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Meritage Homes CORP - Quarter Report: 2021 September (Form 10-Q)


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 September 30, 2021
OR 
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                
Commission File Number 1-9977
 mth-20210930_g1.jpg
Meritage Homes Corporation
(Exact Name of Registrant as Specified in its Charter)
Maryland 86-0611231
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
8800 E. Raintree Drive, Suite 300, Scottsdale, Arizona 85260
(Address of Principal Executive Offices) (Zip Code)
(480) 515-8100
(Registrant’s telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock $.01 par valueMTHNew 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 a checkmark whether the registrant has submitted electronically every Interactive Date 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerýAccelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not 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 a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
Common shares outstanding as of October 25, 2021: 37,311,125


MERITAGE HOMES CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
 
Items 3-5. Not Applicable

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PART I - FINANCIAL INFORMATION

Item 1.        Financial Statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
 
 September 30, 2021December 31, 2020
Assets
Cash and cash equivalents$562,291 $745,621 
Other receivables148,743 98,573 
Real estate3,593,007 2,778,039 
Deposits on real estate under option or contract77,987 59,534 
Investments in unconsolidated entities3,905 4,350 
Property and equipment, net36,595 38,933 
Deferred tax assets, net38,850 36,040 
Prepaids, other assets and goodwill104,071 103,308 
Total assets$4,565,449 $3,864,398 
Liabilities
Accounts payable$214,575 $175,250 
Accrued liabilities324,407 296,121 
Home sale deposits40,002 25,074 
Loans payable and other borrowings18,985 23,094 
Senior notes, net1,142,210 996,991 
Total liabilities1,740,179 1,516,530 
Stockholders’ Equity
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at September 30, 2021 and December 31, 2020
— — 
Common stock, par value $0.01. Authorized 125,000,000 shares; 37,555,010 and 37,512,127 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
376 375 
Additional paid-in capital433,179 455,762 
Retained earnings2,391,715 1,891,731 
Total stockholders’ equity2,825,270 2,347,868 
Total liabilities and stockholders’ equity$4,565,449 $3,864,398 
See accompanying notes to unaudited consolidated financial statements


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MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
 
Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Homebuilding:
Home closing revenue$1,251,435 $1,133,221 $3,596,060 $3,055,229 
Land closing revenue8,470 4,870 25,225 16,954 
Total closing revenue1,259,905 1,138,091 3,621,285 3,072,183 
Cost of home closings(879,759)(889,654)(2,612,428)(2,412,606)
Cost of land closings(7,706)(4,360)(24,246)(17,509)
Total cost of closings(887,465)(894,014)(2,636,674)(2,430,115)
Home closing gross profit371,676 243,567 983,632 642,623 
Land closing gross profit/(loss)764 510 979 (555)
Total closing gross profit372,440 244,077 984,611 642,068 
Financial Services:
Revenue5,208 4,939 15,624 13,329 
Expense(2,308)(2,026)(6,846)(5,519)
Earnings from financial services unconsolidated entities and other, net
1,324 1,402 3,821 3,132 
Financial services profit4,224 4,315 12,599 10,942 
Commissions and other sales costs(68,952)(73,282)(210,585)(204,863)
General and administrative expenses(47,192)(40,737)(128,297)(111,083)
Interest expense(79)(55)(246)(2,176)
Other income, net1,268 1,188 3,443 3,313 
Loss on early extinguishment of debt— — (18,188)— 
Earnings before income taxes261,709 135,506 643,337 338,201 
Provision for income taxes(60,957)(26,388)(143,353)(67,253)
Net earnings$200,752 $109,118 $499,984 $270,948 
Earnings per common share:
Basic$5.33 $2.90 $13.26 $7.17 
Diluted$5.25 $2.84 $13.06 $7.04 
Weighted average number of shares:
Basic37,647 37,607 37,703 37,763 
Diluted38,229 38,405 38,285 38,491 

See accompanying notes to unaudited consolidated financial statements


4


MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 Nine Months Ended September 30,
 20212020
Cash flows from operating activities:
Net earnings$499,984 $270,948 
Adjustments to reconcile net earnings to net cash (used in)/provided by operating activities:
Depreciation and amortization19,892 22,496 
Stock-based compensation14,435 15,724 
Loss on early extinguishment of debt18,188 — 
Equity in earnings from unconsolidated entities (2,878)(2,821)
Distributions of earnings from unconsolidated entities3,324 2,449 
Other(3,085)1,881 
Changes in assets and liabilities:
(Increase)/decrease in real estate(810,731)9,080 
Increase in deposits on real estate under option or contract(18,453)(12,910)
(Increase)/decrease in other receivables, prepaids and other assets(51,611)4,933 
Increase in accounts payable and accrued liabilities67,301 60,039 
Increase in home sale deposits14,928 1,263 
Net cash (used in)/provided by operating activities(248,706)373,082 
Cash flows from investing activities:
Investments in unconsolidated entities(1)(4)
Distributions of capital from unconsolidated entities— 1,000 
Purchases of property and equipment(17,910)(14,771)
Proceeds from sales of property and equipment404 528 
Maturities/sales of investments and securities2,795 632 
Payments to purchase investments and securities(2,795)(632)
Net cash used in investing activities(17,507)(13,247)
Cash flows from financing activities:
Repayment of loans payable and other borrowings(6,308)(8,509)
Repayment of senior notes(317,690)— 
Proceeds from issuance of senior notes450,000 — 
Payment of debt issuance costs(6,102)— 
Repurchase of shares(37,017)(60,813)
Net cash provided by/(used in) financing activities82,883 (69,322)
Net (decrease)/increase in cash and cash equivalents(183,330)290,513 
Cash and cash equivalents, beginning of period745,621 319,466 
Cash and cash equivalents, end of period$562,291 $609,979 
See Supplemental Disclosure of Cash Flow Information in Note 13.
See accompanying notes to unaudited consolidated financial statements

5


MERITAGE HOMES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Organization. Meritage Homes is a leading designer and builder of single-family homes. We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed for the first-time and first move-up buyers. We have homebuilding operations in three regions: West, Central and East, which are comprised of nine states: Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee. We also operate a financial services reporting segment. In this segment, we offer title and escrow, mortgage, and insurance services. Carefree Title Agency, Inc. ("Carefree Title"), our wholly-owned title company, provides title insurance and closing/settlement services to our homebuyers. Managing our own title operations allows us greater control over the entire escrow and closing cycles in addition to generating additional revenue. Meritage Homes Insurance Agency, Inc. (“Meritage Insurance"), our wholly-owned insurance broker, works in collaboration with insurance companies nationwide to offer homeowners insurance and other insurance products to our homebuyers. Our financial services operations also provide mortgage services to our homebuyers through an unconsolidated joint venture.
We commenced our homebuilding operations in 1985 through our predecessor company known as Monterey Homes. Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation. Since that time, we have engaged in homebuilding and related activities and ceased to operate as a real estate investment trust. Meritage Homes Corporation operates as a holding company and has no independent assets or operations. Its homebuilding construction, development and sales activities are conducted through its subsidiaries. Our homebuilding activities are conducted under the name of Meritage Homes in each of our homebuilding markets. At September 30, 2021, we were actively selling homes in 236 communities, with base prices ranging from approximately $200,000 to $889,000.
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020. The unaudited consolidated financial statements include the accounts of Meritage Homes Corporation and those of our consolidated subsidiaries, partnerships and other entities in which we have a controlling financial interest, and of variable interest entities (see Note 3) in which we are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full fiscal year.
Cash and Cash Equivalents. Liquid investments with an initial maturity of three months or less are classified as cash equivalents. Amounts in transit from title companies or closing agents for home closings of approximately $94.3 million and $61.3 million are included in cash and cash equivalents at September 30, 2021 and December 31, 2020, respectively.
Real Estate. Real estate 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 Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment (“ASC 360-10”). Inventory includes the costs of land acquisition, land development, home construction, capitalized interest, real estate taxes, and capitalized direct overhead costs incurred during development, 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. An accrued liability to capture such obligations is recorded in connection with the home closing and charged directly to cost of sales.
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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 and weather delays, labor or material shortages, slower absorptions, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues or delays 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 rate 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. Our analysis is conducted if indication 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 asset's carrying amount exceeds its fair value. The impairment of a community is allocated to each lot on a straight-line basis.
Deposits. Deposits paid related to land option and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased. Deposits are reclassified as a component of real estate inventory at the time the deposit is used to offset the acquisition price of the land based on the terms of the underlying agreements. To the extent they are non-refundable, deposits are charged to expense if the land acquisition is terminated or no longer considered probable. Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of any nonrefundable deposits and any ancillary capitalized costs. Our Deposits on real estate under option or contract were $78.0 million and $59.5 million as of September 30, 2021 and December 31, 2020, respectively.
Goodwill. In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test. ASC 350 states that an entity may assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test. Such qualitative factors include: (1) macroeconomic conditions, such as a deterioration in general economic conditions, (2) industry and market considerations such as deterioration in the environment in which the entity operates, (3) cost factors such as increases in raw materials, labor costs, etc., and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings. If the qualitative analysis determines that additional impairment testing is required, a two-step impairment test in accordance with ASC 350 would be initiated. We continually evaluate our qualitative inputs to assess whether events and circumstances have occurred that indicate the goodwill balance may not be recoverable. See Note 9 for additional information on our goodwill assets.
Leases. We lease certain office space and equipment for use in our operations. We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842, Leases ("ASC 842"). In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration. Leases that meet the criteria of ASC 842 are recorded on our unaudited consolidated balance sheets as right-of-use ("ROU") assets and lease liabilities. ROU assets are classified within Prepaids, other assets and goodwill on the accompanying unaudited consolidated balance sheets, while lease liabilities are classified within Accrued liabilities on the accompanying unaudited consolidated balance sheets.
The table below outlines our ROU assets and lease liabilities (in thousands):
As of
September 30, 2021December 31, 2020
ROU assets$17,159 $21,624 
Lease liabilities22,644 28,254 
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Off-Balance Sheet Arrangements - Joint Ventures. We may participate in land development joint ventures as a means of accessing larger parcels of land and lot positions, expanding our market opportunities, managing our risk profile, optimizing deal structure for the impacted parties and leveraging our capital base, although our participation in such ventures is currently limited. See Note 4 for additional discussion of our investments in unconsolidated entities.
Off-Balance Sheet Arrangements - Other. In the normal course of business, we may acquire lots from various development entities pursuant to option and purchase agreements. The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators). See Note 3 for additional information on these off-balance sheet arrangements.
Surety Bonds and Letters of Credit. We provide surety bonds or letters of credit in support of our obligations relating to the development of our projects and other corporate purposes in lieu of cash deposits. The amount of these obligations outstanding at any time varies depending on the stage and level of our development activities. Bonds are generally not wholly released until all development activities under the bond are complete. In the event a bond or letter of credit is drawn upon, we would be obligated to reimburse the issuer for any amounts advanced under the bond or letter of credit. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon.
The table below outlines our surety bond and letter of credit obligations (in thousands):
As of
 September 30, 2021December 31, 2020
 OutstandingEstimated work
remaining to
complete		OutstandingEstimated work
remaining to
complete
Sureties:
Sureties related to owned projects and lots under contract$597,379 $331,195 $478,788 $216,708 
Total Sureties$597,379 $331,195 $478,788 $216,708 
Letters of Credit (“LOCs”):
LOCs for land development71,965 N/A93,661 N/A
LOCs for general corporate operations3,000 N/A3,750 N/A
Total LOCs$74,965 N/A$97,411 N/A

