The housing market was exceptionally strong in 2021 as the high demand that we experienced in 2020 continued, driven by favorable market factors including low mortgage interest rates, record low supply of existing homes and persistent demand, particularly from the millennial and baby boomer generations who are experiencing increased levels of household savings alongside life events that align with home ownership. We believe that the elevated demand created by these underlying economic and demographic factors will continue in the near to mid-term but will taper to a normalized pace over time. We believe our strategy for providing affordable new homes in desirable locations with inventory available for quick move-in is well positioned to address these buyer concerns. At
Meritage, we continue to focus on enhancing our entry-level and first move-up product through our commitment to simplification and remaining focused on our key financial initiatives of home closing gross margin improvement, selling, general and administrative cost control, balance sheet management and long-term community count growth. As of December 31, 2021, 98% of our ending number of actively selling communities are targeted to first-time or first move-up buyers and those buyer segments represented approximately 98% of our orders in 2021. In 2021, supply chain constraints and labor shortages caused by COVID-19 and other economic-related disruptions impacted our production and the homebuilding industry as a whole. Through long cultivated relationships with our national and local partners, we were able to navigate the limitations and expect to continue to utilize our spec-heavy, limited SKU operating model to manage the supply chain concerns that are expected to continue for at least the next several quarters.
Summary of business results
Total home closing revenue increased 14.1% due to higher home closing volume and higher ASPs, growing to our highest annual home closing revenue in Company history of
$5.1 billionfor the year ended December 31, 2021from $4.5 billionin 2020. Home closing gross margin for the year ended December 31, 2021improved by 580 basis points to 27.8% while gross margin for the year ended December 31, 2020was 22.0%. The higher margin in 2021 reflects increased pricing power, higher closings and effective cost controls, despite rising prices for lumber and other commodities. We recorded impairment charges of approximately $2.1 millionduring the year ended December 31, 2021, primarily resulting from the decision to sell land assets that no longer fit our strategy, compared to $24.9 millionof similar charges in 2020. General and administrative expenses as a percentage of home closing revenue held steady at 3.6% in both 2021 and 2020, but did increase $22.4 millionover the prior year to $181.4 million, primarily driven by higher performance related compensation expenses and a higher employee headcount. Interest expense decreased to $0.3 millionfor the year ended December 31, 2021from $2.2 millionin 2020, as we benefited from lower interest rates as a result of our debt refinancing in April 2021and more capitalization of interest on a higher balance of qualified assets. In connection with the debt refinancing transaction, we recognized an $18.2 millionloss on early extinguishment of debt (see Note 7 in the accompanying financial statements for additional information). Pre-tax net earnings of $954.8 millionin 2021 increased 79.0% from $533.6 millionin 2020. Our effective tax rate in 2021 was 22.8% as compared to a 20.6% effective tax rate in 2020. Net income for the year ended December 31, 2021was $737.4 millioncompared to $423.5 millionin 2020. Our results for 2021 reflect strong growth in both closings and orders as buyers took advantage of the persistent low interest-rate environment and capitalized on their desire to purchase their first home or move out of their existing home and transition to a larger, healthier home with indoor space to accommodate work and school from home needs and outdoor space to enjoy. We ended 2021 with 12,801 closings, our highest closing volume in Company history and represented an 8.2% increase over 11,834 closings in 2020. Orders were relatively flat year-over-year, at 13,808 orders for the year compared to 13,724 in 2020 due to our metering of orders to align with production constraints. At December 31, 2021, our backlog of $2.5 billionon 5,679 units increased by 38.8% in value, compared to $1.8 billionon 4,672 units at December 31, 2020. Supported by strong market demand, our full year cancellation rate on sales orders as a percentage of gross sales units in 2021 decreased to 10.2% as compared to 13.6% for the year ended December 31, 2020.
We believe that the investments in our new communities designed for the first-time and first move-up homebuyer, our commitment to an all-spec strategy for our entry-level homes, our simplified first move-up design studio process, and industry-leading innovation in energy-efficient product offerings and automation create a differentiated strategy that has aided us in our growth in the highly competitive new home market. 28 --------------------------------------------------------------------------------
Our goal includes the following strategic initiatives:
•Increase the number of our communities and our market share;
•Continually improve the overall home buying experience through simplification and innovation;
• Leverage and extend technology solutions through digital offerings to our customers, such as our virtual home tours, interactive maps, digital financial services offerings and online warranty portal;
•Increasing homeowner satisfaction by setting industry standards for energy-efficiency and offering healthier, safer homes that come equipped with standard features such as multi-speed HVAC systems to save energy and improve air quality and enhanced security features;
• Simplify our production process to enable us to build our homes more efficiently and reduce our construction costs, which allows us to price our homes competitively and deliver them in shorter lead times; and
•Improve our home closing gross margin by increasing closing volume, allowing us to better leverage our overhead;
In order to continue to focus on growing our business, we also remain committed to the following:
• Maintaining a good pace of orders through our consumer and market research to ensure that we are building homes that offer our buyers the desired features and amenities;
• Achieve or maintain a position of at least 5% market share in all of our markets;
• Continue to innovate and promote our energy efficiency program and our M.Connected® automation suite to create differentiation for the
• Manage construction efficiency and costs through relationships with national and regional vendors with a focus on construction quality and warranty management;
•Prudent management of our liquid assets and a solid balance sheet; we ended the year with a debt ratio of 27.6% and a net debt ratio of 15.1%;
•Maximize returns for our shareholders, most recently through our improved financial performance and share buyback program; and
•Promoting a positive environment for our employees through our commitment to foster DE&I and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts.
