Financial Data and Key Metrics Changes - Homebuilding revenue grew 15% year-over-year to $1.2 billion in Q1 2022, driven by a 17% increase in average selling prices (ASPs) [45][46] - Home closing gross margin reached a record 30.3%, a 560 basis point improvement from 24.7% a year ago, primarily due to higher ASPs offsetting increased commodity costs [46][50] - Diluted EPS increased by 68% year-over-year to $5.79 [50] Business Line Data and Key Metrics Changes - Entry-level homes comprised 86% of closings, up from 72% in the prior year, reflecting a shift in product mix [26][27] - Total orders for Q1 2022 were 3,874, reflecting a 12% year-over-year increase, driven by a 32% increase in average asset community count [26][28] - Cancellation rate remained stable at 9.6%, similar to the last eight quarters [22] Market Data and Key Metrics Changes - The central region, primarily Texas, saw a 16% increase in order volume, attributed to a 21% increase in average asset communities [28] - The east region experienced a 15% year-over-year order growth, primarily due to a 45% increase in average asset communities [29] - The west region's order volume increased by 5% year-over-year, despite a 19% decline in average order pace [31] Company Strategy and Development Direction - The company focuses on entry-level and first move-up markets, emphasizing affordability and efficient operations [18][67] - A new division was announced for the Salt Lake City market, expanding operations into a region with steady growth [14] - The company plans to maintain a disciplined approach to land acquisition, evaluating opportunities in light of rising interest rates [100][101] Management's Comments on Operating Environment and Future Outlook - Management acknowledged that rising interest rates may impact buyer psychology and affordability but believes underlying demand remains solid [11][62] - The company expects total closings for 2022 to be between 14,500 and 15,500 units, with home closing revenue projected at $6.5 billion to $6.9 billion [63] - Management remains prepared for market fluctuations and is focused on maintaining a healthy land position [67] Other Important Information - The company has initiated a tree planting program in partnership with the Arbor Day Foundation as part of its ESG initiatives [16] - A new general counsel was appointed, bringing extensive legal experience to the company [15] Q&A Session Summary Question: Is the entry-level segment still a good place to be in a rising rate environment? - Management indicated that demand is based on current rates, with buyers adjusting their expectations accordingly [73][76] Question: What is the outlook for gross margins and incentives? - Management expects margins to stabilize and anticipates some incremental incentives to be necessary in the rising interest rate environment [80][81] Question: How is consumer behavior changing in the current market? - There is more handholding required to get buyers comfortable with financing, but demand remains strong [87][89] Question: What is the level of investor activity in core for-sale communities? - The company maintains a tight control on investor activity, limiting it to around 5% of overall community sales [91] Question: What are the economics of the build-for-rent (BFR) platform? - The BFR platform is expected to be net neutral for the company, with some cost savings passed to operator partners [96] Question: What is the strategy regarding land acquisition? - The company plans to adopt a more measured approach to land acquisition, focusing on quality over quantity in light of rising interest rates [100][101]

Part I [Business](index=4&type=section&id=Item%201.%20Business) Meritage Homes is a leading single-family homebuilder focused on affordable, energy-efficient homes for entry-level and first move-up buyers across nine states, achieving record financial performance in 2021 [The Company and Strategy](index=4&type=section&id=The%20Company%20and%20Strategy) Meritage Homes designs and builds energy-efficient, quick move-in homes for entry-level and first move-up buyers across nine states, supported by a financial services segment - The company operates in three regions (West, Central, East) across **nine states**[12](index=12&type=chunk) - The operational strategy focuses on affordable, quick move-in homes for entry-level and first move-up markets, using a **100% speculative building approach** for entry-level products[20](index=20&type=chunk) - All new homes meet or exceed **ENERGY STAR standards** and include advanced features like MERV-13 air filters and the M.Connected Home™ Automation Suite[21](index=21&type=chunk) [Recent Industry and Company Developments](index=7&type=section&id=Recent%20Industry%20and%20Company%20Developments) In 2021, the company achieved record financial performance, including a 580 basis point improvement in gross margin and 75% diluted EPS growth, driven by strong housing demand and its focus on affordable homes FY 2021 Financial Performance Highlights | Metric | 2021 Value | Change vs 2020 | | :--- | :--- | :--- | | Home Closing Revenue Growth | 14% | - | | Home Closing Volume Growth | 8% | - | | ASP on Closings Growth | 6% | - | | Home Closing Gross Margin | 27.8% | +580 bps | | Net Earnings Growth | 74% | - | | Diluted EPS Growth | 75% | - | Balance Sheet Position (as of Dec 31, 2021) | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $618.3 million | $745.6 million | | Inventory | $3.7 billion | - | | Debt-to-Capital Ratio | 27.6% | 30.3% | | Net Debt-to-Capital Ratio | 15.1% | 10.5% | - First-time and first move-up buyers accounted for approximately **97% of 2021 closings**[27](index=27&type=chunk) [Land Acquisition and Development](index=8&type=section&id=Land%20Acquisition%20and%20Development) The company aggressively invested approximately $2.0 billion in land acquisition and development in 2021, securing nearly 34,000 new lots, primarily for entry-level communities, to maintain a four-to-five year supply Land Position and Investment (FY 2021) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Investment in Land Acquisition & Development | ~$2.0 billion | - | | Net New Lots Secured | ~34,000 | ~27,200 | | Total Lots Under Control (Year-End) | 75,049 | 55,502 | | Year Supply of Lots (based on 2021 closings) | 5.9 years | - | - Approximately **90% of lots acquired in 2021** are designated for entry-level communities[31](index=31&type=chunk) - At year-end 2021, the company controlled **26,495 lots** under option or purchase contracts with a total purchase price of approximately **$1.0 billion**, secured by **$82.7 million** in cash deposits[38](index=38&type=chunk) [Operations and Sales](index=10&type=section&id=Operations%20and%20Sales) The company navigated 2021 building material cost pressures and supply chain constraints, expanded digital marketing, and saw its sales backlog increase significantly by 39% in value - The company experienced **building material cost pressures** and **supply chain constraints** in 2021, with expectations for continuation[44](index=44&type=chunk) - Marketing