Form 10-Q M.D.C. HOLDINGS, INC. For: Mar 31

April 28, 2022 1:47 PM EDT

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mdc-20220331
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City
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-8951
M.D.C. HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware84-0622967
(State or other jurisdiction
of incorporation or organization)
(I.R.S. employer
identification no.)
4350 South Monaco Street, Suite 50080237
Denver, Colorado
(Zip code)
(Address of principal executive offices)
(303) 773-1100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value552676108New York Stock Exchange
6% Senior Notes due January 2043552676AQ1New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No  
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated Filer
Non-Accelerated FilerSmaller Reporting Company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes    No  
As of April 26, 2022, 71,162,245 shares of M.D.C. Holdings, Inc. common stock were outstanding.


M.D.C. HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED March 31, 2022
INDEX
Page
No. 


(i)

PART I
Item 1.    Unaudited Consolidated Financial Statements
M.D.C. HOLDINGS, INC.
Consolidated Balance Sheets
March 31,
2022
December 31,
2021
(unaudited)
(Dollars in thousands, except
per share amounts)
ASSETS
Homebuilding:
Cash and cash equivalents$474,447 $485,839 
Restricted cash6,400 12,799 
Trade and other receivables114,823 98,580 
Inventories:
Housing completed or under construction2,194,303 1,917,616 
Land and land under development1,734,515 1,843,235 
Total inventories3,928,818 3,760,851 
Property and equipment, net61,856 60,561 
Deferred tax asset, net17,100 17,942 
Prepaids and other assets114,120 106,562 
Total homebuilding assets4,717,564 4,543,134 
Financial Services:
Cash and cash equivalents107,503 104,821 
Mortgage loans held-for-sale, net187,914 282,529 
Other assets46,133 33,044 
Total financial services assets341,550 420,394 
Total Assets$5,059,114 $4,963,528 
LIABILITIES AND EQUITY
Homebuilding:
Accounts payable$172,134 $149,488 
Accrued and other liabilities405,140 370,910 
Revolving credit facility10,000 10,000 
Senior notes, net1,481,976 1,481,781 
Total homebuilding liabilities2,069,250 2,012,179 
Financial Services:
Accounts payable and accrued liabilities100,551 97,903 
Mortgage repurchase facility178,231 256,300 
Total financial services liabilities278,782 354,203 
Total Liabilities2,348,032 2,366,382 
Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding
  
Common stock, $0.01 par value; 250,000,000 shares authorized; 71,162,245 and 70,668,093 issued and outstanding at March 31, 2022 and December 31, 2021, respectively
712 707 
Additional paid-in-capital1,710,369 1,709,276 
Retained earnings1,000,001 887,163 
Total Stockholders' Equity2,711,082 2,597,146 
Total Liabilities and Stockholders' Equity$5,059,114 $4,963,528 
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
-1-

M.D.C. HOLDINGS, INC.
Consolidated Statements of Operations and Comprehensive Income
Three Months Ended
March 31,
20222021
(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues
$1,240,520 $1,041,858 
Home cost of sales
(921,378)(813,888)
Inventory impairments
(660) 
Total cost of sales
(922,038)(813,888)
Gross profit
318,482 227,970 
Selling, general and administrative expenses
(129,314)(114,993)
Interest and other income
755 967 
Other expense
(1,424)(437)
Homebuilding pretax income
188,499 113,507 
Financial Services:
Revenues
29,131 45,023 
Expenses
(16,935)(15,105)
Other income, net1,187 887 
Financial services pretax income13,383 30,805 
Income before income taxes
201,882 144,312 
Provision for income taxes
(53,461)(33,622)
Net income
$148,421 $110,690 
Comprehensive income
$148,421 $110,690 
Earnings per share:
Basic
$2.09 $1.58 
Diluted
$2.02 $1.51 
Weighted average common shares outstanding:
Basic
70,766,146 69,790,927 
Diluted
72,938,414 72,788,177 
Dividends declared per share
$0.50 $0.37 
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
-2-