Critical accounting estimates
We have established various accounting policies that govern the application of
United Statesgenerally accepted accounting principles ("GAAP") in the preparation and presentation of our consolidated financial statements. Our significant accounting policies are described in Note 1 of the accompanying consolidated financial statements included in this Form 10- K. Certainof these policies involve critical accounting estimates, which are significant judgments, assumptions and estimates by management in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the carrying value of certain assets and liabilities, and revenue and costs. We are subject to uncertainties such as the impact of future events, economic, environmental, political and regulatory factors and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of our financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are revised when circumstances warrant. Such changes in estimates and refinements in methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements. The judgments, assumptions and estimates we use and believe to be critical to our business are based on historical experience, knowledge of the accounts, industry practices, and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we have made, actual results may differ from these judgments and estimates and could have a material impact on the carrying values of assets and liabilities and the results of our operations.
The critical accounting estimates that we believe involve the most difficult, subjective or complex judgments are as follows:
Real Estate Appraisal and Cost of Home Closings
Real estate inventory is stated at cost unless the community or land is determined to be impaired, at which point the inventory is written down to fair value as required by ASC 360-10, Property, Plant and Equipment. Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, direct overhead costs incurred during development and home construction that benefit the entire community, less impairments, if any. Land and development costs are typically allocated and transferred to homes when home construction begins. Home construction costs are accumulated on a per-home basis, while selling and marketing costs are expensed as incurred. Cost of home closings includes the specific construction costs of the home and all related allocated land acquisition, land development and other common costs (both incurred and estimated to be incurred) that are allocated based upon the total number of homes expected to be closed in each community or phase. Any changes to the estimated total development costs of a community or phase are allocated to the remaining homes in that community or phase. When a home closes, we may have incurred costs for goods and services that have not yet been paid. We accrue a liability to capture such obligations in connection with the home closing which is charged directly to cost of sales. We capitalize qualifying interest to inventory during the development and construction periods. Capitalized interest is included in cost of closings when the related inventory is closed. Included within our real estate inventory is land held for development and land held for sale. Land held for development primarily represents land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for these inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred. We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, slower absorptions, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control. To address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate home construction and land development costs. Typically, a community's life cycle ranges from three to five years, commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the sale, construction and closing of the homes. Actual community lives will vary based on the size of the community, the orders absorption rates and whether the land purchased was raw, partially-developed or in finished status. Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be significantly shorter. All of our land inventory and related real estate assets are periodically reviewed for recoverability when certain criteria are met, but at least annually, as our inventory is considered "long-lived" in accordance with GAAP. If the undiscounted cash flows expected to be generated by an asset are lower than its carrying amount, impairment charges are recorded to write down the asset to its estimated fair value. Our determination of fair value is based on projections and estimates. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions. We conduct an analysis if indicators of a decline in value of our land and real estate assets exists. If an asset is deemed to be impaired, the impairment recognized is measured as the amount by which the assets' carrying amount exceeds their fair value. The impairment of a community is allocated to each lot on a straight-line basis and is recognized in Cost of closings in the period in which the impairment is determined. We recorded impairment charges of approximately
$2.1 millionduring the year ended December 31, 2021, primarily resulting from the decision to sell land assets that no longer fit our strategy, compared to $24.9 millionof similar charges in 2020.
We have made no material changes to our methodology or material assumptions used to record and value our real estate and home cost closings over the past three years.
