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Item 2. Management’s Discussion and Analysis

2023-04-28 compared with 2022-10-28 · 135 added, 287 removed, 282 unchanged (60% of the section changed)

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Overview and Outlook

The third quarter of 2022 saw a continuation of the housing market deterioration that began in the second quarter, as homebuyers remain concerned about the effects of higher interest rates and future potential interest rate increases, inflation and deterioration in the general economy on their personal financial condition and overall affordability following two years of strong home price appreciation.

Although these economic conditions are applying current downward pressure on the housing market, we believe favorable homebuyer demographics support long-term stable demand, although at a more normalized pace than what was experienced in 2020 and 2021.

We believe our all-spec strategy targeting affordable homes offers our customers readily available inventory which, combined with our financing and other incentives, still provides an attractive opportunity for homeownership.

Disruptions in the supply chain have continued to impact production costs and cycle times in the homebuilding industry as a whole.

We have been successful over the past several quarters in offsetting the higher costs with sales price increases due to the elevated buyer demand, although we have experienced elongated cycle times and more recently, have not been able to offset these cost increases as we previously had.

We continue to carefully navigate this constrained operating environment by expanding our trade base and strengthening critical relationships and expect that over time, with lower, normalized volume in the homebuilding market, costs will begin to decline and cycle times will shorten.

In the first quarter of 2023, housing demand was stronger than anticipated despite ongoing economic uncertainty, the regional banking turmoil and continuing volatility in interest rates.

We saw demand stabilize as we entered the spring selling season as buyers acclimated to the current interest rate environment.

Homebuyers are looking for quick move-in homes, which are increasingly difficult to find as the shortage of readily-available new inventory coupled with extremely limited resale inventory persists, especially in the markets where we operate.

We expect the housing undersupply and favorable demographics to provide a strong long-term runway for future homebuying demand, and believe that our affordable, all-spec strategy with a focus on the largest buying segments of millennials and move-down buyers, provides us the opportunity to capitalize on that demand and continue to grow our market share.

Production costs and cycle times continue to be elevated due to the continuing labor and supply chain issues that first presented themselves in 2020;

however, in the first quarter of 2023 our construction cycle was approximately a week shorter than the same period last year.

We continue to carefully navigate this volatile and constrained operating environment by rebidding all costs with our vendors, expanding our vendor base and strengthening existing critical relationships.

We expect that over time, with lower, normalized volume in the homebuilding market, costs will begin to decline and cycle times will continue to shorten.

Summary Company Results

We achieved our highest quarterly home closing revenue in Company history of $1.6 billion on 3,487 homes closed for the three months ended September 30, 2022, compared to $1.3 billion on 3,112 homes closed for the third quarter of 2021.

This 25.4% increase in home closing revenue year-over-year was driven by the 12.1% higher volume and an 11.9% increase in average sales price ("ASP") on closings.

Third quarter home closing gross margin declined 100 basis points to 28.7%, for home closing gross profit of $450.6 million compared to $371.7 million in the third quarter of 2021.

The margin deterioration is the combined effect of higher direct costs and increased incentives, as well as $8.8 million of charges related to the write-off of option deposits and due diligence costs on cancelled land contracts as we reassessed our land positions in response to weakening demand.

There were only $0.9 million of such charges in the third quarter of 2021.

Commissions and other sales costs increased $8.9 million due to higher home closing revenue, although as a percentage of home closing revenue improved 50 basis points in the three months ended September 30, 2022 as compared to prior year, due to lower commission rates.

General and administrative expenses increased 2.7%, to $48.4 million during the three months ended September 30, 2022, compared to $47.2 million in the prior year quarter, primarily due to higher headcount.

Higher home closing revenue provided leverage on these fixed expenses, and as a result, they improved 70 basis points year over year.

Earnings before income taxes are up $67.8 million, or 25.9%, year over year to $329.5 million for the third quarter of 2022.

The lower effective income tax rate of 20.3% compared to 23.3% in 2021 reflects the catch-up of tax credits for energy efficient homes closed in the first half of 2022 as the Inflation Reduction Act retroactively extended these credits.

The year-over-year improved profitability combined with the lower tax rate resulted in net earnings of $262.5 million in the third quarter of 2022 versus $200.8 million in the third quarter of 2021.

Year-to-date results reflect a $289.4 million increase in home closing gross profit compared to the nine months ended September 30, 2021, and a 270 basis point improvement in home closing gross margin due to higher ASPs on closings and leverage of fixed expenses on higher home closing revenue.

In the first nine months of 2021, we recognized a loss on early extinguishment of debt of $18.2 million in connection with the early redemption of our 2022 Senior Notes in April 2021.

There were no such transactions in the first nine months of 2022.

Higher revenue and gross margin, technology-enabled marketing and commission savings and leverage of higher home closing revenue on fixed expenses combined led to net income of $729.8 million for the nine months ended September 30, 2022 compared to $500.0 million for the 2021 period.

Home orders of 2,310 for the quarter ended September 30, 2022 were 32.9% lower than the same quarter of the prior year, primarily due to an escalated cancellation rate of 30%, compared to 10% in the prior year period, as buyers terminated their existing home purchase contracts due to a variety of reasons, including uncertainty about current economic conditions, changes in personal finances and a shift to resale home inventory due to elongation of cycle times for new homes.

Higher cancellation rates and slowing demand contributed to a 46.0% decline in orders pace to 2.7 per month compared to 5.0 per month in 2021.

Gross orders of 3,291 for the third quarter of 2022 were 14% lower than 2021, indicating stable demand still exists for new

Home order value decreased 34.6% year-over-year, to $1.0 billion during the three months ended September 30, 2022, versus $1.5 billion in the same period of 2021, largely due to the lower volume as well as a 2.5% decrease in ASP on orders due to increased incentives reducing home sale prices and our continuing shift to offer more affordable product.

For the nine months ended September 30, 2022, home order value increased 4.9% due to a 10.1% increase in ASP on home orders, partially offset by a 4.7% decrease in home order volume over the prior year.

For the nine months ended September 30, 2022, the cancellation rate of 16% was up from 10% for the prior year period, stemming primarily from the cancellations in the third quarter, as previously discussed.

