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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

 

FORM 10-Q

 (Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
  For the quarterly period ended March 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 1-8951

 

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware

84-0622967

(State or other jurisdiction

(I.R.S. employer

of incorporation or organization)

identification no.)

 

4350 South Monaco Street, Suite 500

80237

Denver, Colorado

(Zip code)

(Address of principal executive offices)

 

 

(303) 773-1100 

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $.01 par value

 

552676108

 

New York Stock Exchange

6% Senior Notes due January 2043

 

552676AQ1

 

New York Stock Exchange

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No  

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

  

  

Accelerated Filer

  

Non-Accelerated Filer

  

  

  

Smaller Reporting Company

  

Emerging growth company

  

 

       

 

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No  

 

As of May 1, 2020, 63,054,495 shares of M.D.C. Holdings, Inc. common stock were outstanding.

 

 

 

 

M.D.C. HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020

 

INDEX

 

 

 

 

Page
No.

     

Part I. Financial Information:

 

 
         

 

Item 1.

Unaudited Consolidated Financial Statements:

 

 
         

 

 

Consolidated Balance Sheets at March 31, 2020 and December 31, 2019

1

 
         

 

 

Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2020 and 2019

2

 
         
   

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019

         3

 
         

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

4

 
         

 

 

Notes to Unaudited Consolidated Financial Statements

5

 
         

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

 
         

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 
         

 

Item 4.

Controls and Procedures

43

 
     

Part II. Other Information:

 

 
         

 

Item 1.

Legal Proceedings

44

 
         

 

Item 1A.

Risk Factors

44

 
         

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 
         

 

Item 6.

Exhibits

      45

 
       

 

Signature

      45

 

 

 

 

 

PART I

 

ITEM 1.     Unaudited Consolidated Financial Statements

 

M.D.C. HOLDINGS, INC.

Consolidated Balance Sheets

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 

 

 

(Dollars in thousands, except

 
   

per share amounts)

 
ASSETS                

Homebuilding:

               

Cash and cash equivalents

  $ 386,704     $ 424,186  

Restricted cash

    15,762       14,279  

Trade and other receivables

    69,301       65,829  

Inventories:

               

Housing completed or under construction

    1,215,214       1,036,191  

Land and land under development

    1,301,433       1,330,384  

Total inventories

    2,516,647       2,366,575  

Property and equipment, net

    62,316       60,414  

Deferred tax asset, net

    20,660       21,768  

Prepaid and other assets

    78,002       78,358  

Total homebuilding assets

    3,149,392       3,031,409  

Financial Services:

               

Cash and cash equivalents

    22,159       35,747  

Marketable securities

    43,985       56,747  

Mortgage loans held-for-sale, net

    133,921       197,021  

Other assets

    24,255       17,432  

Total financial services assets

    224,320       306,947  

Total Assets

  $ 3,373,712     $ 3,338,356  

LIABILITIES AND EQUITY

               

Homebuilding:

               

Accounts payable

  $ 97,980     $ 87,364  

Accrued and other liabilities

    233,034       245,940  

Revolving credit facility

    15,000       15,000  

Senior notes, net

    1,036,900       989,422  

Total homebuilding liabilities

    1,382,914       1,337,726  

Financial Services:

               

Accounts payable and accrued liabilities

    70,977       68,529  

Mortgage repurchase facility

    108,744       149,616  

Total financial services liabilities

    179,721       218,145  

Total Liabilities

    1,562,635       1,555,871  

Stockholders' Equity

               

Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding

    -       -  

Common stock, $0.01 par value; 250,000,000 shares authorized; 63,052,495 and 62,574,961 issued and outstanding at March 31, 2020 and December 31, 2019, respectively

    631       626  

Additional paid-in-capital

    1,361,362       1,348,733  

Retained earnings

    449,084       433,126  

Total Stockholders' Equity

    1,811,077       1,782,485  

Total Liabilities and Stockholders' Equity

  $ 3,373,712     $ 3,338,356  

 

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands, except per

share amounts)

 

Homebuilding:

               

Home sale revenues

  $ 697,085     $ 647,278  

Home cost of sales

    (558,647 )     (524,552 )

Inventory impairments

    -       (610 )

Total cost of sales

    (558,647 )     (525,162 )

Gross profit

    138,438       122,116  

Selling, general and administrative expenses

    (89,321 )     (82,261 )

Interest and other income

    1,889       2,391  

Other expense

    (1,337 )     (1,191 )

Homebuilding pretax income

    49,669       41,055  
                 

Financial Services:

               

Revenues

    21,886       17,404  

Expenses

    (10,929 )     (8,957 )

Other income (expense), net

    (12,064 )     6,104  

Financial services pretax income (loss)

    (1,107 )     14,551  
                 

Income before income taxes

    48,562       55,606  

Provision for income taxes

    (11,802 )     (15,056 )

Net income

  $ 36,760     $ 40,550  
                 

Comprehensive income

  $ 36,760     $ 40,550  
                 

Earnings per share:

               

Basic

  $ 0.58     $ 0.66  

Diluted

  $ 0.56     $ 0.64  
                 

Weighted average common shares outstanding:

               

Basic

    62,491,238       60,939,364  

Diluted

    64,931,225       62,708,334  
                 

Dividends declared per share

  $ 0.33     $ 0.30  

 

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollars in thousands, except share amounts)

 

   

Three-Month Period Ended March 31, 2020

 
                                         
                   

Additional

                 
   

Common Stock

   

Paid-in

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance at December 31, 2019

    62,574,961     $ 626     $ 1,348,733     $ 433,126     $ 1,782,485  

Cumulative effect of newly adopted accounting standards (Note 2)

    -       -       -       (34 )     (34 )

Balance at January 1, 2020

    62,574,961       626       1,348,733       433,092       1,782,451  

Net Income

    -       -       -       36,760       36,760  

Shares issued under stock-based compensation programs, net

    477,582       5       8,189       -       8,194  

Cash dividends declared

    -       -       -       (20,768 )     (20,768 )

Stock-based compensation expense

    -       -       4,440       -       4,440  

Forfeiture of restricted stock

    (48 )     -       -       -       -  

Balance at March 31, 2020

    63,052,495     $ 631     $ 1,361,362     $ 449,084     $ 1,811,077  

 