and sales expanded **digital offerings**, including online scheduling, virtual tours, and digital contract signing[46](index=46&type=chunk)[51](index=51&type=chunk) Sales Backlog (as of Dec 31, 2021) | Metric | Dec 31, 2021 | Dec 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Backlog Units | 5,679 | 4,672 | +22% | | Backlog Value | $2.5 billion | $1.8 billion | +39% | [Human Capital](index=15&type=section&id=Human%20Capital) As of December 31, 2021, Meritage Homes had 1,773 full-time employees, demonstrating a commitment to DE&I with 40% female and 25% minority representation, and implemented COVID-19 safety measures Employee Statistics (as of Dec 31, 2021) | Category | Number/Percentage | | :--- | :--- | | Total Full-Time Employees | 1,773 | | Management & Administration | 346 | | Sales & Marketing | 494 | | Construction & Warranty | 878 | | Female Employees | 40% | | Minority Employees | 25% | - In 2021, the company adopted a Human Rights Policy and donated **$300,000** to organizations supporting racial equity and inclusion[72](index=72&type=chunk) [Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including rising interest rates, supply chain shortages, land availability, IT failures, and regulatory changes, which could impact its operations and financial performance - Housing demand is adversely affected by increases in **interest rates** and lack of mortgage availability, with predictions for further increases in 2022 and beyond[84](index=84&type=chunk) - **Supply chain constraints** for construction materials, which lengthened cycle times in 2021, are expected to persist in 2022 and potentially beyond[88](index=88&type=chunk) - A shift in market demand away from **entry-level and first move-up homes** could negatively impact operations[106](index=106&type=chunk) - **Information technology failures** and **data security breaches** pose significant operational risks, though a Q1 2020 malware attack was remediated without material adverse effect[111](index=111&type=chunk)[112](index=112&type=chunk) [Unresolved Staff Comments](index=25&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - No unresolved staff comments were reported[133](index=133&type=chunk) [Properties](index=25&type=section&id=Item%202.%20Properties) The company leases its 72,000 square foot corporate office in Scottsdale, Arizona, and an additional 325,000 square feet for operating divisions - The corporate office is a leased space of approximately **72,000 square feet** in Scottsdale, Arizona[134](index=134&type=chunk) - Approximately **325,000 square feet** of office space is leased for operating divisions and other corporate offices[134](index=134&type=chunk) [Legal Proceedings](index=26&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine legal proceedings, mainly warranty and construction defect claims, which are expected to be covered by subcontractor obligations and insurance, with no material adverse impact anticipated - The company is involved in routine legal proceedings, primarily **warranty and construction defect claims**, generally covered by subcontractor indemnities and insurance[136](index=136&type=chunk) - Pending legal and warranty matters are not expected to have a **material adverse impact** beyond existing reserves[137](index=137&type=chunk) [Mine Safety Disclosures](index=26&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not applicable[138](index=138&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=27&type=section&id=Item%205.%20Market%20For%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Meritage Homes' common stock trades on the NYSE (MTH), with no cash dividends planned, while the company repurchased $61.0 million in shares during 2021 under an ongoing program - The company's common stock is listed on the **NYSE** under the symbol **"MTH"**[141](index=141&type=chunk) - The company does not intend to declare **cash dividends** in the foreseeable future, retaining earnings for operations and growth[146](index=146&type=chunk) Share Repurchase Activity (FY 2021) | Metric | Value | | :--- | :--- | | Shares Repurchased | 639,346 | | Aggregate Purchase Price | $61.0 million | | Amount Available for Repurchase (as of Dec 31, 2021) | $153.4 million | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In 2021, the company achieved record home closing revenue of $5.1 billion and net earnings of $737.4 million, driven by strong market conditions and strategic focus, despite negative operating cash flow due to inventory investment [Summary Company Results](index=29&type=section&id=Summary%20Company%20Results) In 2021, the company achieved record home closing revenue of $5.1 billion and net income of $737.4 million, with gross margin expanding to 27.8%, while year-end backlog value grew 38.8% FY 2021 vs. FY 2020 Key Results | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Home Closing Revenue | $5.1 billion | $4.5 billion | | Home Closing Gross Margin | 27.8% | 22.0% | | Pre-tax Net Earnings | $954.8 million | $533.6 million | | Net Income | $737.4 million | $423.5 million | | Homes Closed | 12,801 | 11,834 | | Backlog Value (Year-End) | $2.5 billion | $1.8 billion | - Orders were intentionally **metered** to align with production constraints, resulting in relatively flat year-over-year order volume[152](index=152&type=chunk) [Home Closing Revenue, Home Orders and Order Backlog - Segment Analysis](index=32&type=section&id=Home%20Closing%20Revenue%2C%20Home%20Orders%20and%20Order%20Backlog%20-%20Segment%20Analysis) In 2021, total home closing revenue increased 14.1% to $5.1 billion, with the East Region showing strongest growth, and year-end backlog value rising 38.8% to $2.5 billion Home Closing Revenue by Region (FY 2021 vs 2020) | Region | 2021 Revenue ($M) | 2020 Revenue ($M) | % Change | | :--- | :--- | :--- | :--- | | West | $1,914.4 | $1,795.2 | +6.6% | | Central | $1,500.7 | $1,273.7 | +17.8% | | East | $1,679.8 | $1,395.5 | +20.4% | | **Total** | **$5,094.9** | **$4,464.4** | **+14.1%** | Home Orders by Region (FY 2021 vs 2020) | Region | 2021 Orders (Units) | 2020 Orders (Units) | % Change | | :--- | :--- | :--- | :--- | | West | 4,276 | 4,781 | -10.6% | | Central | 4,413 | 4,476 | -1.4% | | East | 5,119 | 4,467 | +14.6% | | **Total** | **13,808** | **13,724** | **+0.6%** | Order Backlog (as of Dec 31) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Backlog Value | $2,516.2 M | $1,812.5 M | +38.8% | | Homes in Backlog | 5,679 | 4,672 | +21.6% | [Other Operating Information](index=38&type=section&id=Other%20Operating%20Information) Home closing gross margin improved to 27.8% in 2021, driven by pricing power, while sales costs decreased as a percentage of revenue and the effective tax rate increased Home Closing Gross Profit Margin by Region (FY 2021 vs 2020) | Region | 2021 Margin | 2020 Margin | Basis Point Change | | :--- | :--- | :--- | :--- | | West | 27.1% | 21.2% | +590 bps | | Central | 29.9% | 23.9% | +600 bps | | East | 26.8% | 21.2% | +560 bps | | **Total** | **27.8%** | **22.0%** | **+580 bps** | - Commissions and other