We ended the third quarter of 2022 with 6,064 homes in backlog valued at $2.8 billion, a 3.9% increase in units and a 10.6% increase in value over September 30, 2021.

We ended the third quarter of 2022 with 275 active communities, down from 303 at June 30, 2022.

Due to the natural timing of community openings and closings, we expect this to be a temporary drop in our community count.

During the nine months ended September 30, 2022 we purchased approximately 10,000 lots for $378.8 million, spent $794.5 million on land development and started construction on 11,761 homes.

In response to weaker demand, we reassessed our land positions during the third quarter and reduced our lot supply and terminated option contracts for approximately 5,200 lots.

With the current absorption pace and higher incentives environment, we determined these terminated lots did not offer an optimal return.

We achieved our highest first quarter home closing revenue and volume of $1.3 billion on 2,897 homes in the first quarter of 2023, compared to $1.2 billion on 2,858 homes closed for the first quarter of 2022.

The 1.3% increase in home closing revenue year-over-year was driven entirely by the 1.4% higher volume, as average sales price ("ASP") on closings was flat.

First quarter home closing gross margin declined 790 basis points to 22.4%, for home closing gross profit of $282.5 million compared to $377.6 million in the first quarter of 2022.

The margin deterioration is the combined effect of higher direct costs and increased incentives offered in response to the market slowdown that begin in the latter months of 2022.

Commissions and other sales costs of $82.8 million increased $17.3 million due to higher spend on commissions and advertising costs.

General and administrative expenses of $47.5 million in the three months ended March 31, 2023 increased due to severance-related costs and higher spend on technology and insurance, compared to $40.0 million in the prior year quarter.

Earnings before income taxes for the first quarter of 2023 of $165.3 million decreased $120.6 million year over year from $285.9 million in 2022.

The lower effective income tax rate of 20.6% compared to 24.0% in 2022 reflects the benefit from earned eligible energy tax credits on qualifying homes under the Inflation Reduction Act ("IRA") enacted in August 2022.

The decrease in year-over-year profitability partially offset by a lower tax rate, resulted in net earnings of $131.3 million in the first quarter of 2023 versus $217.3 million in the first quarter of 2022.

Home orders of 3,487 for the quarter ended March 31, 2023 were 10.0% lower than the first quarter of 2022, which was our highest quarterly orders volume in Company history.

Order volume declined despite a 4.2% increase in average active communities due to relatively softer demand, resulting in a 14.3% decline in orders pace to 4.2 per month compared to 4.9 per month in 2022.

We exceeded our orders pace target of 3 - 4 homes per month in the first quarter of 2023 due to the availability of move-in ready homes and a combination of price cuts, mortgage interest rate locks and buy downs, and other incentives tailored to the customer expectations in each of our markets.

Our cancellation rate declined to 15% sequentially in the first quarter of 2023 from 39% in the fourth quarter of 2022, returning to a normalized rate.

Home order value decreased 14.8% year-over-year, to $1.5 billion during the three months ended March 31, 2023, versus $1.8 billion in the same period of 2022, due to the lower volume as well as a 5.3% decrease in ASP on orders.

The lower ASP on orders was due to offering increased incentives to alleviate homebuyer concerns of affordability.

We ended the first quarter of 2023 with 3,922 homes in backlog valued at $1.8 billion, a decrease in units and value of 41.4% and 42.0%, respectively, from March 31, 2022.

The decrease in backlog units is due to an 86.9% backlog conversion rate combined with lower order volume in the first quarter of 2023.

We ended the first quarter of 2023 with 278 active communities, up from 268 at March 31, 2022 and up sequentially from 271 at December 31, 2022.

We purchased approximately 2,100 lots for $89.1 million, spent $221.0 million on land development and started construction on 2,462 homes during the three months ended March 31, 2023.

In recognition of our ongoing efforts to improve the energy efficiency of our homes, we were awarded the 2023 ENERGY STAR® Partner of the Year for Sustained Excellence by the Environmental Protection Agency during the first quarter of 2023, making us a ten-time recipient of this award since 2013.

Company Positioning

We believe that the investments in our 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, and industry-leading innovation in energy-efficient product offerings and automation, create a differentiated strategy that has aided us in our growth in the highly competitive new home market.

Our mid-term focus includes the following strategies:

• Maintain our community count and grow market share;

Our focus on growing our community count and market share includes the following strategic initiatives:

• Achieving or maintaining a position of at least 5% market share in all of our markets;

• Delivering affordable homes on a shorter timeline through simplification of production processes and maintaining market-appropriate levels of spec inventory;

• Continuously improving the overall home buying experience through simplification and innovation;

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

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

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

• Leveraging and expanding on technological solutions through digital offerings to our customers, such as our virtual home tours, interactive maps, digital financial services offerings and online warranty portal;

• Increasing homeowner satisfaction by offering healthier, safer homes that come equipped with a suite of energy-efficiency and home automation standard features.

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

• Increasing homeowner satisfaction by offering healthier, energy-efficient homes that come equipped with a suite of home automation standard features.

In addition to these strategic initiatives, we also remain committed to the following:

• Carefully managing our liquidity and a strong balance sheet;

we ended the quarter with a 23.9% debt-to-capital ratio and an 18.9% net debt-to-capital ratio;

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

• Achieving or maintaining a position of at least 5% market share in all of our markets;

we ended the first quarter with a 22.1% debt-to-capital ratio and a 4.5% net debt-to-capital ratio;

• Maximizing returns to our shareholders through improved financial performance, dividend payments and share repurchases;

• Managing construction efficiencies and costs through national and regional vendor relationships with a focus on timely, quality construction and warranty management;

• Promoting a positive environment for our employees through our commitment to foster diversity, equity, and inclusion ("DE&I") and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts;

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

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

• Continuing to innovate and promote our energy efficiency program and our M.Connected ® Automation Suite to create differentiation for the Meritage brand.

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The critical accounting estimates that we deem to involve the most difficult, subjective or complex judgments include valuation of real estate and cost of home closings, warranty reserves and valuation of deferred tax assets.

There have been no significant changes to our critical accounting estimates during the nine months ended September 30, 2022 compared to those disclosed in Item 7.

There have been no significant changes to our critical accounting estimates during the three months ended March 31, 2023 compared to those disclosed in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2022 Annual Report on Form 10-K.