   

Three-Month Period Ended March 31, 2019

 
                                         
                   

Additional

                 
   

Common Stock

   

Paid-in

   

Retained

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Total

 

Balance at December 31, 2018

    56,615,352     $ 566     $ 1,168,442     $ 406,992     $ 1,576,000  

Cumulative effect of newly adopted accounting standards

    -       -       -       (67 )     (67 )

Balance at January 1, 2019

    56,615,352       566       1,168,442       406,925       1,575,933  

Net Income

    -       -       -       40,550       40,550  

Shares issued under stock-based compensation programs, net

    372,344       4       7,083       -       7,087  

Cash dividends declared

    -       -       -       (17,019 )     (17,019 )

Stock dividend declared

    4,534,908       45       138,950       (139,091 )     (96 )

Stock-based compensation expense

    -       -       4,251       -       4,251  

Forfeiture of restricted stock

    (1,714 )     -       -       -       -  

Balance at March 31, 2019

    61,520,890     $ 615     $ 1,318,726     $ 291,365     $ 1,610,706  

 

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 

 

M.D.C. HOLDINGS, INC.

Consolidated Statements of Cash Flows

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Operating Activities:

               

Net income

  $ 36,760     $ 40,550  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Stock-based compensation expense

    4,440       4,251  

Depreciation and amortization

    5,152       4,878  

Inventory impairments

    -       610  

Net (gain) loss on marketable equity securities

    13,268       (4,840 )

Deferred income tax expense

    1,131       2,696  

Net changes in assets and liabilities:

               

Trade and other receivables

    (1,611 )     (13,771 )

Mortgage loans held-for-sale, net

    63,100       38,401  

Housing completed or under construction

    (178,873 )     2,137  

Land and land under development

    29,051       (18,496 )

Prepaid and other assets

    (8,460 )     1,085  

Accounts payable and accrued liabilities

    (1,131 )     (3,153 )

Net cash provided by (used in) operating activities

    (37,173 )     54,348  
                 

Investing Activities:

               

Purchases of marketable securities

    (9,782 )     (4,785 )

Sales of marketable securities

    9,276       4,737  

Purchases of property and equipment

    (6,512 )     (6,386 )

Net cash used in investing activities

    (7,018 )     (6,434 )
                 

Financing Activities:

               

Payments on mortgage repurchase facility, net

    (40,872 )     (31,959 )

Repayment of senior notes

    (250,000 )     -  

Proceeds from issuance of senior notes

    298,050       -  

Dividend payments

    (20,768 )     (17,115 )

Issuance of shares under stock-based compensation programs, net

    8,194       7,087  

Net cash used in financing activities

    (5,396 )     (41,987 )
                 

Net increase (decrease) in cash, cash equivalents and restricted cash

    (49,587 )     5,927  

Cash, cash equivalents and restricted cash:

               

Beginning of period

    474,212       470,139  

End of period

  $ 424,625     $ 476,066  
                 

Reconciliation of cash, cash equivalents and restricted cash:

               

Homebuilding:

               

Cash and cash equivalents

  $ 386,704     $ 416,374  

Restricted cash

    15,762       8,136  

Financial Services:

               

Cash and cash equivalents

    22,159       51,556  

Total cash, cash equivalents and restricted cash

  $ 424,625     $ 476,066  

 

The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 

 

1.

Basis of Presentation

 

The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at March 31, 2020 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Included in these footnotes are certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this section are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered.

 

Where necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.

 

 

2.

Recently Issued Accounting Standards

 

Adoption of New Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. The amendments in ASU 2016-13 eliminate the probable threshold for initial recognition of a credit loss in legacy GAAP and reflect an entity’s current estimate of all expected credit losses. On January 1, 2020, we adopted ASU 2016-13 using the modified retrospective transition method, resulting in a cumulative effect adjustment that decreased the opening balance of retained earnings by less than $0.1 million. The standard did not materially impact our consolidated statements of operations and comprehensive income or consolidated cash flows.

 

 

3.

Segment Reporting

 

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions. We have identified our CODM as two key executives—the Chief Executive Officer (“CEO”) and the Chief Operating Officer (“COO”).

 

We have identified each homebuilding division as an operating segment. Our homebuilding operating segments have been aggregated into the reportable segments noted below because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. Our homebuilding reportable segments are as follows:

 

 

West (Arizona, California, Nevada, Oregon and Washington)

 

Mountain (Colorado and Utah)

 

East (mid-Atlantic, which includes Maryland and Virginia, and Florida)

 

 

Our financial services business consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3) StarAmerican Insurance Ltd. (“StarAmerican”) (collectively our “Insurance Entities”); (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. Due to its contributions to consolidated pretax income, we consider HomeAmerican to be a reportable segment (“mortgage operations”). The remaining operating segments have been aggregated into one reportable segment (“other”) because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (a) the combined reported profit of all operating segments that did not report a loss or (b) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets.

 

Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance, treasury, information technology, insurance, risk management, litigation and human resources. Corporate also provides the necessary administrative functions to support MDC as a publicly traded company. A portion of the expenses incurred by Corporate are allocated to the homebuilding operating segments based on their respective percentages of assets, and to a lesser degree, a portion of Corporate expenses are allocated to the financial services operating segments. A majority of Corporate’s personnel and resources are primarily dedicated to activities relating to the homebuilding segments, and, therefore, the balance of any unallocated Corporate expenses is included in the homebuilding operations section of our consolidated statements of operations and comprehensive income.     

 

On a periodic basis, we assess our Corporate cost allocation estimates. Our most recent assessment resulted in increases in Corporate cost allocations to both our homebuilding and financial services segments beginning January 1, 2020, to reflect the use of centralized administrative functions. Applying the most recent cost allocation estimate to the three months ended March 31, 2019 would have resulted in decreased pretax income for our homebuilding and financial services segments of approximately $2.7 million and $0.4 million, respectively, with corresponding increases in our Corporate segment pretax income. Additionally, beginning January 1, 2020, we have reflected the expense associated with all homebuilding employee bonuses in the respective homebuilding segment to which the employee reports, consistent with how the CODM is now evaluating homebuilding division performance and making operating decisions. Had these bonuses been reflected in a similar manner during the three months ended March 31, 2019, pretax income for our homebuilding segments would have decreased by an additional $3.0 million with a corresponding increase in our Corporate segment pretax income.