Accrued Liabilities. Accrued liabilities at September 30, 2021 and December 31, 2020 consisted of the following (in thousands):
As of
 September 30, 2021December 31, 2020
Accruals related to real estate development and construction activities$116,351 $92,701 
Payroll and other benefits85,959 88,337 
Accrued interest21,528 8,457 
Accrued taxes26,526 34,373 
Warranty reserves26,551 23,743 
Lease liabilities22,644 28,254 
Other accruals24,848 20,256 
Total$324,407 $296,121 

Warranty Reserves. We provide home purchasers with limited warranties against certain building defects and we have certain obligations related to those post-construction warranties for closed homes. The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty for the first year after the close of the home, a major mechanical warranty for two years after the close of the home and a structural warranty that typically extends up to 10 years after the close of the home. With the assistance of an actuary, we have estimated the reserves for the structural warranty based on the number of homes still under warranty and our historical data and trends for our communities. We may use industry data with respect to similar product types and geographic areas in markets where our experience is incomplete to draw a meaningful conclusion. We regularly review our warranty reserves and
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adjust them, as necessary, to reflect changes in trends as information becomes available. Based on such reviews of warranty costs incurred, we did not adjust the warranty reserve balance in the three or nine months ended September 30, 2021 or 2020. Included in the warranty reserve balances at September 30, 2021 and December 31, 2020 reflected in the table below are case-specific reserves for a warranty matter related to alleged stucco defects in certain homes we constructed between 2006 and 2017 and water drainage issues in a single community in Florida that we developed in 2016. See Note 15 for additional information regarding these case-specific reserves.
A summary of changes in our warranty reserves follows (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Balance, beginning of period$25,065 $21,578 $23,743 $22,015 
Additions to reserve from new home deliveries4,442 4,592 12,766 12,620 
Warranty claims(2,956)(2,911)(9,958)(11,376)
Adjustments to pre-existing reserves— — — — 
Balance, end of period$26,551 $23,259 $26,551 $23,259 
Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves are included in Cost of home closings within the accompanying unaudited consolidated income statements. These reserves are intended to cover costs associated with our contractual and statutory warranty obligations, which include, among other items, claims involving defective workmanship and materials. We believe that our total reserves, coupled with our contractual relationships and rights with our trades and the insurance we and our trades maintain, are sufficient to cover our general warranty obligations. However, as unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, future costs could differ significantly from our estimates.
Revenue Recognition. In accordance with ASC 606, Revenue from Contracts with Customers, we apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy the performance obligations. The performance obligations and subsequent revenue recognition for our three sources of revenue are outlined below:
•Revenue from closings of residential real estate is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.
•Revenue from land sales is recognized when a significant down payment is received, title passes, and collectability of the receivable, if any, is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.
•Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.
Home closing and land sale revenue expected to be recognized in any future year related to remaining performance obligations (if any) and the associated contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. Revenue from financial services includes estimated future insurance policy renewal commissions as our performance obligations are satisfied upon issuance of the initial policy with a third party broker. The related contract assets for these estimated future renewal commissions are not material at September 30, 2021 and December 31, 2020. Our three sources of revenue are disaggregated by type in the accompanying unaudited consolidated income statements.
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Recent Accounting Pronouncements.
In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes by eliminating certain exceptions within ASC Topic 740, Income Taxes, and clarifying other areas of existing guidance. ASU 2019-12 was effective for us on January 1, 2021, and the adoption did not have a material impact on our financial statements or financial statement disclosures.

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST
Real estate consists of the following (in thousands):
As of
September 30, 2021December 31, 2020
Homes under contract under construction (1)
$1,142,724 $873,365 
Unsold homes, completed and under construction (1)
397,422 357,861 
Model homes (1)
75,239 82,502 
Finished home sites and home sites under development (2) (3)
1,977,622 1,464,311 
Total$3,593,007 $2,778,039 

(1)Includes the allocated land and land development costs associated with each lot for these homes.
(2)Includes raw land, land held for development and land held for sale, less impairments, if any. 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 inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.
(3)Includes land held for sale of $47.8 million and $72.7 million as of September 30, 2021 and December 31, 2020, respectively.
Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred to applicable qualifying assets in connection with our real estate development and construction activities. Capitalized interest is allocated to active real estate when incurred and charged to cost of closings when the related property is delivered. A summary of our capitalized interest is as follows (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Capitalized interest, beginning of period$56,710 $72,882 $58,940 $82,014 
Interest incurred15,212 16,103 47,625 50,188 
Interest expensed(79)(55)(246)(2,176)
Interest amortized to cost of home and land closings(14,550)(21,380)(49,026)(62,476)
Capitalized interest, end of period$57,293 $67,550 $57,293 $67,550 

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NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED
We enter into purchase and option agreements for land or lots as part of the normal course of business. These purchase and option agreements enable us to acquire properties at one or multiple future dates at pre-determined prices. We believe these acquisition structures allow us to better leverage our balance sheet and reduce our financial risk associated with land acquisitions. In accordance with ASC 810, Consolidation, we evaluate all purchase and option agreements for land to determine whether they are a variable interest entity ("VIE"), and if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, if we are the primary beneficiary we are required to consolidate the VIE in our financial statements and reflect such assets and liabilities as Real estate not owned. As a result of our analyses, we determined that as of September 30, 2021 and December 31, 2020, we were not the primary beneficiary of any VIEs from which we have acquired rights to land or lots under option contracts.
The table below presents a summary of our lots under option at September 30, 2021 (dollars in thousands): 
Projected Number
of Lots
Purchase
Price		Option/
Earnest  Money
Deposits–Cash
Purchase and option contracts recorded on balance sheet as Real estate not owned— $— $— 
Option contracts — non-refundable deposits, committed (1)
11,433 530,759 43,214 
Purchase contracts — non-refundable deposits, committed (1)
11,084 327,738 25,734 
Purchase and option contracts —refundable deposits, committed2,619 86,635 743 
Total committed 25,136 945,132 69,691 
Purchase and option contracts — refundable deposits, uncommitted (2)
31,655 769,696 8,296 
Total lots under contract or option56,791 $1,714,828 $77,987 
Total purchase and option contracts not recorded on balance sheet (3)
56,791 $1,714,828 $77,987 (4)
 
(1)Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.
(2)Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots.
(3)Except for our specific performance contracts recorded on the accompanying unaudited consolidated balance sheets as Real estate not owned (if any), none of our purchase or option contracts require us to purchase lots.
(4)Amount is reflected on the accompanying unaudited consolidated balance sheets in Deposits on real estate under option or contract as of September 30, 2021.
Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement. Although the pre-established number is typically structured to approximate our expected rate of home construction starts, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our sales and home starts pace needed to meet the pre-established minimum number of lots or restructure our original contract to terms that more accurately reflect our revised orders pace expectations. During a strong homebuilding market, we may accelerate our pre-established minimum purchases if allowed by the contract.

NOTE 4 - INVESTMENTS IN UNCONSOLIDATED ENTITIES
We may enter into joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile, optimizing deal structure for the impacted parties and leveraging our capital base. While purchasing land through a joint venture can be beneficial, currently we do not view joint ventures as critical to the success of our homebuilding operations. Our joint venture partners are generally other homebuilders, land sellers or other real estate investors. We do not always have a controlling interest in these ventures, which means our joint venture partners could cause the venture to take actions we disagree with or fail to take actions we believe should be undertaken, including the sale of the underlying property to repay debt or recoup all or part of the partners' investments. Based on the structure of each joint venture, it may or may not be consolidated into our results. As of September 30, 2021, we had one active equity-method land joint venture with limited operations, and one mortgage joint venture, which is engaged in mortgage activities and primarily provides services to our homebuyers.
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Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):
As of
September 30, 2021December 31, 2020
Assets:
Cash
$3,985 $4,656 
Real estate
5,732 5,745 
Other assets
4,655 5,118 
Total assets$14,372 $15,519 
Liabilities and equity:
Accounts payable and other liabilities$4,641 $5,588 
Equity of:
Meritage (1)
5,184 5,330 
Other4,547 4,601 
Total liabilities and equity$14,372 $15,519 
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Revenue$10,070 $9,630 $29,173 $26,903 
Costs and expenses(8,171)(8,138)(24,700)(21,945)
Net earnings of unconsolidated entities$1,899 $1,492 $4,473 $4,958 
Meritage’s share of pre-tax earnings (1) (2)
$1,071 $1,129 $2,878 $2,864 

(1)Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported in the accompanying unaudited consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.
(2)Our share of pre-tax earnings is recorded in Earnings from financial services unconsolidated entities and other, net and Other income, net on the accompanying unaudited consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any. Such profit is deferred until homes are delivered by us and title passes to a homebuyer.

NOTE 5 — LOANS PAYABLE AND OTHER BORROWINGS
Loans payable and other borrowings consist of the following (in thousands):
As of
September 30, 2021December 31, 2020
Other borrowings, real estate notes payable (1)
$18,985 $23,094 
$780.0 million unsecured revolving credit facility with interest approximating LIBOR (approximately 0.08% at September 30, 2021) plus 1.375% or Prime (3.25% at September 30, 2021) plus 0.375%
— — 
Total$18,985 $23,094 
(1)Reflects balance of non-recourse notes payable in connection with land purchases.
The Company entered into an amended and restated unsecured revolving credit facility ("Credit Facility") in 2014 that has been amended from time to time. In December 2020, the Credit Facility was amended to extend the maturity date to December
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22, 2025 and provide for the replacement of LIBOR in the event such reference rate is no longer available. The Credit Facility's aggregate commitment is $780.0 million with 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. 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 $1.5 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 September 30, 2021.
We had no outstanding borrowings under the Credit Facility as of September 30, 2021 and December 31, 2020. There were no borrowings or repayments during the three and nine months ended September 30, 2021. During the first quarter of 2020 we borrowed $500.0 million on our Credit Facility in connection with the perceived potential instability of the financial markets around the COVID-19 pandemic, which we repaid in full during the second quarter of 2020. As of September 30, 2021, we had outstanding letters of credit issued under the Credit Facility totaling $75.0 million, leaving $705.0 million available under the Credit Facility to be drawn.

NOTE 6 — SENIOR NOTES, NET
Senior notes, net consist of the following (in thousands):
As of
September 30, 2021December 31, 2020
7.00% senior notes due 2022
$— $300,000 
6.00% senior notes due 2025. At September 30, 2021 and December 31, 2020 there was approximately $3,000 and $3,614 in net unamortized premium, respectively.
403,000 403,614 
5.125% senior notes due 2027
300,000 300,000 
3.875% senior notes due 2029
450,000 — 
Net debt issuance costs(10,790)(6,623)
Total$1,142,210 $996,991 
The indentures for all of our senior notes contain non-financial covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers. We were in compliance with all such covenants as of September 30, 2021.
Obligations to pay principal and interest on the senior notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, collectively, the “Guarantor Subsidiaries”), each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees are full and unconditional, and joint and several. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor may be released and relieved of any obligations under its note guarantee. There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan. We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several. Subsidiaries of Meritage Homes Corporation that are non-guarantor subsidiaries are, individually and in the aggregate, minor.
In April 2021, we completed an offering of $450.0 million aggregate principal amount of 3.875% Senior Notes due 2029. We used a portion of the net proceeds from this offering to redeem all $300.0 million aggregate principal outstanding of our 7.00% Senior Notes due 2022, incurring $18.2 million in early debt extinguishment charges in the nine months ended September 30, 2021, reflected as Loss on early extinguishment of debt in the accompanying unaudited consolidated income statements.