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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 September 30, Quarter over Quarter

2022 2021 Change $ Change %

Home Closing Revenue

Dollars $ 1,569,032 $ 1,251,435 $ 317,597 25.4 %

Homes closed 3,487 3,112 375 12.1 %

Average sales price $ 450.0 $ 402.1 $ 47.9 11.9 %

Dollars $ 254,530 $ 193,847 $ 60,683 31.3 %

Homes closed 599 532 67 12.6 %

Average sales price $ 424.9 $ 364.4 $ 60.5 16.6 %

Dollars $ 236,872 $ 177,623 $ 59,249 33.4 %

Homes closed 321 295 26 8.8 %

Average sales price $ 737.9 $ 602.1 $ 135.8 22.6 %

Dollars $ 98,625 $ 80,149 $ 18,476 23.1 %

Homes closed 166 144 22 15.3 %

Average sales price $ 594.1 $ 556.6 $ 37.5 6.7 %

West Region Totals

Dollars $ 590,027 $ 451,619 $ 138,408 30.6 %

Homes closed 1,086 971 115 11.8 %

Average sales price $ 543.3 $ 465.1 $ 78.2 16.8 %

Central Region - Texas

Central Region Totals

Dollars $ 499,713 $ 383,206 $ 116,507 30.4 %

Homes closed 1,218 1,012 206 20.4 %

Average sales price $ 410.3 $ 378.7 $ 31.6 8.3 %

Dollars $ 166,138 $ 139,642 $ 26,496 19.0 %

Homes closed 426 386 40 10.4 %

Average sales price $ 390.0 $ 361.8 $ 28.2 7.8 %

Dollars $ 53,108 $ 52,004 $ 1,104 2.1 %

Homes closed 117 139 (22) (15.8) %

Average sales price $ 453.9 $ 374.1 $ 79.8 21.3 %

North Carolina

Dollars $ 148,111 $ 145,268 $ 2,843 2.0 %

Homes closed 340 371 (31) (8.4) %

Average sales price $ 435.6 $ 391.6 $ 44.0 11.2 %

South Carolina

Dollars $ 48,777 $ 31,686 $ 17,091 53.9 %

Homes closed 147 92 55 59.8 %

Average sales price $ 331.8 $ 344.4 $ (12.6) (3.7) %

Dollars $ 63,158 $ 48,010 $ 15,148 31.6 %

Homes closed 153 141 12 8.5 %

Average sales price $ 412.8 $ 340.5 $ 72.3 21.2 %

East Region Totals

Dollars $ 479,292 $ 416,610 $ 62,682 15.0 %

Homes closed 1,183 1,129 54 4.8 %

Average sales price $ 405.1 $ 369.0 $ 36.1 9.8 %

Nine Months Ended September 30, Quarter over Quarter

Three Months Ended March 31, Quarter over Quarter

2023 2022 Change $ Change %

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Average sales price $ 394.5 $ 387.3 $ 7.2 1.9 %

Three Months Ended September 30, Quarter over Quarter

2022 2021 Change $ Change %

Home Orders (1)

Dollars $ 974,314 $ 1,488,951 $ (514,637) (34.6) %

Homes ordered 2,310 3,441 (1,131) (32.9) %

Average sales price $ 421.8 $ 432.7 $ (10.9) (2.5) %

Dollars $ 97,462 $ 233,828 $ (136,366) (58.3) %

Homes ordered 232 550 (318) (57.8) %

Average sales price $ 420.1 $ 425.1 $ (5.0) (1.2) %

Dollars $ 122,994 $ 213,859 $ (90,865) (42.5) %

Homes ordered 187 319 (132) (41.4) %

Average sales price $ 657.7 $ 670.4 $ (12.7) (1.9) %

Dollars $ 20,642 $ 123,242 $ (102,600) (83.3) %

Homes ordered 37 207 (170) (82.1) %

Average sales price $ 557.9 $ 595.4 $ (37.5) (6.3) %

West Region Totals

Dollars $ 241,098 $ 570,929 $ (329,831) (57.8) %

Homes ordered 456 1,076 (620) (57.6) %

Average sales price $ 528.7 $ 530.6 $ (1.9) (0.4) %

Central Region - Texas

Central Region Totals

Dollars $ 253,321 $ 427,689 $ (174,368) (40.8) %

Homes ordered 635 1,070 (435) (40.7) %

Average sales price $ 398.9 $ 399.7 $ (0.8) (0.2) %

Dollars $ 214,004 $ 192,479 $ 21,525 11.2 %

Homes ordered 531 534 (3) (0.6) %

Average sales price $ 403.0 $ 360.4 $ 42.6 11.8 %

Dollars $ 71,731 $ 74,766 $ (3,035) (4.1) %

Homes ordered 175 176 (1) (0.6) %

Average sales price $ 409.9 $ 424.8 $ (14.9) (3.5) %

North Carolina

Dollars $ 98,147 $ 140,135 $ (41,988) (30.0) %

Homes ordered 251 347 (96) (27.7) %

Average sales price $ 391.0 $ 403.8 $ (12.8) (3.2) %

South Carolina

Dollars $ 42,728 $ 31,535 $ 11,193 35.5 %

Homes ordered 137 100 37 37.0 %

Average sales price $ 311.9 $ 315.4 $ (3.5) (1.1) %

Dollars $ 53,285 $ 51,418 $ 1,867 3.6 %

Homes ordered 125 138 (13) (9.4) %

Average sales price $ 426.3 $ 372.6 $ 53.7 14.4 %

East Region Totals

Dollars $ 479,895 $ 490,333 $ (10,438) (2.1) %

Homes ordered 1,219 1,295 (76) (5.9) %

Average sales price $ 393.7 $ 378.6 $ 15.1 4.0 %

(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.