 

The following table summarizes revenues for our homebuilding and financial services operations:

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

 

 

(Dollars in thousands)

 
Homebuilding                

West

  $ 405,498     $ 369,558  

Mountain

    222,858       209,192  

East

    68,729       68,528  

Total homebuilding revenues

  $ 697,085     $ 647,278  
                 

Financial Services

               

Mortgage operations

  $ 14,625     $ 10,174  

Other

    7,261       7,230  

Total financial services revenues

  $ 21,886     $ 17,404  

 

 

The following table summarizes pretax income (loss) for our homebuilding and financial services operations:

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

 

 

(Dollars in thousands)

 
Homebuilding                

West

  $ 36,576     $ 33,200  

Mountain

    21,512       21,714  

East

    900       1,473  

Corporate

    (9,319 )     (15,332 )

Total homebuilding pretax income

  $ 49,669     $ 41,055  
                 

Financial Services

               

Mortgage operations

  $ 8,243     $ 4,993  

Other

    (9,350 )     9,558  

Total financial services pretax income (loss)

  $ (1,107 )   $ 14,551  
                 

Total pretax income

  $ 48,562     $ 55,606  

 

The following table summarizes total assets for our homebuilding and financial services operations. The assets in our West, Mountain and East segments consist primarily of inventory while the assets in our Corporate segment primarily include our cash and cash equivalents and deferred tax assets. The assets in our financial services segment consist primarily of cash and cash equivalents, marketable securities and mortgage loans held-for-sale.

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 

 

 

(Dollars in thousands)

 
Homebuilding assets                

West

  $ 1,559,410     $ 1,461,645  

Mountain

    907,727       869,665  

East

    216,063       194,592  

Corporate

    466,192       505,507  

Total homebuilding assets

  $ 3,149,392     $ 3,031,409  
                 

Financial services assets

               

Mortgage operations

  $ 154,546     $ 209,946  

Other

    69,774       97,001  

Total financial services assets

  $ 224,320     $ 306,947  
                 

Total assets

  $ 3,373,712     $ 3,338,356  

 

 

 

4.

Earnings Per Share

 

Accounting Standards Codification (“ASC”) Topic 260, Earnings per Share (“ASC 260”) requires a company that has participating security holders (for example, holders of unvested restricted stock that have non-forfeitable dividend rights) to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Our common shares outstanding are comprised of shareholder owned common stock and shares of unvested restricted stock held by participating security holders. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding, excluding participating shares in accordance with ASC 260. To calculate diluted EPS, basic EPS is adjusted to include the effect of potentially dilutive stock options outstanding. The table below shows our basic and diluted EPS calculations.

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands, except per

 

 

 

share amounts)

 
Numerator                

Net income

  $ 36,760     $ 40,550  

Less: distributed earnings allocated to participating securities

    (135 )     (111 )

Less: undistributed earnings allocated to participating securities

    (96 )     (139 )

Net income attributable to common stockholders (numerator for basic earnings per share)

    36,529       40,300  

Add back: undistributed earnings allocated to participating securities

    96       139  

Less: undistributed earnings reallocated to participating securities

    (93 )     (136 )

Numerator for diluted earnings per share under two class method

  $ 36,532     $ 40,303  
                 

Denominator

               

Weighted-average common shares outstanding

    62,491,238       60,939,364  

Add: dilutive effect of stock options

    1,862,619       1,217,846  

Add: dilutive effect of performance stock units

    577,368       551,124  

Denominator for diluted earnings per share under two class method

    64,931,225       62,708,334  
                 
                 

Basic Earnings Per Common Share

  $ 0.58     $ 0.66  

Diluted Earnings Per Common Share

  $ 0.56     $ 0.64  

 

Diluted EPS for the three months ended March 31, 2020 and 2019 excluded options to purchase approximately 0.4 million and 0.5 million shares of common stock, respectively, because the effect of their inclusion would be anti-dilutive.

 

 

 

5.

Fair Value Measurements

 

ASC Topic 820, Fair Value Measurements (“ASC 820”), defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs, other than quoted prices in active markets, that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:

 

       

Fair Value

 

Financial Instrument

 

Hierarchy

 

March 31,

2020

   

December 31,

2019

 
       

(Dollars in thousands)

 

Marketable securities

                   

Equity securities

 

Level 1

  $ 43,985     $ 56,747  
                     

Mortgage loans held-for-sale, net

 

Level 2

  $ 133,921     $ 197,021  

 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2020 and December 31, 2019.

 

Cash and cash equivalents (excluding debt securities with an original maturity of three months or less), restricted cash, trade and other receivables, prepaid and other assets, accounts payable, accrued liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.

 

Equity securities. Our equity securities consist of holdings in common stock and exchange traded funds. As of March 31, 2020 and December 31, 2019, all of our equity securities were recorded at fair value with all changes in fair value recorded to other income (expense), net in the financial services section of our consolidated statements of operations and comprehensive income.

 

The following table reconciles the net gain (loss) recognized during the three months ended March 31, 2020 and 2019 on equity securities to the unrealized gain (loss) recognized during the periods on equity securities still held at the reporting date.

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Net gain (loss) recognized during the period on equity securities

  $ (13,268 )   $ 4,840  

Less: Net gain (loss) recognized during the period on equity securities sold during the period

    609       (237 )

Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date

  $ (13,877 )   $ 4,603  

 

 

Mortgage loans held-for-sale, net.  Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At March 31, 2020 and December 31, 2019, we had $88.1 million and $136.8 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At March 31, 2020 and December 31, 2019, we had $45.8 million and $60.2 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.

 

Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three months ended March 31, 2020, we recorded net gains on the sales of mortgage loans of $16.7 million, compared to $11.7 million for the same period in the prior year.

 

Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.

 

Senior Notes. The estimated values of the senior notes in the following table are based on Level 2 inputs, which primarily reflect estimated prices for our senior notes that were provided by multiple sources.

