year-over-year third quarter 2021 financial services profit despite an increase in closing volume is largely due to costs attributable to increased employee headcount.

The $1.7 million year-over-year increase in year-to-date financial services profit is commensurate with the year-over-year 14.6% higher closing volumes.

Selling, General and Administrative Expenses and Other Expenses (dollars in thousands)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

9 unchanged sentences

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 $73.9 million for the three months ended June 30, 2021, $3.5 million higher than the prior year comparable period, although as a percentage of home closing revenue, decreased 100 basis points to 5.8% for the second quarter of 2021 compared to the prior year period.

For the six months ended June 30, 2021, commissions and other sales costs decreased 80 basis points and were $10.1 million higher than the corresponding prior year period.

For both the three and six month comparative periods, 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 costs as we continued to leverage more digital technologies and incurred fewer expenses associated with active communities, such as sales office and model home maintenance expenses.

In addition, the second quarter of 2020 commissions and other sales costs was negatively impacted by additional commission incentives that were offered during COVID-19 sales events.

The decline as a percentage of home closing revenue is 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.

At $69.0 million for the three months ended September 30, 2021, these costs decreased $4.3 million compared to the prior year comparable period, and decreased 100 basis points as a percentage of home closing revenue, down to 5.5% versus 6.5%.

For the nine months ended September 30, 2021, commissions and other sales costs decreased 80 basis points and were $5.7 million higher than the corresponding prior year period.

For both the three and nine month comparative periods, the decline as a percentage of home closing revenue is due to greater leverage of fixed expenses on higher closing revenue and cost savings from technology innovations that particularly benefited our sales and marketing efforts and lower external broker commissions.

In addition, the third quarter of 2020 was negatively impacted by increased commission incentives that were temporarily offered during the earlier stages of COVID-19.

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 June 30, 2021, general and administrative expenses were $43.2 million, $7.0 million higher than $36.2 million for the 2020 period, although as a percentage of home closing revenue, decreased by 10 basis points.

For the six months ended June 30, 2021 and 2020, general and administrative expenses were $81.1 million or 3.5% of home closing revenue, as compared to $70.3 million or 3.7% of home closing revenue in 2020.

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.

As COVID-19 restrictions ease, we expect a portion of these costs to gradually return as employees return to the office and resume travel.

We continually strive to optimize overhead leverage through cost control efforts and expect some long-term efficiencies as we start to generate higher revenue from our increased community count in the coming quarters.

For the three months ended September 30, 2021, general and administrative expenses were $47.2 million, compared to $40.7 million for the 2020 period, a $6.5 million increase, due primarily to increased payroll and performance based bonus compensation expenses on higher employee headcount.

For the nine months ended September 30, 2021 and 2020, general and administrative expenses were $128.3 million and $111.1 million, respectively.

As a percentage of home closing revenue, expenses were flat at 3.6% for both periods, as we realized the efforts of our cost control objectives.

We have also continued our restrictions on certain corporate expenditures, particularly as they relate to precautions taken to address ongoing COVID-19 concerns.

As COVID-19 restrictions ease, we expect these costs to gradually return as more employees return to the office and resume travel.

Interest Expense.

Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, other borrowings, and our Credit Facility.

Interest expense for the three and six months ended June 30, 2021 totaled $0.1 million and $0.2 million, respectively, compared to $2.1 million in both the three and six months ended June 30, 2020.

The decrease in both quarter-to-date and year-to-date interest expense is due to lower interest rates on our senior notes, increased capitalization of interest incurred with development and construction activities, and interest charges incurred in the first half of 2020 on our Credit Facility which had $500.0 million outstanding for several weeks during that period.

Interest expense for the three and nine months ended September 30, 2021 totaled $0.1 million and $0.2 million, respectively, compared to $0.1 million and $2.2 million in the three and nine months ended September 30, 2020, respectively.

The decrease in year-to-date interest expense is due to interest charges incurred in the first half of 2020 on our Credit Facility which had $500.0 million outstanding for several weeks during that 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 June 30, 2021, Other income, net was $1.4 million, compared to $1.5 million in the 2020 comparable period.