Nine Months Ended September 30, Quarter over Quarter

Three Months Ended March 31, Quarter over Quarter

2023 2022 Change $ Change %

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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 September 30,

Ending Average Ending Average

Active Communities

Total 275 289.0 236 231.0

Arizona 52 54.0 38 38.0

California 32 32.0 18 19.0

Colorado 18 18.5 16 16.5

West Region Totals 102 104.5 72 73.5

Central Region - Texas

Central Region Totals 74 77.0 68 66.0

Florida 30 35.5 38 36.0

Georgia 18 16.0 12 11.0

North Carolina 27 29.5 26 26.0

South Carolina 12 14.5 11 9.0

Tennessee 12 12.0 9 9.5

East Region Totals 99 107.5 96 91.5

Nine Months Ended September 30,

Three Months Ended March 31,

Ending Average Ending Average

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East Region Totals 100 98.0 112 110.0

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

2022 2021 2022 2021

Three Months Ended March 31,

Cancellation Rates (1)

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(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 September 30, Quarter over Quarter

At March 31, Quarter over Quarter

2023 2022 Change $ Change %

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Average sales price $ 427.9 $ 415.9 $ 12.0 2.9 %

(1) Our backlog represents net sales that have not closed.

(1) Our backlog represents net home orders that have not closed.

Operating Results

Companywide .

In the third quarter of 2022, we achieved our highest quarterly home closing revenue in Company history, with 3,487 closings valued at $1.6 billion compared to 3,112 closings valued at $1.3 billion in the prior year.

Home closing volume increased 12.1% over the third quarter of 2021 as we entered the quarter with a higher backlog as compared to prior year, a lower backlog conversion rate due primarily to construction delays as well as some home closing delays from Hurricane Ian in our Florida markets.

Home closing revenue improved by 25.4% over the third quarter of 2021 due to the higher closing volume and an 11.9% increase in ASP on closings.

Home order volume declined by 32.9% to 2,310 homes as compared to 3,441 homes in the third quarter of 2021, despite a 25.1% increase in average active communities.

This is a direct result of the 46.0% lower orders pace, dropping to 2.7 per month compared to 5.0 per month in 2021, primarily resulting from a 30% cancellation rate during the quarter ended September 30, 2022.

The spike in cancellations stems largely from homebuyer hesitancy over affordability, cycle times and economic uncertainties.

Gross orders for the third quarter of 2022 were down by 14% from prior year, indicating stable demand is still present for new homes.

Home order value of $1.0 billion declined 34.6% from the third quarter of 2021, due to the decrease in order volume and a 2.5% lower ASP on orders.

The lower ASP on orders reflects higher buyer incentives provided to address the softening demand from affordability concerns and our continuing shift into more affordable product.

Community count increased 16.5% year-over-year, ending the third quarter with 275 actively selling communities at September 30, 2022, up from 236 at September 30, 2021, although down sequentially from 303 at June 30, 2022.

The temporary drop in community count this quarter is due to the natural timing of community openings and closings.

For the nine months ended September 30, 2022, home closing volume grew by 291 units, or 3.1%, and home closing revenue improved by $627.4 million on 9,566 closings valued at $4.2 billion.

Order volume for the nine months ended September 30, 2022 decreased 4.7% year-over-year, to 9,951 orders, while value increased 4.9%, to $4.6 billion for the nine months ended September 30, 2022.

The higher year-to-date order cancellation rate of 16% is due almost entirely to the third quarter cancellations.

Demand in the first half of the year provided us with pricing power, resulting in a 10.1% increase in ASP on orders for the nine months ended September 30, 2022.

We ended the quarter with 6,064 homes in backlog valued at $2.8 billion, compared to 5,838 units valued at $2.6 billion at September 30, 2021.

Despite the decrease in order volume, backlog units increased from the combination of higher backlog entering the quarter and construction cycle delays, and backlog value increased year-over-year from the combined impact of higher units as well as higher ASP on orders.

The West Region generated $590.0 million in home closing revenue on 1,086 homes in the third quarter of 2022, from $451.6 million and 971 homes in the comparable 2021 period.

ASP increases averaging $78,200 accounted for more than half of the year-over-year increase in home closing revenue, with home closing revenue and units improving 30.6% and 11.8%, respectively.

The West Region experienced a 43% cancellation rate, the highest rate in the Company, and ASP's on orders were flat, which directly contributed to order volume and order value decreases of 57.6% and 57.8%, respectively, to 456 homes at $241.1 million in the third quarter of 2022 compared to 1,076 homes and $570.9 million in 2021.

Although the average community count increased 42.2%, orders declined due to a slower orders pace of 1.5 homes per month compared to 4.9 homes in the same period of 2021 primarily from the elevated cancellations.

Buyer hesitancy and construction cycle challenges have been most impactful to date in the West Region, predominantly in Colorado.

Year-to-date results in the West Region were slightly more favorable than those of the third quarter, supported by the strong demand in the first half of 2022.

Home closing revenue and volume versus prior year increased by 19.9% and 3.5%, respectively, and ASP on closings improved 15.8%.

Order volume for the Region declined 19.7% year-to-date, even as the average number of actively selling communities increased 35.8%.

The lower orders are due primarily to a 21% cancellation rate that contributed to a 40.7% reduction in orders pace.

The higher cancellation rate is due largely to the third quarter spike discussed previously.

Order value was 9.1% lower for the nine months ended September 30, 2022 due to the decreased volume, partially offset by a 13.2% increase in ASP.

The West Region ended the third quarter of 2022 with 1,627 homes in backlog valued at $0.9 billion, down from 2,150 units valued at $1.1 billion at September 30, 2021.

In the third quarter of 2022, the Central Region, made up of our Texas markets, closed 1,218 homes and generated $499.7 million in home closing revenue, up from the prior year comparable period results of 1,012 homes and $383.2 million of home closing revenue.

The 30.4% increase in revenue was due to 20.4% higher volume with an 8.3% increase in ASP on closings.

Although average active communities increased 16.7%, order volume declined 40.7% due to a 50.0% decrease in orders pace, predominantly driven by a 37% cancellation rate.

The lower order volume drove a proportionate decrease in order value of 40.8%, to $253.3 million in the third quarter of 2022, from $427.7 million in the prior year quarter, as ASPs were flat.

For the nine months ended September 30, 2022, the Central Region grew home closing revenue 14.9% as pricing power provided improved ASP on closings of 14.5% while closing volume was relatively flat year-over-year.

Average active communities increased 18.9%, but order volume decreased 7.9% due to a 20% cancellation rate that drove down the orders pace to 4.4 per month from 5.7 per month in 2021.