 

   

March 31, 2020

   

December 31, 2019

 
   

Carrying
Amount

   

Fair Value

   

Carrying
Amount

   

Fair Value

 
   

(Dollars in thousands)

 

$250 Million 5.625% Senior Notes due February 2020, net

  $ -     $ -     $ 249,909     $ 250,400  

$250 Million 5.500% Senior Notes due January 2024, net

    249,060       228,750       249,005       272,083  

$300 Million 3.850% Senior Notes due January 2030, net

    297,285       270,750       -       -  

$500 Million 6.000% Senior Notes due January 2043, net

    490,555       466,250       490,508       528,542  

Total

  $ 1,036,900     $ 965,750     $ 989,422     $ 1,051,025  

 

 

 

6.

Inventories

 

The following table sets forth, by reportable segment, information relating to our homebuilding inventories:

 

    March 31,     December 31,  
   

2020

   

2019

 
   

(Dollars in thousands)

 

Housing completed or under construction:

               

West

  $ 699,039     $ 589,040  

Mountain

    411,077       358,370  

East

    105,098       88,781  

Subtotal

    1,215,214       1,036,191  

Land and land under development:

               

West

    760,606       772,189  

Mountain

    448,492       468,718  

East

    92,335       89,477  

Subtotal

    1,301,433       1,330,384  

Total inventories

  $ 2,516,647     $ 2,366,575  

 

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes. Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins.

 

In accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories, excluding those classified as held for sale, are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable.  We evaluate inventories for impairment at each quarter end on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:

 

 

actual and trending “Operating Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);

 

estimated future undiscounted cash flows and Operating Margin;

 

forecasted Operating Margin for homes in backlog;

 

actual and trending net home orders;

 

homes available for sale;

 

market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and

 

known or probable events indicating that the carrying value may not be recoverable.

 

If events or circumstances indicate that the carrying value of our inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision (including capitalized interest) to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates, which are Level 3 inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.

 

 

If land is classified as held for sale, we measure it in accordance with ASC 360 at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price, which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies, which are considered Level 3 inputs. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

 

Impairments of homebuilding inventory by segment for the three months ended March 31, 2020 and 2019 are shown in the table below.

 

    Three Months Ended  
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

West

  $ -     $ -  

Mountain

    -       400  

East

    -       210  

Total inventory impairments

  $ -     $ 610  

 

The table below provides quantitative data for the periods presented, where applicable, used in determining the fair value of the impaired inventory.

 

   

Impairment Data

   

Quantitative Data

 

Three Months Ended

 

Inventory
Impairments

   

 

Fair Value of
Inventory After

Impairments

   

Number of
Subdivisions
Impaired

   

Discount Rate

 
                                 

March 31, 2019

  $ 610     $ 10,476       2       N/A  

 

 

 

7.

Capitalization of Interest

 

We capitalize interest to inventories during the period of development in accordance with ASC Topic 835, Interest (“ASC 835”). Homebuilding interest capitalized as a cost of inventories is included in cost of sales during the period that related units or lots are delivered. To the extent our homebuilding debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred. Qualified homebuilding assets consist of all lots and homes, excluding finished unsold homes or finished models, within projects that are actively selling or under development. The table set forth below summarizes homebuilding interest activity. For all periods presented below, our qualified assets exceeded our homebuilding debt and as such, all interest incurred has been capitalized.

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Homebuilding interest incurred

  $ 16,534     $ 16,031  

Less: Interest capitalized

    (16,534 )     (16,031 )

Homebuilding interest expensed

  $ -     $ -  
                 

Interest capitalized, beginning of period

  $ 55,310     $ 54,845  

Plus: Interest capitalized during period

    16,534       16,031  

Less: Previously capitalized interest included in home cost of sales

    (12,767 )     (13,929 )

Interest capitalized, end of period

  $ 59,077     $ 56,947  

 

 

 

8.

Leases

 

We lease certain property, land and equipment, the majority of which comprise property related leases to provide office space where we operate our business. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.

 

Our property related leases typically have terms of between three and five years, with the exception of the lease governing the Company’s headquarters, and are classified as operating leases. These leases do not contain any residual value guarantees or restrictive covenants and do not include variable lease payments, except for the payment of common area maintenance and real estate taxes. Many of our property related leases give us the option to extend the lease term for a period of time, generally consistent with the initial lease term. These options are excluded from our calculation of the right-of-use asset and lease liability until such time as we determine it is reasonably certain that the option will be exercised.

 

The property related lease for the Company’s headquarters in Denver, Colorado is ten years in length with an expiration date of October 31, 2026 and contains a ten year option to extend the term of the lease through 2036. This option has been excluded from our calculation of the right-of-use asset and lease liability as it is not currently considered reasonably certain that the option will be exercised.

 

Operating lease expense is included as a component of selling, general and administrative expenses in the homebuilding and expenses in the financial services sections of our consolidated statements of operations and comprehensive income, respectively. Components of operating lease expense were as follows:

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Operating lease cost 1

  $ 2,046     $ 1,980  

Less: Sublease income (Note 19)

    (38 )     (37 )

Net lease cost

  $ 2,008     $ 1,943  

__________________________________________________

               

1 Includes variable lease costs, which are immaterial.

               

 

 

Supplemental cash flow information related to leases was as follows:

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

 

 

(Dollars in thousands)

 
Cash paid for amounts included in the measurement of lease liabilities:                

Operating cash flows from operating leases

  $ 1,906     $ 1,771  

Leased assets obtained in exchange for new operating lease liabilities

  $ 2,645     $ 1,477  

 

 

Weighted-average remaining lease term and discount rate for operating leases were as follows:

 

   

March 31,

2020

 

Weighted-average remaining lease term (in years)

    6.0  

Weighted-average discount rate

    5.5 %

               

 

Maturities of operating lease liabilities were as follows:

 

   

Year Ended

 
   

December 31,

 
   

(Dollars in thousands)

 

2020 (excluding the three months ended March 31, 2020)

  $ 5,112  

2021

    7,009  

2022

    6,670  

2023

    5,718  

2024

    5,307  

Thereafter

    9,529  

Total operating lease payments

  $ 39,345  
         

Less: Interest

    6,073  

Present value of operating lease liabilities 1

  $ 33,272  

 

__________________________________________________

       

1 Homebuilding and financial services operating lease liabilities of $32.2 million and $1.1 million, respectively, are included as a component of accrued and other liabilities and accounts payable and accrued liabilities, respectively, in the homebuilding and financial services section of our consolidated balance sheet at March 31, 2020.