sales costs decreased to **5.6% of home closing revenue** in 2021 from 6.4% in 2020, driven by lower broker commissions and digital sales solutions[187](index=187&type=chunk)[188](index=188&type=chunk) - The effective tax rate increased to **22.8%** in 2021 from 20.6% in 2020, primarily due to higher profits in states with higher tax rates[193](index=193&type=chunk) [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) In 2021, net cash used in operations was $152.1 million, primarily due to a $948.1 million investment in real estate inventory, while the company maintained a strong balance sheet with a 27.6% debt-to-capital ratio Cash Flow Summary (FY 2021 vs 2020) | Cash Flow Activity ($M) | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash (Used in)/Provided by Operating Activities | ($152.1) | $530.4 | | Net Cash Used in Investing Activities | ($26.8) | ($18.2) | | Net Cash Provided by/(Used in) Financing Activities | $51.6 | ($86.0) | - Negative operating cash flow in 2021 was primarily due to a **$948.1 million increase in real estate inventory** for homes under construction and new land acquisitions[205](index=205&type=chunk) Leverage Ratios (as of Dec 31) | Ratio | 2021 | 2020 | | :--- | :--- | :--- | | Debt-to-Capital | 27.6% | 30.3% | | Net Debt-to-Capital | 15.1% | 10.5% | [Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate sensitivity, as rising mortgage rates can adversely affect housing demand and its variable-rate borrowing costs, though most debt is fixed-rate - The company's operations are sensitive to **interest rates**, as higher mortgage rates can negatively impact homebuyer affordability and demand[217](index=217&type=chunk) - The company's fixed-rate debt comprises **$1.2 billion in senior notes**, with no maturities until 2025[215](index=215&type=chunk)[216](index=216&type=chunk) - There were **no outstanding borrowings** under the variable-rate Credit Facility at year-end 2021 or 2020[215](index=215&type=chunk) [Financial Statements and Supplementary Data](index=43&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for FY2021, with an unqualified auditor's opinion, highlighting real estate valuation as a critical audit matter [Report of Independent Registered Public Accounting Firm](index=44&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) Deloitte & Touche LLP issued an unqualified opinion on the company's consolidated financial statements and internal control over financial reporting, identifying real estate valuation as a critical audit matter - The auditor issued an **unqualified opinion**, affirming the fair presentation of the company's financial position[221](index=221&type=chunk) - The **valuation of real estate** was identified as a Critical Audit Matter due to significant management judgments and estimates in assessing recoverability[225](index=225&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk) [Consolidated Financial Statements](index=46&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements show total assets increased to $4.81 billion, total closing revenue rose to $5.12 billion, and net earnings grew 74% to $737.4 million in 2021 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $618,335 thousand | $745,621 thousand | | Real estate | $3,734,408 thousand | $2,778,039 thousand | | **Total assets** | **$4,807,533 thousand** | **$3,864,398 thousand** | | Senior notes, net | $1,142,486 thousand | $996,991 thousand | | **Total liabilities** | **$1,763,144 thousand** | **$1,516,530 thousand** | | **Total stockholders' equity** | **$3,044,389 thousand** | **$2,347,868 thousand** | Consolidated Income Statement Highlights (in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Total closing revenue | $5,120,110 thousand | $4,482,120 thousand | | Total closing gross profit | $1,417,294 thousand | $959,614 thousand | | Earnings before income taxes | $954,834 thousand | $533,566 thousand | | **Net earnings** | **$737,444 thousand** | **$423,475 thousand** | | Diluted EPS | $19.29 | $11.00 | [Notes to Consolidated Financial Statements](index=50&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, including $2.1 million in real estate impairment charges, the issuance of $450 million in new senior notes, and segment performance, with the Central region showing the highest operating income margin - **Real estate impairment charges** were **$2.1 million** in 2021, down from $24.9 million in 2020, primarily due to selling non-strategic assets[272](index=272&type=chunk) - In April 2021, the company issued **$450.0 million** of 3.875% Senior Notes due 2029 and redeemed **$300.0 million** of 7.00% Senior Notes due 2022, incurring an **$18.2 million loss** on early extinguishment[302](index=302&type=chunk) Homebuilding Segment Operating Income (in thousands) | Region | 2021 | 2020 | | :--- | :--- | :--- | | West | $379,093 thousand | $213,918 thousand | | Central | $319,435 thousand | $185,202 thousand | | East | $302,487 thousand | $157,971 thousand | | **Total** | **$1,001,015 thousand** | **$557,091 thousand** | [Controls and Procedures](index=70&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, a conclusion affirmed by the independent auditor - Management concluded that the company's **disclosure controls and procedures were effective** as of December 31, 2021[339](index=339&type=chunk) - Management concluded that **internal control over financial reporting was effective** as of December 31, 2021, a conclusion audited and affirmed by Deloitte & Touche LLP[342](index=342&type=chunk)[345](index=345&type=chunk) Part III [Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership](index=72&type=section&id=Items%2010-14) Information for Items 10 through 14, covering directors, executive officers, corporate governance, compensation, and security ownership, is incorporated by reference from the 2022 Proxy Statement - Information for **Items 10-14** is incorporated by reference from the registrant's Proxy Statement for the 2022 Annual Meeting of Stockholders[353](index=353&type=chunk)[354](index=354&type=chunk)[355](index=355&type=chunk)[356](index=356&type=chunk)[357](index=357&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=73&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, with consolidated financial statements in Item 8 and a comprehensive list of exhibits provided - The consolidated financial statements are included under **Part II, Item 8** of the report[360](index=360&type=chunk) - A list of exhibits filed with the report includes **governance documents, debt agreements, employment agreements, and certifications**[362](index=362&type=chunk)[363](index=363&type=chunk)[364](index=364&type=chunk)