For the six months ended June 30, 2021, Other income, net was $2.2 million compared to $2.1 million in the 2020 period.

For the three months ended September 30, 2021, Other income, net was $1.3 million, compared to $1.2 million in the 2020 comparable period.

For the nine months ended September 30, 2021, Other income, net was $3.4 million compared to $3.3 million in the 2020 period.

Loss on Early Extinguishment of Debt.

Loss on early extinguishment of debt of $18.2 million for the three and six months ended June 30, 2021 is related to the early redemption of our $300.0 million 7.00% Senior Notes due 2022 during the second quarter of 2021.

There were no similar charges for the three and six months ended June 30, 2020.

Loss on early extinguishment of debt of $18.2 million for the nine months ended September 30, 2021 is related to the early redemption of our $300.0 million 7.00% Senior Notes due 2022 during the second quarter of 2021.

There were no similar charges during the nine months ended September 30, 2020.

See Note 6 in the accompanying unaudited consolidated financial statements for more information related to the early redemption of our Senior Notes due 2022.

Income Taxes.

Our effective tax rate was 22.4% and 21.7% for the three months ended June 30, 2021 and 2020, respectively, and 21.6% and 20.2% for the six months ended June 30, 2021 and 2020, respectively.

The tax rates for the three and six months ended June 30, 2021, reflect credits earned under IRC §45L new energy efficient homes and higher non-deductible senior executive officer stock-based compensation.

The tax rates for the three and six months ended June 30, 2020, reflect credits earned under Internal Revenue Code §45L new energy efficient homes.

Our effective tax rate was 23.3% and 19.5% for the three months ended September 30, 2021 and 2020, respectively, and 22.3% and 19.9% for the nine months ended September 30, 2021 and 2020, respectively.

The higher tax rates for the three and nine months ended September 30, 2021, reflect increased profit in states with higher tax rates and a reduced benefit of the federal energy efficient home credits earned under Internal Revenue Code §45L applied to greater earnings before income taxes.

The tax rates for the three and nine months ended September 30, 2020, reflect credits earned under Internal Revenue Code §45L new energy efficient homes.

Liquidity and Capital Resources

Our principal uses of capital in the first six 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.

Our principal uses of capital in the first nine months of 2021 were acquisition and development of new lot positions, home construction, operating expenses, the payment of routine liabilities, the repayment of senior notes and repurchases of our common stock.

We used funds generated by operations to meet our short-term working capital requirements.

1 unchanged sentence

See Note 6 in the accompanying unaudited consolidated financial statements for more information.

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.

We remain focused long-term on acquiring desirable land positions and maintaining a strong balance sheet to support future needs and growth, while leveraging land options where possible.

Operating Cash Flow Activities

During the six months ended June 30, 2021, net cash used in operating activities totaled $143.5 million versus cash provided by operating activities of $237.4 million during the six months ended June 30, 2020.

During the nine months ended September 30, 2021, net cash used in operating activities totaled $248.7 million versus cash provided by operating activities of $373.1 million during the nine months ended September 30, 2020.

Operating cash flows in 2021 and 2020 benefited from cash generated by net earnings of $500.0 million and $270.9 million, respectively.

For the six months ended June 30, 2021, operating cash flows generated by net earnings were offset by a $469.7 million increase in real estate assets due to our increased home construction land acquisition and development activities.

For the six months ended June 30, 2020, operating cash flows also benefited from an increase in accounts payable and accrued liabilities of $34.8 million due to timing of payments for routine transactions.

For the nine months ended September 30, 2021, operating cash flows generated by net earnings were offset by an $810.7 million increase in real estate assets due to our increased home construction, land acquisition and development activities.

For the nine months ended September 30, 2020, operating cash flows also benefited from an increase in accounts payable and accrued liabilities of $60.0 million due to timing of payments for routine transactions.

Investing Cash Flow Activities

During the six months ended June 30, 2021, net cash used in investing activities totaled $10.7 million as compared to $9.1 million for the same period in 2020.