 

 

 

 

9.

Homebuilding Prepaid and Other Assets

 

The following table sets forth the components of homebuilding prepaid and other assets:

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Operating lease right-of-use asset (Note 8)

  $ 31,619     $ 30,277  

Land option deposits

    27,126       27,361  

Prepaid expenses

    6,997       7,294  

Goodwill

    6,008       6,008  

Deferred debt issuance costs on revolving credit facility, net

    5,746       6,130  

Other

    506       1,288  

Total

  $ 78,002     $ 78,358  

 

 

 

10.

Homebuilding Accrued and Other Liabilities and Financial Services Accounts Payable and Accrued Liabilities

 

The following table sets forth information relating to homebuilding accrued and other liabilities:

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Customer and escrow deposits

  $ 43,342     $ 39,001  

Warranty accrual

    30,887       31,386  

Accrued compensation and related expenses

    26,333       45,003  

Lease liability (Note 8)

    32,182       30,830  

Accrued interest

    14,018       27,734  

Construction defect claim reserves

    8,318       8,196  

Land development and home construction accruals

    8,862       9,750  

Other accrued liabilities

    69,092       54,040  

Total accrued liabilities

  $ 233,034     $ 245,940  

 

 

The following table sets forth information relating to financial services accounts payable and accrued liabilities:

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Insurance reserves

  $ 53,132     $ 52,219  

Accounts payable and other accrued liabilities

    17,845       16,310  

Total accounts payable and accrued liabilities

  $ 70,977     $ 68,529  

 

 

 

11.

Warranty Accrual

 

Our homes are sold with limited third-party warranties and, under our agreement with the issuer of the third-party warranties, we are responsible for performing all of the work for the first two years of the warranty coverage and paying for substantially all of the work required to be performed during years three through ten of the warranties. We record accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Our warranty accrual is recorded based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The determination of the warranty accrual rate for closed homes and the evaluation of our warranty accrual balance at period end are based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.

 

Our warranty accrual is included in accrued and other liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty accrual are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations and comprehensive income.

 

The table set forth below summarizes accrual, adjustment and payment activity related to our warranty accrual for the three months ended March 31, 2020 and 2019.

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 31,386     $ 28,262  

Expense provisions

    3,165       3,348  

Cash payments

    (3,664 )     (2,493 )

Adjustments

    -       875  

Balance at end of period

  $ 30,887     $ 29,992  

 

 

 

12.

Insurance and Construction Defect Claim Reserves

 

The establishment of reserves for estimated losses associated with insurance policies issued by Allegiant and re-insurance agreements issued by StarAmerican are based on actuarial studies that include known facts and interpretations of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns depending on the business conducted, and changing regulatory and legal environments. It is possible that changes in the insurance payment experience used in estimating our ultimate insurance losses could have a material impact on our insurance reserves.

 

The establishment of reserves for estimated losses to be incurred by our homebuilding subsidiaries associated with (1) the self-insured retention (“SIR”) portion of construction defect claims that are expected to be covered under insurance policies with Allegiant and (2) the entire cost of any construction defect claims that are not expected to be covered by insurance policies with Allegiant are based on actuarial studies that include known facts similar to those for our insurance reserves. It is possible that changes in the payment experience used in estimating our ultimate losses for construction defect claims could have a material impact on our reserves.

 

The table set forth below summarizes our insurance and construction defect claim reserves activity for the three months ended March 31, 2020 and 2019. These reserves are included as a component of accounts payable and accrued liabilities and accrued and other liabilities in either the financial services or homebuilding sections of the consolidated balance sheets, respectively.

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Balance at beginning of period

  $ 60,415     $ 55,308  

Expense provisions

    2,918       2,465  

Cash payments, net of recoveries

    (1,883 )     (1,554 )

Balance at end of period

  $ 61,450     $ 56,219  

 

In the ordinary course of business, we make payments from our insurance and construction defect claim reserves to settle litigation claims arising from our homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments, net of recoveries shown for the three months ended March 31, 2020 and 2019 are not necessarily indicative of what future cash payments will be for subsequent periods.

 

 

13.

Income Taxes

 

Our overall effective income tax rates were 24.3% and 27.1% for the three months ended March 31, 2020 and 2019, respectively, resulting in income tax expense of $11.8 million and $15.1 million for the same periods, respectively. The year-over-year decrease in our effective tax rate for the three months ended March 31, 2020 was primarily impacted by a windfall on non-qualifying stock options exercised and lapsed restricted stock awards during the three months ended March 31, 2020 as well as energy tax credits related to homes closed during the quarter. These benefits were partially offset by a decrease in the amount of executive compensation that is deductible under Internal Revenue Code Section 162(m).

 

At March 31, 2020 and December 31, 2019, we had deferred tax assets, net of valuation allowances and deferred tax liabilities, of $20.7 million and $21.8 million, respectively. The valuation allowances were primarily related to various state net operating loss carryforwards where realization is uncertain at this time due to the limited carryforward periods coupled with minimal activity that exists in certain states.

 

 

 

 

14.

Senior Notes

 

The carrying values of our senior notes as of March 31, 2020 and December 31, 2019, net of any unamortized debt issuance costs or discount, were as follows:

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

5.625% Senior Notes due February 2020, net

  $ -     $ 249,909  

5.500% Senior Notes due January 2024, net

    249,060       249,005  

3.850% Senior Notes due January 2030, net

    297,285       -  

6.000% Senior Notes due January 2043, net

    490,555       490,508  

Total

  $ 1,036,900     $ 989,422  

 

 

Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries.

 

 

15.