Order value and ASP on orders improved 3.6% and 12.5%, respectively, year-

The Region ended the quarter with 1,766 units in backlog, down 1.2%, while backlog value of $790.2 million was up 10.5% due to an 11.8% increase in ASP, compared to the prior year.

During the three months ended September 30, 2022, the East Region closed 1,183 homes for $479.3 million, compared to 1,129 closings and $416.6 million in home closing revenue in the comparable prior year period, improvements of 4.8% and 15.0%, respectively.

These higher volumes were achieved despite the delayed closing of approximately 150 homes in Florida until the fourth quarter due to the effects of Hurricane Ian.

Home closing revenue benefited from the higher volume and a 9.8% increase in ASP on closings.

In spite of a 17.5% increase in average actively selling communities in the third quarter of 2022, home orders decreased 5.9% to 1,219 units compared to 1,295 units in the prior year period.

Orders in the third quarter of 2022 declined due to an elevated cancellation rate, causing a 19.1% decline in orders pace to 3.8 per month versus 4.7 per month in the prior year.

Home order value of $479.9 million decreased 2.1% from $490.3 million in the third quarter of 2021, as 4.0% higher ASP's partially offset the reduction in volume.

The East Region saw improvements of 5.4% and 17.2% in home closing volume and revenue, respectively, for the nine months ended September 30, 2022 compared to 2021, providing 3,552 closings and $1.4 billion in home closing revenue in 2022.

The East Region was the only Region in the Company with improvements in both year-to-date orders and order value, increasing 10.7% and 21.8%, respectively, as a 29.9% increase in average active communities offset the 13.7% decrease in orders pace for the nine months ended September 30, 2022 compared to prior year.

Due to the increase in orders and the impacts of extended cycle times and delayed closings from the effects of Hurricane Ian, the East Region ended the quarter with 40.5% higher backlog of 2,671 homes in backlog valued at $1.1 billion compared to 1,901 homes valued at $766.1 million at September 30, 2021.

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 home construction or where we are looking to diversify our land positions in a specific geography, particularly with assets that no longer align with our strategy.

As a result of such sales, we recognized land closing revenue of $9.0 million and $8.5 million for the three months ending September 30, 2022 and 2021, respectively, and profit of $0.4 million and $0.8 million for the three months ending September 30, 2022 and 2021, respectively.

Year-to-date land sales resulted in profits of $11.9 million and $1.0 million, respectively, for the nine months ended September 30, 2022 and 2021.

In the first quarter of 2023, we achieved our highest first quarter home closing revenue and volume in Company history of 2,897 closings valued at $1.3 billion, compared to 2,858 closings valued at $1.2 billion in the prior year.

Despite entering the 2023 first quarter with lower backlog than the prior period, home closing volume increased 1.4% over the first quarter of 2022 as we successfully sold and closed a high volume of homes in the same quarter, reflecting our availability of move-in ready inventory.

The increase in volume translated to a 1.3% improvement in home closing revenue, as ASP on closings was flat year-over-year.

Despite a 4.2% increase in average active communities, home order volume declined by 10.0% to 3,487 homes as compared to 3,874 homes in the first quarter of 2022.

Home order value of $1.5 billion declined 14.8% from the first quarter of 2022, due to the decrease in order volume and a 5.3% lower ASP on orders.

The first quarter 2023 orders pace of 4.2 per month exceeded our target orders pace of 3 - 4 homes per month, although down from 4.9 per month in the same period of 2022.

Sequentially from the fourth quarter of 2022, orders pace increased notably in every market and returned to historical levels as homebuyers acclimated to the higher interest rates and we adjusted pricing and offered different types of incentives to find the market clearing price.

Community count increased 3.7% year-over-year, ending the first quarter with 278 actively selling communities at March 31, 2023, up from 268 at March 31, 2022 and also up sequentially from 271 at December 31, 2022.

We plan to return to a community count of 300 by the end of 2023.

The quarter ended with 3,922 homes in backlog valued at $1.8 billion, compared to 6,695 units valued at $3.0 billion at March 31, 2022, due to the lower order volume and a high backlog conversion rate during the first quarter of 2023.

The West Region generated $417.3 million in home closing revenue on 785 homes in the first quarter of 2023, down from $463.4 million and 864 homes in the prior year period.

The 9.1% decrease in volume was the mixed result of declines in Arizona and California, while Colorado grew closing volume.

Colorado was the most impacted by the elevated cancellations in the last half of 2022, but experienced some stabilization in the first quarter of 2023.

Home closing revenue decreased 9.9% due to the lower volume and a 0.9% decrease in ASP on closings.

The West Region had the largest decline in ASP on closings in the Company, as it experienced some of the most significant price increases over the past few years and accordingly has required the steepest sales price adjustments to find the market.

Home orders in the first quarter 2023 of 1,286 increased 16.4% over the prior year, driven entirely by the 19.5% increase in average active communities.

The cancellation rate of 13% in the West Region is a return to historical normal levels, although Colorado continues to be slightly elevated.

ASP on orders declined 10.9% as the West Region adjusted pricing to meet market demand.

The increased volume and lower ASPs resulted in a 3.7% increase in home order value to $635.9 million in the first quarter of 2023, up from $613.3 million in the prior year.

The West Region ended the first quarter of 2023 with 1,373 homes in backlog valued at $676.1 million, down from 2,107 units valued at $1.1 billion at March 31, 2022, due to a lower order volume and a 90.0% backlog conversion rate.

The Central Region, made up of our Texas markets, was the only region to grow both home closing revenue and volume in the first quarter of 2023.

With a 20.0% increase in volume to 1,048 homes, and a 1.8% increase in ASP on closings, home closing revenue grew 22.2% to $424.9 million, up from $347.8 million in 2022.

Despite a 10.1% increase in average active communities, home order volume decreased 17.2% to 1,073 homes in the first quarter of 2023.

The decline is partially due to the Region's slightly elevated cancellation rate of 17%, although sequentially it is down significantly from the fourth quarter 2022 rate of 43%.

The lower demand caused a 24.1% decrease in orders pace to 4.4 homes per month, which is still well above our target pace of 3 to 4 homes.