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NOTE 7 — FAIR VALUE DISCLOSURES
ASC 820-10, Fair Value Measurement ("ASC 820"), defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from market participants external to the Company while unobservable inputs are generally developed internally, utilizing management’s estimates, assumptions and specific knowledge of the assets/liabilities and related markets. The three levels are defined as follows:
•Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.
•Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.
•Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the company’s own estimates about the assumptions that market participants would use to value the asset or liability.
If the only observable inputs are from inactive markets or for transactions which the Company evaluates as “distressed”, the use of Level 1 inputs should be modified by the Company to properly address these factors, or the reliance of such inputs may be limited, with a greater weight attributed to Level 3 inputs.
Financial Instruments: The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (Level 2 inputs as per the discussion above) and is as follows (in thousands):
As of
 September 30, 2021December 31, 2020
 Aggregate
Principal		Estimated  Fair
Value		Aggregate
Principal		Estimated  Fair
Value
7.00% senior notes due 2022
$— $— $300,000 $319,758 
6.00% senior notes due 2025
$400,000 $451,000 $400,000 $451,913 
5.125% senior notes due 2027
$300,000 $333,000 $300,000 $333,328 
3.875% senior notes due 2029
$450,000 $471,375 $— $— 
Due to the short-term nature of other financial assets and liabilities, including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.

NOTE 8 — EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):
 
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Basic weighted average number of shares outstanding37,647 37,607 37,703 37,763 
Effect of dilutive securities:
Unvested restricted stock582 798 582 728 
Diluted average shares outstanding38,229 38,405 38,285 38,491 
Net earnings$200,752 $109,118 $499,984 $270,948 
Basic earnings per share$5.33 $2.90 $13.26 $7.17 
Diluted earnings per share$5.25 $2.84 $13.06 $7.04 
 

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NOTE 9 — ACQUISITIONS AND GOODWILL
Goodwill. In prior years, we have entered new markets through the acquisition of the homebuilding assets and operations of local/regional homebuilders in Georgia, South Carolina and Tennessee. As a result of these transactions, we recorded approximately $33.0 million of goodwill. Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the net assets acquired. Our acquisitions were recorded in accordance with ASC 805, Business Combinations, and ASC 820, using the acquisition method of accounting. The purchase price for acquisitions was allocated based on estimated fair value of the assets and liabilities at the date of the acquisition. The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included on the accompanying unaudited consolidated balance sheets in Prepaids, other assets and goodwill. In accordance with ASC 350, we assess the recoverability of goodwill annually, or more frequently, if impairment indicators are present.

A summary of the carrying amount of goodwill follows (in thousands):
WestCentralEastFinancial ServicesCorporateTotal
Balance at December 31, 2020$— $— $32,962 $— $— $32,962 
Additions— — — — — — 
Balance at September 30, 2021$— $— $32,962 $— $— $32,962 

NOTE 10 — STOCKHOLDERS’ EQUITY
A summary of changes in stockholders’ equity is presented below (in thousands): 
 Nine Months Ended September 30, 2021
 (In thousands)
 Number of
Shares		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Total
Balance at December 31, 202037,512 $375 $455,762 $1,891,731 $2,347,868 
Net earnings— — — 131,843 131,843 
Stock-based compensation expense— — 5,367 — 5,367 
Issuance of stock435 4 (4)— — 
Share repurchases(100)(1)(8,384)— (8,385)
Balance at March 31, 202137,847 $378 $452,741 $2,023,574 $2,476,693 
Net earnings— — — 167,389 167,389 
Stock-based compensation expense— — 3,223 — 3,223 
Share repurchases(200)(2)(19,159)— (19,161)
Balance at June 30, 202137,647 $376 $436,805 $2,190,963 $2,628,144 
Net earnings— — — 200,752 200,752 
Stock-based compensation expense— — 5,845 — 5,845 
Issuance of stock3 — — — — 
Share repurchases(95)— (9,471)— (9,471)
Balance at September 30, 2021$37,555 $376 $433,179 $2,391,715 $2,825,270 

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 Nine Months Ended September 30, 2020
 (In thousands)
 Number of
Shares		Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Total
Balance at December 31, 201938,199 $382 $505,352 $1,468,256 $1,973,990 
Net earnings— — — 71,152 71,152 
Stock-based compensation expense— — 6,437 — 6,437 
Issuance of stock398 4 (4)— — 
Share repurchases(1,000)(10)(60,803)— (60,813)
Balance at March 31, 202037,597 $376 $450,982 $1,539,408 $1,990,766 
Net earnings— — — 90,678 90,678 
Stock-based compensation expense— — 3,157 — 3,157 
Issuance of stock6 1 (1)— — 
Balance at June 30, 202037,603 $377 $454,138 $1,630,086 $2,084,601 
Net earnings— — — 109,118 109,118 
Stock-based compensation expense— — 6,130 — 6,130 
Issuance of stock9 — — — — 
Balance at September 30, 202037,612 $377 $460,268 $1,739,204 $2,199,849 

NOTE 11 — STOCK BASED AND DEFERRED COMPENSATION

We have a stock compensation plan, the Meritage Homes Corporation 2018 Stock Incentive Plan (the “2018 Plan"), that was approved by our Board of Directors and our stockholders and adopted in May 2018. The 2018 Plan is administered by our Board of Directors and allows for the grant of stock appreciation rights, restricted stock awards, restricted stock units, performance share awards and performance-based awards in addition to non-qualified and incentive stock options. All available shares from expired, terminated, or forfeited awards that remained under prior plans were merged into and became available for grant under the 2018 Plan. The 2018 Plan authorizes awards to officers, key employees, non-employee directors and consultants. The 2018 Plan authorizes 6,600,000 shares of stock to be awarded, of which 1,050,079 shares remain available for grant at September 30, 2021. We believe that such awards provide a means of performance-based compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders. Non-vested stock awards are usually granted with a five-year ratable vesting period for employees, a three-year cliff vesting for both non-vested stock and performance-based awards granted to senior executive officers and either a three-year cliff vesting or one-year vesting for non-employee directors, dependent on their start date.
Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed, less forfeitures, on a straight-line basis over the vesting period of the award. Compensation cost related to performance-based restricted stock awards is also measured as of the closing price on the date of grant but is expensed in accordance with ASC 718-10-25-20, Compensation – Stock Compensation ("ASC 718"), which requires an assessment of probability of attainment of the performance target. As our performance targets are dependent on performance over a specified measurement period, once we determine that the performance target outcome is probable, the cumulative expense is recorded immediately with the remaining expense recorded on a straight-line basis through the end of the award vesting period. A portion of the performance-based restricted stock awards granted to our executive officers contain market conditions as defined by ASC 718. ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period. We engage a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is being expensed straight-line over the service period of the awards. Below is a summary of compensation
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expense and stock award activity (dollars in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Stock-based compensation expense$5,845 $6,130 $14,435 $15,724 
Non-vested shares granted4,114 2,112 225,666 225,593 
Performance-based non-vested shares granted — — 46,593 56,139 
Performance-based shares issued in excess of target shares granted (1)
— — 37,425 24,054 
Restricted stock awards vested (includes performance-based awards)3,615 8,610 438,344 413,016 
(1)Performance-based shares that vested and were issued as a result of performance achievement exceeding the originally established targeted number of shares related to respective performance metrics.
The following table includes additional information regarding our stock compensation plan (dollars in thousands):
 As of
 September 30, 2021December 31, 2020
Unrecognized stock-based compensation cost$29,890 $22,687 
Weighted average years expense recognition period2.022.01
Total equity awards outstanding (1)
910,557 1,098,545 
(1)Includes unvested restricted stock, performance-based awards (assuming 100% payout) and restricted stock units.
We also offer a non-qualified deferred compensation plan ("deferred compensation plan") to highly compensated employees in order to allow them additional pre-tax income deferrals above and beyond the limits that qualified plans, such as 401(k) plans, impose on highly compensated employees. We do not currently offer a contribution match on the deferred compensation plan. All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the three or nine months ended September 30, 2021 or 2020, other than minor administrative costs.
NOTE 12 — INCOME TAXES
Components of the income tax provision are as follows (in thousands): 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Federal$47,955 $21,692 $115,781 $54,594 
State13,002 4,696 27,572 12,659 
Total$60,957 $26,388 $143,353 $67,253 

The effective tax rate for the three and nine months ended September 30, 2021 was 23.3% and 22.3%, and for the three and nine months ended September 30, 2020 was 19.5% and 19.9%, respectively. The higher tax rates for the three and nine months ended September 30, 2021 reflect increased profits in states with higher tax rates and the reduced benefit of credits earned under the Internal Revenue Code ("IRC") §45L new energy efficient homes credit due to greater overall profitability of the Company.

At September 30, 2021 and December 31, 2020, we have no unrecognized tax benefits. We believe that our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Our policy is to accrue interest and penalties on unrecognized tax benefits and include them in federal income tax expense.
We determine our deferred tax assets and liabilities in accordance with ASC 740, Income Taxes. We evaluate our deferred tax assets, including the benefit from net operating losses ("NOLs"), by jurisdiction to determine if a valuation allowance is required. Companies must assess 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 cumulative losses,
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forecasts of future profitability, the length of statutory carry forward periods, experiences with operating losses and experiences of utilizing tax credit carry forwards and tax planning alternatives. We have no valuation allowance on our deferred tax assets or NOL carryovers at September 30, 2021.
At September 30, 2021, we have income taxes payable of $15.8 million and income taxes receivable of $0.7 million. The income taxes payable primarily consists of current federal and state tax accruals, net of current energy tax credits and estimated tax payments. This amount is recorded in Accrued liabilities on the accompanying unaudited consolidated balance sheets at September 30, 2021. The income taxes receivable primarily consists of additional energy tax credits claimed by amending prior year tax returns and is recorded in Other receivables on the accompanying unaudited consolidated balance sheets at September 30, 2021.
We conduct business and are subject to tax in the U.S. both federally and in several states. With few exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations by taxing authorities for years prior to 2016. We have no federal or state income tax examinations being conducted at this time.
The future tax benefits from NOLs, built-in losses, and tax credits would be materially reduced or potentially eliminated if we experience an “ownership change” as defined under IRC §382. Based on our analysis performed as of September 30, 2021 we do not believe that we have experienced an ownership change. As a protective measure, our stockholders held a Special Meeting of Stockholders on February 16, 2009 and approved an amendment to our Articles of Incorporation that restricts certain transfers of our common stock. The amendment is intended to help us avoid an unintended ownership change and thereby preserve the value of any tax benefit for future utilization.