Stock-Based Compensation

 

We account for share-based awards in accordance with ASC Topic 718 Compensation–Stock Compensation (“ASC 718”), which requires the fair value of stock-based compensation awards to be amortized as an expense over the vesting period. Stock-based compensation awards are valued at fair value on the date of grant. The following table sets forth share-based award expense activity for the three months ended March 31, 2020 and 2019, which is included as a component of selling general and administrative expenses and expenses in the homebuilding and financial services sections of our consolidated statements of operations and comprehensive income, respectively:

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 
   

(Dollars in thousands)

 

Stock option grants expense

  $ 495     $ 255  

Restricted stock awards expense

    1,517       911  

Performance share units expense

    2,428       3,085  

Total stock-based compensation

  $ 4,440     $ 4,251  

 

 

On August 5, 2019, May 23, 2018, June 20, 2017 and July 25, 2016, the Company granted long term performance share unit awards (“PSUs”) to each of the CEO, the COO, and the Chief Financial Officer (“CFO”) under the Company’s 2011 Equity Incentive Plan. The PSUs are earned based upon the Company’s performance, over a three year period (the “Performance Period”), measured by increasing home sale revenues over a “Base Period.” Each award is conditioned upon the Company achieving an average gross margin from home sales (excluding impairments) of at least fifteen percent (15%) over the Performance Period. Target goals will be earned if the Company’s three year average home sale revenues over the Performance Period (“Performance Revenues”) exceed the home sale revenues over the Base Period (“Base Revenues”) by at least 10% but less than 20%. If Performance Revenues exceed the Base Revenues by at least 5% but less than 10%, 50% of the Target Goals will be earned (“Threshold Goals”). If Performance Revenues exceed the Base Revenues by at least 20%, 200% of the Target Goals will be earned (“Maximum Goals”). For the PSUs granted in 2017, 2018 and 2019, the number of PSUs earned shall be adjusted to be proportional to the partial performance between the Threshold Goals, Target Goals and Maximum Goals. Details for each defined term above for each grant has been provided in the table below.

 

 

               

Threshold Goal

 

Target Goal

 

Maximum Goal

         

Maximum

   

Maximum

 

Date of

Award

 

Performance

Period

 

Base

Period

 

Base

Period

Revenues

 

PSUs

 

Home

Sale

Revenues

 

PSUs

 

Home

Sale

Revenues

 

PSUs

 

Home

Sale

Revenues

 

Fair Value

per Share

   

Potential

Expense

to be

Recognized*

   

Remaining

Expense

to be

Recognized*

 
                                                             
July 25, 2016  

July 1, 2016 to

June 30, 2019

 

July 1, 2015 to

June 30, 2016

  $1.975 billion   137,781   $2.074 billion   275,562   $2.173 billion   551,124   $2.370 billion   $ 19.66     $ 10,834     $ -  
                                                             

June 20, 2017

 

April 1, 2017 to

March 31, 2020

 

April 1, 2016 to

March 31, 2017

 

$2.426 billion

  144,342  

$2.547 billion

  288,684  

$2.669 billion

  577,368  

$2.911 billion

  $ 27.83     $ 16,070     $ -  
                                                             

May 23, 2018

 

April 1, 2018 to

March 31, 2021

 

April 1, 2017 to

March 31, 2018

 

$2.543 billion

  145,800  

$2.670 billion

  291,600  

$2.797 billion

  583,200  

$3.052 billion

  $ 25.57     $ 14,915     $ 7,641  
                                                             

August 5, 2019

 

January 1, 2019 to

December 31, 2021

 

January 1, 2018 to

December 31, 2018

 

$2.982 billion

  135,000  

$3.131 billion

  270,000  

$3.280 billion

  540,000  

$3.578 billion

  $ 32.60     $ 17,604     $ 17,604  

 

 

* Dollars in thousands

 

 

In accordance with ASC 718, the PSUs were valued on the date of grant at their fair value. The fair value of these grants was equal to the closing price of MDC stock on the date of grant less the discounted cash flows of expected future dividends over the respective vesting period (as these PSUs do not participate in dividends). The grant date fair value and maximum potential expense if the Maximum Goals were met for these awards has been provided in the table above. ASC 718 does not permit recognition of expense associated with performance-based stock awards until achievement of the performance targets are probable of occurring.

 

2016 PSU Grants. The 2016 PSU awards vested on August 7, 2019 at the Maximum Goal following the achievement of the Maximum Goals and certification by the Compensation Committee that the Maximum Goals had been achieved. For the three months ended March 31, 2019 the Company recorded share-based award expense of $0.9 million related to these awards.

 

2017 PSU Grants. As of March 31, 2020, the Company determined that achievement of the Maximum Goals for these awards was probable and, as such, the Company recorded share- award expense related to the awards of $1.4 million for the three months ended March 31, 2020. For the three months ended March 31, 2019, the Company recorded share-based award expense of $2.2 million related to these awards.

 

2018 PSU Grants. As of March 31, 2020, the Company determined that achievement between the Target and Maximum Goals for these awards was probable and, as such, the Company recorded share-based award expense related to the awards of $1.0 million for the three months ended March 31, 2020. At March 31, 2019, the Company concluded that achievement of any of the performance metrics had not met the level of probability required to record compensation expense, and as such, no expense related to these awards had been recognized as of March 31, 2019.

 

2019 PSU Grants. For the PSUs granted in August of 2019, the Company concluded that achievement of any of the performance metrics has not met the level of probability required to record compensation expense and, as such, no expense related to these awards has been recognized as of March 31, 2020.

 

 

 

16.

Commitments and Contingencies

 

Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At March 31, 2020, we had outstanding surety bonds and letters of credit totaling $284.0 million and $96.6 million, respectively, including $70.9 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $152.4 million and $51.2 million, respectively. All letters of credit as of March 31, 2020, excluding those issued by HomeAmerican, were issued under our unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.

 

We have made no material guarantees with respect to third-party obligations.

 

Litigation. Due to the nature of the homebuilding business, we have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

 

Lot Option Contracts. In the ordinary course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments, and minimizes the amount of land inventories on our consolidated balance sheets. In certain cases, these contracts will be settled shortly following the end of the period. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At March 31, 2020, we had cash deposits and letters of credit totaling $21.4 million and $8.2 million, respectively, at risk associated with the option to purchase 8,533 lots.