The lower order volume combined with a 7.4% decrease in ASP on orders drove a decrease in order value of 23.3%, to $420.5 million in the first quarter of 2023, from $548.6 million in the prior year quarter.

The Central Region ended the quarter with 988 units in backlog valued at $419.8 million, down 57.1% and 56.9%, respectively, compared to March 31, 2022.

During the three months ended March 31, 2023, the East Region closed 1,064 homes for $419.7 million, compared to 1,121 closings and $434.2 million in home closing revenue in the comparable prior year period.

The 5.1% decrease in volume was partially offset by a 1.9% increase in ASP on closings, resulting in a 3.3% decrease in home closing revenue.

With 10.9% fewer average active communities and a 15.6% decline in orders pace to 3.8 per month, home orders fell 23.4% to 1,128 in the first quarter of 2023 from 1,473 in the prior year.

The cancellation rate increased to 15% in the first quarter of 2023 from 7% in the first quarter of 2022, but is down significantly sequentially from 31% in the fourth quarter of 2022.

Home order value of $450.4 million decreased 25.6% from $605.8 million in the prior year period due to the decreased volume and a 2.9% reduction in ASPs.

The East Region ended the quarter with 31.7% fewer units in backlog of 1,561 homes in backlog valued at $667.9 million compared to 2,287 homes valued at $951.3 million at March 31, 2022 due to the lower home order volume and a backlog conversion rate of 71.1% during the first quarter of 2023 as the result of a high number of spec homes being sold and closed in the first quarter of 2023.

Land Closing Revenue and Gross Profit

From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in a specific geography or divest of assets that no longer align with our strategy.

As a result of such sales, we recognized land closing revenue of $17.4 million and $41.5 million for the three months ending March 31, 2023 and 2022, respectively, and profit of $1.4 million and $10.8 million for the three months ending March 31, 2023 and 2022, respectively.

Other Operating Information (dollars in thousands)

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

2022 2021 2022 2021

Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue

Three Months Ended March 31,

Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue

Home Closing Gross Profit (1)

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Companywide .

Gross profit for the third quarter of 2022 improved $79.0 million, or 21.2%, due to higher home closing volume.

Home closing gross margin declined 100 basis points to 28.7%, compared to 29.7% in the third quarter of 2021 due to the combined impact of rising direct costs and increased sales incentives.

Additionally, we incurred $8.8 million in charges during the third quarter of 2022 associated with the termination of land purchase agreements for lots that we determined no

longer offer optimal return potential, compared to only $0.9 million of such charges in the third quarter of 2021.

Without these charges, gross margin for the three months ended September 30, 2022 and 2021 would have been 29.3% and 29.8%, respectively.

Year-to-date, gross margin improved 270 basis points to 30.1% versus 27.4% for the nine months ended September 30, 2022 and 2021, as pricing power and leverage of fixed costs on higher home closing revenue more than offset the increased commodity costs earlier in the year.

The West Region home closing gross margin decreased 170 basis points to 26.6% for the third quarter of 2022 versus 28.3% in the third quarter of 2021, primarily due to charges on terminated land purchase agreements as well as increased incentives.

For the nine months ended September 30, 2022, home closing gross margin improved by 280 basis points to 29.2% versus 26.4% for the same period in the prior year.

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

The Central Region provided the highest home closing gross margin in the Company of 30.1%.

The 200 basis point decrease from 32.1% in the prior year quarter resulted from increased sales incentives, higher direct costs and mix shift across the state.

For the nine months ended September 30, 2022, gross margin in the Central Region improved 110 basis points due largely to pricing power earlier this year.

The East Region had the Company's only quarterly gross margin improvement, increasing 90 basis points to 29.9% in the third quarter of 2022 versus 29.0% for the comparable 2021 period.

The improvement in margin for the third quarter of 2022 was attributable to pricing power and mix of homes that have more favorable margins due to lower land costs, partially offset by charges associated with cancelled land contracts and an increase in sales incentives.

For the nine months ended September 30, 2022, gross margin was up 430 basis points to 30.6% versus 26.3% for the same period in the prior year due to leverage of higher home closing revenue on fixed costs and product mix.

Gross profit for the first quarter of 2023 was $282.5 million, with a margin of 22.4%.

This is a 790 basis point decline compared to 30.3% in the first quarter of 2022 resulting from the combined impact of increased sales incentives and continued elevated direct costs, including interest rate locks and buy-downs.

Our use of mortgage rate locks and buy-downs did not begin to impact our home closing gross margins until the back half of 2022.

The West Region delivered home closing gross margin of 17.8% for the first quarter of 2023 versus 31.0% in the first quarter of 2022.

As previously discussed, the West Region experienced steep price appreciation over the past few years, causing significant levels of homebuyer hesitancy when interest rates rose.

To find the market clearing price, the West Region offered significant price cuts and incentives.

These aggressive sales incentives combined with a shift in product mix and the continued elevated direct costs led to the West Region's decline in home closing gross margin year-over-year.

In the first quarter of 2023, the Central Region's home closing gross margin of 24.9% declined 510 basis points from 30.0% in the prior year quarter.

The Central Region's gross margin was negatively impacted by sales incentives that largely began in the second half of 2022, combined with persistent elevated direct costs.

The East Region home closing gross margin of 24.5% in the first quarter of 2023 declined 530 basis points from 29.8% for the comparable 2022 period.

Similar to the other Regions, the home closing gross margin deterioration is due to the increased sales incentives and continued elevated direct costs that have impacted the homebuilding industry nationwide.

Financial Services Profit (in thousands)

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

2022 2021 2022 2021

Three Months Ended March 31,

Financial services profit $ 2,923 $ 3,334

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 was $4.8 million and $4.2 million for the three months ended September 30, 2022 and 2021, respectively, and $12.3 million and $12.6 million for the nine months ended September 30, 2022 and 2021, respectively.

The increase in third quarter 2022 financial services profit compared to 2021 is due to a higher number of closings in the markets where Carefree Title provides title and escrow services.

The decrease in year-to-date financial services profit is primarily due to a change in the mix of financial services closing volume as well as increased overhead expenses due to a higher employee headcount.

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

Financial services profit was $2.9 million and $3.3 million for the three months ended March 31, 2023 and 2022, respectively.