M.D.C. HOLDINGS, INC.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollars in thousands, except share amounts)
Three Months Ended March 31, 2022
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Shares
Amount
Balance at December 31, 202170,668,093 $707 $1,709,276 $887,163 $2,597,146 
Net income— — — 148,421 148,421 
Shares issued under stock-based compensation programs, net
498,921 5 (12,633)— (12,628)
Cash dividends declared
— — — (35,583)(35,583)
Stock-based compensation expense
— — 13,726 — 13,726 
Forfeiture of restricted stock
(4,769)— — — — 
Balance at March 31, 202271,162,245 $712 $1,710,369 $1,000,001 $2,711,082 
Three Months Ended March 31, 2021
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Shares
Amount
Balance at December 31, 202064,851,126 $649 $1,407,597 $711,666 $2,119,912 
Net income— — — 110,690 110,690 
Shares issued under stock-based compensation programs, net
221,303 2 1,007 — 1,009 
Cash dividends declared
— — — (25,978)(25,978)
Stock dividends declared5,192,776 52 279,579 (280,318)(687)
Stock-based compensation expense
— — 9,926 — 9,926 
Balance at March 31, 202170,265,205 $703 $1,698,109 $516,060 $2,214,872 
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
-3-

M.D.C. HOLDINGS, INC.
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Operating Activities:
Net income$148,421 $110,690 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation expense14,882 9,926 
Depreciation and amortization6,652 7,003 
Inventory impairments660  
Deferred income tax expense (benefit)842 (1,348)
Net changes in assets and liabilities:
Trade and other receivables(16,677)(40,282)
Mortgage loans held-for-sale, net94,615 1,767 
Housing completed or under construction(277,187)(218,655)
Land and land under development108,755 34,978 
Prepaids and other assets(20,479)(23,594)
Accounts payable and accrued and other liabilities57,571 61,558 
Net cash provided by (used in) operating activities118,055 (57,957)
Investing Activities:
Purchases of property and equipment(6,884)(5,749)
Net cash (used in) investing activities(6,884)(5,749)
Financing Activities:
Proceeds from (payments on) mortgage repurchase facility, net(78,069)15,092 
Proceeds from issuance of senior notes 347,725 
Dividend payments(35,583)(26,665)
Payments of deferred financing costs (819)
Issuance of shares under stock-based compensation programs, net(12,628)1,009 
Net cash provided by (used in) financing activities(126,280)336,342 
Net increase (decrease) in cash, cash equivalents and restricted cash(15,109)272,636 
Cash, cash equivalents and restricted cash:
Beginning of period603,459 503,972 
End of period$588,350 $776,608 
Reconciliation of cash, cash equivalents and restricted cash:
Homebuilding:
Cash and cash equivalents$474,447 $678,194 
Restricted cash6,400 17,314 
Financial Services:
Cash and cash equivalents107,503 81,100 
Total cash, cash equivalents and restricted cash$588,350 $776,608 
The accompanying Notes are an integral part of these Unaudited Consolidated Financial Statements.
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1.    Basis of Presentation
The Unaudited Consolidated Financial Statements of M.D.C. Holdings, Inc. ("MDC," “the Company," “we,” “us,” or “our,” which refers to M.D.C. Holdings, Inc. and its subsidiaries) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of MDC at March 31, 2022 and for all periods presented. These statements should be read in conjunction with MDC’s Consolidated Financial Statements and Notes thereto included in MDC’s Annual Report on Form 10-K for the year ended December 31, 2021.
Included in these footnotes are certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this section are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered.
Where necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.
2.    Recently Issued Accounting Standards
There are no recently issued accounting standards applicable to the Company.