 

Coronavirus/COVID-19 Pandemic. While the response to the pandemic continues to rapidly evolve, many state and local governments had extended and expanded on restrictions that substantially limited the operations of non-essential businesses and the activities of individuals. Certain markets in which we do business stopped our construction and sales of homes and others limited the operations of sales centers and model homes. We continue to market and sell homes in all markets, but economic uncertainty and shelter in place requirements have caused a significant decline in traffic at our sales centers and model homes, and we have seen a significant increase in our cancellation rate. The impact of the decreased traffic and increased cancellation rate was evident in our net new orders for the month of April, which fell 53% year-over-year. While the extent to which the pandemic will impact our financial results in the coming periods depends on future developments, the pandemic and its associated impact on the U.S. economy and consumer confidence could have a material impact to the Company’s future results of operations, financial condition and cash flows.

 

 

 

17.

Derivative Financial Instruments

 

The derivative instruments we utilize in the normal course of business are interest rate lock commitments and forward sales of mortgage-backed securities, both of which typically are short-term in nature. Forward sales of mortgage-backed securities are utilized to hedge changes in fair value of our interest rate lock commitments as well as mortgage loans held-for-sale not under commitments to sell. For forward sales of mortgage-backed securities, as well as interest rate lock commitments that are still outstanding at the end of a reporting period, we record the changes in fair value of the derivatives in revenues in the financial services section of our consolidated statements of operations and comprehensive income with an offset to other assets or accounts payable and accrued liabilities in the financial services section of our consolidated balance sheets, depending on the nature of the change.

 

At March 31, 2020, we had interest rate lock commitments with an aggregate principal balance of $221.0 million. Additionally, we had $43.7 million of mortgage loans held-for-sale at March 31, 2020 that had not yet been committed to a mortgage purchaser. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale that had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $162.0 million at March 31, 2020.

 

For the three months ended March 31, 2020 and 2019, we recorded net gains on derivatives of $1.0 million and $0.9 million, respectively, in revenues in the financial services section of our consolidated statements of operations and comprehensive income.

.

 

18.

Lines of Credit

 

Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement was amended on November 1, 2018 to (1) extend the Revolving Credit Facility maturity to December 18, 2023, (2) increase the aggregate commitment from $700 million to $1.0 billion (the “Commitment”) and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.5 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a prime rate, (3) a federal funds effective rate plus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to a specified eurocurrency rate plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.

 

The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the Revolving Credit Facility. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default.

 

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of March 31, 2020.

 

We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At March 31, 2020 and December 31, 2019, there were $25.7 million and $23.5 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. We had $15.0 million outstanding under the Revolving Credit Facility as of March 31, 2020 and December 31, 2019. As of March 31, 2020, availability under the Revolving Credit Facility was approximately $959.3 million.

 

 

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). Effective May 23, 2019, the Mortgage Repurchase Facility was amended to extend its termination date to May 21, 2020. The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased on March 30, 2020 from $75 million to $110 million effective through April 27, 2020. The Mortgage Repurchase Facility also had a temporary increase in the maximum aggregate commitment from $75 million to $150 million on December 24, 2019 effective through January 22, 2020. At March 31, 2020 and December 31, 2019, HomeAmerican had $108.7 million and $149.6 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. Advances under the Mortgage Repurchase Facility carry a price range that is based on a LIBOR rate or successor benchmark rate.

 

The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of March 31, 2020.

 

 

19.

Related Party Transactions

 

We contributed $1.5 million in cash to the MDC/Richmond American Homes Foundation (the “Foundation”) during the three months ended March 31, 2020. The Foundation is a non-profit organization operated exclusively for charitable, educational and other purposes beneficial to social welfare within the meaning of Section 501(c)(3) of the Internal Revenue Code. The following Directors and/or officers of the Company served as directors of the Foundation at March 31, 2020, all of whom serve without compensation:

 

Name

 

MDC Title

Larry A. Mizel

 

Chairman and CEO

David D. Mandarich

 

President and COO

 

Three other individuals, who are independent of the Company, also serve as directors of the Foundation. All directors of the Foundation serve without compensation.

 

The Company has a sublease agreement with CVentures, Inc. Larry A. Mizel, the Chief Executive Officer of the Company, is the President of CVentures, Inc. The sublease is for office space that CVentures, Inc. has continuously leased from the Company since 2005. The current sublease term commenced November 1, 2016 and will continue through October 31, 2021, with an option to extend to October 31, 2026. The sublease agreement is for approximately 5,437 rentable square feet at a base rent that increases over the initial term from $26.50 to $28.68 per rentable square foot per year, and increasing over the extension term from $29.26 to $31.67 per rentable square foot per year. The sublease rent is an allocation of the rent under the master lease agreement based on the sublease square footage.

 

 

 

20.

Supplemental Guarantor Information

 

Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the "Guarantor Subsidiaries"), which are 100%-owned subsidiaries of the Company:

 

 

M.D.C. Land Corporation

 

RAH of Florida, Inc.

 

Richmond American Construction, Inc.

 

Richmond American Homes of Arizona, Inc.

 

Richmond American Homes of Colorado, Inc.

 

Richmond American Homes of Florida, LP

 

Richmond American Homes of Illinois, Inc.

 

Richmond American Homes of Maryland, Inc.

 

Richmond American Homes of Nevada, Inc.

 

Richmond American Homes of New Jersey, Inc.

 

Richmond American Homes of Oregon, Inc.

 

Richmond American Homes of Pennsylvania, Inc.

 

Richmond American Homes of Utah, Inc.

 

Richmond American Homes of Virginia, Inc.

 

Richmond American Homes of Washington, Inc.

 

The senior note indentures do not provide for a suspension of the guarantees, but do provide that any Guarantor may be released from its guarantee so long as (1) no default or event of default exists or would result from release of such guarantee, (2) the Guarantor being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (3) the Guarantors released from their guarantees in any year-end period comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (4) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (5) the Guarantor is released from its guarantee(s) under all Specified Indebtedness (other than by reason of payment under its guarantee of Specified Indebtedness). Upon delivery of an officers’ certificate and an opinion of counsel stating that all conditions precedent provided for in the indenture relating to such transactions have been complied with and the release is authorized, the guarantee will be automatically and unconditionally released. “Specified Indebtedness” means indebtedness under the senior notes, the Company’s Indenture dated as of December 3, 2002, the Revolving Credit Facility, and any refinancing, extension, renewal or replacement of any of the foregoing.