NOTE 13 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following table presents certain supplemental cash flow information (in thousands):
Nine Months Ended September 30,
20212020
Cash paid during the year for:
Interest, net of interest capitalized$(14,451)$(14,756)
Income taxes paid$152,843 $49,103 
Non-cash operating activities:
Real estate acquired through notes payable$2,199 $8,664 

NOTE 14 — OPERATING AND REPORTING SEGMENTS
We operate with two principal business segments: homebuilding and financial services. As defined in ASC 280-10, Segment Reporting, we have nine homebuilding operating segments. The homebuilding segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes and providing warranty and customer services. We aggregate our homebuilding operating segments into reporting segments based on similar long-term economic characteristics and geographical proximity. Our current reportable homebuilding segments are as follows:
West:
Arizona, California and Colorado
Central:
Texas
East:
Florida, Georgia, North Carolina, South Carolina and Tennessee
Management’s evaluation of segment performance is based on segment operating income, which we define as home and land closing revenues less cost of home and land closings, commissions and other sales costs, land development and other land sales costs and other costs incurred by or allocated to each segment, including impairments. Each reportable segment follows the same accounting policies described in Note 1, “Organization and Basis of Presentation.” Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.
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The following segment information is in thousands:
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Homebuilding revenue (1):
West$460,089 $434,289 $1,305,684 $1,198,782 
Central383,206 353,208 1,109,228 909,692 
East416,610 350,594 1,206,373 963,709 
Consolidated total$1,259,905 $1,138,091 $3,621,285 $3,072,183 
Homebuilding segment operating income:
West$95,167 $53,423 $238,356 $140,059 
Central90,579 52,394 232,537 119,208 
East83,853 37,791 207,509 97,343 
Total homebuilding segment operating income 269,599 143,608 678,402 356,610 
Financial services segment profit4,224 4,315 12,599 10,942 
Corporate and unallocated costs (2)
(13,303)(13,550)(32,673)(30,488)
Interest expense(79)(55)(246)(2,176)
Other income, net1,268 1,188 3,443 3,313 
Loss on early extinguishment of debt— — (18,188)— 
Net earnings before income taxes$261,709 $135,506 $643,337 $338,201 
 
(1)Homebuilding revenue includes the following land closing revenue, by segment, as outlined in the table below:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Land closing revenue:
West$8,470 $— $21,426 $4,974 
Central— 3,301 3,799 7,901 
East— 1,569 — 4,079 
Total$8,470 $4,870 $25,225 $16,954 
(2)Balance consists primarily of corporate costs and numerous shared service functions such as finance and treasury that are not allocated to the homebuilding or financial services reporting segments.
 At September 30, 2021
 WestCentralEastFinancial ServicesCorporate  and
Unallocated		Total
Deposits on real estate under option or contract$23,808 $12,129 $42,050 $— $— $77,987 
Real estate1,551,248 1,015,779 1,025,980 — — 3,593,007 
Investments in unconsolidated entities206 2,988 — — 711 3,905 
Other assets83,749 (1)165,693 (2)85,669 (3)713 554,726 (4)890,550 
Total assets$1,659,011 $1,196,589 $1,153,699 $713 $555,437 $4,565,449 

(1)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and property and equipment.
(2)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaid expenses and other assets.
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(3)Balance consists primarily of cash and cash equivalents, goodwill, prepaid expenses and other assets and property and equipment.
(4)Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaid expenses and other assets.
 At December 31, 2020
 WestCentralEastFinancial ServicesCorporate  and
Unallocated		Total
Deposits on real estate under option or contract$22,493 $11,154 $25,887 $— $— $59,534 
Real estate1,154,488 814,919 808,632 — — 2,778,039 
Investments in unconsolidated entities261 3,090 — — 999 4,350 
Other assets51,271 (1)122,933 (2)81,601 (3)612 766,058 (4)1,022,475 
Total assets$1,228,513 $952,096 $916,120 $612 $767,057 $3,864,398 
(1)Balance consists primarily of cash and cash equivalents and property and equipment.
(2)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaids and other assets.
(3)Balance consists primarily of cash and cash equivalents, goodwill, prepaids and other assets and property and equipment.
(4)Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaids and other assets. 

NOTE 15 — COMMITMENTS AND CONTINGENCIES
We are involved in various routine legal and regulatory proceedings, including, without limitation, claims and litigation alleging construction defects. In general, the proceedings are incidental to our business, and most exposure is subject to and should be covered by warranty and indemnity obligations of our consultants and subcontractors. Additionally, some such claims are also covered by insurance. With respect to the majority of pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to these matters are not considered probable. Historically, most disputes regarding warranty claims are resolved prior to litigation. We believe there are no pending legal or warranty matters as of September 30, 2021 that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.

As discussed in Note 1 under the heading “Warranty Reserves”, we have case specific reserves within our $26.6 million of total warranty reserves related to alleged stucco defects in certain homes we constructed between 2006 and 2017 and for water drainage issues in a single community in Florida that we developed in 2016. Our review and handling of these two matters is ongoing and our estimate of and reserves for resolving these matters is based on internal data, our judgement and various assumptions and estimates. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimates and thus our related reserves. As of September 30, 2021, after considering potential recoveries from the consultants and contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover the above mentioned matters. See Note 1 for information related to our warranty obligations.

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Special Note of Caution Regarding Forward-Looking Statements
In passing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress encouraged public companies to make “forward-looking statements” by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the PSLRA.

The words “believe,” “expect,” “anticipate,” “forecast,” “plan,” “intend,” "may," "will," "should," "could," “estimate,” “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All statements we make other than statements of historical fact are forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements in this Quarterly Report include: statements concerning our expectations for our financial results, business, operations, housing demand and the economy and society in general; trends and economic factors in the homebuilding industry in general, and our markets and results specifically, including the impact thereon of an epidemic or pandemic (such as COVID-19), the duration, impact and severity of which is highly uncertain; our goals, strategies and strategic initiatives and the anticipated benefits relating thereto; our intentions and the expected benefits and advantages of our product and land positioning strategies, including with respect to our focus on the first-time and first move-up buyer and housing demand for affordable homes and our spec home strategy; supply chain constraints and construction cycle times; the timing and targeted number of new community openings in 2021 and beyond; demand and pricing trends in the short-term throughout our geographies; that we may opportunistically repurchase or redeem our debt; the benefits of our land acquisition strategy and structures, including the use and the benefits of option contracts; our expectation that existing guarantees, letters of credit and performance and surety bonds will not be drawn on; the adequacy of our insurance coverage and warranty reserves; the expected outcome of legal proceedings we are involved in and the sufficiency of our reserves relating thereto; seasonality; our ability and willingness to acquire land under option or contract; our strategy and trends and expectations concerning sales prices, sales pace, closings, orders, cancellations, land investments and spend, material and labor costs for land development and home construction, gross margins, gross profit, revenues, general and administrative expenses, net earnings, operating leverage, backlog and backlog conversion, land prices, changes in and location of active communities, and the amount, type and timing of new community openings; our future cash needs; the impact of new accounting standards; that we may seek to raise additional debt and equity capital; our intentions regarding the payment of dividends and the use of derivative contracts; our perceptions about the importance of joint ventures to our business; and the impact of changes in interest rates.

Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following: changes in interest rates and the availability and pricing of residential mortgages; inflation in the cost of materials used to develop communities and construct homes; supply chain constraints; our ability to obtain performance and surety bonds in connection with our development work; the ability of our potential buyers to sell their existing homes; legislation related to tariffs; the adverse effect of slow absorption rates; impairments of our real estate inventory; cancellation rates; competition; home warranty and construction defect claims; failures in health and safety performance; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our potential exposure to and impacts from natural disasters or severe weather conditions; the availability and cost of finished lots and undeveloped land; the success of our strategy to offer and market entry-level and first move-up homes; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest or option deposits; our limited geographic diversification; the replication of our energy-efficient technologies by our competitors; shortages in the availability and cost of subcontract labor; our exposure to information technology failures and security breaches and the impact thereof; the loss of key personnel; changes in tax laws that adversely impact us or our homebuyers; our inability to prevail on contested tax positions; failure to comply with laws and regulations; our compliance with government regulations; negative publicity that affects our reputation; disruptions to our business by an epidemic or pandemic (such as COVID-19), and measures that federal, state and local governments and/or health authorities implement to address it; and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in this Form 10-Q and our Form 10-K for the year ended December 31, 2020 under the caption "Risk Factors."
Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain, as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. In addition, we disclaim and undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law.


21


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview and Outlook
The housing market remained solid during the third quarter of 2021 as it continues to benefit from still low interest rates, a limited supply of available homes, and ongoing demand, particularly with the millennial and baby boomer generations who are experiencing life events that align with a change in home ownership. We believe that these underlying economic and demographic factors will continue in the near to mid-term, but will likely taper to a normalized pace over time. Our operating model to provide buyers with affordable, healthy, and quick move-in ready homes has positioned us to take full advantage of the current market, resulting in the highest third quarter closing volume and the highest quarterly home closing gross margin in the Company's history.
In addition to our strong growth in closings and profitability during the third quarter of 2021, we continued to make progress on our goals for community count growth. As of September 30, 2021, we had 236 active communities, up both sequentially and year-over-year from 226 at June 30, 2021, and 204 at September 30, 2020. We were able to close 3,112 homes in the third quarter of 2021 despite supply chain constraints that impacted our production. Through long-cultivated relationships with our national and local partners, we were able to navigate the current limitations and expect to continue to utilize our spec-heavy, limited SKU operating model to manage the continuing supply chain concerns that are expected to last into 2022. We metered the number of homes available for sale to align with the current production constraints, causing our average absorption pace to decrease year-over-year during the third quarter, although it remains strong compared to historical trends.
Summary Company Results

Total home closing revenue was $1.3 billion on 3,112 homes closed for the three months ended September 30, 2021 compared to $1.1 billion on 3,004 homes closed for the third quarter of 2020, increases of 10.4% and 3.6%, respectively. In addition to higher home closing revenue, we achieved our highest home closing gross margin in Company history of 29.7%, an 820 basis point increase year-over-year that contributed to a $128.1 million increase in home closing gross profit to $371.7 million compared to $243.6 million in the third quarter of 2020. This improvement was due to pricing power from strong buyer demand and leveraging of our fixed costs on higher home closing volumes, more than offsetting higher lumber costs and other rising commodity costs. General and administrative expenses were $47.2 million in the three months ended September 30, 2021, a $6.5 million increase from $40.7 million during the third quarter of 2020, driven by higher performance related compensation expenses and a higher employee headcount. Earnings before income taxes improved by $126.2 million year-over-year to $261.7 million for the third quarter of 2021. These improved year-over-year results combined with our higher effective income tax rate of 23.3% as compared to 19.5% in the prior year period led to net earnings of $200.8 million in the third quarter of 2021 versus $109.1 million in the third quarter of 2020. The higher effective tax rate in the third quarter of 2021 reflects increased profit in states with higher tax rates and the reduced benefit of federal energy efficient home tax credits on higher net earnings before income taxes. For the nine months ended September 30, 2021, home closing revenue was $3.6 billion on 9,275 homes closed, 17.7% and 14.6% increases over 2020, respectively. Year-to-date results reflect an increase of $341.0 million in home closing gross profit versus the nine months ended September 30, 2020. Interest expense decreased year-over-year by $1.9 million as we benefited from lower interest rates as a result of our debt refinancing in April 2021. In connection with this refinancing transaction, we recognized an $18.2 million loss on early extinguishment of debt (see Note 6 in the accompanying unaudited financial statements for additional information). Higher pre-tax income was reduced by an effective tax rate of 22.3%, leading to net income of $500.0 million for the nine months ended September 30, 2021 compared to $270.9 million for the 2020 period.

