Meritage Homes CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview and Outlook During the first quarter of 2025, the spring selling season was healthy due to sustained demand as a result of favorable demographics and a limited supply of homes available at an affordable price, even as mortgage rates remained high and increasing macroeconomic concerns impacted consumer sentiment. Our strategy of providing affordable, move-in ready homes with a 60-day closing ready commitment provided us an opportunity to meet the demand for immediately available homes with a comfortable monthly mortgage payment. Although we expect that mortgage rates will remain volatile and macroeconomic concerns will continue to impact consumer psychology for the near to mid-term, we believe that our interest rate buy-downs, other financing incentives and affordable price points provide us with a competitive advantage, particularly over resale homes as individual home sellers are not typically able to provide such incentives. Land costs remain elevated following several years of historically high land development activity and have negatively impacted our margins, although we have seen offsetting improvements in margin due to construction cycle times and material costs returning to normalized levels in the first quarter of 2025 after stabilizing in late 2024. We believe that our strategy has, and will continue to, drive strong performance of key financial measures, including home closing volume, home closing gross margin, selling, general and administrative cost leveraging, balance sheet management and long-term community count growth. Summary Company Results Home closing revenue of $1.3 billion decreased 8.5% due to lower volume and a 6.0% decrease in average sales price ("ASP") on closings. Home closing units volume of 3,416 homes in the three months ended March 31, 2025 decreased 2.6% from 3,507 homes in the same prior year period. The lower ASP is a result of increased utilization of incentives and contributed to the first quarter 2025 home closing gross margin decline of 380 basis points to 22.0%, compared to 25.8% in the prior year. The decrease in home closing gross margin was also the result reduced leverage of fixed costs on lower home closing revenue and higher lot costs, all of which were partially offset by direct cost savings. Home closing gross profit of $295.7 million in the first quarter 2025 compared to $378.0 million in the prior year period. Land closing gross profit was $3.2 million in the first quarter of 2025, compared to nominal profit in the first quarter of 2024. Financial services profit was $3.6 million in the three months ended March 31, 2025 compared to financial services loss of $0.7 million in 2024. The loss in the prior year period was driven by charges taken for unused prepaid interest rate forward commitments. Commissions and other sales costs of $94.7 million in the three months ended March 31, 2025 decreased $6.8 million due to lower home closing revenue. General and administrative expenses of $57.0 million in the three months ended March 31, 2025 increased $6.3 million from $50.7 million in the same period of 2024 due to incremental start-up costs for our new divisions in Alabama and Mississippi, as well as increased spend on technology. Earnings before income taxes for the three months ended March 31, 2025 of $160.2 million decreased $73.9 million year over year from $234.0 million in 2024. The effective income tax rate of 23.3% for the three months ended March 31, 2025 increased from 20.5% in 2024 due to fewer homes qualifying for energy tax credits under the Inflation Reduction Act ("IRA") in 2025. The decrease in year-over-year profitability resulted in net earnings of $122.8 million in the three months ended March 31, 2025 versus $186.0 million in the three months ended March 31, 2024. Home orders of 3,876 for the three months ended March 31, 2025 decreased 2.9% from 3,991 home orders in the prior year quarter due to a 10.2% decrease in orders pace, which was partially offset by a 6.8% increase in average active communities. Orders pace of 4.4 net homes per month in the first quarter of 2025 is down from 4.9 in the prior year period, reflecting the tougher selling environment, although still above our targeted orders pace of 4.0 net homes per month. Home order value during the three months ended March 31, 2025 of $1.6 billion decreased 4.5% year-over-year, as a result of the lower order volume and a 1.6% decrease in ASP on orders. Our cancellation rate of 9% in the first quarter of 2025 was relatively flat with 8% in the first quarter of 2024 and below the Company's historical average. We ended the first quarter of 2025 with 2,004 homes in backlog valued at $812.4 million, decreases of 33.9% and 34.7%, respectively, from March 31, 2024. The lower backlog units is directly tied to our record high backlog conversion rate of 221.2% during the first quarter of 2025, compared to 137.6% in the same quarter of 2024. The decrease in backlog and higher backlog conversion rate was anticipated with our strategy of offering move-in ready homes with a 60-day closing ready commitment, as we are selling homes later in the construction cycle and are therefore able to shorten the time between home sale and home closing. Of the homes closed in first quarter of 2025, approximately 61% were sold within the same quarter, compared to approximately 48% in the prior year period. 