 

We have determined that separate, full financial statements of the Guarantor Subsidiaries would not be material to investors and, accordingly, supplemental financial information for the Guarantor and Non-Guarantor Subsidiaries is presented below.

 

 

Supplemental Condensed Combining Balance Sheet

 

   

March 31, 2020

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 

 

 

(Dollars in thousands)

 
ASSETS                                        

Homebuilding:

                                       

Cash and cash equivalents

  $ 380,318     $ 6,386     $ -     $ -     $ 386,704  

Restricted cash

    -       15,762       -       -       15,762  

Trade and other receivables

    694       68,607       -       -       69,301  

Inventories:

                                       

Housing completed or under construction

    -       1,215,214       -       -       1,215,214  

Land and land under development

    -       1,301,433       -       -       1,301,433  

Total inventories

    -       2,516,647       -       -       2,516,647  

Intercompany receivables

    2,265,553       5,919       -       (2,271,472 )     -  

Investment in subsidiaries

    279,593       -       -       (279,593 )     -  

Property and equipment, net

    23,033       39,283       -       -       62,316  

Deferred tax asset, net

    18,962       -       -       1,698       20,660  

Prepaid and other assets

    32,961       45,041       -       -       78,002  

Total homebuilding assets

    3,001,114       2,697,645       -       (2,549,367 )     3,149,392  
                                         

Financial Services:

                                       

Cash and cash equivalents

    -       -       22,159       -       22,159  

Marketable securities

    -       -       43,985       -       43,985  

Intercompany receivables

    -       -       64,666       (64,666 )     -  

Mortgage loans held-for-sale, net

    -       -       133,921       -       133,921  

Other assets

    -       -       25,953       (1,698 )     24,255  

Total financial services assets

    -       -       290,684       (66,364 )     224,320  

Total Assets

  $ 3,001,114     $ 2,697,645     $ 290,684     $ (2,615,731 )   $ 3,373,712  
                                         

LIABILITIES AND EQUITY

                                       

Homebuilding:

                                       

Accounts payable

  $ 515     $ 97,465     $ -     $ -     $ 97,980  

Accrued and other liabilities

    67,874       162,742       -       2,418       233,034  

Advances and notes payable to parent and subsidiaries

    69,748       2,254,742       -       (2,324,490 )     -  

Revolving credit facility

    15,000       -       -       -       15,000  

Senior notes, net

    1,036,900       -       -       -       1,036,900  

Total homebuilding liabilities

    1,190,037       2,514,949       -       (2,322,072 )     1,382,914  
                                         

Financial Services:

                                       

Accounts payable and other liabilities

    -       -       73,395       (2,418 )     70,977  

Advances and notes payable to parent and subsidiaries

    -       -       11,648       (11,648 )     -  

Mortgage repurchase facility

    -       -       108,744       -       108,744  

Total financial services liabilities

    -       -       193,787       (14,066 )     179,721  

Total Liabilities

    1,190,037       2,514,949       193,787       (2,336,138 )     1,562,635  
                                         

Equity:

                                       

Total Stockholders' Equity

    1,811,077       182,696       96,897       (279,593 )     1,811,077  

Total Liabilities and Stockholders' Equity

  $ 3,001,114     $ 2,697,645     $ 290,684     $ (2,615,731 )   $ 3,373,712  

 

 

Supplemental Condensed Combining Balance Sheet

 

   

December 31, 2019

 
                   

Non-

                 
           

Guarantor

   

Guarantor

   

Eliminating

   

Consolidated

 
   

MDC

   

Subsidiaries

   

Subsidiaries

   

Entries

   

MDC

 
   

Dollars in thousands

 
ASSETS                                        

Homebuilding:

                                       

Cash and cash equivalents

  $ 418,822     $ 5,364     $ -     $ -     $ 424,186  

Restricted cash

    -       14,279       -       -       14,279  

Trade and other receivables

    624       65,205       -       -       65,829  

Inventories:

                                       

Housing completed or under construction

    -       1,036,191       -       -       1,036,191  

Land and land under development

    -       1,330,384       -       -       1,330,384  

Total inventories

    -       2,366,575       -       -       2,366,575  

Intercompany receivables

    1,936,075       6,370       -       (1,942,445 )     -  

Investment in subsidiaries

    488,993       -       -       (488,993 )     -  

Property and equipment, net

    23,192       37,222       -       -       60,414  

Deferred tax assets, net

    22,508       -       -       (740 )     21,768  

Other assets

    34,728       43,630       -       -       78,358  

Total Homebuilding Assets

    2,924,942       2,538,645       -       (2,432,178 )     3,031,409  
                                         

Financial Services:

                                       

Cash and cash equivalents

    -       -       35,747       -       35,747  

Marketable securities

    -       -       56,747       -       56,747  

Intercompany receivables

    -       -       47,753       (47,753 )     -  

Mortgage loans held-for-sale, net

    -       -       197,021       -       197,021  

Other assets

    -       -       16,692       740       17,432  

Total Financial Services Assets

    -       -       353,960       (47,013 )     306,947  

Total Assets

  $ 2,924,942     $ 2,538,645     $ 353,960     $ (2,479,191 )   $ 3,338,356  
                                         

LIABILITIES AND EQUITY

                                       

Homebuilding:

                                       

Accounts payable

  $ 289     $ 87,075     $ -     $ -     $ 87,364  

Accrued and other liabilities

    84,088       156,652       -       5,200       245,940  

Advances and notes payable to parent and subsidiaries

    53,658       1,912,969       -       (1,966,627 )     -  

Revolving credit facility

    15,000       -       -       -       15,000  

Senior notes, net

    989,422       -       -       -       989,422  

Total Homebuilding Liabilities

    1,142,457       2,156,696       -       (1,961,427 )     1,337,726  
                                         

Financial Services:

                                       

Accounts payable and accrued liabilities

    -       -       73,729       (5,200 )     68,529  

Advances and notes payable to parent and subsidiaries

    -       -       23,571       (23,571 )     -  

Mortgage repurchase facility

    -       -       149,616       -       149,616  

Total Financial Services Liabilities

    -       -       246,916       (28,771 )     218,145