Order volume declined 10.6% in the three months ended September 30, 2021 compared to the same period in 2020, as a result of metering our orders to align with production and a slight return of traditional seasonality. The third quarter of 2021 orders pace remained elevated at 5.0 per month, down from 5.8 in the third quarter of 2020, which represented the highest third quarter pace in Company history. This was partially offset by a 4.8% increase in average active communities over the prior year comparable period. Order value remained flat as a 12.0% increase in average sales price ("ASP") offset the volume decrease. We were able to open 40 communities during the third quarter of 2021 despite delays in permitting, zoning and entitlement as well as land supply chain constraints. Our order cancellation rate dropped to 10% for the third quarter of 2021 compared to 13% for the prior year period. For the nine months ended September 30, 2021, home order volume decreased 1.0% while home order value increased 9.6% over the prior year, and our order cancellation rate dropped to 10% compared to 14% for the prior year period. We ended the third quarter of 2021 with 5,838 homes in backlog valued at $2.6 billion, an 11.4% increase in units and a 27.5% increase in value over September 30, 2020.
22


Company Positioning
We believe that our ongoing investments in new communities designed for the first-time and first move-up homebuyer, our commitment to an all-spec strategy for our entry-level homes, our simplified first move-up design studio process, industry-leading innovation in our energy-efficient product offerings, automation, and transformative customer buying experience, create a differentiated strategy that has aided us in our success in the highly-competitive new home market and will continue to do so in the long-term.
Our focus includes the following strategies:
•Expanding our community count and market share;
•Continuously improving the overall home buying experience through simplification and innovation. Studio M streamlines the option selection process for move-up buyers, while all of our LiVE.NOW® communities feature interactive technology tools offering homebuyers the ability to electronically search for available homes with their desired home features and based on their preferred availability or move-in dates;
•Leveraging and expanding on technological solutions through digital offerings. During the third quarter of 2021, we launched our chat bot, Virtual Assistant Liaison ("VAL"), which provides customers and owners with around-the-clock information and support on our website. We also offer virtual tours, partial or fully virtual closings in states where such services are permitted, and online scheduling for in-person model home tours and self-guided tours in select locations. Our website provides a warranty portal for our homeowners to submit and track warranty-related matters and a comprehensive online suite of financial services such as mortgage pre-qualifications and on-demand homeowners’ insurance quotes;
•Increasing homeowner satisfaction by setting industry standards for energy-efficiency and offering healthier homes with enhanced security features. Every new home we construct meets or exceeds ENERGY STAR® standards and comes standard with the MERV-13 air filter and a multispeed HVAC system, allowing owners to better manage the comfort of their home while reducing their environmental impact and operating costs. In addition, each of our newly constructed homes includes home automation features through our M.Connected Home™ Automation Suite which includes the Honeywell Pro Series Hub ("the Hub") that allows homeowners to monitor and control key components of their homes;
•Simplifying our production process to allow us to more efficiently build our homes and reduce our construction costs, which in turn allows us to competitively price our homes and deliver them on a shorter timeline; and
•Improving our home closing gross profit by growing closing volume, allowing us to better leverage our overhead;
In order to maintain focus on growing our business, we remain committed to the following long-term objectives:
•Maintaining a healthy orders pace through the use of our consumer and market research to build homes that offer our buyers their desired features and amenities;
•Achieving or maintaining a position of at least 5% market share in all of our markets;
•Continuing to innovate and promote our energy efficiency program and our M.Connected Home™ Automation Suite to create differentiation for the Meritage brand;
•Managing construction efficiencies and costs through national and regional vendor relationships with a focus on quality construction and warranty management;
•Carefully managing our liquidity and a strong balance sheet; we ended the quarter with a 29.1% debt-to-capital ratio and a 17.5% net debt-to-capital ratio;
•Maximizing returns to our shareholders, most recently through our improved financial performance and share repurchase program; and
•Promoting a positive environment for our employees through our commitment to foster diversity, equity, and inclusion and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts.
23


Critical Accounting Policies
The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, valuation of real estate, warranty reserves and valuation of deferred tax assets. There have been no significant changes to our critical accounting policies during the nine months ended September 30, 2021 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2020 Annual Report on Form 10-K.
24


Home Closing Revenue, Home Orders and Order Backlog
The composition of our closings, home orders and backlog is constantly changing and is based on a changing mix of communities with various price points between periods as new projects open and existing projects wind down and close-out. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):
 Three Months Ended September 30,Quarter over Quarter
 20212020Change $Change %
Home Closing Revenue
Total
Dollars$1,251,435 $1,133,221 $118,214 10.4 %
Homes closed3,112 3,004 108 3.6 %
Average sales price$402.1 $377.2 $24.9 6.6 %
West Region
Arizona
Dollars$193,847 $143,630 $50,217 35.0 %
Homes closed532 429 103 24.0 %
Average sales price$364.4 $334.8 $29.6 8.8 %
California
Dollars$177,623 $202,460 $(24,837)(12.3)%
Homes closed295 332 (37)(11.1)%
Average sales price$602.1 $609.8 $(7.7)(1.3)%
Colorado
Dollars$80,149 $88,199 $(8,050)(9.1)%
Homes closed144 183 (39)(21.3)%
Average sales price$556.6 $482.0 $74.6 15.5 %
West Region Totals
Dollars$451,619 $434,289 $17,330 4.0 %
Homes closed971 944 27 2.9 %
Average sales price$465.1 $460.1 $5.0 1.1 %
Central Region - Texas
Central Region Totals
Dollars$383,206 $349,907 $33,299 9.5 %
Homes closed1,012 1,059 (47)(4.4)%
Average sales price$378.7 $330.4 $48.3 14.6 %
East Region
Florida
Dollars$139,642 $124,836 $14,806 11.9 %
Homes closed386 339 47 13.9 %
Average sales price$361.8 $368.2 $(6.4)(1.7)%
Georgia
Dollars$52,004 $62,921 $(10,917)(17.4)%
Homes closed139 178 (39)(21.9)%
Average sales price$374.1 $353.5 $20.6 5.8 %
North Carolina
Dollars$145,268 $98,322 $46,946 47.7 %
Homes closed371 295 76 25.8 %
Average sales price$391.6 $333.3 $58.3 17.5 %
South Carolina
Dollars$31,686 $25,502 $6,184 24.2 %
Homes closed92 78 14 17.9 %
Average sales price$344.4 $326.9 $17.5 5.4 %
Tennessee
Dollars$48,010 $37,444 $10,566 28.2 %
Homes closed141 111 30 27.0 %
Average sales price$340.5 $337.3 $3.2 0.9 %
East Region Totals
Dollars$416,610 $349,025 $67,585 19.4 %
Homes closed1,129 1,001 128 12.8 %
Average sales price$369.0 $348.7 $20.3 5.8 %
25


 Nine Months Ended September 30,Quarter over Quarter
 20212020Change $Change %
Home Closing Revenue
Total
Dollars$3,596,060 $3,055,229 $540,831 17.7 %
Homes closed9,275 8,090 1,185 14.6 %
Average sales price$387.7 $377.7 $10.0 2.6 %
West Region
Arizona
Dollars$497,105 $437,233 $59,872 13.7 %
Homes closed1,423 1,315 108 8.2 %
Average sales price$349.3 $332.5 $16.8 5.1 %
California
Dollars$547,754 $487,605 $60,149 12.3 %
Homes closed890 787 103 13.1 %
Average sales price$615.5 $619.6 $(4.1)(0.7)%
Colorado
Dollars$239,399 $268,970 $(29,571)(11.0)%
Homes closed464 553 (89)(16.1)%
Average sales price$515.9 $486.4 $29.5 6.1 %
West Region Totals
Dollars$1,284,258 $1,193,808 $90,450 7.6 %
Homes closed2,777 2,655 122 4.6 %
Average sales price$462.5 $449.6 $12.9 2.9 %
Central Region - Texas
Central Region Totals
Dollars$1,105,429 $901,791 $203,638 22.6 %
Homes closed3,129 2,747 382 13.9 %
Average sales price$353.3 $328.3 $25.0 7.6 %
East Region
Florida
Dollars$440,847 $357,233 $83,614 23.4 %
Homes closed1,246 942 304 32.3 %
Average sales price$353.8 $379.2 $(25.4)(6.7)%
Georgia
Dollars$169,620 $163,617 $6,003 3.7 %
Homes closed456 459 (3)(0.7)%
Average sales price$372.0 $356.5 $15.5 4.3 %
North Carolina
Dollars$372,119 $276,477 $95,642 34.6 %
Homes closed1,000 805 195 24.2 %
Average sales price$372.1 $343.4 $28.7 8.4 %
South Carolina
Dollars$87,741 $73,113 $14,628 20.0 %
Homes closed258 229 29 12.7 %
Average sales price$340.1 $319.3 $20.8 6.5 %
Tennessee
Dollars$136,046 $89,190 $46,856 52.5 %
Homes closed409 253 156 61.7 %
Average sales price$332.6 $352.5 $(19.9)(5.6)%
East Region Totals
Dollars$1,206,373 $959,630 $246,743 25.7 %
Homes closed3,369 2,688 681 25.3 %
Average sales price$358.1 $357.0 $1.1 0.3 %
26


 Three Months Ended September 30,Quarter over Quarter
 20212020Change $Change %
Home Orders (1)
Total
Dollars$1,488,951 $1,488,480 $471 — %
Homes ordered3,441 3,851 (410)(10.6)%
Average sales price$432.7 $386.5 $46.2 12.0 %
West Region
Arizona
Dollars$233,828 $240,151 $(6,323)(2.6)%
Homes ordered550 709 (159)(22.4)%
Average sales price$425.1 $338.7 $86.4 25.5 %
California
Dollars$213,859 $319,680 $(105,821)(33.1)%
Homes ordered319 510 (191)(37.5)%
Average sales price$670.4 $626.8 $43.6 7.0 %
Colorado
Dollars$123,242 $88,972 $34,270 38.5 %
Homes ordered207 188 19 10.1 %
Average sales price$595.4 $473.3 $122.1 25.8 %
West Region Totals
Dollars$570,929 $648,803 $(77,874)(12.0)%
Homes ordered1,076 1,407 (331)(23.5)%
Average sales price$530.6 $461.1 $69.5 15.1 %
Central Region - Texas
Central Region Totals
Dollars$427,689 $395,453 $32,236 8.2 %
Homes ordered1,070 1,183 (113)(9.6)%
Average sales price$399.7 $334.3 $65.4 19.6 %
East Region
Florida
Dollars$192,479 $179,607 $12,872 7.2 %
Homes ordered534 491 43 8.8 %
Average sales price$360.4 $365.8 $(5.4)(1.5)%
Georgia
Dollars$74,766 $62,541 $12,225 19.5 %
Homes ordered176 172 4 2.3 %
Average sales price$424.8 $363.6 $61.2 16.8 %
North Carolina
Dollars$140,135 $132,988 $7,147 5.4 %
Homes ordered347 386 (39)(10.1)%
Average sales price$403.8 $344.5 $59.3 17.2 %
South Carolina
Dollars$31,535 $28,140 $3,395 12.1 %
Homes ordered100 90 10 11.1 %
Average sales price$315.4 $312.7 $2.7 0.9 %
Tennessee
Dollars$51,418 $40,948 $10,470 25.6 %
Homes ordered138 122 16 13.1 %
Average sales price$372.6 $335.6 $37.0 11.0 %
East Region Totals
Dollars$490,333 $444,224 $46,109 10.4 %
Homes ordered1,295 1,261 34 2.7 %
Average sales price$378.6 $352.3 $26.3 7.5 %
(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.
27