We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects and cover any resultant damages, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, warranty reserves are recorded to cover our exposure to costs for materials and labor not expected to be covered by our subcontractors or available insurance to the extent they relate to warranty-type claims subsequent to the delivery of a home to the homeowner. Reserves are reviewed on a regular basis and, with the assistance of an actuary for the structural warranty, we determine their sufficiency based on our and industry-wide historical data and trends. These reserves are subject to variability due to uncertainties regarding material or construction defect claims, the markets in which we build, claim settlement history, insurance, legal interpretations and expected recoveries, among other factors. At
December 31, 2021, our warranty reserve was $26.3 million, reflecting an accrual of 0.1% to 0.5% of a home's sale price depending on our loss history in the geographic area in which the home was built. A 10% increase in our warranty reserve rate would have increased our accrual and corresponding cost of sales by approximately $1.8 millionin 2021. There were no adjustments to our reserve balance for the years ended December 31, 2021and December 31, 2020. While we believe that the warranty reserve is sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. Furthermore, there can be no assurances that future economic, financial or legislative developments might not lead to a significant change in the reserve.
We have made no material changes to our methodology or the material assumptions used to record and measure our collateral reserves over the past three years.
Valuation of deferred tax assets
We account for income taxes using the asset and liability method, which requires that deferred tax assets and liabilities be recognized based on future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted. In accordance with ASC 740-10, Income Taxes, we evaluate our deferred tax assets by tax jurisdiction, including the benefit from net operating losses ("NOLs") by tax jurisdiction, to determine if a valuation allowance is required. Companies must assess, using significant judgments, whether a valuation allowance should be established based on the consideration of all available evidence using a "more likely than not" standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, experience with operating losses and experience of utilizing tax credit carryforwards and tax planning alternatives. We have no valuation allowance on our deferred tax assets and NOL carryovers at
December 31, 2021.
We have not made any material changes to our methodology or the material assumptions used to value our deferred tax assets over the past three years.
Home Closing Revenue, Home Orders and Backlog – Analysis by Segment
The composition of our closings, home orders and backlog is constantly changing and is based on a dissimilar mix of communities between periods as new projects and product lines open and existing projects wind down. 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. For discussion of our fiscal 2020 results compared to our fiscal 2019 results, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part II of our Annual Report on Form 10-K for the year ended
December 31, 2020.
The tables on the following pages present the operational and financial data that we consider most critical for the management of our operations (in thousands of dollars):
Years Ended December 31, Year Over Year 2021 2020 Chg $ Chg % Home Closing Revenue Total Dollars