Financial Data and Key Metrics Changes - In Q4 2021, home closing revenue grew 6% year-over-year to $1.5 billion, driven by a 13% increase in average selling price (ASP) despite a 6% decline in home closing volume due to supply chain issues [44][50]. - Home closing gross margin improved by 500 basis points to 29% from 24% a year ago, primarily due to pricing power outweighing cost pressures [45]. - Diluted EPS increased by 57% year-over-year to $6.25, reflecting strong profit growth and lower outstanding share count [50]. Business Line Data and Key Metrics Changes - Entry-level homes comprised 81% of total closings in Q4 2021, up from 72% in the prior year, indicating a strategic focus on this segment [27][30]. - Total orders for Q4 2021 were 3,367, a 6% increase year-over-year, supported by a 24% increase in average active community count [28]. Market Data and Key Metrics Changes - The Central region, particularly Texas, led in average absorption pace with 5.3 homes per month, contributing to an 11% increase in order volume [31]. - The East region saw a 34% increase in average community count year-over-year, although average absorption pace decreased by 21% [33]. Company Strategy and Development Direction - The company aims to capitalize on strong demand for entry-level homes, with a forecast of continued double-digit community growth in 2022 [14][66]. - A disciplined land acquisition strategy is in place, focusing on larger parcels to reduce costs and enhance affordability [65]. Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in maintaining strong margins despite rising costs, citing the ability to leverage pricing power due to high demand and limited supply [79][80]. - The company anticipates a robust spring selling season in 2022, with projected closings between 14,500 and 15,500 units and home closing revenue of $6.1 billion to $6.5 billion [67]. Other Important Information - The company opened 48 new communities in Q4 2021, increasing community count by 33% year-over-year to 259 [58]. - The balance sheet remains strong, with a cash balance of $618 million and a net debt-to-cap ratio of 15.1% as of December 31, 2021 [52][53]. Q&A Session Summary Question: Impact of interest rate outlook on demand - Management noted that January showed strong demand with no discernible impact from rising interest rates, attributing demand to a lack of housing supply [73][76]. Question: Drivers of gross margin compression - Management indicated that the modest compression in gross margin is entirely related to rising costs, with no changes in incentives or marketing costs anticipated [78][80]. Question: Cycle times and future expectations - Cycle times lengthened by two weeks in Q4, with no expected improvement in 2022 due to ongoing supply chain challenges [85][89]. Question: Pricing power and ASP trends - Management stated that while ASPs were stable in Q4, they have seen an acceleration in pricing power in January, indicating a strong demand environment [104][110]. Question: Customer demographics and migration trends - The company is seeing a diverse customer base, including millennials and baby boomers, with significant in-migration to key markets like Florida and Texas [119][120]. Question: Cash flow outlook for 2022 - Management expects to be neutral or slightly positive in operating cash flow for 2022, despite significant land acquisition spending [122].

Financial Performance - Home closing revenue reached $1.4988 billion in 4Q21, a 6% increase compared to $1.4092 billion in 4Q20[23] - Home closing gross profit increased by 29% to $434.7 million in 4Q21 from $337.8 million in 4Q20[23] - Home closing gross margin improved by 500 basis points to 29% in 4Q21 from 24% in 4Q20[23] - Net earnings increased by 56% to $237.5 million in 4Q21, compared to $152.5 million in 4Q20[23] - Diluted EPS increased by 57% to $6.25 in 4Q21 from $3.97 in 4Q20[23] - The average selling price (ASP) on closings increased by 13% to $425,000 in 4Q21 from $376,000 in 4Q20[23] Land and Community - Active communities increased by 33% to 259 at the end of 4Q21 from 195 at the end of 4Q20[27] - Total lots controlled were 75,049 [26] - Supply of lots is 5.9 years [26] Orders and Absorption - Entry-level homes accounted for 79% of orders in 4Q21 [12] - Absorptions per month were 5.5 in 4Q21 [14]

Financial Performance - The company achieved an 84% increase in earnings in 3Q21, with net earnings reaching $201 million compared to $109 million in 3Q20[22] - Diluted EPS increased by 85% to $5.25 in 3Q21 from $2.84 in 3Q20[22] - Home closing revenue increased by 10% to $1.251 billion in 3Q21 from $1.133 billion in 3Q20[22] - Home closing gross profit increased significantly by 53% to $372 million in 3Q21 from $244 million in 3Q20[22] - Home closing gross margin expanded by 820 bps to 29.7% in 3Q21 from 21.5% in 3Q20[22] Community and Orders - Average community count increased from 221 in 3Q20 to 231 in 3Q21[13] - Orders totaled 3,441 in 3Q21[13] - The company had 236 active communities as of September 30, 2021, a 16% increase from 204 at September 30, 2020[31] Land and Development - Land and development spending increased to $526 million in 3Q21 from $299 million in 3Q20[29] - Total lots controlled increased to 69,767 in 3Q21 from 47,875 in 3Q20[29] - As of September 30, 2021, the supply of lots was 5.4 years[29] Balance Sheet - The company had $562 million in cash as of September 30, 2021[26] - Net debt-to-capital ratio was 17.5% as of September 30, 2021[26] Guidance - The company anticipates 12,600-12,900 home closings for full year 2021[34] - The company anticipates $5.05-5.15 billion in home closing revenue for full year 2021[34]

PART I [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Unaudited consolidated financial statements reflect substantial asset and liability growth, with Q3 2021 net earnings and diluted EPS significantly increasing year-over-year Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $562,291 | $745,621 | | Real estate | $3,593,007 | $2,778,039 | | **Total assets** | **$4,565,449** | **$3,864,398** | | Senior notes, net | $1,142,210 | $996,991 | | **Total liabilities** | **$1,740,179** | **$1,516,530** | | **Total stockholders' equity** | **$2,825,270** | **$2,347,868** | Consolidated Income Statement Highlights (in thousands, except per share) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Home closing revenue | $1,251,435 | $1,133,221 | $3,596,060 | $3,055,229 | | Total closing gross profit | $372,440 | $244,077 | $984,611 | $642,068 | | **Net earnings** | **$200,752** | **$109,118** | **$499,984** | **$270,948** | | **Diluted EPS** | **$5.25** | **$2.84** | **$13.06** | **$7.04** | Consolidated Cash Flow Highlights (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(248,706) | $373,082 | | Net cash used in investing activities | $(17,507) | $(13,247) | | Net cash provided by/(used in) financing activities | $82,883 | $(69,322) | | **Net (decrease)/increase in cash** | **$(183,330)** | **$290,513** | - In April 2021, the company issued **$450.0 million** of 3.875% Senior Notes due 2029 and used the proceeds to redeem all **$300.0 million** of its 7.00% Senior Notes due 2022, incurring an **$18.2 million** loss on early debt extinguishment[52](index=52&type=chunk) Segment Operating Income (Nine Months Ended Sep 30, in thousands) | Segment | 2021 | 2020 | | :--- | :--- | :--- | | West | $238,356 | $140,059 | | Central | $232,537 | $119,208 | | East | $207,509 | $97,343 | | **Total homebuilding segment