 Nine Months Ended September 30,Quarter over Quarter
 20212020Change $Change %
Home Orders (1)
Total
Dollars$4,337,753 $3,958,870 $378,883 9.6 %
Homes ordered10,441 10,550 (109)(1.0)%
Average sales price$415.5 $375.2 $40.3 10.7 %
West Region
Arizona
Dollars$713,067 $654,579 $58,488 8.9 %
Homes ordered1,776 2,016 (240)(11.9)%
Average sales price$401.5 $324.7 $76.8 23.7 %
California
Dollars$604,478 $769,251 $(164,773)(21.4)%
Homes ordered949 1,250 (301)(24.1)%
Average sales price$637.0 $615.4 $21.6 3.5 %
Colorado
Dollars$317,155 $258,268 $58,887 22.8 %
Homes ordered557 540 17 3.1 %
Average sales price$569.4 $478.3 $91.1 19.0 %
West Region Totals
Dollars$1,634,700 $1,682,098 $(47,398)(2.8)%
Homes ordered3,282 3,806 (524)(13.8)%
Average sales price$498.1 $442.0 $56.1 12.7 %
Central Region - Texas
Central Region Totals
Dollars$1,248,032 $1,130,943 $117,089 10.4 %
Homes ordered3,286 3,457 (171)(4.9)%
Average sales price$379.8 $327.1 $52.7 16.1 %
East Region
Florida
Dollars$547,706 $435,411 $112,295 25.8 %
Homes ordered1,481 1,198 283 23.6 %
Average sales price$369.8 $363.4 $6.4 1.8 %
Georgia
Dollars$213,632 $182,958 $30,674 16.8 %
Homes ordered533 518 15 2.9 %
Average sales price$400.8 $353.2 $47.6 13.5 %
North Carolina
Dollars$450,854 $340,626 $110,228 32.4 %
Homes ordered1,156 999 157 15.7 %
Average sales price$390.0 $341.0 $49.0 14.4 %
South Carolina
Dollars$90,532 $85,316 $5,216 6.1 %
Homes ordered264 272 (8)(2.9)%
Average sales price$342.9 $313.7 $29.2 9.3 %
Tennessee
Dollars$152,297 $101,518 $50,779 50.0 %
Homes ordered439 300 139 46.3 %
Average sales price$346.9 $338.4 $8.5 2.5 %
East Region Totals
Dollars$1,455,021 $1,145,829 $309,192 27.0 %
Homes ordered3,873 3,287 586 17.8 %
Average sales price$375.7 $348.6 $27.1 7.8 %
(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.
28


 Three Months Ended September 30,
 20212020
EndingAverageEndingAverage
Active Communities
Total236231.0204 220.5
West Region
Arizona3838.035 36.5
California1819.020 24.0
Colorado1616.511 12.0
West Region Totals7273.566 72.5
Central Region - Texas
Central Region Totals6866.058 63.0
East Region
Florida3836.034 35.0
Georgia1211.011 14.0
North Carolina2626.020 20.5
South Carolina119.06 5.5
Tennessee99.59 10.0
East Region Totals9691.580 85.0

Nine Months Ended September 30,
20212020
EndingAverageEndingAverage
Active Communities
Total236215.3204232.1
West Region
Arizona3835.53534.3
California1818.32025.3
Colorado1614.01113.8
West Region Totals7267.86673.4
Central Region - Texas
Central Region Totals6863.65870.3
East Region
Florida3833.33434.4
Georgia1210.31115.3
North Carolina2624.320 21.6
South Carolina117.566.8
Tennessee98.5910.3
East Region Totals9683.98088.4













29



 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Cancellation Rates (1)
Total10 %13 %10 %14 %
West Region
Arizona12 %10 %10 %11 %
California10 %13 %10 %15 %
Colorado10 %15 %8 %15 %
West Region Totals10 %12 %9 %13 %
Central Region - Texas
Central Region Totals13 %15 %11 %16 %
East Region
Florida5 %12 %8 %12 %
Georgia9 %12 %10 %12 %
North Carolina7 %11 %7 %9 %
South Carolina18 %15 %15 %13 %
Tennessee7 %12 %10 %17 %
East Region Totals8 %11 %9 %12 %
(1)Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.



30


 At September 30,Quarter over Quarter
 20212020Change $Change %
Order Backlog (1)
Total
Dollars$2,555,405 $2,004,981 $550,424 27.5 %
Homes in backlog5,838 5,242 596 11.4 %
Average sales price$437.7 $382.5 $55.2 14.4 %
West Region
Arizona
Dollars$560,090 $404,044 $156,046 38.6 %
Homes in backlog1,346 1,212 134 11.1 %
Average sales price$416.1 $333.4 $82.7 24.8 %
California
Dollars$331,454 $373,949 $(42,495)(11.4)%
Homes in backlog503 608 (105)(17.3)%
Average sales price$659.0 $615.0 $44.0 7.2 %
Colorado
Dollars$182,536 $87,047 $95,489 109.7 %
Homes in backlog301 183 118 64.5 %
Average sales price$606.4 $475.7 $130.7 27.5 %
West Region Totals
Dollars$1,074,080 $865,040 $209,040 24.2 %
Homes in backlog2,150 2,003 147 7.3 %
Average sales price$499.6 $431.9 $67.7 15.7 %
Central Region - Texas
Central Region Totals
Dollars$715,226 $602,709 $112,517 18.7 %
Homes in backlog1,787 1,758 29 1.6 %
Average sales price$400.2 $342.8 $57.4 16.7 %
East Region
Florida
Dollars$321,831 $242,419 $79,412 32.8 %
Homes in backlog785 627 158 25.2 %
Average sales price$410.0 $386.6 $23.4 6.1 %
Georgia
Dollars$101,996 $69,204 $32,792 47.4 %
Homes in backlog233 192 41 21.4 %
Average sales price$437.8 $360.4 $77.4 21.5 %
North Carolina
Dollars$242,192 $143,741 $98,451 68.5 %
Homes in backlog610 413 197 47.7 %
Average sales price$397.0 $348.0 $49.0 14.1 %
South Carolina
Dollars$44,028 $36,723 $7,305 19.9 %
Homes in backlog126 114 12 10.5 %
Average sales price$349.4 $322.1 $27.3 8.5 %
Tennessee
Dollars$56,052 $45,145 $10,907 24.2 %
Homes in backlog147 135 12 8.9 %
Average sales price$381.3 $334.4 $46.9 14.0 %
East Region Totals
Dollars$766,099 $537,232 $228,867 42.6 %
Homes in backlog1,901 1,481 420 28.4 %
Average sales price$403.0 $362.7 $40.3 11.1 %
(1)Our backlog represents net sales that have not closed.

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Operating Results

Companywide. In the third quarter of 2021, we achieved our highest third quarter home closing volume and revenue in Company history, providing a 3.6% improvement in units over the third quarter of 2020, with 3,112 closings valued at $1.3 billion compared to 3,004 closings valued at $1.1 billion in the prior year. This increase in closing volume was attributable to entering the quarter with a higher backlog as compared to prior year, despite a lower backlog conversion rate. Home closing revenue increased by 10.4% over the third quarter of 2020 due to the higher closing volume combined with a 6.6% increase in ASP. Home order volume declined by 10.6% to 3,441 homes as compared to 3,851 homes in the third quarter of 2020, due to a 14.9% decrease in orders pace that was partially offset by a 4.8% increase in average active communities. We metered the number of homes available for sale during the third quarter of 2021 to align with our starts and the current production constraints. Orders pace was still strong at 5.0 homes ordered per average active community per month during the third quarter of 2021, but down from the Company's all time third quarter high of 5.8 homes in 2020. Home order value of $1.5 billion was flat compared to the third quarter of 2020, as the decrease in order volume was entirely offset by a 12.0% increase in ASP on orders. This increase in ASP demonstrates the continuing market demand for homes, providing us pricing power. Our focus on first-time and first move-up buyers, with our entry-level communities offering only spec homes for sale, allows for quicker move-ins for our customers, increasing the desirability of our products. Community count increased 15.7% year-over-year, ending the third quarter with 236 actively selling communities at September 30, 2021, up from 204 at September 30, 2021. Our order cancellation rate improved to 10% for both the three and nine month periods in 2021, as compared to 13% and 14% during the three and nine month periods in 2020, respectively, a further indication of strong demand in the market.

For the nine months ended September 30, 2021, home closing volume grew by 1,185 units, or 14.6%, and home closing revenue improved by $540.8 million on 9,275 closings valued at $3.6 billion. Order volume for the nine months ended September 30, 2021 decreased 1.0% year-over-year, to 10,441 orders, while value increased 9.6%, to $4.3 billion for the nine months ended September 30, 2021. Demand for our affordable entry-level homes has provided us with pricing power, resulting in a 10.7% increase in ASP on orders for the nine months ended September 30, 2021. We ended the quarter with 5,838 homes in backlog valued at $2.6 billion, compared to 5,242 units valued at $2.0 billion at September 30, 2020. Despite the decrease in order volume, backlog units and backlog value increased year-over-year from the impacts of rising ASP on orders and cycle time delays.
West. The West Region closed 971 homes and generated $451.6 million in home closing revenue in the third quarter of 2021, up from 944 homes and $434.3 million in home closing revenue in the comparable 2020 period. Order volume decreased 23.5% to 1,076 homes in the third quarter of 2021 compared to 1,407 in 2020, most notably in California, due in part to a 20.8% decrease in average active communities. Strong demand and pricing power resulted in a 15.1% increase in ASP on orders and helped to partially offset the decreased volumes, resulting in a net 12.0% decrease in order value in the third quarter of 2021 to $570.9 million, down from $648.8 million in the 2020 period. Orders pace declined year-over-year to 4.9 homes per average community per month during the three months ended September 30, 2021 compared to 6.5 homes in the same period of 2020. As discussed previously, the year-over-year decline in orders pace is due mainly to metering of homes available for sale in order to keep pace with production cycle times.
Year-to-date results in the West Region were similar to those of the third quarter. The number and value of homes closed versus prior year increased by 4.6% and 7.6%, respectively, and ASP improved 2.9%. Order volumes for the Region declined 13.8% year-to-date, due to a 7.6% decline in the average number of actively selling communities and a 6.7% decline in orders pace. Order value was 2.8% lower for the nine months ended September 30, 2021, due to the decreased volume partially offset by a 12.7% increase in ASP. The West Region ended the third quarter of 2021 with 2,150 homes in backlog valued at $1.1 billion, up from 2,003 units valued at $865.0 million at September 30, 2020. Despite the decrease in order volume, backlog increased year-over-year due to entering the period with a higher backlog and closing delays caused by supply chain constraints.
Central. In the third quarter of 2021, the Central Region, made up of our Texas markets, closed 1,012 homes and generated $383.2 million in home closing revenue, up from the prior year comparable period results of 1,059 homes and $349.9 million of home closing revenue. The 9.5% increase in revenue was due entirely to the 14.6% increase in ASP, as closing volume decreased 4.4% year-over-year. Order volume declined 9.6% due to a 13.8% decrease in orders pace, partially offset by an increase in average active community count of 4.8%. Despite the lower volume, order value increased 8.2% to $427.7 million in the third quarter of 2021, compared to $395.5 million in the prior year quarter, due to pricing power that drove ASP up by 19.6% in the Region.
The Central Region experienced improvements in home closings and home closing revenues for the nine months ended September 30, 2021, which were up 13.9% and 22.6%, respectively. Order volume decreased 4.9% due to a lower average active community count, offset by increased orders pace. Order value and ASP on orders improved 10.4% and 16.1%, respectively, year-over-year. The Region ended the quarter with 1,787 units in backlog, up 1.6%, and backlog value of $715.2 million, up 18.7% compared to the prior year.
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East. During the three months ended September 30, 2021, the East Region delivered 1,129 closings and $416.6 million in home closing revenue compared to 1,001 closings and $349.0 million in home closing revenue in the comparable prior year period, improvements of 12.8% and 19.4%, respectively. The East Region was the only region in the Company to generate an increase in order volume in the third quarter of 2021, with an improvement in both volume and value of 2.7% and 10.4%, respectively, reporting 1,295 units valued at $490.3 million compared to 1,261 units valued at $444.2 million in the prior year period. The higher orders reflect a 7.6% increase in average active communities, which offset the 4.1% decrease in orders pace, while the improvement in order value benefited from both the increase in volume as well as the 7.5% higher ASP.
The year-to-date results of the East Region were similar to those of the third quarter, with 25.3% and 25.7% improvements in home closing volume and revenue, respectively, compared to 2020, providing 3,369 closings and $1.2 billion in home closing revenue for the nine month period ending September 30, 2021. The number and value of orders rose by 17.8% and 27.0%, respectively, due to a 24.2% increase in orders pace for the nine months ended September 30, 2021 compared to prior year, which more than offset the 5.1% decrease in average active communities. The East Region ended the quarter with 1,901 homes in backlog valued at $766.1 million compared to 1,481 homes valued at $537.2 million at September 30, 2020, a 28.4% increase in units and 42.6% in order value from strong demand and pricing power.
Land Closing Revenue and Gross Profit/(Loss)
From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing development or home construction or where we are looking to diversify our land positions in the specific geography. As a result of such sales, we recognized land closing revenue of $8.5 million and $4.9 million for the three months ending September 30, 2021 and 2020, respectively, and profit of $0.8 million and $0.5 for the third quarter of 2021 and 2020, respectively. Year-to-date land sales resulted in a profit of $1.0 million for the nine months ended September 30, 2021 and a loss of $0.6 million loss in the prior year.
Other Operating Information (dollars in thousands)  
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
 DollarsPercent of Home Closing RevenueDollarsPercent of Home Closing RevenueDollarsPercent of Home Closing RevenueDollarsPercent of Home Closing Revenue
Home Closing Gross Profit (1)
Total$371,676 29.7 %$243,567 21.5 %$983,632 27.4 %$642,623 21.0 %
West$127,783 28.3 %$88,655 20.4 %$339,024 26.4 %$243,252 20.4 %
Central$122,940 32.1 %$83,452 23.8 %$327,728 29.6 %$205,431 22.8 %
East$120,953 29.0 %$71,460 20.5 %$316,880 26.3 %$193,940 20.2 %
 