25 We ended the first quarter of 2025 with 290 active communities, up from 275 at March 31, 2024. We purchased approximately 2,900 lots for $222.1 million, spent $242.7 million on land development, net of reimbursements, and started construction on 3,601 homes during the three months ended March 31, 2025. Company Positioning We believe that the investments in our new communities designed for the first-time and first move-up homebuyer, our move-in ready homes with a 60-day closing ready commitment, and our partnership with external realtors create a differentiated strategy that has aided us in our growth in the highly competitive new home market. Our focus on growing our community count and market share includes the following strategic initiatives: • Delivering affordable homes on a shorter timeline through simplification of production processes and maintaining levels of spec inventory that are aligned with our strategy; • Offering our customers affordable, move-in ready homes with a 60-day closing ready commitment; • Embracing external realtor relationships, as we view realtors as a strategic partner who assists with sourcing homebuyers, particularly first-time homebuyers who view the realtor as a trusted advisor; • Continuously improving the overall home buying experience through simplification and innovation; and • Increasing homeowner satisfaction by offering 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: • Achieving or maintaining a top 5 market position in all of our markets, and maintaining our status as a top 5 national builder (based on homes closed in 2024); • Targeting a strong, yet sustainable, orders pace through the use of consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities; • Maintaining and where possible, expanding, our home closing gross profit by growing closing volume, allowing us to better leverage our direct overhead; • Carefully managing our liquidity and maintaining a strong balance sheet. We ended the first quarter of 2025 with a 26.1% debt-to-capital ratio and a 13.7% net debt-to-capital ratio, after issuing $500.0 million of senior notes during the first quarter of 2025; • Balancing return of capital to our stockholders with internal growth goals, utilizing both share repurchases and dividend payments; • Managing construction efficiencies and costs through national and regional vendor relationships with a focus on timely, quality construction and warranty management; and • Promoting a positive environment for our employees through our commitment to inclusion, culture, and belonging, and providing market-competitive benefits in order to develop and motivate our employees, minimize turnover and maximize recruitment efforts. Critical Accounting Estimates The critical accounting estimates that we deem to involve the most difficult, subjective or complex judgments include real estate valuation and cost of home closings and warranty reserves. There have been no significant changes to our critical accounting estimates during the three months ended March 31, 2025 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2024 Annual Report on Form 10-K for the year ended December 31, 2024 (the "Annual Report"). 26 Home Closing Revenue, Home Orders and Order Backlog The composition of our closings, home orders and backlog is constantly changing and is based on a changing mix of communities with various price points between periods as new projects open and existing projects wind down and close-out. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. As previously disclosed in Note 1, effective January 1, 2025, all segment information included in this Quarterly Report on Form 10-Q has been recast for all periods presented to reflect Tennessee in the Central Region. The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands): Home Closing Revenue Three Months Ended March 31, Quarter over Quarter 2025 2024 Change $ Change % Total Dollars $ 1,342,104 $ 1,466,096 $ (123,992) (8.5) % Homes closed 3,416 3,507 (91) (2.6) % Average sales price $ 392.9 $ 418.0 $ (25.1) (6.0) % West Region Dollars $ 479,636 $ 515,632 $ (35,996) (7.0) % Homes closed 998 1,014 (16) (1.6) % Average sales price $ 480.6 $ 508.5 $ (27.9) (5.5) % Central Region Dollars $ 412,537 $ 483,770 $ (71,233) (14.7) % Homes closed 1,187 1,295 (108) (8.3) % Average sales price $ 347.5 $ 373.6 $ (26.1) (7.0) % East Region Dollars $ 449,931 $ 466,694 $ (16,763) (3.6) % Homes closed 1,231 1,198 33 2.8 % Average sales price $ 365.5 $ 389.6 $ (24.1) (6.2) % Home Orders (1) Three Months Ended March 31, Quarter over Quarter 2025 2024 Change $ Change % Total Dollars $ 1,558,177 $ 1,631,195 $ (73,018) (4.5) % Homes ordered 3,876 3,991 (115) (2.9) % Average sales price $ 402.0 $ 408.7 $ (6.7) (1.6) % West Region Dollars $ 539,594 $ 580,805 $ (41,211) (7.1) % Homes ordered 1,093 1,170 (77) (6.6) % Average sales price $ 493.7 $ 496.4 $ (2.7) (0.5) % Central Region Dollars $ 489,160 $ 556,159 $ (66,999) (12.0) % Homes ordered 1,365 1,500 (135) (9.0) % Average sales price $ 358.4 $ 370.8 $ (12.4) (3.3) % East Region Dollars $ 529,423 $ 494,231 $ 35,192 7.1 % Homes ordered 1,418 1,321 97 7.3 % Average sales price $ 373.4 $ 374.1 $ (0.7) (0.2) % (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. 