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

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

2022 2021 2022 2021

Three Months Ended March 31,

Commissions and other sales costs $ (82,846) $ (65,540)

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Interest expense $ — $ (41)

Other (expense)/income, net $ (74) $ 1,268 $ (849) $ 3,443

Loss on early extinguishment of debt $ — $ — $ — $ (18,188)

Other income/(expense), net $ 8,844 $ (317)

Provision for income taxes $ (34,002) $ (68,629)

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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.

At $77.9 million for the three months ended September 30, 2022, these costs increased $8.9 million due to higher home closing revenue compared to the prior year.

As a percentage of home closing revenue, these costs improved 50 basis points from the benefit of lower commission rates on home closings in the third quarter of 2022.

For the nine months ended September 30, 2022, commissions and other sales

costs were $2.2 million higher than the corresponding prior year period.

The year-over-year improvement as a percentage of home closing revenue of 90 basis points is due to lower commissions.

These costs increased $17.3 million to $82.8 million in the three months ended March 31, 2023, primarily resulting from higher commissions as well as increased advertising activities, reflecting the current market dynamics.

Commissions and other sales costs were 6.6% of home closing revenue in the first quarter of 2023, up 130 basis points from 5.3% as home closing revenue was relatively flat year-over-year.

General and Administrative Expenses.

General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses.

For the three months ended September 30, 2022, general and administrative expenses were $48.4 million, $1.3 million higher than the 2021 period, due primarily to increased payroll expenses on higher employee headcount and some increased travel costs due to lifting COVID-19 restrictions.

General and administrative expenses as a percentage of home closing revenue improved 70 basis points to 3.1% in the third quarter of 2022 due to leverage of higher home closing revenue on fixed overhead expenses.

For the nine months ended September 30, 2022, general and administrative expenses were $136.4 million, a 6.3% increase from $128.3 million in the prior year comparative period.

As a percentage of home closing revenue, expenses improved 40 basis points to 3.2% for similar reasons as our quarterly results.

For the three months ended March 31, 2023, general and administrative expenses were $47.5 million, $7.5 million higher than the 2022 period, due primarily to severance-related expenses and increased spending on technology and insurance.

As a percentage of home closing revenue, general and administrative expenses increased 60 basis points to 3.8% in the first quarter of 2023.

Interest Expense.

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

We recognized no interest expense for the three months ended September 30, 2022 as all interest was capitalized.

Interest expense was $79,000 for same period in 2021.

For the nine months ended September 30, 2022 and 2021, interest expense totaled $41,000 and $246,000, respectively.

Other (Expense)/Income, Net.

We recognized no interest expense for the three months ended March 31, 2023 as all interest was capitalized.

Interest expense was $41,000 for the same period in 2022.

Other Income/(Expense), 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 and nine months ended September 30, 2022, Other expense was $0.1 million and $0.8 million, respectively, compared to Other income of $1.3 million and $3.4 million in the 2021 comparable periods.

Loss on Early Extinguishment of Debt.

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 for the nine months ended September 30, 2022.

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

Other income, net of $8.8 million for the three ended March 31, 2023 increased from an expense of $0.3 million in the prior year, primarily due to a higher interest rate on a higher cash balance.

Income Taxes.

Our effective tax rate was 20.3% and 23.3% for the three months ended September 30, 2022 and 2021, respectively, and 22.9% and 22.3% for the nine months ended September 30, 2022 and 2021, respectively.

The lower tax rate for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, reflects the benefit of the retroactive extension of the federal energy efficient home credits under Internal Revenue Code §45L enacted by the IRA of 2022 in August 2022, under which we recorded a benefit in the third quarter of 2022 for all qualifying 2022 home closings.

The tax rates for the nine months ended September 30, 2022 and the three and nine months ended September 30, 2021 also reflect credits earned under Internal Revenue Code §45L new energy efficient homes.

Our effective tax rate was 20.6% and 24.0% for the three months ended March 31, 2023 and 2022, respectively.

The lower tax rate for the three months ended March 31, 2023 reflects energy-efficient homes tax credits on qualifying homes under the Internal Revenue Code ("IRC") §45L energy-efficient homes federal tax credit from the IRA that was enacted in August 2022.

There were no such credits available in the first quarter of 2022.

Liquidity and Capital Resources

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We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land acquisition and development and spec home construction.

Our principal uses of cash include acquisition and development of land and lots, home construction, operating expenses, and the payment of interest and routine liabilities.

From time to time, we opportunistically repurchase our common stock and senior notes.

Our principal uses of cash include acquisition and development of land and lots, home construction, operating expenses, share repurchases and the payment of interest, routine liabilities and dividends.

We also opportunistically repurchase our common stock and, from time to time, our senior notes.

Cash flows for each of our communities depend on their stage of the development cycle, and can differ substantially from reported earnings.

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In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred.

Similarly, in times of community count growth, we incur significant outlays of cash through the land purchase, development and community opening stages whereas in in times of community count stability, these cash outlays are incurred in a more even-flow cadence with cash inflows from actively selling communities that are contributing closing volume and home closing revenue.

Similarly, in times of community count growth, we incur significant outlays of cash

through the land purchase, development and community opening stages whereas in in times of community count stability, these cash outlays are incurred in a more even-flow cadence with cash inflows from actively selling communities that are contributing closing volume and home closing revenue.

Conversely, in a down turn environment, cash outlays for land and community count growth may be scaled back.

Short-term Liquidity and Capital Resources

Over the course of the next twelve months, we expect that our primary demand for funds will be for the construction of homes, as well as acquisition and development of both new and existing lots, operating expenses, including general and administrative expenses, interest payments and opportunistic common stock repurchases.

Over the course of the next twelve months, we expect that our primary demand for funds will be for the construction of homes, as well as acquisition and development of both new and existing lots, operating expenses, including general and administrative expenses, interest and dividend payments and common stock repurchases.

We expect to meet these short-term liquidity requirements primarily through our cash and cash equivalents on hand and the net cash flows provided by our operations.

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Long-term Liquidity and Capital Resources

Beyond the next twelve months, our principal demands for funds will be for the construction of homes, land acquisition and development activities needed to maintain our lot supply and active community count, payments of principal and interest on our senior notes as they become due or mature and common stock repurchases.