(1)Home closing gross profit represents home closing revenue less cost of home closings, including impairments. Cost of home closings includes land and associated development costs, direct home construction costs, an allocation of common community costs (such as model complex costs and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs.
Companywide. Home closing gross margin for the third quarter of 2021 improved 820 basis points to our highest quarterly home closing gross margin in Company history of 29.7%, compared to 21.5% in the third quarter of 2020. The improved margin combined with higher revenue contributed to a $128.1 million improvement in home closing gross profit to end the quarter with $371.7 million compared to $243.6 million in 2020. Gross margin was up 640 basis points to 27.4% versus 21.0% for the nine months ended September 30, 2021 and 2020, respectively. The improved margins in 2021 in both the three and nine month periods are due to pricing power from strong buyer demand combined with leverage of fixed costs on greater home closing revenue, which have more than offset the higher lumber prices and increases in other commodity costs.
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West. Home closing gross margin for the West Region improved by 790 basis points to 28.3% for the third quarter of 2021 versus 20.4% in the third quarter of 2020. For the nine months ended September 30, 2021, home closing gross margin improved by 600 basis points to 26.4% versus 20.4% for the same period in the prior year. The improvements in the West Region's gross margins are due to pricing power from strong market demand and leverage of fixed costs on higher home closing revenue.
Central. The Central Region provided the highest home closing gross margin in the Company, which at 32.1% for the third quarter of 2021 was up 830 basis points from 23.8% in the prior year quarter. The improvement in gross margin was due to pricing power that generated the highest ASP increase in the Company of 14.6% combined with leverage of fixed costs and overhead. For the nine months ended September 30, 2021, gross margin was up 680 basis points to 29.6% as compared to 22.8% for the same 2020 period.
East. Home closing gross margin in the East Region was up 850 basis points year-over-year, our most notable improvement, at 29.0% in the third quarter of 2021 versus 20.5% for the comparable 2020 period. For the nine months ended September 30, 2021, gross margin was up 610 basis points to 26.3% versus 20.2% for the same period in the prior year. Pricing power and leverage of fixed costs on higher closing revenues contributed to improvements in gross margin for both the three and nine months ended September 30, 2021 compared to the respective 2020 periods.
Financial Services Profit (in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Financial services profit$4,224 $4,315 $12,599 $10,942 
Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title Agency and Meritage Homes Insurance Agency, as well as our portion of earnings from our mortgage joint venture. Financial services profit was $4.2 million and $4.3 million for the three months ended September 30, 2021 and 2020, respectively, and $12.6 million and $10.9 million for the nine months ended September 30, 2021 and 2020, respectively. The nominal decrease in year-over-year third quarter 2021 financial services profit despite an increase in closing volume is largely due to costs attributable to increased employee headcount. The $1.7 million year-over-year increase in year-to-date financial services profit is commensurate with the year-over-year 14.6% higher closing volumes.
Selling, General and Administrative Expenses and Other Expenses (dollars in thousands)
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Commissions and other sales costs$(68,952)$(73,282)$(210,585)$(204,863)
Percent of home closing revenue5.5 %6.5 %5.9 %6.7 %
General and administrative expenses$(47,192)$(40,737)$(128,297)$(111,083)
Percent of home closing revenue3.8 %3.6 %3.6 %3.6 %
Interest expense$(79)$(55)$(246)$(2,176)
Other income, net$1,268 $1,188 $3,443 $3,313 
Loss on early extinguishment of debt$— $— $(18,188)$— 
Provision for income taxes$(60,957)$(26,388)$(143,353)$(67,253)

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. At $69.0 million for the three months ended September 30, 2021, these costs decreased $4.3 million compared to the prior year comparable period, and decreased 100 basis points as a percentage of home closing revenue, down to 5.5% versus 6.5%. For the nine months ended September 30, 2021, commissions and other sales costs decreased 80 basis points and were $5.7 million higher than the corresponding prior year period. For both the three and nine month comparative periods, the decline as a percentage of home closing revenue is due to greater leverage of fixed expenses on higher closing revenue and cost savings from technology innovations that particularly benefited our sales and marketing efforts and lower external broker commissions. In addition, the third quarter of 2020 was negatively impacted by increased commission incentives that were temporarily offered during the earlier stages of COVID-19.

34


General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. For the three months ended September 30, 2021, general and administrative expenses were $47.2 million, compared to $40.7 million for the 2020 period, a $6.5 million increase, due primarily to increased payroll and performance based bonus compensation expenses on higher employee headcount. For the nine months ended September 30, 2021 and 2020, general and administrative expenses were $128.3 million and $111.1 million, respectively. As a percentage of home closing revenue, expenses were flat at 3.6% for both periods, as we realized the efforts of our cost control objectives. We have also continued our restrictions on certain corporate expenditures, particularly as they relate to precautions taken to address ongoing COVID-19 concerns. As COVID-19 restrictions ease, we expect these costs to gradually return as more employees return to the office and resume travel.
Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, other borrowings, and our Credit Facility. Interest expense for the three and nine months ended September 30, 2021 totaled $0.1 million and $0.2 million, respectively, compared to $0.1 million and $2.2 million in the three and nine months ended September 30, 2020, respectively. The decrease in year-to-date interest expense is due to interest charges incurred in the first half of 2020 on our Credit Facility which had $500.0 million outstanding for several weeks during that period.
Other Income, Net. Other income, net, primarily consists of (i) sublease income, (ii) interest earned on our cash and cash equivalents, (iii) payments and awards related to legal settlements and (iv) our portion of pre-tax income or loss from non-financial services joint ventures. For the three months ended September 30, 2021, Other income, net was $1.3 million, compared to $1.2 million in the 2020 comparable period. For the nine months ended September 30, 2021, Other income, net was $3.4 million compared to $3.3 million in the 2020 period.
Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of $18.2 million for the nine months ended September 30, 2021 is related to the early redemption of our $300.0 million 7.00% Senior Notes due 2022 during the second quarter of 2021. There were no similar charges during the nine months ended September 30, 2020. See Note 6 in the accompanying unaudited consolidated financial statements for more information related to the early redemption of our Senior Notes due 2022.
Income Taxes. Our effective tax rate was 23.3% and 19.5% for the three months ended September 30, 2021 and 2020, respectively, and 22.3% and 19.9% for the nine months ended September 30, 2021 and 2020, respectively. The higher tax rates for the three and nine months ended September 30, 2021, reflect increased profit in states with higher tax rates and a reduced benefit of the federal energy efficient home credits earned under Internal Revenue Code §45L applied to greater earnings before income taxes. The tax rates for the three and nine months ended September 30, 2020, reflect credits earned under Internal Revenue Code §45L new energy efficient homes.

Liquidity and Capital Resources
Overview
Our principal uses of capital in the first nine months of 2021 were acquisition and development of new lot positions, home construction, operating expenses, the payment of routine liabilities, the repayment of senior notes and repurchases of our common stock. We used funds generated by operations to meet our short-term working capital requirements. In addition, in the second quarter of 2021, we received proceeds from issuing new 3.875% senior notes due 2029, which were used in part to pay off existing 7.00% senior notes due 2022. See Note 6 in the accompanying unaudited consolidated financial statements for more information. We remain focused long-term on acquiring desirable land positions and maintaining a strong balance sheet to support future needs and growth, while leveraging land options where possible.
Operating Cash Flow Activities
During the nine months ended September 30, 2021, net cash used in operating activities totaled $248.7 million versus cash provided by operating activities of $373.1 million during the nine months ended September 30, 2020. Operating cash flows in 2021 and 2020 benefited from cash generated by net earnings of $500.0 million and $270.9 million, respectively. For the nine months ended September 30, 2021, operating cash flows generated by net earnings were offset by an $810.7 million increase in real estate assets due to our increased home construction, land acquisition and development activities. For the nine months ended September 30, 2020, operating cash flows also benefited from an increase in accounts payable and accrued liabilities of $60.0 million due to timing of payments for routine transactions.
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Investing Cash Flow Activities
During the nine months ended September 30, 2021, net cash used in investing activities totaled $17.5 million as compared to $13.2 million for the same period in 2020. Cash used in investing activities in the first nine months of 2021 and 2020 is mainly attributable to the purchases of property and equipment of $17.9 million and $14.8 million for the 2021 and 2020 periods, respectively.
Financing Cash Flow Activities
During the nine months ended September 30, 2021, net cash provided by financing activities totaled $82.9 million as compared to net cash used of $69.3 million for the same period in 2020. The net cash provided by financing activities in 2021 primarily reflects the net proceeds of $450.0 million from the issuance of our 3.875% Senior Notes due 2029, offset by the early redemption of our 7.00% Senior Notes due 2022 of $300.0 million principal and associated early tender fees of $17.7 million, along with share repurchases of $37.0 million. An additional $0.5 million of non-cash charges associated with the early redemption of our 7.00% Senior Notes due 2022 were recognized as Loss on early extinguishment of debt in the accompanying unaudited consolidated income statements. The activity in 2020 was primarily due to $60.8 million of share repurchases.