27 Order Backlog (1) At March 31, Quarter over Quarter 2025 2024 Change $ Change % Total Dollars $ 812,358 $ 1,244,257 $ (431,899) (34.7) % Homes in backlog 2,004 3,033 (1,029) (33.9) % Average sales price $ 405.4 $ 410.2 $ (4.8) (1.2) % West Region Dollars $ 262,627 $ 439,957 $ (177,330) (40.3) % Homes in backlog 530 902 (372) (41.2) % Average sales price $ 495.5 $ 487.8 $ 7.7 1.6 % Central Region Dollars $ 242,919 $ 390,848 $ (147,929) (37.8) % Homes in backlog 659 1,046 (387) (37.0) % Average sales price $ 368.6 $ 373.7 $ (5.1) (1.4) % East Region Dollars $ 306,812 $ 413,452 $ (106,640) (25.8) % Homes in backlog 815 1,085 (270) (24.9) % Average sales price $ 376.5 $ 381.1 $ (4.6) (1.2) % (1) Our backlog represents net home orders that have not closed. Active Communities and Cancellation Rates Active Communities Three Months Ended March 31, 2025 2024 Ending Average Ending Average Total 290 291.0 275 272.5 West Region 85 88.0 83 80.5 Central Region 82 86.0 94 96.5 East Region 123 117.0 98 95.5 Cancellation Rates (2) Three Months Ended March 31, 2025 2024 Total 9 % 8 % West Region 7 % 9 % Central Region 9 % 9 % East Region 10 % 8 % (2) Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period. 28 Operating Results Companywide . In the three months ended March 31, 2025, we closed 3,416 homes, down 2.6% from 3,507 closings in the three months ended March 31, 2024. The decrease in home closing volume combined with a 6.0% lower ASP on closings led to $1.3 billion in home closing revenue for the three months ended March 31, 2025, 8.5% lower than the same period in 2024. The decline in ASP on closings was caused by increased utilization of financing incentives. Home order volume in the three months ended March 31, 2025 of 3,876 homes was 2.9% lower than 3,991 homes in the three months ended March 31, 2024, due to a 10.2% lower orders pace of 4.4 net homes per month in the three months ended March 31, 2025 compared to 4.9 in 2024, which was offset by a 6.8% increase in average active communities. The decline in ASP on orders was driven by increased financing incentives, similar to ASP on home closings. Order cancellations of 9% for the three months ended March 31, 2025 were relatively flat with 8% in the three months ended March 31, 2024; the current run rate for cancellations across the company is below our historical company average and we believe that this demonstrates the shorter timeline between home order and home closing that's a product of our move-in ready homes with a 60-day closing ready commitment. The quarter ended with 2,004 homes in backlog valued at $812.4 million, compared to 3,033 units valued at $1.2 billion at March 31, 2024. The lower backlog year over year is a result of the increase in our backlog conversion rate, as we are selling spec homes later in the construction cycle. West . The West Region generated $479.6 million in home closing revenue in the three months ended March 31, 2025, a 7.0% decrease compared to the $515.6 million in prior year period. The lower revenue was due to lower ASP on closings and 1.6% lower volume of 998 homes in the three months ended March 31, 2025, compared to 1,014 homes in the prior year period. The 5.5% year over year decline in ASP is due to increased use of financing incentives and geographic mix within the region. Home orders for the three months ended March 31, 2025 of 1,093 were down 6.6% from 1,170 in the prior year, resulting from a 14.6% decrease in orders pace to 4.1 net homes per month, which was offset by a 9.3% higher average active community count. Home order value of $539.6 million for the first quarter of 2025 decreased 7.1% due to the lower order volume on a relatively consistent ASP on orders, the combined effect of increased utilization of financing incentives and a shift in geographic mix within the region. The West Region cancellation rate of 7% in the three months ended March 31, 2025 improved from 9% in the prior year. The West Region ended the first quarter of 2025 with 530 homes in backlog valued at $262.6 million, compared to 902 units valued at $440.0 million at March 31, 2024. The lower backlog is due entirely to a higher backlog conversion rate of 229.4% for the three months ended March 31, 2025 compared to 135.9% in the same period of 2024. Central . The Central Region closed 1,187 homes in the three months ended March 31, 2025, down 8.3% from 1,295 in the prior year period. Home closing revenue of $412.5 million in the three months ended March 31, 2025 was down 14.7% from $483.8 million in the prior year period, due to the combined impact of lower home closing volume and a 7.0% decrease in ASP on closings. The decline in ASP on closings is a result of higher utilization of incentives. Home order volume decreased 9.0% to 1,365 homes in the three months ended March 31, 2025 as 10.9% lower average active communities outweighed the 1.9% improvement in orders pace to 5.3 net homes per month. Home order value of $489.2 million in the three months ended March 