$ 5,094,873 $ 4,464,389 $ 630,48414.1 % Homes closed 12,801 11,834 967 8.2 % Average sales price $ 398.0 $ 377.3$ 20.7 5.5 % West Region Arizona Dollars $ 802,401 $ 666,223 $ 136,17820.4 % Homes closed 2,183 2,019 164 8.1 % Average sales price $ 367.6 $ 330.0$ 37.6 11.4 % California Dollars $ 776,528 $ 774,349 $ 2,1790.3 % Homes closed 1,242 1,231 11 0.9 % Average sales price $ 625.2 $ 629.0$ (3.8) (0.6) % Colorado Dollars $ 335,490 $ 354,677 $ (19,187)(5.4) % Homes closed 630 738 (108) (14.6) % Average sales price $ 532.5 $ 480.6$ 51.9 10.8 % West Region Totals Dollars $ 1,914,419 $ 1,795,249 $ 119,1706.6 % Homes closed 4,055 3,988 67 1.7 % Average sales price $ 472.1 $ 450.2$ 21.9 4.9 % Central Region- TexasCentral Region Totals Dollars $ 1,500,682 $ 1,273,661 $ 227,02117.8 % Homes closed 4,165 3,894 271 7.0 % Average sales price $ 360.3 $ 327.1$ 33.2 10.1 % East Region Florida Dollars $ 600,554 $ 540,644 $ 59,91011.1 % Homes closed 1,663 1,466 197 13.4 % Average sales price $ 361.1 $ 368.8$ (7.7) (2.1) % Georgia Dollars $ 249,882 $ 229,577 $ 20,3058.8 % Homes closed 647 642 5 0.8 % Average sales price $ 386.2 $ 357.6$ 28.6 8.0 % North Carolina Dollars $ 528,840 $ 388,776 $ 140,06436.0 % Homes closed 1,390 1,132 258 22.8 % Average sales price $ 380.5 $ 343.4$ 37.1 10.8 % South Carolina Dollars $ 129,367 $ 105,369 $ 23,99822.8 % Homes closed 377 331 46 13.9 % Average sales price $ 343.1 $ 318.3$ 24.8 7.8 % Tennessee Dollars $ 171,129 $ 131,113 $ 40,01630.5 % Homes closed 504 381 123 32.3 % Average sales price $ 339.5 $ 344.1$ (4.6) (1.3) % East Region Totals Dollars $ 1,679,772 $ 1,395,479 $ 284,29320.4 % Homes closed 4,581 3,952 629 15.9 % Average sales price $ 366.7 $ 353.1$ 13.6 3.9 % 31
Years Ended December 31, Year Over Year 2021 2020 Chg $ Chg % Home Orders (1) Total Dollars
$ 5,796,813 $ 5,174,938 $ 621,87512.0 % Homes ordered 13,808 13,724 84 0.6 % Average sales price $ 419.8 $ 377.1$ 42.7 11.3 % West Region Arizona Dollars $ 951,730 $ 823,339 $ 128,39115.6 % Homes ordered 2,335 2,501 (166) (6.6) % Average sales price $ 407.6 $ 329.2$ 78.4 23.8 % California Dollars $ 773,166 $ 956,681 $ (183,515)(19.2) % Homes ordered 1,191 1,530 (339) (22.2) % Average sales price $ 649.2 $ 625.3$ 23.9 3.8 % Colorado Dollars $ 429,499 $ 361,619 $ 67,88018.8 % Homes ordered 750 750 - - % Average sales price $ 572.7 $ 482.2$ 90.5 18.8 % West Region Totals Dollars $ 2,154,395 $ 2,141,639 $ 12,7560.6 % Homes ordered 4,276 4,781 (505) (10.6) % Average sales price $ 503.8 $ 447.9$ 55.9 12.5 % Central Region- TexasCentral Region Totals Dollars $ 1,700,744 $ 1,472,183 $ 228,56115.5 % Homes ordered 4,413 4,476 (63) (1.4) % Average sales price $ 385.4 $ 328.9$ 56.5 17.2 % East Region Florida Dollars $ 738,132 $ 590,966 $ 147,16624.9 % Homes ordered 1,981 1,645 336 20.4 % Average sales price $ 372.6 $ 359.2$ 13.4 3.7 % Georgia Dollars $ 283,649 $ 237,576 $ 46,07319.4 % Homes ordered 694 665 29 4.4 % Average sales price $ 408.7 $ 357.3$ 51.4 14.4 % North Carolina Dollars $ 591,193 $ 472,483 $ 118,71025.1 % Homes ordered 1,501 1,367 134 9.8 % Average sales price $ 393.9 $ 345.6$ 48.3 14.0 % South Carolina Dollars $ 132,779 $ 122,049 $ 10,7308.8 % Homes ordered 390 380 10 2.6 % Average sales price $ 340.5 $ 321.2$ 19.3 6.0 % Tennessee Dollars $ 195,921 $ 138,042 $ 57,87941.9 % Homes ordered 553 410 143 34.9 % Average sales price $ 354.3 $ 336.7$ 17.6 5.2 % East Region Totals Dollars $ 1,941,674 $ 1,561,116 $ 380,55824.4 % Homes ordered 5,119 4,467 652 14.6 % Average sales price $ 379.3 $ 349.5$ 29.8 8.5 % (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. 32 --------------------------------------------------------------------------------
Years Ended December 31, 2021 2020 Ending Average Ending Average Active Communities Total 259 223.8 195 219.7 West Region Arizona 39 36.2 33 34.8 California 22 19.0 16 23.3 Colorado 17 14.6 11 12.0 West Region Totals 78 69.8 60 70.1
Central Region- TexasCentral Region Totals 73 65.4 63 66.9 East Region Florida 41 34.8 31 33.8 Georgia 15 11.2 7 12.5 North Carolina 26 24.6 21 20.6 South Carolina 14 8.8 6 6.0 Tennessee 12 9.2 7 9.8 East Region Totals 108 88.6 72 82.7 Years Ended December 31, 2021 2020 Cancellation Rates (1) Total 10.2 % 13.6 % West Region Arizona 10.8 % 12.2 % California 10.0 % 15.7 % Colorado 10.4 % 14.3 % West Region Totals 10.5 % 13.6 % Central Region- TexasCentral Region Totals 11.9 % 15.4 % East Region Florida 7.0 % 11.7 % Georgia 10.3 % 12.4 % North Carolina 7.0 % 9.6 % South Carolina 15.9 % 13.0 % Tennessee 9.5 % 16.3 % East Region Totals 8.5 % 11.8 %
(1)Cancellation rates are calculated as the number of units canceled for the period divided by the gross sales units for the same period.