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3.    Segment Reporting
An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group, to evaluate performance and make operating decisions. We have identified our CODM as two key executives—the Executive Chairman and the Chief Executive Officer (“CEO”).
We have identified each homebuilding division as an operating segment. Our homebuilding operating segments have been aggregated into the reportable segments noted below because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to construct and sell homes. Our homebuilding reportable segments are as follows
West (Arizona, California, Nevada, New Mexico, Oregon, Texas and Washington)
Mountain (Colorado, Idaho and Utah)
East (Florida, mid-Atlantic, which includes Maryland, Pennsylvania and Virginia, and Tennessee)
Our financial services business consists of the operations of the following operating segments: (1) HomeAmerican Mortgage Corporation (“HomeAmerican”); (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”); (3) StarAmerican Insurance Ltd. (“StarAmerican”); (4) American Home Insurance Agency, Inc.; and (5) American Home Title and Escrow Company. Due to its contributions to consolidated pretax income, we consider HomeAmerican to be a reportable segment (“mortgage operations”). The remaining operating segments have been aggregated into one reportable segment (“other”) because they do not individually exceed 10 percent of: (1) consolidated revenue; (2) the greater of (a) the combined reported profit of all operating segments that did not report a loss or (b) the positive value of the combined reported loss of all operating segments that reported losses; or (3) consolidated assets.
Corporate is a non-operating segment that develops and implements strategic initiatives and supports our operating divisions by centralizing key administrative functions such as finance, treasury, information technology, insurance, risk management, litigation and human resources. Corporate also provides the necessary administrative functions to support MDC as a publicly traded company. A portion of the expenses incurred by Corporate are allocated to the homebuilding operating segments based on their respective percentages of assets, and to a lesser degree, a portion of Corporate expenses are allocated to the financial services segments. A majority of Corporate’s personnel and resources are primarily dedicated to activities relating to the homebuilding segments, and, therefore, the balance of any unallocated Corporate expenses is included in the homebuilding operations section of our consolidated statements of operations and comprehensive income.
The following table summarizes revenues for our homebuilding and financial services operations:
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Homebuilding
West
$707,311 $616,611 
Mountain
335,128 324,717 
East
198,081 100,530 
Total homebuilding revenues
$1,240,520 $1,041,858 
Financial Services
Mortgage operations
$17,601 $35,165 
Other
11,530 9,858 
Total financial services revenues
$29,131 $45,023 
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The following table summarizes pretax income (loss) for our homebuilding and financial services operations:
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Homebuilding
West
$130,526 $77,187 
Mountain
50,506 45,858 
East
31,394 7,835 
Corporate
(23,927)(17,373)
Total homebuilding pretax income$188,499 $113,507 
Financial Services
Mortgage operations
$7,433 $26,039 
Other
5,950 4,766 
Total financial services pretax income$13,383 $30,805 
Total pretax income$201,882 $144,312 
The following table summarizes total assets for our homebuilding and financial services operations. The assets in our West, Mountain and East segments consist primarily of inventory while the assets in our Corporate segment primarily include our cash and cash equivalents and deferred tax assets. The assets in our financial services segment consist mostly of cash and cash equivalents and mortgage loans held-for-sale.
March 31,
2022
December 31,
2021
(Dollars in thousands)
Homebuilding assets
West
$2,548,681 $2,472,378 
Mountain
1,141,395 1,072,717 
East
479,790 450,675 
Corporate
547,698 547,364 
Total homebuilding assets$4,717,564 $4,543,134 
Financial services assets
Mortgage operations
$228,712 $313,373 
Other
112,838 107,021 
Total financial services assets$341,550 $420,394 
Total assets$5,059,114 $4,963,528 