operating income** | **$678,402** | **$356,610** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management reports a solid Q3 2021 housing market, achieving record closing volume and gross margin, driven by strong demand and pricing power despite supply chain constraints [Overview and Outlook](index=22&type=section&id=Overview%20and%20Outlook) The company capitalized on a solid Q3 2021 housing market, achieving record closing volume and gross margin while strategically managing supply chain constraints and community growth - The company achieved its **highest third-quarter closing volume** and the **highest quarterly home closing gross margin** in its history during Q3 2021[83](index=83&type=chunk) - Active communities grew to **236** as of September 30, 2021, an increase from **226** at the end of Q2 2021 and **204** at the end of Q3 2020[84](index=84&type=chunk) - The company intentionally metered the number of homes available for sale to align with production constraints, which are expected to continue into 2022[84](index=84&type=chunk) [Home Closing Revenue, Home Orders and Order Backlog](index=25&type=section&id=Home%20Closing%20Revenue%2C%20Home%20Orders%20and%20Order%20Backlog) Q3 2021 saw home closing revenue increase 10.4% to $1.25 billion, while order volume declined, but order value remained flat due to higher average sales prices and an improved cancellation rate Q3 2021 vs Q3 2020 Operating Metrics | Metric | Q3 2021 | Q3 2020 | % Change | | :--- | :--- | :--- | :--- | | Homes Closed | 3,112 | 3,004 | 3.6% | | Home Closing Revenue ($M) | $1,251.4M | $1,133.2M | 10.4% | | Homes Ordered | 3,441 | 3,851 | (10.6)% | | Home Order Value ($M) | $1,489.0M | $1,488.5M | 0.0% | Order Backlog (as of Sep 30) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Homes in Backlog | 5,838 | 5,242 | 11.4% | | Backlog Value ($M) | $2,555.4M | $2,005.0M | 27.5% | | Average Sales Price ($K) | $437.7K | $382.5K | 14.4% | - The order cancellation rate improved, dropping to **10%** for Q3 2021 compared to **13%** for the prior year period, indicating strong demand[86](index=86&type=chunk)[98](index=98&type=chunk) [Operating Results and Other Operating Information](index=33&type=section&id=Operating%20Results%20and%20Other%20Operating%20Information) The company achieved a record home closing gross margin of **29.7%** in Q3 2021, driven by strong pricing power and fixed cost leverage, with all regions showing significant margin expansion Home Closing Gross Margin by Region (Q3 2021 vs Q3 2020) | Region | Q3 2021 Margin (%) | Q3 2020 Margin (%) | Basis Point Change | | :--- | :--- | :--- | :--- | | **Companywide** | **29.7%** | **21.5%** | **+820 bps** | | West | 28.3% | 20.4% | +790 bps | | Central | 32.1% | 23.8% | +830 bps | | East | 29.0% | 20.5% | +850 bps | - The significant improvement in gross margins across all periods in 2021 is attributed to pricing power from strong buyer demand and leveraging fixed costs on higher revenue, which more than offset increased lumber and commodity costs[112](index=112&type=chunk) - Financial services profit was **$4.2 million** for Q3 2021, a slight decrease from **$4.3 million** in Q3 2020, mainly due to increased employee headcount, while year-to-date profit increased by **$1.7 million** to **$12.6 million**[116](index=116&type=chunk) [Selling, General and Administrative Expenses and Other Expenses](index=35&type=section&id=Selling%2C%20General%20and%20Administrative%20Expenses%20and%20Other%20Expenses) Q3 2021 saw commissions and sales costs decrease as a percentage of revenue, while G&A expenses rose in absolute terms but remained flat as a percentage of revenue, and the effective tax rate increased Key Expenses as a Percentage of Home Closing Revenue | Expense Category | Q3 2021 (%) | Q3 2020 (%) | 9M 2021 (%) | 9M 2020 (%) | | :--- | :--- | :--- | :--- | :--- | | Commissions & other sales costs | 5.5% | 6.5% | 5.9% | 6.7% | | General & administrative expenses | 3.8% | 3.6% | 3.6% | 3.6% | - G&A expenses increased by **$6.5 million** in Q3 2021 compared to Q3 2020, primarily due to increased payroll and performance-based bonus compensation from higher employee headcount[118](index=118&type=chunk) - The effective tax rate for Q3 2021 was **23.3%**, up from **19.5%** in Q3 2020, attributed to higher profits in states with higher tax rates and a reduced benefit from federal energy efficiency tax credits on greater overall earnings[122](index=122&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) The company's capital allocation in the first nine months of 2021 focused on real estate investment, resulting in net cash used in operating activities, while maintaining a strong cash position and improving its debt-to-capital ratio - During the first nine months of 2021, the company purchased approximately **24,800 lots** for **$824.6 million** and spent **$623.0 million** on land development[128](index=128&type=chunk) - In the nine months ended September 30, 2021, the company repurchased and retired **395,461 shares** of its common stock for an aggregate price of **$37.0 million**[130](index=130&type=chunk)[131](index=131&type=chunk) Leverage Ratios | Ratio | September 30, 2021 (%) | December 31, 2020 (%) | | :--- | :--- | :--- | | Debt-to-capital | 29.1% | 30.3% | | Net debt-to-capital | 17.5% | 10.5% | [Quantitative and Qualitative Disclosures About Market Risk](index=38&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate sensitivity, as higher mortgage rates could adversely impact housing demand, revenues, and margins, though fixed-rate debt mitigates some exposure - The company's operations are interest rate sensitive, as higher mortgage rates can negatively affect homebuyers' ability to secure financing, which could adversely impact revenues and margins[138](index=138&type=chunk) - The company's fixed-rate debt consists primarily of **$1.2 billion** in senior notes, mitigating short-term impact from rate changes, however, the Credit Facility has variable rates based on LIBOR or Prime[137](index=137&type=chunk) [Controls and Procedures](index=38&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were **effective** as of September 30, 2021, with **no changes** to internal control over financial reporting during the quarter - Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were **effective** at a reasonable assurance level[139](index=139&type=chunk) - There were **no changes** in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[140](index=140&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in routine legal proceedings, primarily construction defect claims, which are generally covered by insurance or subcontractor obligations, with no material adverse impact expected - The company is involved in routine legal proceedings, mainly construction defect claims, which are generally covered by subcontractor warranties, indemnities, or insurance[78](index=78&type=chunk) - Specific reserves have been established for alleged stucco defects in homes built between 2006-2017 and water drainage issues in a Florida community, and the company