At December 31, Year Over Year 2021 2020 Chg $ Chg % Order Backlog (1) Total Dollars
$ 2,516,164 $ 1,812,547 $ 703,61738.8 % Homes in backlog 5,679 4,672 1,007 21.6 % Average sales price $ 443.1 $ 388.0$ 55.1 14.2 % West Region Arizona Dollars $ 493,575 $ 343,917 $ 149,65843.5 % Homes in backlog 1,145 993 152 15.3 % Average sales price $ 431.1 $ 346.3$ 84.8 24.5 % California Dollars $ 271,383 $ 274,680 $ (3,297)(1.2) % Homes in backlog 393 444 (51) (11.5) % Average sales price $ 690.5 $ 618.6$ 71.9 11.6 % Colorado Dollars $ 198,832 $ 104,709 $ 94,12389.9 % Homes in backlog 328 208 120 57.7 % Average sales price $ 606.2 $ 503.4 $ 102.820.4 % West Region Totals Dollars $ 963,790 $ 723,306 $ 240,48433.2 % Homes in backlog 1,866 1,645 221 13.4 % Average sales price $ 516.5 $ 439.7$ 76.8 17.5 % Central Region- TexasCentral Region Totals Dollars $ 772,871 $ 572,242 $ 200,62935.1 % Homes in backlog 1,878 1,630 248 15.2 % Average sales price $ 411.5 $ 351.1$ 60.4 17.2 % East Region Florida Dollars $ 352,584 $ 214,790 $ 137,79464.2 % Homes in backlog 868 550 318 57.8 % Average sales price $ 406.2 $ 390.5$ 15.7 4.0 % Georgia Dollars $ 91,781 $ 57,882 $ 33,89958.6 % Homes in backlog 203 156 47 30.1 % Average sales price $ 452.1 $ 371.0$ 81.1 21.9 % North CarolinaDollars $ 225,854 $ 163,346 $ 62,50838.3 % Homes in backlog 565 454 111 24.4 % Average sales price $ 399.7 $ 359.8$ 39.9 11.1 % South CarolinaDollars $ 44,673 $ 41,211 $ 3,4628.4 % Homes in backlog 133 120 13 10.8 % Average sales price $ 335.9 $ 343.4$ (7.5) (2.2) % Tennessee Dollars $ 64,611 $ 39,770 $ 24,84162.5 % Homes in backlog 166 117 49 41.9 % Average sales price $ 389.2 $ 339.9$ 49.3 14.5 % East Region Totals Dollars $ 779,503 $ 516,999 $ 262,50450.8 % Homes in backlog 1,935 1,397 538 38.5 % Average sales price $ 402.8 $ 370.1$ 32.7 8.8 %
(1)Our backlog represents net sales not yet closed.
Fiscal 2021 vs. Fiscal 2020
Companywide. In 2021, home closing revenue grew by 14.1% to
$5.1 billionon 12,801 units compared to $4.5 billionon 11,834 units in 2020. The improved revenue reflects an 8.2% increase in volume and a 5.5% increase in ASP on closings resulting from pricing power on continued elevated demand in the homebuilding market due to the macroeconomic events discussed in "Industry Conditions." Order value increased 12.0% to $5.8 billionfrom $5.2 billion, due almost entirely to pricing power, as ASP on orders increased 11.3% year-over-year, while both order volume and orders pace were comparable with prior year as we metered orders in 2021 to align with our current production capacity. Order volume was 13,808 and 13,724 for the years ended December 31, 2021and 2020, respectively, as a 1.9% higher number of average active communities was offset by a 1.3% decline in orders pace of 5.1 per month in 2021 compared to 5.2 in 2020. We ended the year with 5,679 homes in backlog valued at $2.5 billion, 21.6% and 38.8% higher backlog units and value, respectively, compared to 2020. ASP on homes in backlog grew by 14.2% to $443,100at December 31 2021, compared to $388,000in 2020, reflective of the persistent pricing power experienced throughout the year. West. The West Regiongenerated $1.9 billionin home closing revenue for the year ended December 31, 2021, a 6.6% increase over the $1.8 billionin the prior year, closing 4,055 homes in 2021, up 1.7% from the 3,988 homes closed in 2020. Order value for the West Regionheld steady at $2.2 billionin 2021 as compared to $2.1 billionin 2020, as a 12.5% increase in ASP on orders offset the 10.6% decrease in order volume of 4,276 homes during the year ended December 31, 2021from 4,781 home orders in 2020. The decrease in order volume is primarily the result of a 10.1% decline in year-over-year orders pace per community to 5.1 per month in 2021 compared to 5.7 in 2020, due to the metering of orders as previously discussed, and a relatively consistent average active community count year-over-year. In the West Region, approximately 80% of our communities target first-time buyers at December 31, 2021. The West Regionended 2021 with backlog of 1,866 homes valued at $963.8 millionversus 1,645 homes at $723.3 millionin 2020, 13.4% and 33.2% increases over the prior year, respectively. Central. The Central Region, made up of our Texasmarkets, closed 4,165 homes for the year ended December 31, 2021compared to 3,894 in 2020. The 7.0% improvement in closing units combined with 10.1% higher ASP generated a 17.8% increase in home closing revenue to $1.5 billion, up from $1.3 billionin 2020. The Central Regionalso reported a 15.5% improvement in order value year-over-year due to a 17.2% increase in ASP on orders that was partially offset by 1.4% lower order volume. The decline in order volume was driven entirely by a 2.2% decline in average active communities. The Central Regionended 2021 with 4,413 orders valued at $1.7 billioncompared to 4,476 orders at $1.5 billionin the prior year. The Region ended 2021 with backlog of 1,878 units valued at $772.9 millioncompared to 1,630 units valued at $572.2 millionat December 31, 2020, reflecting a 17.2% improvement in ASP. East. The East Regiongenerated the strongest year-over-year improvements in both volume and value of closings and orders. The East Regionposted increases of 20.4% and 15.9% in home closing revenue and volume, respectively, to $1.7 billionon 4,581 homes in 2021 from $1.4 billionon 3,952 homes in 2021. Home closing revenue benefited from the increase in volume and a 3.9% higher ASP on closings. The East Regionwas the only region to see improvement in order volume, with order volume and value improving by 14.6% and 24.4%, respectively, in 2021 to 5,119 units valued at $1.9 billioncompared to 4,467 units valued at $1.6 billionin the prior year. The year-over-year improvement in orders is due to both a 7.0% higher orders pace and a 7.1% increase in average active communities, with the East as our only region to have an increase in average active communities. The East Regionalso delivered the greatest improvement in backlog units and value, ending 2021 with 1,935 units in backlog valued at $779.5 million, 38.5% and 50.8% increases, respectively, compared to the prior year.