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4.     Earnings Per Share
Accounting Standards Codification ("ASC") Topic 260, Earnings per Share ("ASC 260") requires a company that has participating security holders (for example, holders of unvested restricted stock that have non-forfeitable dividend rights) to utilize the two-class method for calculating earnings per share (“EPS”) unless the treasury stock method results in lower EPS. The two-class method is an allocation of earnings/(loss) between the holders of common stock and a company’s participating security holders. Under the two-class method, earnings/(loss) for the reporting period are allocated between common shareholders and other security holders based on their respective rights to receive distributed earnings (i.e., dividends) and undistributed earnings (i.e., net income/(loss)). Our common shares outstanding are comprised of shareholder owned common stock and shares of unvested restricted stock held by participating security holders. Basic EPS is calculated by dividing income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding, excluding participating shares in accordance with ASC 260. To calculate diluted EPS, basic EPS is adjusted to include the effect of potentially dilutive stock options outstanding and contingently issuable equity awards. The table below shows our basic and diluted EPS calculations.
Three Months Ended
March 31,
20222021
(Dollars in thousands, except per share amounts)
Numerator
Net income$148,421 $110,690 
Less: distributed earnings allocated to participating securities(194)(158)
Less: undistributed earnings allocated to participating securities(562)(463)
Net income attributable to common stockholders (numerator for basic earnings per share)147,665 110,069 
Add back: undistributed earnings allocated to participating securities562 463 
Less: undistributed earnings reallocated to participating securities(546)(447)
Numerator for diluted earnings per share under two class method$147,681 $110,085 
Denominator
Weighted-average common shares outstanding70,766,146 69,790,927 
Add: dilutive effect of stock options1,998,156 2,367,394 
Add: dilutive effect of contingently issuable equity awards174,112 629,856 
Denominator for diluted earnings per share under two class method72,938,414 72,788,177 
Basic Earnings Per Common Share$2.09 $1.58 
Diluted Earnings Per Common Share$2.02 $1.51 
Diluted EPS for the three months ended March 31, 2022 and 2021 excluded options to purchase 15,000 and zero shares of common stock, respectively, because the effect of their inclusion would be anti-dilutive.
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5.    Fair Value Measurements
ASC Topic 820, Fair Value Measurements (“ASC 820”), defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs, other than quoted prices in active markets, that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:
Fair Value
Financial Instrument
Hierarchy
March 31,
2022
December 31,
2021
(Dollars in thousands)
Mortgage loans held-for-sale, net
Level 2
$187,914 $282,529 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2022 and December 31, 2021.
Cash and cash equivalents (excluding debt securities with an original maturity of three months or less), restricted cash, trade and other receivables, prepaids and other assets, accounts payable, accrued and other liabilities and borrowings on our revolving credit facility. Fair value approximates carrying value.
Mortgage loans held-for-sale, net.  Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At March 31, 2022 and December 31, 2021, we had $122.4 million and $157.7 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At March 31, 2022 and December 31, 2021, we had $65.5 million and $124.9 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party, which is a Level 2 fair value input.
Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three months ended March 31, 2022, we recorded net gains on the sales of mortgage loans of $2.1 million, compared to $23.5 million for the same period in the prior year.
Mortgage Repurchase Facility. The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.
Senior Notes. The estimated values of the senior notes in the following table are based on Level 2 inputs, which primarily reflect estimated prices for our senior notes that were provided by multiple sources.
March 31, 2022December 31, 2021
Carrying
Amount
Fair ValueCarrying
Amount
Fair Value
(Dollars in thousands)
$300 million 3.850% Senior Notes due January 2030, net
$297,760 $287,655 $297,699 $319,057 
$350 million 2.500% Senior Notes due January 2031, net
347,197 304,093 347,126 339,185 
$500 million 6.000% Senior Notes due January 2043, net
490,956 515,424 490,903 628,092 
$350 million 3.966% Senior Notes due August 2061, net
346,063 265,766 346,053 337,017 
Total$1,481,976 $1,372,938 $1,481,781 $1,623,351 

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6.    Inventories
The following table sets forth, by reportable segment, information relating to our homebuilding inventories:
March 31,
2022
December 31,
2021
(Dollars in thousands)
Housing completed or under construction:
West
$1,227,497 $1,077,256 
Mountain
685,984 596,164 
East
280,822 244,196 
Subtotal
2,194,303 1,917,616 
Land and land under development:
West
1,173,709 1,235,363 
Mountain
399,403 435,958 
East
161,403 171,914 
Subtotal
1,734,515 1,843,235 
Total inventories
$3,928,818 $3,760,851 
Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes. Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins.
In accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories, excluding those classified as held for sale, are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable.  We evaluate inventories for impairment at each quarter end on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:
actual and trending “Operating Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);
estimated future undiscounted cash flows and Operating Margin;
forecasted Operating Margin for homes in backlog;
actual and trending net home orders;
homes available for sale;
market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and
known or probable events indicating that the carrying value may not be recoverable.
If events or circumstances indicate that the carrying value of our inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision (including capitalized interest) to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates, which are Level 3 inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.

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If land is classified as held for sale, we measure it in accordance with ASC 360 at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price, which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies, which are considered Level 3 inputs. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.
Inventory impairments recognized by segment for the three months ended ended March 31, 2022 and 2021 are shown in the table below.
Three Months Ended March 31,
20222021
(Dollars in thousands)
West$660 $ 
Mountain  
East  
Total Inventory Impairments$660 $ 
The table below provides quantitative data, for the periods presented, where applicable, used in determining the fair value of the impaired inventory.
Impairment Data
Quantitative Data
Three Months Ended
Number of Subdivisions Impaired
Inventory
Impairments
Fair Value of
Inventory After Impairments
Discount Rate
(Dollars in thousands)
March 31, 20221$660 $1,728 N/A
Total$660 
7.    Capitalization of Interest
We capitalize interest to inventories during the period of development in accordance with ASC Topic 835, Interest (“ASC 835”). Homebuilding interest capitalized as a cost of inventories is included in cost of sales during the period that related units or lots are delivered. To the extent our homebuilding debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred. Qualified homebuilding assets consist of all lots and homes, excluding finished unsold homes or finished models, within projects that are actively selling or under development. The table set forth below summarizes homebuilding interest activity. For all periods presented below, our qualified assets exceeded our homebuilding debt and as such, all interest incurred has been capitalized.
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Homebuilding interest incurred$17,258 $17,332 
Less: Interest capitalized(17,258)(17,332)
Homebuilding interest expensed$ $ 
Interest capitalized, beginning of period$58,054 $52,777 
Plus: Interest capitalized during period17,258 17,332 
Less: Previously capitalized interest included in home cost of sales(14,844)(14,841)
Interest capitalized, end of period$60,468 $55,268 