We expect our existing and generated cash will be adequate to fund our ongoing operating activities as well as providing capital for investment in future land purchases and related development activities.

We expect our existing and future generated cash will be adequate to fund our ongoing operating activities as well as providing capital for investment in future land purchases and related development activities.

To the extent the sources of capital described above are insufficient to meet our long-term cash needs, we may also conduct additional public offerings of our securities, refinance or secure new debt or dispose of certain assets to fund our operating activities.

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These obligations impact both short-term and long-term liquidity and capital resource needs.

Certain contractual obligations are reflected on our unaudited consolidated balance sheets as of September 30, 2022, while others are considered future commitments for materials or services not yet provided.

Our contractual obligations primarily consist of principal and interest payments on our senior notes, loans payable and other borrowings, including our Credit Agreement, letters of credit and surety bonds and operating leases.

Certain contractual obligations are reflected on our unaudited consolidated balance sheets as of March 31, 2023, while others are considered future commitments for materials or services not yet provided.

Our contractual obligations primarily consist of principal and interest payments on our senior notes, loans payable and other borrowings, including our Credit Facility, letters of credit and surety bonds and operating leases.

We have no debt maturities until 2025.

We also have certain short-term lease commitments, commitments to fund our existing unconsolidated joint ventures and other purchase obligations in the normal course of business.

We also have requirements for certain short-term lease commitments, funding working capital needs of our existing unconsolidated joint ventures and other purchase obligations in the normal course of business.

Other material cash requirements include land acquisition and development costs, home construction costs and operating expenses, including our selling, general and administrative expenses, as previously discussed.

We plan to fund these commitments primarily with cash flows generated by operations, but may also utilize additional debt or equity financing and borrowing capacity under our Credit Facility.

Our maximum exposure to loss on our purchase and option agreements is generally limited to non-refundable deposits and capitalized pre-acquisition costs.

Our maximum exposure to loss on our purchase and option agreements is generally limited to non-refundable deposits and capitalized or committed pre-acquisition costs.

For information about our loans payable and other borrowings, including our Credit Facility, and senior notes, reference is made to Notes 5 and 6 in the notes to our unaudited consolidated financial statements included in this report and are incorporated by reference herein.

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We do not engage in commodity trading or other similar activities.

We had no derivative financial instruments at September 30, 2022 or December 31, 2021.

We had no derivative financial instruments at March 31, 2023 or December 31, 2022.

Operating Cash Flow Activities

During the nine months ended September 30, 2022 and 2021, net cash used by operating activities totaled $169.8 million and $248.7 million, respectively.

Operating cash flows in the first nine months of 2022 benefited from cash generated by net earnings of $729.8 million and an increase in accounts payable and accrued liabilities of $118.6 million due to timing of payments for routine transactions, offset by a $990.1 million increase in real estate and an $89.2 million increase in other receivables, prepaids and other assets.

The increase in real estate was due to construction activities on a greater number of homes under construction, land acquisition and development activities.

The increase in other receivables, prepaids and other assets was largely due to receivables from municipalities for land development reimbursements and the purchase of fixed rate interest locks for eligible buyers in our backlog.

During the nine months ended September 30, 2021, operating cash flows benefited from cash generated by net earnings of $500.0 million and were offset by an increase in real estate assets of $810.7 million.

During the three months ended March 31, 2023 and 2022, net cash provided by operating activities totaled $124.5 million and $12.2 million, respectively.

Operating cash flows in the first quarter of 2023 benefited from cash generated by net earnings of $131.3 million.

Operating cash flows in the first quarter of 2022 benefited from cash generated by net earnings of $217.3 million and an increase in accounts payable and accrued liabilities of $115.9 million due to timing of payments for routine transactions, offset by a $283.9 million increase in real estate assets and a $52.1 million increase in other receivables, prepaids and other assets due to the purchase of fixed rate interest locks for eligible buyers in our backlog.

Investing Cash Flow Activities

During the nine months ended September 30, 2022 and 2021, net cash used in investing activities totaled $24.9 million and $17.5 million, respectively.

Cash used in investing activities in 2022 was mainly attributable to the purchases of property and equipment of $19.5 million and investments in unconsolidated entities of $5.7 million.

Cash used in investing activities in 2021 was primarily due to $17.9 million in purchases of property and equipment.

During the three months ended March 31, 2023 and 2022, net cash used in investing activities totaled $8.7 million and $6.2 million, respectively.

Cash used in investing activities for both periods is mainly attributable to the purchases of property and equipment.

Financing Cash Flow Activities

During the nine months ended September 30, 2022, net cash used in financing activities totaled $124.3 million, versus net cash provided by financing activities of $82.9 million for the 2021 period.

During the three months ended March 31, 2023 and 2022, net cash used in financing activities totaled $20.1 million and $103.9 million, respectively.

The net cash used in financing activities in 2023 includes $9.9 million of dividends paid and $10.0 million in share repurchases.

The net cash used in financing activities in 2022 primarily reflects $99.3 million in share repurchases.

See 'Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds' for more information about our authorized share repurchase program.

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.

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):

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Senior notes, net, loans payable and other borrowings $ 1,150,755 $ 1,150,647

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Net debt-to-capital (2)

18.9 % 15.1 %

(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.

(2) Net debt-to-capital is considered a non-GAAP financial measure, and is computed as net debt divided by the aggregate of net debt and stockholders' equity.

Net debt is comprised of total senior notes, net and loans payable and other borrowings, less cash and cash equivalents.

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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, restrictions imposed by our Credit Facility, as well as other factors considered relevant by our Board of Directors.

On February 16, 2023, our Board of Directors approved the initiation of a recurring quarterly cash dividend on common stock of $0.27 per share.

The first dividend was paid on March 31, 2023 to shareholders of record as of the close of trading on March 15, 2023.

Credit Facility Covenants

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In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) 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 September 30, 2022.

Our actual financial covenant calculations as of September 30, 2022 are reflected in the table below.

We were in compliance with all Credit Facility covenants as of March 31, 2023.

Our actual financial covenant calculations as of March 31, 2023 are reflected in the table below.

Financial Covenant (dollars in thousands):

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What changed 10-Q

Item 2. Management’s Discussion and Analysis