Overview of Cash Management

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 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. From a liquidity standpoint, we are currently acquiring and developing lots in our markets to grow our lot supply and active community count. We intend to increase our land and development spending over the next several years, consistent with our growth initiatives. We are using our cash on hand to fund operations.

During the nine months ended September 30, 2021, we closed 9,275 homes, purchased approximately 24,800 lots for $824.6 million, spent $623.0 million on land development and started construction on 10,554 homes. We primarily purchase undeveloped land or partially-finished lots requiring development in order to bring them to a finished status ready for home construction. We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land and inventory acquisition and development. We ended the third quarter of 2021 with $562.3 million of cash and cash equivalents, a decrease of $183.3 million from December 31, 2020, with no outstanding borrowings on our Credit Facility. We expect to generate cash from the sale of our inventory, but we intend to redeploy that cash primarily to acquire and develop strategic and well-positioned lots to grow our business.

Between our available cash and liquidity in our Credit Facility, we believe that we currently have sufficient liquidity to manage through our strategic growth goals. Nevertheless, we may seek additional capital to strengthen our liquidity position. Such additional capital may be in the form of equity or debt financing and may be from a variety of sources. 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. We may also from time to time engage in opportunistic repurchases of our common stock in open market or privately-negotiated transactions as well as repurchase or redeem our outstanding senior notes. In April 2021, we completed an offering of $450.0 million aggregate principal amount of 3.875% Senior Notes due 2029. The proceeds were used to redeem all $300.0 million aggregate principal amount outstanding of our 7.00% Senior Notes due 2022. See Note 6 in the accompanying unaudited consolidated financial statements for more information related to the early redemption of our 7.00% Senior Notes due 2022.

On February 13, 2019, our Board of Directors authorized a new stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock. On November 13, 2020, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program. On August 12, 2021, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program. There is no stated expiration for this program. The repurchases of the Company's shares may be made in the open market, in privately negotiated transactions, or otherwise. The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as market price of the Company's common stock, corporate and contractual requirements, prevailing market and economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any time. The Company intends to retire any shares repurchased. In the nine months ended September 30, 2021, we purchased and retired 395,461 shares of our
36


common stock at an aggregate purchase price of $37.0 million and as of September 30, 2021, $177.4 million remained available under this program.

We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands):
As of
September 30, 2021December 31, 2020
Senior notes, net, loans payable and other borrowings$1,161,195 $1,020,085 
Stockholders’ equity2,825,270 2,347,868 
Total capital$3,986,465 $3,367,953 
Debt-to-capital (1)
29.1 %30.3 %
Senior notes, net, loans payable and other borrowings$1,161,195 $1,020,085 
Less: cash and cash equivalents(562,291)(745,621)
Net debt598,904 274,464 
Stockholders’ equity2,825,270 2,347,868 
Total net capital$3,424,174 $2,622,332 
Net debt-to-capital (2)
17.5 %10.5 %
 
(1)Debt-to-capital is computed as senior notes, net and loans payable and other borrowings divided by the aggregate of total senior notes, net, 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 comprised of 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-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.

We have never declared cash dividends. Currently, we plan to utilize our cash to manage our liquidity and to grow community count. Future cash dividends, if any, will depend upon economic and financial conditions, results of operations, capital requirements, statutory requirements, compliance with certain restrictive debt covenants, as well as other factors considered relevant by our Board of Directors.
Credit Facility Covenants
Borrowings under the Credit Facility are unsecured, but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $1.5 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 in the credit facility) of at least 1.50 to 1.00 or (ii) liquidity (as defined in the credit facility) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of September 30, 2021. Our actual financial covenant calculations as of September 30, 2021 are reflected in the table below.
Financial Covenant (dollars in thousands):Covenant RequirementActual
Minimum Tangible Net Worth> $1,839,475$2,785,088
Leverage Ratio< 60%15.3%
Interest Coverage Ratio (1)
> 1.5015.69
Minimum Liquidity (1)
> $63,726$1,192,361
Investments other than defined permitted investments< $835,526$3,905

(1)We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both.
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Off-Balance Sheet Arrangements
Reference is made to Notes 1, 3, and 4 in the accompanying notes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which 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.
Seasonality
Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements. We typically sell more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy the deliveries in the second half of the year. We typically benefit from the cash generated from home closings more in the third and fourth quarters than in the first and second quarters. In 2020, historical cycles were impacted by COVID-19 and its impact on consumer behavior, particularly as it relates to the homebuilding market. This impact has continued throughout 2021; however, we saw some return of seasonality in the third quarter of 2021 and expect our historical seasonal pattern to continue over the long term, although it may continue to be affected by short-term volatility in the homebuilding industry and in the overall economy.
Recent Issued Accounting Pronouncements
See Note 1 in the accompanying notes to the unaudited consolidated financial statements included in this report for discussion of recently issued accounting pronouncements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk
Our fixed rate debt is made up primarily of $1.2 billion in principal of our senior notes. Except in limited circumstances, we do not have an obligation to prepay our fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value should not have a significant impact on our fixed rate borrowings until we would be required to repay such debt and access the capital markets to issue new debt. Our Credit Facility is subject to interest rate changes as the borrowing rates are based on LIBOR (or its anticipated future substitute) or Prime (see Note 5 in the accompanying notes to the unaudited consolidated financial statements included in this Form 10-Q).
Our operations are interest rate sensitive. As overall housing demand is adversely affected by increases in interest rates, a significant increase in mortgage interest rates may negatively affect the ability of homebuyers to secure adequate financing. Higher interest rates could adversely affect our revenues, gross margins and net income and would also increase our variable rate borrowing costs. We do not enter into, or intend to enter into, derivative interest rate swap financial instruments for trading or speculative purposes.
Item 4.Controls and Procedures
In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, we have developed and implemented disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of September 30, 2021 (the “Evaluation Date”). Based on such evaluation, management has concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective at a reasonable assurance level in ensuring that information that is required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
During the fiscal quarter covered by this Form 10-Q, there has not been any change in our internal control over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
Item 1.Legal Proceedings
See Note 15 in the accompanying notes to the unaudited consolidated financial statements in this report for a discussion of our legal proceedings.

Item 1A.Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item IA "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results. The risks described below and in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, financial condition and/or operating results. Except as described below, there has been no material change in our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Supply shortages and other risks related to the demand for building materials could materially disrupt our operations and increase costs.

We depend on continued availability of building materials in order to timely construct our homes. The availability of these materials can be significantly impacted by a variety of factors outside of our control. Constraints of raw materials and finished goods or in the distribution channels of our construction inputs can delay delivery of our homes to customers and can increase our building costs or lead to sales orders cancellations. For example, in 2021, supply chain constraints for various construction materials related to sustained demand amid the backdrop of a global pandemic have delayed our construction cycle times. These delays impact the timing of our expected home closings and may also result in cost increases that we may not be able to pass to our current or future customers. Sustained increases in construction costs may, over time, erode our margins.


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
We have never declared cash dividends. Currently, we plan to retain our cash to finance the continuing development of the business. Future cash dividends, if any, will depend upon financial condition, results of operations, capital requirements, statutory requirements, compliance with certain restrictive debt covenants, as well as other factors considered relevant by our Board of Directors.
Issuer Purchases of Equity Securities
On February 13, 2019, our Board of Directors authorized a new stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock. On November 13, 2020, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program. On August 12, 2021, the Board of Directors authorized the expenditure of an additional $100.0 million to repurchase shares of our common stock under this program, which was announced on August 17, 2021. There is no stated expiration for this program. The repurchases of the Company's shares may be made in the open market, in privately negotiated transactions, or otherwise. The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as the market price of the Company's common stock, corporate and contractual requirements, prevailing market and economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any time. As of September 30, 2021 there was $177.4 million available under this program to repurchase shares. We purchased 95,461 shares under the program during the three months ended September 30, 2021.

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PeriodTotal Number of Shares PurchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsApproximate dollar value of shares that may yet be purchased under the plans or programs
July 1, 2021 - July 31, 2021— $— — $86,827,896 
August 1, 2021 - August 31, 2021— $— — $186,827,896 
September 1, 2021 - September 30, 202195,461 $99.23 95,461 $177,355,474 
Total95,461 95,461 
Since September 30, 2021, we have repurchased and retired 243,885 shares of our common stock at an aggregate purchase price of $24.0 million under our authorized stock repurchase program. As of October 25, 2021, $153.4 million remained available under this program.
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 Item 6.Exhibits

Exhibit
Number
DescriptionPage or Method of Filing
3.1Restated Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Exhibit 3 of Form 8-K dated June 20, 2002
3.1.1Amendment to Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Exhibit 3.1 of Form 8-K dated September 15, 2004
3.1.2Amendment to Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Appendix A of the Proxy Statement for the Registrant's 2006 Annual Meeting of Stockholders
3.1.3Amendment to Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Appendix B of Proxy Statement for the Registrant's 2008 Annual Meeting of Stockholders
3.1.4Amendment to Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Appendix A of the Definitive Proxy Statement filed with the Securities and Exchange Commission on January 9, 2009
3.2Amended and Restated Bylaws of Meritage Homes CorporationIncorporated by reference to Exhibit 3.1 of Form 8-K dated May 10, 2017
10.1Amended and Restated Employment Agreement between the Company and Clinton Szubinski*Incorporated by reference to Exhibit 10.1 of Form 8-K dated August 17, 2021
10.2Amendment to the Third Amended and Restated Employment Agreement between the Company and C. Timothy White*Incorporated by reference to Exhibit 10.1 of Form 8-K dated September 3, 2021
22List of Guarantor SubsidiariesIncorporated by reference to Exhibit 22 of Form 10-K for the year ended December 31, 2020
31.1Rule 13a-14(a)/15d-14(a) Certification of Phillippe Lord, Chief Executive Officer Filed herewith
31.2Rule 13a-14(a)/15d-14(a) Certification of Hilla Sferruzza, Chief Financial OfficerFiled herewith
32.1Section 1350 Certification of Chief Executive Officer and Chief Financial OfficerFurnished herewith
101.0The following financial statements from the Meritage Homes Corporation Quarterly Report on Form 10-Q as of and for the three months and nine months ended September 30, 2021 were formatted in Inline XBRL (Extensible Business Reporting Language); (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Income Statements, (iii) Unaudited Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Consolidated Financial Statements.
104.0The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL.

*     Indicates a management contract or compensation plan.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
MERITAGE HOMES CORPORATION,
a Maryland corporation
By:/s/ HILLA SFERRUZZA
Hilla Sferruzza
Chief Financial Officer and Chief Accounting Officer
(Duly Authorized Officer and Principal Financial Officer)
Date:October 29, 2021

INDEX OF EXHIBITS
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.2
10.1
10.2
22 
31.1
31.2
32.1
101.0The following financial statements from the Meritage Homes Corporation Quarterly Report on Form 10-Q as of and for the three months and nine months ended September 30, 2021 were formatted in Inline XBRL (Extensible Business Reporting Language); (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Income Statements, (iii) Unaudited Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Consolidated Financial Statements.
104.0The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL.
*     Indicates a management contract or compensation plan.



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