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8.    Leases
We lease certain property, land and equipment, the majority of which comprise property related leases to provide office space where we operate our business. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
Our property related leases typically have terms of between three and five years, with the exception of the lease governing the Company’s headquarters. All of our property related leases are classified as operating leases. These leases do not contain any residual value guarantees or restrictive covenants and do not include variable lease payments, except for the payment of common area maintenance and real estate taxes. Many of our property related leases give us the option to extend the lease term for a period of time, generally consistent with the initial lease term. These options are excluded from our calculation of the right-of-use asset and lease liability until such time as we determine it is reasonably certain that the option will be exercised.
The property related lease for the Company’s headquarters in Denver, Colorado is ten years in length with an expiration date of October 31, 2026 and contains a ten year option to extend the term of the lease through 2036. This option has been excluded from our calculation of the right-of-use asset and lease liability as it is not currently considered reasonably certain that the option will be exercised.
Operating lease expense is included as a component of selling, general and administrative expenses in the homebuilding and expenses in the financial services sections of our consolidated statements of operations and comprehensive income, respectively. Components of operating lease expense were as follows:
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Operating lease cost 1
$2,131 $1,977 
Less: Sublease income (Note 19)(83)(39)
Net lease cost$2,048 $1,938 
1Includes variable lease costs, which are immaterial.
Supplemental cash flow information related to leases was as follows:
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$2,022 $1,858 
Leased assets obtained in exchange for new operating lease liabilities$3,748 $830 
Weighted-average remaining lease term and discount rate for operating leases were as follows:
March 31, 2022March 31, 2021
Weighted-average remaining lease term (in years)4.55.1
Weighted-average discount rate5.5 %5.5 %

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Maturities of operating lease liabilities were as follows:
Year Ended December 31,
(Dollars in thousands)
2022 (excluding the three months ended March 31, 2022)$5,452 
20237,466 
20246,845 
20256,637 
20265,573 
Thereafter1,119 
Total operating lease payments 1
$33,092 
Less: Interest3,845 
Present value of operating lease liabilities 2
$29,247 
_______________________________________________________________

1Operating lease payments exclude $0.1 million of legally binding lease payments for leases signed but not yet commenced.
2Homebuilding and financial services operating lease liabilities of $29.1 million and $0.1 million, respectively, are included as a component of accrued and other liabilities and accounts payable and accrued liabilities, respectively, in the homebuilding and financial services section of our consolidated balance sheet at March 31, 2022.

9.    Homebuilding Prepaids and Other Assets
The following table sets forth the components of homebuilding prepaids and other assets:
March 31,
2022
December 31,
2021
(Dollars in thousands)
Operating lease right-of-use asset (Note 8)$28,007 $25,514 
Land option deposits52,225 41,617 
Prepaids20,975 26,058 
Goodwill6,008 6,008 
Deferred debt issuance costs on revolving credit facility, net6,712 7,166 
Other193 199 
Total prepaids and other assets$114,120 $106,562 

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10.    Homebuilding Accrued and Other Liabilities and Financial Services Accounts Payable and Accrued Liabilities
The following table sets forth information relating to homebuilding accrued and other liabilities:
March 31,
2022
December 31, 2021
(Dollars in thousands)
Accrued compensation and related expenses
$54,567 $81,417 
Customer and escrow deposits
97,426 89,353 
Warranty accrual (Note 11)40,946 37,491 
Lease liability (Note 8)29,125 26,440 
Accrued interest
14,889 30,934 
Construction defect claim reserves (Note 12)9,023 9,287 
Land development and home construction accruals
24,739 22,012 
Income taxes payable62,032 9,836 
Other accrued liabilities
72,393 64,140 
Total accrued and other liabilities
$405,140 $370,910 
The following table sets forth information relating to financial services accounts payable and accrued liabilities:
March 31,
2022
December 31, 2021
(Dollars in thousands)
Insurance reserves
$75,401 $72,900 
Accounts payable and other accrued liabilities
25,150 25,003 
Total accounts payable and accrued liabilities
$100,551 $97,903 