Land closing receipts and gross profit
From time to time, we may sell certain land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in the specific geography. As a result of such sales, we recognized land closing revenue of
$25.2 millionand $17.7 millionfor the years ending December 31, 2021and 2020, respectively. We recognized losses of $1.1 millionand $20.8 millionin 2021 and 2020, respectively. The losses recognized in both years were due to the upcoming dispositions of certain assets that no longer fit our strategic focus on entry-level and first move-up homes and includes associated impairment charges of $2.0 millionand $21.8 million, in 2021 and 2020, respectively. 35
Other operating information (in thousands of dollars)
2021 2020 Percent of Percent of Home Closing Home Closing Dollars Revenue Dollars Revenue Home Closing Gross Profit (1) Total
$ 1,418,37727.8 % $ 980,40822.0 % West $ 519,37227.1 % $ 380,67521.2 % Central $ 448,28429.9 % $ 304,53823.9 % East $ 450,72126.8 % $ 295,19521.2 % (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 lot 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.
Fiscal 2021 vs. Fiscal 2020
Companywide. Home closing gross margin improved to 27.8% for the year ended
December 31, 2021compared to 22.0% in the prior year. Home closing gross profit increased by $438.0 millionto $1.4 billionin 2021 versus $980.4 millionin 2020, driven by the higher home closing revenue and 580 basis point increase in home closing gross margin. The improvement in home closing gross margin is primarily due to pricing power from robust buyer demand combined with leverage of fixed costs on greater home closing revenue, which have more than offset the rising lumber prices and increases in other commodity costs. West. Our West Regionhome closing gross margin improved 590 basis points to 27.1% in 2021 versus 21.2% in 2020. Pricing power and leverage of fixed costs on greater revenues led to improved margins year-over-year. Central. The Central Regionproduced the highest home closing gross margin and the greatest improvement of 600 basis points for the year ended December 31, 2021at 29.9%, up from 23.9% in the prior year. The improvement in gross margin was due to pricing power resulting in the highest ASP increase in the Company of 10.1% combined with leverage of fixed costs. East. The East Regionexperienced a 560 basis point improvement in 2021 of 26.8% versus 21.2% for 2020. The margin improvement in the Region is the result of greater leverage of fixed costs on 20.4% higher closing revenue year-over-year as well as a 3.9% increase in ASP. 36
Years Ended December 31, ($ in thousands) 2021 2020 Financial services profit
$ 18,034 $ 16,388Financial services profit. Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title and Meritage Insurance, as well as our portion of earnings from a mortgage joint venture. The increase of $1.6 million, or 10.0%, is in line with the increase in home closing volume year-over-year. Years Ended December 31, ($ in thousands) 2021 2020
Commissions and other selling expenses
Percentage of home closing income
5.6 % 6.4 %
General and administrative expenses
Percentage of home closing income
3.6 % 3.6 % Interest Expense
$ (318) $ (2,177)Other Income, Net $ 4,864 $ 6,662
Loss on early extinguishment of debt
$ (217,390) $ (110,091)
Fiscal 2021 vs. Fiscal 2020
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
$2.5 millionand decreased as a percentage of home closing revenue by 80 basis points in 2021 over 2020. The decrease as a percentage of home closing revenue is due to lower broker commissions in 2021 and our utilization of digital sales solutions. Additionally, the latter half of 2020 was negatively impacted by increased commission incentives that were temporarily offered during the early stages of the pandemic. The decrease in commissions and other sales costs in dollars was primarily the result of savings in marketing and advertising spend as we leveraged more digital platforms and efficiencies integrated into our sales and marketing structure. 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 year ended December 31, 2021, general and administrative expenses were $181.4 millionor 3.6% of home closing revenue as compared to $159.0 millionor 3.6% of home closing revenue for the 2020 period. The $22.4 millionincrease is due primarily to increased payroll and performance based bonus compensation expenses on higher employee headcount and one-time items totaling approximately $5.0 millionincluded retirement payments to our former General Counsel who retired in December 2021and a change in the Company's retirement vesting eligibility for equity awards. As a percentage of home closing revenue, general and administrative expenses were consistent at 3.6% for both periods, as we realized the efforts of our cost control objectives. We have also continued our restrictions on certain corporate expenditures, particularly as they relate to precautions taken to address ongoing COVID-19 concerns. As COVID-19 restrictions ease, we expect these costs to gradually return as more employees return to the office and resume travel. Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes and our Credit Facility. Our non-capitalizable interest expense decreased to $0.3 millionin 2021 compared to $2.2 millionfor the 2020 period due to lower interest incurred in 2021 resulting from the early redemption of the $300.0 million7.00% Senior Notes due 2022 ("2022 Notes") during the second quarter of 2021 and no outstanding borrowings on our Credit Facility during 2021. In 2020 we incurred interest charges from our Credit Facility which had $500.0 millionoutstanding for several months during the first half of 2020. Other Income, Net. Other income, net primarily consists of (i) sub lease 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 decreased by $1.8 millionin 2021 compared to 2020 due to a one-time benefit payment in 2020 of approximately $1.5 millionfor company-owned life insurance proceeds. 37 -------------------------------------------------------------------------------- Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of $18.2 millionfor the year ended December 31, 2021is related to the early redemption of our 2022 Notes. There were no similar charges for the year ended December 31, 2020. See Note 7 in the accompanying consolidated financial statements for more information related to the early redemption. Income Taxes. The effective tax rate was 22.8% and 20.6% for 2021 and 2020, respectively. The effective rate in both years reflects the availability of the Internal Revenue Code §45L energy efficient homes credits (the "energy tax credit") from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the "2019 Act") that was signed into law on December 20, 2019and has been extended through 2021. The higher rate in 2021 reflects increased profit in states with higher tax rates and a reduced benefit of the energy tax credit applied to greater earnings before income taxes.
Cash and capital resources
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 unsecured revolving credit facility ("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 and inventory acquisition and development. Our principal uses of cash include acquisition and development of new and previously controlled land and lot positions, home construction, operating expenses, and the payment of interest and routine liabilities. From time to time, we opportunistically repurchase our senior notes and common stock. 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 construction was previously incurred.
Short-term liquidity and capital resources
Over the course of the next twelve months, we expect that our primary demand for funds will be for the construction of homes, as well as acquisition and development of both new and existing lots, operating expenses, including general and administrative expenses, interest payments on current and future debt financings and opportunistic common stock repurchases. We expect to meet these short-term liquidity requirements primarily through our cash and cash equivalents on hand and our net cash flows provided by operations. Between our cash and cash equivalents on hand combined with the availability of funds in our Credit Facility, we believe that we currently have sufficient liquidity. Nevertheless, 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 grow our lot supply and active community count, payments of the principal amounts and interest on our senior notes as they become due or mature and common stock repurchases. We expect our existing and generated cash will be adequate to fund our ongoing operating activities as well as providing capital for investment in future land purchases and related development activities. 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 needs
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 consolidated balance sheets as of
December 31, 2021, while others are considered future commitments. Our contractual obligations primarily consist of principal and interest payments on our senior notes, loans payable and other borrowings, including our Credit Agreement, letters of credit and surety bonds and operating leases. We have no debt maturities until 2025. We also have certain short-term lease commitments, commitments to fund our existing unconsolidated joint 38 -------------------------------------------------------------------------------- ventures and other purchase obligations in the normal course of business. Future commitments include land acquisition spend under purchase and option agreements. We plan to fund these commitments primarily with cash flows generated by operations, but may also utilize additional debt or equity financing and borrowing capacity under our Credit Facility. Our maximum exposure to loss on our purchase and option agreements is generally limited to non-refundable deposits and capitalized pre-acquisition costs. For information about our lease obligations, loans payable and other borrowings and senior notes, reference is made to Notes 4, 6, and 7 in the accompanying Notes to the consolidated financial statements included in this Annual Report on Form 10-K and are incorporated by reference herein. Reference is made to Notes 1, 3, 5, and 16 in the accompanying Notes to the consolidated financial statements included in this Annual Report on Form 10-K 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.