31, 2025 declined 12.0% from $556.2 million in the prior year quarter due the combined impact of lower home order volume and an 3.3% decrease in ASP on orders caused by increased utilization of financing incentives. The Central Region cancellation rate of 9% in the three months ended March 31, 2025 was flat year over year. The Central Region ended the quarter with 659 units in backlog valued at $242.9 million, down 37.0% and 37.8%, respectively, compared to March 31, 2024, due to a higher backlog conversion rate of 246.8% in the first quarter of 2025 compared to 154.0% in the prior year quarter. East . During the three months ended March 31, 2025, the East Region closed 1,231 homes for $449.9 million, compared to 1,198 closings and $466.7 million in home closing revenue in the comparable prior year period. The 2.8% increase in volume was due to a higher average active community count in the first quarter of 2025 combined with an increase in the percentage of orders that converted to closings within the same quarter. The higher volume was offset by a 6.2% lower ASP on home closings, resulting in a 3.6% decrease in home closing revenue. The East Region's lower ASP on home closings was due to greater utilization financing incentives and geographic mix shift within the region. The East Region was the only region with improved home order volume over prior year, with orders of 1,418 for the three months ended March 31, 2025, including our first orders from the new divisions in Alabama and Mississippi, and increasing 7.3% over prior year due entirely to a 22.5% higher average active community count, which was partially offset by a 13.0% lower orders pace of 4.0 net homes per month compared to 4.6 in the prior year. Order value of $529.4 million in the three months ended March 31, 2025 increased 7.1% from $494.2 million in the prior year period due to the higher volume and a consistent ASP on orders year over year. The East Region cancellation rate of 10% in the three months ended March 31, 2025 was up from 8% in the same prior year period. The East Region ended the first quarter of 2025 with 815 homes in backlog valued at $306.8 million, down 24.9% and 25.8%, respectively, from 1,085 homes valued at $413.5 million at March 31, 2024. The East Region had a backlog conversion rate of 196.0% in the first quarter of 2025 compared to 124.5% in the prior year quarter. 29 Land Closing Revenue and Gross Profit (in thousands) Three Months Ended March 31, 2025 2024 Land closing revenue $ 15,421 $ 2,305 Land closing gross profit $ 3,165 $ 7 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. Therefore, the timing of land closings is not typically consistent between periods. Other Operating Information (dollars in thousands) Three Months Ended March 31, 2025 2024 Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue Home Closing Gross Profit (1) Total $ 295,650 22.0 % $ 377,958 25.8 % West $ 104,971 21.9 % $ 115,128 22.3 % Central $ 90,729 22.0 % $ 133,399 27.6 % East $ 99,950 22.2 % $ 129,431 27.7 % (1) Home closing gross profit represents home closing revenue less cost of home closings, including impairments, if any. Cost of home closings includes land and associated development costs, direct home construction costs, an allocation of common community costs (such as architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs. Companywide . Home closing gross profit for the three months ended March 31, 2025 was $295.7 million, with a home closing gross margin of 22.0%, down 380 basis points from 25.8% in the three months ended March 31, 2024. The margin decline in all regions was due to the combined effect of increased utilization of financing incentives, reduced leverage of fixed costs on lower home closing revenue, and higher lot costs, which were partially offset by savings in direct costs. Financial Services Profit/(Loss) (in thousands) Three Months Ended March 31, 2025 2024 Financial services profit/(loss) $ 3,563 $ (690) Financial services profit represents the net profit/(loss) of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title Agency, Inc. and Meritage Homes Insurance Agency, Inc., respectively, as well as our portion of earnings from a mortgage joint venture. Financial services profit of $3.6 million in the three months ended March 31, 2025 increased $4.3 million from financial services loss of $0.7 million in the same prior year period. The favorable variance year over year is entirely attributable to $5.8 million of charges related to expired interest rate forward commitments in the prior year period, compared to $0.4 million in the current period. 30 Selling, General and Administrative Expenses and Other Expenses (dollars in thousands) Three Months Ended March 31, 2025 2024 Commissions and other sales costs $ (94,720) $ (101,550) Percent of home closing revenue 7.1 % 6.9 % General and administrative expenses $ (56,997) $ (50,732) Percent of home closing revenue 4.2 % 3.5 % Interest expense $ — $ — Other income, net $ 9,498 $ 9,022 Provision for income taxes $ (37,353) $ (47,999) Commissions and Other Sales Costs. Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs. These costs decreased $6.8 million to $94.7 million in the three months ended March 31, 2025 compared to the prior year period, primarily due to decreased commissions expense on lower home closing revenue. Commissions and other sales costs were 7.1% and 6.9% of home closing revenue in the three months ended March 31, 2025 and 2024, respectively, due to higher maintenance and utility costs associated with having more spec homes in inventory. The increase in spec home inventory and related costs was anticipated with our new 60-day closing ready commitment in order to have sufficient inventory available. General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. For the three months ended March 31, 2025, general and administrative expenses of $57.0 million increased $6.3 million from $50.7 million in the prior year period, and as a percentage of home closing revenue increased 70 basis points to 4.2% due to increased spend on new technology and expenses associated with the start up of our new divisions in Alabama and Mississippi. Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior and convertible senior notes, loans payable and other borrowings, and our Credit Facility. We recognized no interest expense for the three months ended March 31, 2025 and 2024, as all interest incurred was capitalized to qualifying assets. 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. Other income, net was $9.5 million and $9.0 million for the three months ended March 31, 2025 and 2024, respectively. Income Taxes. Our effective tax rate was 23.3% and 20.5% for the three months ended March 31, 2025 and 2024, respectively. The higher rate in the three months ended March 31, 2025 reflects fewer homes qualifying for energy tax credits under the Internal Revenue Code ("IRC") §45L energy-efficient homes federal tax credit, given the new higher construction thresholds required to earn these tax credits beginning in 2025. Liquidity and Capital Resources Overview We have historically generated cash and funded our operations primarily from cash flows from operating activities. Additional sources of funds may include additional debt or equity financing and borrowing capacity under our Credit Facility. 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, share repurchases and the payment of interest, routine liabilities and dividends. We may also opportunistically repurchase 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. Early stages of development or expansion require significant cash outlays for land acquisitions, zoning plat and other approvals, community and lot development, and construction of model homes, roads, utilities, landscape and other amenities. Because these costs are a component of our inventory and are not recognized in our income statement until a home closes, we incur significant cash outlays prior to recognition of earnings. In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land 31 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. Conversely, in a down turn environment, cash outlays for land and community count growth may be scaled back to preserve liquidity and we may curtail community count. At March 31, 2025, we had $1.0 billion of cash and cash equivalents and $770.6 million available under the Credit Facility, thereby providing approximately $1.8 billion of total available capacity. 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 and dividend payments and share repurchases. Although we don't anticipate any early redemptions in the near term, we may opportunistically retire or redeem a portion of our senior notes. 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. Between our cash and cash equivalents on hand combined with the availability of liquidity from our Credit Facility, we believe that we currently have sufficient liquidity. Nevertheless, in the future, we may seek additional capital to strengthen our liquidity position, enable us to acquire additional land inventory in anticipation of improving market conditions, and/or strengthen our long-term capital structure. 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 and convertible senior notes as they become due or mature, dividend payments and share repurchases. We expect our existing and future generated cash will be adequate to fund our ongoing operating activities as well as provide 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. There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing stockholders or increase our interest costs. Material Cash Requirements We are a party to many contractual obligations involving commitments to make payments to third parties. 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 March 31, 2025, 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 and convertible senior notes, loans payable and other borrowings, including our Credit Facility, letters of credit and surety bonds and operating leases. We have no material debt maturities until 2027. 