believes these reserves are **sufficient**[79](index=79&type=chunk)[34](index=34&type=chunk) [Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) The company emphasizes the risk of **supply shortages** and **increased building material costs**, which can delay construction, impact home closings, and potentially erode margins - A key risk factor is the potential for **supply shortages** and **increased costs** of building materials, which could disrupt operations[144](index=144&type=chunk) - In 2021, supply chain constraints for various construction materials have already **delayed construction cycle times**, impacting the timing of expected home closings and potentially **increasing costs**[144](index=144&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=39&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company retains cash for business development, having **never declared cash dividends**, and authorized an additional **$100.0 million** for its stock repurchase program, with **$177.4 million** remaining available - The company has **never declared cash dividends** and currently plans to retain cash to finance business growth[145](index=145&type=chunk) - On August 12, 2021, the Board of Directors authorized an additional **$100.0 million** for the stock repurchase program, and as of September 30, 2021, **$177.4 million** was available for repurchases[146](index=146&type=chunk) Issuer Purchases of Equity Securities (Q3 2021) | Period | Total Number of Shares Purchased | Average price paid per share ($) | | :--- | :--- | :--- | | July 2021 | — | $ — | | August 2021 | — | $ — | | September 2021 | 95,461 | $99.23 | | **Total** | **95,461** | | [Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, encompassing corporate governance documents, employment agreements, and financial statements, including Inline XBRL

Financial Data and Key Metrics Changes - The company reported a 10% year-over-year increase in home closing revenue to $1.3 billion, driven by a 4% increase in home closings and a 7% higher average selling price (ASP) [35][40] - Home closing gross margin improved by 820 basis points to 29.7% from 21.5% a year ago, attributed to pricing power that offset increased costs of lumber and other commodities [36] - Diluted EPS reached $5.25, an 85% year-over-year increase [39] Business Line Data and Key Metrics Changes - Home closings totaled 3,112, up 4% year-over-year, with entry-level homes comprising 78% of closings, up from 63% in the prior year [20][10] - Total orders for the quarter were 3,441, reflecting an 11% year-over-year decrease, driven by a 15% decline in average absorption pace [21] - The average absorption pace remained elevated at 5.0 sales per month, despite a decrease from the previous year [19][20] Market Data and Key Metrics Changes - The central region, particularly Texas, led in average absorption pace at 5.4 sales per month, although this was a 14% decline from the prior year [23] - The east region saw a 3% year-over-year growth in order volume, attributed to an 8% increase in average active communities [24] - The west region experienced a 24% decline in order volume year-over-year, primarily due to a 25% decrease in average absorption pace [26] Company Strategy and Development Direction - The company continues to focus on affordability, aiming to position products in the mid to low $300,000 range through strategic land acquisitions [17][59] - The goal is to achieve 300 active communities by mid-2022, with a current count of 236 communities [11][54] - The company is investing in digital financial services and self-guided tours to enhance customer experience [13][14] Management's Comments on Operating Environment and Future Outlook - Management noted ongoing supply chain challenges but expressed confidence in navigating these issues due to strong vendor relationships and a streamlined operating model [10][34] - The company anticipates continued elevated demand driven by demographic factors, including household formation among millennials and downsizing among baby boomers [9][8] - Future guidance includes expectations for double-digit growth in unit and home closing revenue for 2022, despite potential challenges from supply chain issues and commodity costs [51][52] Other Important Information - The company ended the quarter with a backlog of over 1,500 units, with a conversion rate decline from 68% to 57% due to supply delays [32] - The land book increased by 46% year-over-year, with nearly 70,000 lots under control, providing a 5.4-year supply based on trailing 12-month closings [44] - The company repurchased over 95,000 shares during the quarter, with an additional 244,000 shares repurchased since the end of the quarter [43] Q&A Session Summary Question: How will the company bring average prices down? - The company aims to source land that allows positioning products in the mid to low $300,000 range, focusing on secondary markets for lower-cost land [58][59] Question: What is the outlook for gross margins? - The company expects margins to remain elevated through next year, with land acquired over the last two years supporting this outlook [61][62] Question: What are the current cycle times compared to previous quarters? - Cycle times have increased by approximately 6 to 7 weeks year-over-year, with no expected improvement in the near term [74][75] Question: What are the biggest challenges in the supply chain? - The primary challenges are related to windows and trusses, with variations in issues across different regions [76] Question: How does the company view the option market for lots? - The company prefers to find land that profiles well for their business model, focusing on owned lots while also considering options where beneficial [84][87]

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) Unaudited consolidated financial statements for June 30, 2021, reflect substantial asset and net earnings growth, with operating cash flow turning negative due to real estate investments [Unaudited Consolidated Balance Sheets](index=3&type=section&id=Unaudited%20Consolidated%20Balance%20Sheets) As of June 30, 2021, total assets reached **$4.32 billion**, driven by real estate inventory, while liabilities and stockholders' equity also increased Consolidated Balance Sheet Highlights (in thousands USD) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **$4,321,553** | **$3,864,398** | | Cash and cash equivalents | $684,374 | $745,621 | | Real estate | $3,251,787 | $2,778,039 | | **Total Liabilities** | **$1,693,409** | **$1,516,530** | | Senior notes, net | $1,141,934 | $996,991 | | **Total Stockholders' Equity** | **$2,628,144** | **$2,347,868** | [Unaudited Consolidated Income Statements](index=4&type=section&id=Unaudited%20Consolidated%20Income%20Statements) Q2 2021 saw total closing revenue rise to **$1.28 billion** and net earnings surge to **$167.4 million**, despite an **$18.2 million** loss on early debt extinguishment Q2 and H1 2021 vs 2020 Performance (in thousands USD, except per share) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total closing revenue | $1,277,599 | $1,033,079 | $2,361,380 | $1,934,092 | | Home closing gross profit | $345,301 | $220,696 | $611,956 | $399,056 | | Earnings before income taxes | $215,651 | $115,862 | $381,628 | $202,695 | | Net earnings | $167,389 | $90,678 | $299,232 | $161,830 | | Diluted EPS | $4.36 | $2.38 | $7.80 | $4.20 | - The company incurred a loss on early extinguishment of debt of **$18.2 million** in the second quarter and first half of 2021, with no similar charge in 2020[13](index=13&type=chunk) [Unaudited Consolidated Statements of Cash Flows](index=5&type=section&id=Unaudited%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities for H1 2021 was **$143.5 million**, a reversal from the prior year, primarily due to increased real estate investment Six Months Ended June 30 Cash Flow Summary (in thousands USD) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | $(143,472) | $237,445 | | Net cash used in investing activities | $(10,679) | $(9,087) | | Net cash provided by/(used in) financing activities | $92,904 | $(63,202) | | **Net (decrease)/increase in cash** | **$(61,247)** | **$165,156** | [Notes to Unaudited Consolidated Financial Statements](index=6&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Notes detail business operations, accounting policies, debt structure including a **$450 million** senior note issuance, and segment performance across nine states - The company designs and builds single-family homes for entry-level and first move-up buyers in Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina, and Tennessee[18](index=18&type=chunk) - In April 2021, the company issued **$450.0 million** of 3.875% Senior Notes due 2029 and used the proceeds to redeem all **$300.0 million** of its 7.00% Senior Notes due 2022, resulting in an **$18.2 million** loss on early debt extinguishment[52](index=52&type=chunk) Homebuilding Segment Operating Income (in thousands USD) | Segment | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | West | $78,938 | $44,742 | $143,189 | $86,600 | | Central | $84,965 | $37,895 | $141,958 | $66,800 | | East | $73,477 | $37,791 | $123,656 | $59,500 | | **Total** | **$237,380** | **$120,428** | **$408,803** | **$213,000** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management reported strong Q2 2021 results with record gross margins and closing volume, driven by robust housing demand despite supply chain disruptions - Housing market conditions in Q2 2021 remained strong, driven by low interest rates, limited supply, and increased desire for space to accommodate work/school from home needs[84](index=84&type=chunk) - The company achieved its highest quarterly home closing gross margin in history at **27.3%**, a **590 basis point** increase year-over-year[86](index=86&type=chunk) - Pandemic-related supply chain disruptions resulted in construction cycle delays of approximately **four weeks**, impacting both orders and closings[85](index=85&type=chunk) Q2 2021 Key Performance Indicators vs Q2 2020 | Metric | Q2 2021 | Q2 2020 | % Change | | :--- | :--- | :--- | :--- | | Home Closing Revenue (Billions USD) | $1.26 | $1.03 | +22.6% | | Homes Closed | 3,273 | 2,770 | +18.2% | | Home Orders (Units) | 3,542 | 3,597 | -1.5% | | Home Order Value (Billions USD) | $1.50 | $1.29 | +16.2% | | Backlog Value (Billions USD) | $2.3 | $1.6 | +40.6% | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Primary market risk is interest rate sensitivity, as rising mortgage rates could negatively impact housing demand and financing, despite fixed-rate senior notes - The company's operations are sensitive to interest rates, as rising rates can negatively affect housing demand and homebuyers' financing ability[144](index=144&type=chunk) - The company's fixed-rate debt consists mainly of **$1.2 billion** in senior notes, while its revolving credit facility is subject to variable interest rates based on LIBOR or Prime[143](index=143&type=chunk) [Item 4. Controls and Procedures](index=39&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective[145](index=145&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[146](index=146&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=40&type=section&id=Item%201.%20Legal%20Proceedings) Routine legal proceedings, primarily construction defect claims, are not expected to have a material adverse impact, as management believes sufficient reserves exist - The company is involved in routine legal proceedings, primarily construction defect claims, which are generally covered by subcontractor warranties or insurance[78](index=78&type=chunk)[148](index=148&type=chunk) [Item 1A. Risk Factors](index=40&type=section&id=Item%201A.%20Risk%20Factors) A key risk factor is supply chain constraints for building materials, causing construction delays and potential cost increases that could erode margins - A key risk factor is supply chain constraints for building materials, which have delayed construction cycle times in 2021[150](index=150&type=chunk) - These delays can impact the timing of home closings and lead to cost increases that may not be fully passed on to customers, potentially eroding margins[150](index=150&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=40&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased **200,000 shares** in Q2 2021, with **$86.8 million** remaining in its stock repurchase program, retaining cash for business development - During Q2 2021, the company purchased **200,000 shares** of its common stock for a total of approximately **$19.16 million**[152](index=152&type=chunk)[153](index=153&type=chunk) - As of June 30, 2021, **$86.8 million** remained available under the authorized stock repurchase program[152](index=152&type=chunk) [Item 6. Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including corporate governance documents, officer certifications, and financial data in Inline XBRL format

Financial Data and Key Metrics Changes - The company reported a 23% year-over-year increase in home closing revenue to $1.2 billion, driven by an 18% increase in home closings and a 4% increase in average selling price (ASP) [28][40] - Home closing gross margin improved by 590 basis points to 27.3% from 21.4% a year ago, reflecting higher ASPs and leveraging of fixed costs [41][46] - Diluted EPS increased by 83% year-over-year to $4.36, with net earnings up 85% [46] Business Line Data and Key Metrics Changes - The average absorption pace increased to 5.5 net orders per month, up from 5.0 the previous year, despite a tightly controlled order pace [10][29] - Entry-level homes accounted for over 80% of total orders, up from 70% in the same quarter last year, indicating a strategic shift towards more affordable housing [31][22] - The company achieved its highest quarterly home-closing gross margin in history at 27.3% [12] Market Data and Key Metrics Changes - The East region saw a 78% increase in order volume year-over-year, attributed to a 25% growth in average absorption pace [32] - The Central region's average absorption pace grew 8% year-over-year to 6.0 per month, the highest in the