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11.    Warranty Accrual
Our homes are sold with limited third-party warranties and, under our agreement with the issuer of the third-party warranties, we are responsible for performing all of the work for the first two years of the warranty coverage and paying for substantially all of the work required to be performed during years three through ten of the warranties. We record accruals for general and structural warranty claims, as well as accruals for known, unusual warranty-related expenditures. Our warranty accrual is recorded based upon historical payment experience in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The determination of the warranty accrual rate for closed homes and the evaluation of our warranty accrual balance at period end are based on an internally developed analysis that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.
Our warranty accrual is included in accrued and other liabilities in the homebuilding section of our consolidated balance sheets and adjustments to our warranty accrual are recorded as an increase or reduction to home cost of sales in the homebuilding section of our consolidated statements of operations and comprehensive income.
The table set forth below summarizes accrual, adjustment and payment activity related to our warranty accrual for the three months ended March 31, 2022 and 2021. The warranty accrual increased due to the increase in the number of home closings as well as a $2.4 million adjustment to increase our warranty accrual during the three months ended March 31, 2022. This adjustment was due to higher general warranty related expenditures. There was no warranty adjustment during the three months ended March 31, 2021.
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Balance at beginning of period$37,491 $33,664 
Expense provisions5,832 4,385 
Cash payments(4,817)(4,176)
Adjustments2,440  
Balance at end of period$40,946 $33,873 

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12.    Insurance and Construction Defect Claim Reserves
The establishment of reserves for estimated losses associated with insurance policies issued by Allegiant and re-insurance agreements issued by StarAmerican are based on actuarial studies that include known facts and interpretations of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns depending on the business conducted, and changing regulatory and legal environments. It is possible that changes in the insurance payment experience used in estimating our ultimate insurance losses could have a material impact on our insurance reserves.
The establishment of reserves for estimated losses to be incurred by our homebuilding subsidiaries associated with: (1) the self-insured retention (“SIR”) portion of construction defect claims that are expected to be covered under insurance policies with Allegiant and (2) the entire cost of any construction defect claims that are not expected to be covered by insurance policies with Allegiant, are based on actuarial studies that include known facts similar to those for our insurance reserves. It is possible that changes in the payment experience used in estimating our ultimate losses for construction defect claims could have a material impact on our reserves.
The table set forth below summarizes our insurance and construction defect claim reserves activity for the three months ended March 31, 2022 and 2021. These reserves are included as a component of accounts payable and accrued liabilities and accrued and other liabilities in the financial services and homebuilding sections, respectively, of the consolidated balance sheets.
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Balance at beginning of period$82,187 $70,054 
Expense provisions4,432 4,283 
Cash payments, net of recoveries(2,195)(334)
Balance at end of period$84,424 $74,003 
In the ordinary course of business, we make payments from our insurance and construction defect claim reserves to settle litigation claims arising from our homebuilding activities. These payments are irregular in both their timing and their magnitude. As a result, the cash payments, net of recoveries shown for the three months ended March 31, 2022 and 2021 are not necessarily indicative of what future cash payments will be for subsequent periods.
13.    Income Taxes