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 or committed pre-acquisition costs. For information about our loans payable and other borrowings, including our Credit Facility, senior and convertible senior notes, reference is made to Notes 5 and 6 in the notes to unaudited consolidated financial statements included in this report and are incorporated by reference herein. For information about our lease obligations, reference is made to Note 4 - Leases in the consolidated financial statements included in our Annual Report. Reference is made to Notes 1, 3, 4, and 15 in the notes to unaudited consolidated financial statements included in this report and are incorporated by reference herein. These Notes discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in connection with the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated, if any. 32 We do not engage in commodity trading or other similar activities. We had no derivative financial instruments that required derivative accounting under ASC 815-10, Derivatives and Hedging , at March 31, 2025 or December 31, 2024. Operating Cash Flow Activities During the three months ended March 31, 2025, net cash used in operating activities totaled $42.6 million, versus net cash provided by operating activities of $81.9 million for the three months ended March 31, 2024. Operating cash flows in the three months ended March 31, 2025 benefited from cash generated by net earnings of $122.8 million, which were offset by increases in real estate and deposits on real estate under option or contract of $60.8 million and $62.2 million, respectively. Operating cash flows in the three months ended March 31, 2024 benefited from cash generated from net earnings of $186.0 million and timing of other receivables, prepaids and other assets, offset by a $193.4 million increase in real estate. Investing Cash Flow Activities During the three months ended March 31, 2025 and 2024, net cash used in investing activities totaled $11.4 million and $7.8 million, respectively. Cash used in investing activities in both periods was mainly attributable to purchases of property and equipment and investments in unconsolidated entities. Financing Cash Flow Activities During the three months ended March 31, 2025, net cash provided by financing activities totaled $414.1 million as compared to net cash used in financing activities of $90.1 million for the three months ended March 31, 2024. The net cash provided by financing activities in 2025 primarily reflects the net proceeds of $492.1 million from the issuance of our 5.650% Senior Notes due 2035, offset by $45.0 million of share repurchases and $30.9 million of dividends paid. The net cash used in financing activities in 2024 includes $27.2 million of dividends paid and $55.9 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. We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands): As of March 31, 2025 December 31, 2024 Senior and convertible senior notes, net, loans payable and other borrowings $ 1,835,268 $ 1,335,878 Stockholders’ equity 5,194,744 5,141,573 Total capital $ 7,030,012 $ 6,477,451 Debt-to-capital (1) 26.1 % 20.6 % Senior and convertible senior notes, net, loans payable and other borrowings $ 1,835,268 $ 1,335,878 Less: cash and cash equivalents (1,011,652) (651,555) Net debt 823,616 684,323 Stockholders’ equity 5,194,744 5,141,573 Total net capital $ 6,018,360 $ 5,825,896 Net debt-to-capital (2) 13.7 % 11.7 % (1) Debt-to-capital is computed as senior and convertible senior notes, net and loans payable and other borrowings divided by the aggregate of total senior and convertible senior notes, net, loans payable and other borrowings 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 and convertible senior notes, net and loans payable and other borrowings, less cash and cash equivalents. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. 33 Dividends During the three months ended March 31, 2025 and 2024, our Board of Directors approved, and we paid, a quarterly cash dividend on common stock of $0.43 and $0.375 per share, respectively. Credit Facility Covenants Borrowings under the Credit Facility are unsecured, but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $3.3 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. We were in compliance with all Credit Facility covenants as of March 31, 2025. Our actual financial covenant calculations as of March 31, 2025 are reflected in the table below. Financial Covenant (dollars in thousands): Covenant Requirement Actual Minimum Tangible Net Worth > $3,633,602 $5,145,874 Leverage Ratio < 60% 11.8% Investments other than defined permitted investments < $1,568,762 $31,288 Seasonality Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements. We typically take orders for more homes in the first half of the year than in the second half, which has created additional working capital requirements in the first and second quarters to build our inventories to satisfy seasonally higher demand with our 60-day closing ready commitment homes. While we expect the seasonal orders pattern to continue over the long term, our higher backlog conversion rate and all-spec strategy may shift the timing of home closings and capital requirements to build our inventories to earlier in the year. Additionally, seasonality may, from time to time, be affected by short-term volatility in the homebuilding industry and in the overall economy. Recent Accounting Pronouncements See Note 1 to our unaudited consolidated financial statements included in this report for discussion of recent accounting pronouncements.