company, despite a 16% decline in average community count [33] - The West region experienced a 10% decrease in order volume, but a 22% increase in order ASP due to strong demand and pricing power [34] Company Strategy and Development Direction - The company aims to grow its community count to 300, which is expected to generate 15,000 orders at a normalized run rate of 50 orders per store [16] - The focus remains on entry-level and first move-up markets, with a commitment to affordability and quality in home offerings [22][24] - The company plans to spend approximately $1.75 billion to $2 billion on land acquisition and development in 2021 to support its growth strategy [55] Management's Comments on Operating Environment and Future Outlook - Management noted that while the current demand and pricing dynamics are strong, they are not sustainable indefinitely, and a normalization of sales pace is expected in the coming quarters [19][20] - The company is monitoring affordability indicators and has not seen significant pushback on pricing, although some consumer feedback suggests a preference to wait due to rising prices [76][77] - Management expressed confidence in achieving the 300 community goal by mid-2022, supported by a strong backlog and increased spec counts [63] Other Important Information - The company has maintained a strong balance sheet, with a cash balance of $684 million and a net debt to capital ratio of 15.4% [48] - The company has a backlog of over 5,500 units, providing good visibility into future margin trends [59] - The company is committed to a 100% spec building strategy focused on entry-level products to maintain affordability [24] Q&A Session Summary Question: Comments on normalization of absorption rates and impact on gross margins - Management acknowledged that while margins are currently strong, normalization of absorption rates may impact future gross margin trends, but they expect to maintain a solid margin profile due to favorable land costs [66][68][72] Question: Indicators of affordability being stretched in some markets - Management noted that while FICO scores and debt-to-income ratios remain stable, there has been qualitative feedback indicating some consumers are hesitant to buy due to rising prices [74][76] Question: Impact of falling lumber prices on margins - Management indicated that while lumber prices peaked in Q2, the benefits of falling prices will be more pronounced in 2022 rather than the second half of 2021 [82][84][89] Question: Incentives and their relationship with ASP increases - Management clarified that traditional incentives are currently low, and while they expect some return of incentives as supply increases, they anticipate ASPs will continue to rise in a normalized market [90][92][94] Question: Loan limits and affordability strategies - Management emphasized the importance of monitoring both loan limits and overall affordability, with a focus on positioning products below FHA limits to enhance accessibility for buyers [97][100]

Financial Data and Key Metrics Changes - The company reported a 25% year-over-year increase in home closings, totaling 2,890 homes, with home closing revenue reaching $1.1 billion, a 21% increase compared to 2020 [26][40] - The home closing gross margin improved to 24.7%, up 470 basis points from 20% in the prior year [26][40] - Diluted EPS increased by 88% year-over-year to $3.44 [44] Business Line Data and Key Metrics Changes - Entry-level homes comprised over 76% of total orders for the quarter, up from 61% in the first quarter last year [27] - The absorption pace for entry-level homes was 5.8 per month, up from 4.3 per month in the prior year, marking the strongest first quarter absorption pace since 2005 [11][26] - The first move-up communities also saw a 45% increase in absorption year-over-year [27] Market Data and Key Metrics Changes - The East region led in absorption growth with a 67% improvement year-over-year, while orders in the East region increased by 39% [28] - Tennessee had the highest absorption pace at 6.6 per month, reflecting a recovery from previous storms [29] - The West region experienced a 13% increase in absorption despite a 6% decrease in orders [30] Company Strategy and Development Direction - The company aims to continue gaining market share by focusing on affordable entry-level and first move-up markets [23] - Meritage Homes is committed to building energy-efficient homes and has been recognized as the 2021 ENERGY STAR Partner of the Year for Sustained Excellence [15] - The company plans to enter new markets, specifically expanding operations into Charleston and Myrtle Beach, South Carolina, with new affordable entry-level communities set to open in 2022 [19][20] Management's Comments on Operating Environment and Future Outlook - Management believes the current housing market demand will persist throughout the year, supported by favorable mortgage rates and strong demographic trends [12][14] - The company anticipates continued pricing power to offset commodity cost increases, projecting total closings for 2021 to be between 11,700 and 12,700 units [55] - Management expressed confidence in sustaining strong margins despite rising commodity costs, with expectations for an effective tax rate of about 23% [44][55] Other Important Information - The company ended the quarter with over 2,200 spec homes in inventory, with a backlog of 5,240 units, reflecting a 47% increase year-over-year [33] - Meritage Homes plans to spend over $1.5 billion annually on land acquisition and development to support its growth strategy [51] - The company has a strong balance sheet, with a cash balance of $716 million and a net debt-to-cap ratio of 10.9% [47] Q&A Session Summary Question: What is the current start pace running at? - The start pace is running almost the same as the sales pace, with limitations due to production issues, but the company is comfortable with its current pace [64] Question: How realistic is it that margins can be sustained as new communities open? - Management believes they can sustain margins through 2021, as new communities were acquired at favorable prices [67] Question: How many markets are selling above FHA limits? - The company is pushing above FHA limits in hot markets like Phoenix and California, but is generally focused on staying below those limits [70] Question: What is the impact of resin shortages in Texas? - There was a temporary disruption due to weather, but regular production times have resumed [75] Question: How are pricing moves being managed in the current market? - The company uses a robust community-by-community pricing strategy to remain competitive and manage pricing effectively [82] Question: What percentage of buyers are utilizing FHA loans? - Less than 25% of buyers are using FHA loans, indicating a strong capital position among buyers [71] Question: How does the company manage costs in a highly inflationary environment? - The company has streamlined its product offerings to manage costs effectively, allowing for better sourcing and vendor relationships [108]