We do not engage in commodity trading or other similar activities. We had no derivative financial instruments at
Operating cash activities
During the year ended
December 31, 2021, net cash used in operations totaled $152.1 millionversus net cash provided by operations of $530.4 millionduring the year ended December 31, 2020. Generally, our operating cash flows fluctuate primarily based on changes in our net earnings, real estate inventory and, to a lesser extent, timing of payments of accounts payable and accrued liabilities. Operating cash flow results in 2021 primarily reflect $737.4 millionin net earnings, which were offset by a $948.1 millionincrease in real estate due to increased spending on homes under construction as well as acquisition of new land positions. Operating cash flow results in 2020 reflect the $423.5 millionin net earnings and an $88.9 millionincrease in accounts payable and accrued liabilities due to the timing of cash payments and an increase in income taxes payable, partially offset by a $40.1 millionincrease in real estate due to increased spending on homes under construction as well as acquisition of new land positions.
Investing Cash Flow Activities
During the year ended
December 31, 2021, net cash used in investing activities totaled $26.8 millionas compared to $18.2 millionfor the same period in 2020. Cash used in investing activities in both 2021 and 2020 is mainly attributable to the purchases of property, plant and equipment of $25.7 millionand $19.9 million, respectively.
Financing of treasury activities
During the year ended
December 31, 2021, net cash provided by financing activities totaled $51.6 millionas compared to net cash used in financing activities of $86.0 millionfor the same period in 2020. The net cash provided by financing activities in 2021 primarily reflects the net proceeds of $450.0 millionfrom the issuance of our 3.875% Senior Notes due 2029, offset by the early redemption of our 7.00% Senior Notes due 2022 of $300.0 millionprincipal and associated early tender fees of $17.7 million, along with share repurchases of $61.0 million. The net cash used in financing activities in 2020 consists of $69.6 millionin share repurchases and $16.4 millionin repayments of loans payable and other borrowings. On February 13, 2019, the Board of Directors authorized a new stock repurchase program, authorizing the expenditure of up to $100.0 millionto repurchase shares of our common stock. On November 13, 2020, the Board of Directors authorized the expenditure of an additional $100.0 millionto repurchase shares of our common stock under this program. On August 12, 2021, the Board of Directors authorized the expenditure of an additional $100.0 millionto repurchase shares of our common stock under this program. We acquired 639,346 and 1,100,000 shares of our common stock at an aggregate purchase price of $61.0 millionand $69.6 millionfor the years ended December 31, 2021and 2020, respectively. As of December 31, 2021, there was approximately $153.4 millionavailable under this program to repurchase shares. The Company entered into the unsecured revolving Credit Facility in 2014 that has been amended from time to time. In December 2021, the Credit Facility was amended, extending the maturity date from December 2025to December 2026and replacing LIBOR as the benchmark interest rate with the Secured Overnight Financing Rate ("SOFR"). The Credit Facility's aggregate commitment is $780.0 millionwith an accordion feature permitting the size of the facility to increase to a maximum of $880.0 million, subject to certain conditions, including the availability of additional bank commitments. 39 -------------------------------------------------------------------------------- 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): At
2021 2020 Senior notes, net, loans payable and other borrowings
$ 1,160,038 $ 1,020,085Stockholders' equity 3,044,389 2,347,868 Total capital $ 4,204,427 $ 3,367,953Debt-to-capital (1) 27.6 % 30.3 % Senior notes, net, loans payable and other borrowings $ 1,160,038 $ 1,020,085Less: cash and cash equivalents (618,335) (745,621) Net debt $ 541,703 $ 274,464Stockholders' equity 3,044,389 2,347,868 Total net capital $ 3,586,092 $ 2,622,332
Net debt-to-capital (2) 15.1 % 10.5 % (1)Debt-to-capital is computed as senior notes, net and loans payable and other borrowings divided by the aggregate of total senior notes, net and loans payable and other borrowings and stockholders' equity. (2)Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity. Net debt is total senior notes, net and loans payable and other borrowings, less cash and cash equivalents. The most directly comparable GAAP financial measure is the ratio of debt to total 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.
Covenants relating to credit facilities
Borrowings under the Credit Facility are unsecured but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of
$1.9 billion(which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of December 31, 2021. Our actual financial covenant calculations as of December 31, 2021are reflected in the table below. Financial Covenant (dollars in thousands): Covenant Requirement Actual Minimum Tangible Net Worth > $2,068,292 $3,003,878Leverage Ratio < 60% 13.1% Interest Coverage Ratio (1) > 1.50 17.30 Minimum Liquidity (1) > $62,836 $1,335,939Investments other than defined permitted investments < $901,163 $5,764
(1)We are required to meet either the interest coverage ratio or the minimum liquidity, but not both.
Recent accounting standards
See note 1 of our consolidated financial statements included in this report for a discussion of recently issued accounting standards.
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