Cash used in investing activities in the first six months of 2021 and 2020 is mainly attributable to the purchases of property and equipment of $11.0 million and $10.3 million for the 2021 and 2020 periods, respectively.

During the nine months ended September 30, 2021, net cash used in investing activities totaled $17.5 million as compared to $13.2 million for the same period in 2020.

Cash used in investing activities in the first nine months of 2021 and 2020 is mainly attributable to the purchases of property and equipment of $17.9 million and $14.8 million for the 2021 and 2020 periods, respectively.

Financing Cash Flow Activities

During the six months ended June 30, 2021, net cash provided by financing activities totaled $92.9 million as compared to net cash used of $63.2 million for the same period in 2020.

During the nine months ended September 30, 2021, net cash provided by financing activities totaled $82.9 million as compared to net cash used of $69.3 million for the same period in 2020.

The net cash provided by financing activities in 2021 primarily reflects the net proceeds of $450.0 million from the issuance of our 3.875% Senior Notes due 2029, offset by the early redemption of our 7.00% Senior Notes due 2022 of $300.0 million principal and associated early tender fees of $17.7 million, along with share repurchases of $37.0 million.

8 unchanged sentences

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 six months ended June 30, 2021, we closed 6,163 homes, purchased approximately 15,000 lots for $539.3 million, spent $382.0 million on land development and started construction on 7,147 homes.

We are using our cash on hand to fund operations.

During the nine months ended September 30, 2021, we closed 9,275 homes, purchased approximately 24,800 lots for $824.6 million, spent $623.0 million on land development and started construction on 10,554 homes.

We primarily purchase undeveloped land or partially-finished lots requiring development 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 second quarter of 2021 with $684.4 million of cash and cash equivalents, a decrease of $61.2 million from December 31, 2020, with no outstanding borrowings on our Credit Facility.

We ended the third quarter of 2021 with $562.3 million of cash and cash equivalents, a decrease of $183.3 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.

9 unchanged sentences

On November 13, 2020, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program.

On August 12, 2021, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program.

There is no stated expiration for this program.

3 unchanged sentences

The Company intends to retire any shares repurchased.

In the six months ended June 30, 2021, we purchased and retired 300,000 shares of our common stock at an aggregate purchase price of $27.5 million and as of June 30, 2021, $86.8 million remained available under this program.

In the nine months ended September 30, 2021, we purchased and retired 395,461 shares of our

common stock at an aggregate purchase price of $37.0 million and as of September 30, 2021, $177.4 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):

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Senior notes, net, loans payable and other borrowings $ 1,161,195 $ 1,020,085

10 unchanged sentences

17.5 % 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.

(1) Debt-to-capital is computed as senior notes, net and loans payable and other borrowings divided by the aggregate of total senior notes, net, loans payable and other borrowings and stockholders' equity.

(2) Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity.

9 unchanged sentences

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 June 30, 2021.

Our actual financial covenant calculations as of June 30, 2021 are reflected in the table below.

We were in compliance with all Credit Facility covenants as of September 30, 2021.

Our actual financial covenant calculations as of September 30, 2021 are reflected in the table below.

Financial Covenant (dollars in thousands):

15 unchanged sentences

In 2020, historical cycles were impacted by COVID-19 and its impact on consumer behavior, particularly as it relates to the homebuilding market.

However, we expect our historical seasonal pattern to continue over the long term although it may continue to be affected by short-term volatility in the homebuilding industry and in the overall economy.

This impact has continued throughout 2021;

however, we saw some return of seasonality in the third quarter of 2021 and expect our historical seasonal pattern to continue over the long term, although it may continue to be affected by short-term volatility in the homebuilding industry and in the overall economy.

Recent Issued Accounting Pronouncements

See Note 1 to our unaudited consolidated financial statements included in this report for discussion of recently issued accounting pronouncements.

See Note 1 in the accompanying notes to the unaudited consolidated financial statements included in this report for discussion of recently issued accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis