Meritage Homes CORP (MTH) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Industry Conditions

The market for new homes was healthy in 2024 as the largest U.S. population cohorts of the millennial, Gen Z and baby boomer generations continue to need affordable, move-in ready homes. While demand was stable, volatile and elevated interest rates resulted in increased need for interest rate assistance for potential homebuyers to help with monthly mortgage affordability. The ability to offer financing incentives, including interest rate locks and buy-downs, combined with a short supply of re-sale inventory available has shifted demand to the new home market in recent years. We believe that our ability to offer financing incentives gives us a competitive advantage, particularly over resale homes, as individual home sellers are not typically able to provide such incentives, and that our all-spec strategy with a commitment to affordability can meet this demand, providing us with ample opportunity to capture and grow our market share.

Supply chain and labor market disruptions, shortages and other economic-related disruptions that impacted construction cycle times for the homebuilding industry during 2022 and 2023 stabilized in 2024. Throughout 2024, we further reduced our construction cycle time, reaching normalized cycle times of approximately 120 days by the end of the year. The increased capacity in supply chain has resulted in a decrease in some material costs over the past few years, and our higher volume allowed us to capture additional volume discounts from our national vendors. Land costs were elevated in 2024 following several years of historically high land development activity and negatively impacted our margins.

We believe that the execution of our all-spec strategy of move-in ready homes with a commitment to affordability will drive strong performance of the key financial goals such as higher home closing revenue, strong home closing gross margin, controlling selling, and general and administrative costs, and maintaining sufficient liquidity.

Summary Company Results

Our results for 2024 reflect the continuing favorable market conditions for affordable, move-in ready homes. We ended 2024 with 15,611 closings, our highest closing volume in Company history, up 11.7% from 13,976 closings in 2023. We also achieved record order volume of 14,606 units, up 10.7% over 13,193 in 2023, due to a 7.5% year-over-year increase in orders pace to 4.3 per month in 2024 combined with a 1.4% increase in average active community count. Our strategy also favorably impacted cancellations as the length of time between sale and closing is shortened, contributing to a cancellation rate of 9.4% for the full year 2024, well below historical averages and improved from 12.8% for the full year 2023. Reduced construction cycle times and our all spec strategy led to record backlog conversions throughout the full year 2024, resulting in 39.4% fewer homes in backlog at December 31, 2024, with 1,544 units valued at $629.5 million compared to 2,549 units valued at $1.1 billion at December 31, 2023.

Total home closing revenue of $6.3 billion for the year ended December 31, 2024 increased 4.7% from $6.1 billion in 2023, due to 11.7% higher home closing volume and 6.3% lower ASP on closings. Home closing gross margin was 24.9% for the year ended December 31, 2024, consistent with 24.8% in 2023, as lower direct costs, leverage of higher home closing revenue on overhead costs and shorter construction cycle times were offset by greater utilization of financing incentives and higher lot costs. Commissions and other sales costs of $409.1 million for the full year ended December 31, 2024 increased $24.2 million from the prior year period due to higher home closing revenue. Commissions and other sales costs were 6.5% of home closing revenue in 2024, relatively consistent with the prior year. General and administrative expenses of $230.9 million for the year ended December 31, 2024 were 3.6% of home closing revenue and improved 20 basis points year over year, primarily due to leverage of higher home closing revenue on fixed overhead expenses and lower performance-based compensation. Other income, net of $45.2 million in 2024 decreased 5.8% from the prior year primarily due to lower interest income earned on smaller cash balances. In May 2024 we redeemed the remaining $250.0 million of our 6.00% Senior Notes due 2025 (the "2025 Notes"), resulting in charges of $0.6 million reflected in Loss on early extinguishment of debt, compared with charges of $0.9 million in 2023. Earnings before income taxes of $1.0 billion in 2024 increased 5.6% from $949.4 million in 2023. Our effective tax rate for the year ended December 31, 2024 was 21.6% as compared to 22.2% in 2023, leading to net income of $786.2 million and $738.7 million for the years ended December 31, 2024 and 2023, respectively.

Company Positioning

We believe that the investments in our new communities designed for the first-time and first move-up homebuyer, our move-in ready homes with our recently introduced 60-day closing ready commitment, and our partnership with external realtors create a differentiated strategy that has aided us in our growth in the highly competitive new home market.

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Our focus on growing our community count and market share includes the following strategic initiatives:

•Delivering affordable homes on a shorter timeline through simplification of production processes and maintaining levels of spec inventory that are aligned with our strategy;

•Offering our customers affordable, move-in ready homes;

•Embracing external realtor relationships, as we view realtors as a trusted resource for potential customers, particularly for first-time buyers;

•Providing homebuyers with our 60-day closing ready commitment;

•Continuously improving the overall home buying experience through simplification and innovation; and

•Increasing homeowner satisfaction by offering energy-efficient homes that come equipped with a suite of home automation standard features.

In addition to these strategic initiatives, we also remain committed to the following:

•Achieving or maintaining a top 5 market position in all of our markets;

•Targeting a strong, yet sustainable, orders pace through the use of consumer, market and potentially artificial intelligence research to ensure that we build homes that offer our buyers their desired features and amenities;

•Maintaining and where possible, expanding, our home closing gross profit by growing closing volume, allowing us to better leverage our direct overhead;

•Carefully managing our liquidity and a strong balance sheet. We ended the year with a 20.6% debt-to-capital ratio and a 11.7% net debt-to-capital ratio, after issuing $575.0 million of convertible senior notes;

•Balancing return of capital to our shareholders with internal growth goals, utilizing both share repurchases and dividend payments;

•Managing construction efficiencies and costs through national and regional vendor relationships with a focus on timely, quality construction and warranty management; and

•Promoting a positive environment for our employees through our commitment to inclusion and belonging, and providing market-competitive benefits in order to develop and motivate our employees, minimize turnover and maximize recruitment efforts.

Critical Accounting Estimates

We have established various accounting policies that govern the application of United States generally accepted accounting principles (“GAAP”) in the preparation and presentation of our consolidated financial statements. Our significant accounting policies are described in Note 1 of the accompanying consolidated financial statements included in this Form 10-K. Certain of these policies involve critical accounting estimates, which are significant judgments, assumptions and estimates by management in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We are subject to uncertainties such as the impact of future events, economic, environmental, political and regulatory factors and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of our financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are revised when circumstances warrant. Such changes in estimates and refinements in methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements. The judgments, assumptions and estimates we use and believe to be critical to our business are based on historical experience, knowledge of the accounts, industry practices, and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we have made, actual results may differ from these judgments and estimates and could have a material impact on the carrying values of assets and liabilities and the results of our operations.

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The critical accounting estimates that we deem to involve the most difficult, subjective or complex judgements are as follows:

Real Estate Valuation and Cost of Home Closings

Real estate inventory is stated at cost unless the community or land is determined to be impaired, at which point the inventory is written down to fair value as required by ASC 360-10, Property, Plant and Equipment. Real estate inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, direct overhead costs incurred during development and home construction that benefit the entire community, less impairments, if any. Land and development costs are typically allocated and transferred to homes when home construction begins. Home construction costs are accumulated on a per-home basis, while commissions and other sales 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 materials and services that have not yet been paid. We accrue a liability to capture such obligations in connection with the home closing which is charged directly to Cost of home closings.

We capitalize qualifying interest to inventory during the development and construction periods. Capitalized interest is included in cost of closings when the related inventory is closed. Included within our Real estate inventory is land held for development and land held for sale. Land held for development primarily represents land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for these inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.

We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, sales orders absorption rates that differ from our expectations, increases in costs that have not yet been contracted, changes in governmental requirements, or other unanticipated issues, encountered during construction and development and other factors beyond our control, including weather. 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 construction, sale and closing of the homes. Actual community lives will vary based on the size of the community, the sales orders absorption rates and whether the land purchased was raw, partially-developed or in finished status. Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be significantly shorter.

All of our land inventory and related real estate assets are periodically reviewed for recoverability when certain criteria are met, but at least annually, as our inventory is considered “long-lived” in accordance with GAAP. Community-level reviews are performed quarterly to determine if indicators of potential impairment exist. If indicators of potential impairment exist and 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. The impairment of a community is allocated to each remaining unstarted lot in the community on a straight-line basis and is recognized in Cost of home closings in the period in which the impairment is determined. 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, although if financial metrics improve, we do not reverse impairments once recorded.

We have not made any material changes in our methodology or significant assumptions used to record and evaluate our Real estate inventory and Cost of home closings during the past three years.

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Warranty Reserves

We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects and cover any resultant damages, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, warranty reserves are recorded to cover our exposure to costs for materials and labor not expected to be covered by our subcontractors or available insurance to the extent they relate to warranty-type claims subsequent to the delivery of a home to the homeowner. Reserves are reviewed on a regular basis and, with the assistance of an actuary for the structural warranty, we determine their sufficiency based on our and industry-wide historical data and trends. These reserves are subject to variability due to uncertainties regarding materials or construction defect claims, the markets in which we build, claim settlement history, insurance, legal interpretations and expected recoveries, among other factors.

At December 31, 2024, our warranty reserve was $32.7 million, reflecting an accrual of 0.1% to 0.5% of a home’s sale price depending on our loss history in the geographic area in which the home was built. A 10% increase in our warranty reserve rate would have increased our accrual and corresponding cost of home closings by approximately $2.2 million in 2024. As a result of the routine review described previously, we decreased our reserve balance by $1.0 million related to specific case reserves during the year ended December 31, 2024. There were no adjustments to our reserve balance during the year ended December 31, 2023. See Notes 1 and 16 in the accompanying consolidated financial statements for more information. While we believe that the warranty reserve is sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. Furthermore, there can be no assurances that future economic, financial or legislative developments might not lead to a significant change in the reserve.

We have not made any material changes in our methodology or significant assumptions used to record and evaluate our warranty reserves during the past three years.

Home Closing Revenue, Home Orders and Order Backlog - Segment Analysis

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.

For discussion of our fiscal 2023 results compared to our fiscal 2022 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our Annual Report on Form 10-K for the year ended December 31, 2023.

The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):

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(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.

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(1)Our backlog represents net home orders that have not closed.

(1)Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.

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Fiscal 2024 Compared to Fiscal 2023

Companywide. We achieved record home closing volume of 15,611 units in 2024, compared to 13,976 units in 2023. Home closing revenue of $6.3 billion for the year ended December 31, 2024 increased 4.7% from $6.1 billion in the prior period, as the 11.7% higher home closing volume was partially offset by a 6.3% lower ASP on closings. The lower ASP on closings was caused by higher utilization of financing incentives and a shift in geographic and product mix. Entry-level homes represented 91% of closings in 2024, compared to 85% in 2023. We also achieved record orders in 2024, with 14,606 orders increasing 10.7% from 13,193 in 2024. The improvement in order volume was driven primarily by a 7.5% increase in orders pace of 4.3 homes per month combined with a 1.4% increase in average active community count. Higher order volume offset by a 5.3% decrease in ASP on orders led to a 4.8% increase in home order value of $6.0 billion for the year ended December 31, 2024, compared to $5.7 billion in the prior year period. The cancellation rate of 9.4% in 2024 improved from 12.8% in 2023 and is below historical normal levels, partially due to our move-in ready strategy which shortens the period between sale and closing. We ended the year with 1,544 homes in backlog valued at $629.5 million, compared to 2,549 homes in backlog valued at $1.1 billion, decreases of 39.4% and 42.1%, respectively, compared to 2023. The number of homes in backlog decreased year over year due to our higher backlog conversion rates throughout 2024. As anticipated with our strategy of offering move-in ready homes, we are selling a higher percentage of spec homes later in the construction cycle, contributing to the higher backlog conversion rates in all of our regions.

West. The West Region generated $2.2 billion in home closing revenue for the year ended December 31, 2024, a 5.5% increase from $2.1 billion in the prior year, due to a 10.1% increase in home closing volume that was partially offset by a 4.2% decrease in ASP on closings as a result of geographic mix within the region, product shift mix to more entry-level homes, and increased utilization of financing incentives. Order value of $2.1 billion in 2024 was relatively consistent with prior year, as a 5.8% increase in order volume for the year ended December 31, 2024 to 4,215 homes from 3,983 in 2023 was offset by a 3.7% decrease in ASP on orders. Order volume increased due to a 13.5% higher orders pace per community to 4.2 homes per month compared to 3.7 per month in 2023, more than offsetting the 6.0% decrease in average actively selling communities. The West Region's cancellation rate of 9.4% improved significantly from 14.2% in 2023. Backlog of 435 homes valued at $214.4 million at December 31, 2024 was down 41.7% and 43.6%, respectively, from 746 homes valued at $379.8 million at December 31, 2023.

Central. The Central Region, made up of our Texas markets, closed 4,834 homes and generated home closing revenue of $1.7 billion for the year ended December 31, 2024 compared to 4,486 homes and $1.8 billion in 2023. The 7.8% increase in home closing volume was fully offset by a 10.2% decrease in ASP on closings, which led to the 3.3% lower home closing revenue. ASP on closings decreased due to product shift mix to more entry-level homes and higher incentives. The Central Region order volume of 4,508 increased 5.1% from 4,291, while order value decreased 3.1% to $1.6 billion compared to $1.7 billion in 2023 due to a 7.7% decrease in ASP on orders. The increase in order volume was due to an 11.6% higher orders pace of 4.8 homes per month in 2024, as average actively selling communities decreased 4.8% year over year. The Central Region cancellation rate of 10.3% in 2024 was down from 13.6% in 2023. The Central Region ended the year with 442 homes in backlog valued at $159.5 million, compared to 768 homes in backlog valued at $289.4 million in 2023.

East. The East Region had strong growth in 2024, closing 6,251 homes in the year ended December 31, 2024, up 16.2% from 5,381 homes in 2023, and generating 10.6% higher home closing revenue of $2.4 billion with the higher home closing volume partially offset by 4.8% decrease in ASP on closings. ASP on closings decreased due to product mix shift to more entry-level homes and higher utilization of financing incentives. Order volume of 5,883 homes increased 19.6% from 4,919 homes, combined with a 4.0% decrease in ASP on orders for a 14.8% increase in home order value of $2.2 billion for the year ended December 31, 2024, compared to $2.0 billion in 2023. Order pace of 4.2 homes per month in 2024 improved from 4.0 homes per month in 2023, and the East Region grew its average active community count by 13.0%. The East Region ended 2024 with 667 homes in backlog valued at $255.6 million, down 35.6% and 39.0%, respectively, from 1,035 homes in backlog valued at $419.0 million in 2023.

Land Closing Revenue and Gross Profit (dollars in thousands)

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From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in a specific geography or divest of assets that no longer align with our strategy. Land sales occur at various intervals and varying degrees of profitability depending upon market opportunities and our land management strategy. Therefore, the revenue and gross profit from land closings will fluctuate from period to period.

Other Operating Information (dollars in thousands)

(1)Home closing gross profit represents home closing revenue less cost of home closings, including impairments, if any. Cost of home closings includes land and associated development costs, direct home construction costs, an allocation of common community costs (such as architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs.

Fiscal 2024 Compared to Fiscal 2023

Companywide. Home closing gross margin of 24.9% for the year ended December 31, 2024 was consistent with 24.8% in the prior year, as lower direct costs, leverage of higher home closing revenue on overhead costs and shorter construction cycle times were partially offset by greater utilization of financing incentives and higher lot costs. Higher home closing revenue and relatively flat home closing gross margin led to higher home closing gross profit of $1.6 billion, up from $1.5 billion in 2023.

West. For the year ended December 31, 2024, the West Region home closing gross margin was 22.8% a 210 basis point improvement from 20.7% in 2023. The demand in this region recovered in 2024 from several challenging years and was able to generate margin improvements with savings in direct costs and leverage of higher home closing revenue and shorter construction cycle times despite higher lot costs.

Central. The Central Region home closing gross margin of 26.2% declined 60 basis points year-over-year from 26.8% in the prior year, primarily due to increased financing incentives combined with higher lot costs, which were partially offset by lower direct construction costs and savings resulting from shorter construction cycle times.

East. The East Region home closing gross margin of 25.9% in 2024 declined 130 basis points from 27.2% in the prior year. The East Region increased financing incentives to address challenging demand conditions in the later half of 2024, particularly in Florida. The 2024 home closing gross margin in the East Region was also negatively impacted by higher lot costs which were partially offset by lower direct costs year over year.

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Financial services profit. Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title and insurance companies, Carefree Title and Meritage Insurance, respectively, as well as our portion of earnings from a mortgage joint venture. Financial services profit of $14.4 million for the year ended December 31, 2024 increased from $12.5 million in the prior year, as higher home closing volume generated greater title and insurance company profits.

Fiscal 2024 Compared to Fiscal 2023

Commissions and Other Sales Costs. Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs. These costs increased $24.2 million due to higher home closing volume and revenue, but as a percentage of home closing revenue, commissions and other sales costs of 6.5% were relatively flat with 6.4% in 2023.

General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. For the year ended December 31, 2024, general and administrative expenses were $230.9 million compared to $231.7 million for the prior year period. General and administrative expenses were 3.6% of home closing revenue in 2024, a 20 basis point improvement from 3.8% in 2023. The improvement as a percentage of home closing revenue is due to leverage of higher home closing revenue on fixed overhead expenses and lower performance-based compensation.

Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior and convertible senior notes, other borrowings and our $910.0 million amended and restated unsecured revolving credit facility agreement (the "Credit Facility"). We had no interest expense for the years ended December 31, 2024 and 2023.

Other Income, Net. Other income, net primarily consists of (i) interest earned on our cash and cash equivalents, (ii) sub lease income, (iii) payments and awards related to legal settlements, and (iv) our portion of pre-tax income or loss from non-financial services joint ventures. Other income, net was $45.2 million and $47.9 million in 2024 and 2023, respectively.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt of $0.6 million for the year ended December 31, 2024 is related to the $250.0 million full redemption of our remaining 2025 Notes. Loss on early extinguishment of debt of $0.9 million for the year ended December 31, 2023 is related to the $150.0 million partial redemption of our 2025 Notes. See Note 7 in the accompanying consolidated financial statements for more information related to the redemption of our 2025 Notes.

Income Taxes. The effective tax rate was 21.6% and 22.2% for 2024 and 2023, respectively. The effective tax rate in both years reflects the energy-efficient homes tax credits on qualifying homes under the Inflation Reduction Act of 2022 (the "IRA").

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Liquidity and Capital Resources

Overview

We have historically generated cash and funded our operations primarily from cash flows from operating activities. Additional sources of funds may include additional debt or equity financing and borrowing capacity under our Credit Facility. We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land acquisition and development and spec home construction. Our principal uses of cash include acquisition and development of land and lots, home construction, operating expenses, share repurchases and the payment of interest, routine liabilities, and dividends. We also opportunistically repurchase or redeem our senior notes, as we did this year with the $250.0 million early redemption of our 2025 Notes.

Cash flows for each of our communities depend on their stage of the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, zoning plat and other approvals, community and lot development, and construction of model homes, roads, utilities, landscape and other amenities. Because these costs are a component of our inventory and are not recognized in our income statement until a home closes, we incur significant cash outlays prior to recognition of earnings. In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. Similarly, in times of community count growth, we incur significant outlays of cash through the land purchase, development and community opening stages whereas in in times of community count stability, these cash outlays are incurred in a more even-flow cadence with cash inflows from actively selling communities that are contributing closing volume and home closing revenue. Conversely, in a down turn environment, cash outlays for land and community count growth may be scaled back to preserve liquidity and we may curtail community count.

Short-term Liquidity and Capital Resources

Over the course of the next twelve months, we expect that our primary demand for funds will be for the construction of homes, as well as acquisition and development of both new and existing lots, operating expenses, including general and administrative expenses, interest and dividend payments and common stock repurchases. Although we don't anticipate any early redemptions in the near term, we may opportunistically repurchase or redeem a portion of our senior notes. We expect to meet these short-term liquidity requirements primarily through our cash and cash equivalents on hand and the net cash flows provided by our operations.

Between our cash and cash equivalents on hand combined with the availability of liquidity from our Credit Facility, we believe that we currently have sufficient liquidity. Nevertheless, in the future, we may seek additional capital to strengthen our liquidity position, enable us to acquire additional land inventory in anticipation of improving market conditions, and/or strengthen our long-term capital structure.

Long-term Liquidity and Capital Resources

Beyond the next twelve months, our principal demands for funds will be for the construction of homes, land acquisition and development activities needed to maintain our lot supply and active community count, payments of principal and interest on our senior and convertible senior notes as they become due or mature, share repurchases and dividend payments. We expect our existing and future generated cash will be adequate to fund our ongoing operating activities as well as provide capital for investment in future land purchases and related development activities. To the extent the sources of capital described above are insufficient to meet our long-term cash needs, we may also conduct additional public offerings of our securities, refinance or secure new debt or dispose of certain assets to fund our operating activities. There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing stockholders or increase our interest costs.

Material Cash Requirements

We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact both short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on our consolidated balance sheets as of December 31, 2024, while others are considered future commitments for materials or services not yet provided. Our contractual obligations primarily consist of principal and interest payments on our senior and convertible senior notes, loans payable and other borrowings, including our Credit Facility, letters of credit and surety bonds and operating leases. We have no material debt maturities until 2027. We also have requirements for certain short-term lease commitments, funding working capital needs of our existing unconsolidated joint ventures, and other purchase obligations in the normal course of business. Other material cash requirements include land acquisition and development costs, home construction costs and operating expenses, including our selling, general and administrative expenses, as previously discussed. We plan to fund these commitments primarily with cash flows generated by operations, but may also utilize

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additional debt or equity financing and borrowing capacity under our Credit Facility. Our maximum exposure to loss on our purchase and option agreements is generally limited to non-refundable deposits and capitalized or committed pre-acquisition costs.

For information about our lease obligations, loans payable and other borrowings, including our Credit Facility, and senior and convertible senior notes, reference is made to Notes 4, 6, and 7 in the accompanying Notes to the consolidated financial statements included in this Annual Report on Form 10-K and are incorporated by reference herein.

Reference is made to Notes 1, 3, 5, and 16 in the accompanying Notes to the consolidated financial statements included in this Annual Report on Form 10-K and are incorporated by reference herein. These Notes discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in connection with the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated, if any.

We do not engage in commodity trading or other similar activities. We had no derivative financial instruments that required derivative accounting under ASC 815-10, Derivatives and Hedging, at December 31, 2024 or 2023.

Operating Cash Flow Activities

During the year ended December 31, 2024, net cash used by operations totaled $227.6 million, compared to net cash provided by operations of $355.6 million during the year ended December 31, 2023. Generally, our operating cash flows fluctuate primarily based on changes in our net earnings, real estate inventory and, to a lesser extent, timing of payments of accounts payable and accrued liabilities.

Operating cash flow results in 2024 primarily reflect $786.2 million in Net earnings, and were offset by a $979.3 million increase in Real estate and an $81.4 million increase in Deposits on real estate under option or contract. The increases in Real estate and Deposits on real estate under option or contract were due to increased land acquisition and development activities as well as construction activities on a greater number of homes under construction. Operating cash flow results in 2023 primarily reflect $738.7 million in Net earnings, and were offset by a $357.4 million increase in Real estate and a $64.2 million increase in Receivables, prepaids and other assets. The increase in Real estate was due to increased land acquisition and development activities as well as construction activities on a greater number of homes under construction. The increase in Receivables, prepaids and other assets was largely due to receivables from municipalities for land development reimbursements and timing of receivables from title companies and closing agents.

Investing Cash Flow Activities

During the years ended December 31, 2024 and 2023, net cash used in investing activities totaled $44.1 million and $43.6 million, respectively. Cash used in investing activities in 2024 was mainly attributable to purchases of property and equipment of $28.7 million and investments in unconsolidated entities of $18.5 million. Cash used in investing activities in 2023 was mainly attributable to purchases of property and equipment of $38.2 million.

Financing Cash Flow Activities

During the year ended December 31, 2024, net cash provided by financing activities totaled $2.0 million, as compared to net cash used in financing activities of $252.3 million during the year ended December 31, 2023. The net cash provided by financing activities in 2024 primarily reflects the net proceeds of $557.9 million from the issuance of our 1.750% Convertible Senior Notes due 2028 (the "2028 Convertible Notes"), offset by the early redemption of our remaining 2025 Notes of $250.0 million aggregate principal and $61.8 million for the purchase of capped calls relating to the 2028 Convertible Notes, along with $125.9 million of share repurchases and $108.6 million of dividends paid. The net cash used in financing activities in 2023 includes $150.0 million for the partial redemption of our 2025 Notes and associated early tender fees of $0.9 million, $59.1 million in share repurchases and $39.5 million of dividends paid. See Part II, Item 5 - "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for more information about our authorized share repurchase program.

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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):

(1)Debt-to-capital is computed as senior and convertible senior notes, net and loans payable and other borrowings divided by the aggregate of total senior and convertible senior notes, net, loans payable and other borrowings and stockholders' equity.

(2)Net debt-to-capital is considered a non-GAAP financial measure, and is computed as net debt divided by the aggregate of net debt and stockholders' equity. Net debt is comprised of total senior and convertible senior notes, net and loans payable and other borrowings, less cash and cash equivalents. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing.

Dividends

During the years ended December 31, 2024 and 2023, our Board approved and we paid, a recurring quarterly cash dividend on common stock of $0.375 and $0.135 per share, respectively. Quarterly dividends declared and paid cumulatively totaled $1.50 and $0.54 per share for the years ended December 31, 2024 and 2023, respectively. Dividend amounts have been retroactively adjusted for the Stock Split. See Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Credit Facility Covenants

Borrowings under the Credit Facility are unsecured but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $3.3 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. We were in compliance with all Credit Facility covenants as of December 31, 2024. Our actual financial covenant calculations as of December 31, 2024 are reflected in the table below.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in this report for discussion of recently issued accounting standards.

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