Our overall effective income tax rates were 26.5% and 23.3% for the three months ended March 31, 2022 and 2021, respectively, resulting in income tax expense of $53.5 million and $33.6 million for the same periods, respectively. The year-over-year increase in our effective tax rate for the three months ended March 31, 2022 was primarily due to energy tax credits not being extended into 2022 and a decrease in the windfall on non-qualifying stock options exercised and lapsed restricted stock during the period.
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14.    Senior Notes
The carrying values of our senior notes as of March 31, 2022 and December 31, 2021, net of any unamortized debt issuance costs or discount, were as follows:
March 31,
2022
December 31, 2021
(Dollars in thousands)
3.850% Senior Notes due January 2030, net
$297,760 $297,699 
2.500% Senior Notes due January 2031, net
347,197 347,126 
6.000% Senior Notes due January 2043, net
490,956 490,903 
3.966% Senior Notes due August 2061, net
346,063 346,053 
Total$1,481,976 $1,481,781 
Our senior notes are not secured and, while the senior note indentures contain some restrictions on secured debt and other transactions, they do not contain financial covenants. Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by most of our homebuilding segment subsidiaries.
In January 2021, we completed an offering of $350.0 million of 2.500% senior notes due January 2031 at 100% of par. In August 2021, the Company issued $350.0 million of 3.966% senior notes due August 2061 at 100% of par. We used the net proceeds for general corporate purposes, which included the retirement of our 5.500% senior notes discussed further below, which were scheduled to mature in January 2024.
In September 2021, we accelerated the retirement of $123.6 million of our 5.500% senior notes scheduled to mature in January 2024 through a cash tender offer. The retirement resulted in a loss of $12.2 million, which included the write-off of debt issuance costs and transaction fees. In December 2021, we accelerated the retirement of the remaining $126.4 million of our 5.500% senior notes pursuant to their optional redemption provisions. This retirement resulted in a loss of $11.4 million, which included the write-off of debt issuance costs and transaction fees.
15.    Stock-Based Compensation
The following table sets forth share-based award expense activity for the three months ended March 31, 2022 and 2021, which is included as a component of selling, general and administrative expenses and expenses in the homebuilding and financial services sections of our consolidated statements of operations and comprehensive income, respectively:
Three Months Ended
March 31,
20222021
(Dollars in thousands)
Stock option grants expense$587 $864 
Restricted stock awards expense2,587 2,469 
Performance share units expense11,708 6,593 
Total stock-based compensation$14,882 $9,926 
Additional detail on the performance share units ("PSUs") expense is included below:
2018 PSU Grants. The 2018 PSU awards vested on April 29, 2021. For the three months ended March 31, 2021, the Company recorded share-based award expense of $1.3 million related to these awards.
2019 PSU Grants. The 2019 PSU awards vested on February 3, 2022. For the three months ended March 31, 2021, the Company recorded share-based award expense of $1.8 million related to these awards.
2020 PSU Grants. As of March 31, 2022, the Company recorded the required share-based award expense related to the awards of $2.5 million for the three months ended March 31, 2022, based on its assessment of the probability for achievement of
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the performance targets. For the three months ended March 31, 2021, the Company recorded share-based award expense of $3.5 million related to these awards.
2021 PSU Grants. As of March 31, 2022, the Company recorded the required share-based award expense related to the awards of $9.3 million for the three months ended March 31, 2022, based on its assessment of the probability for achievement of the performance targets.
16.    Commitments and Contingencies
Surety Bonds and Letters of Credit. We are required to obtain surety bonds and letters of credit in support of our obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At March 31, 2022, we had outstanding surety bonds and letters of credit totaling $383.8 million and $205.1 million, respectively, including $153.4 million in letters of credit issued by HomeAmerican. The estimated cost to complete obligations related to these bonds and letters of credit were approximately $209.4 million and $157.4 million, respectively. All letters of credit as of March 31, 2022, excluding those issued by HomeAmerican, were issued under our unsecured revolving credit facility (see Note 18 for further discussion of the revolving credit facility). We expect that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related performance bonds and letters of credit should be released and we should not have any continuing obligations. However, in the event any such performance bonds or letters of credit are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit.
We have made no material guarantees with respect to third-party obligations.
Litigation. Due to the nature of the homebuilding business, we have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.
Lot Option Contracts. In the ordinary course of business, we enter into lot option purchase contracts (“Option Contracts”), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allow us to reduce the risks associated with direct land ownership and development, reduces our capital and financial commitments, and minimizes the amount of land inventories on our consolidated balance sheets. In certain cases, these contracts will be settled shortly following the end of the period. Our obligation with respect to Option Contracts is generally limited to forfeiture of the related deposits. At March 31, 2022, we had cash deposits and letters of credit totaling $45.0 million and $13.3 million, respectively, at risk associated with the option to purchase 11,205 lots.

Coronavirus/COVID-19 Pandemic. In response to the pandemic, many state and local governments instituted restrictions that substantially limited the operations of non-essential businesses and the activities of individuals. While some of these restrictions have been eased, there is still significant uncertainty around the extent and duration of those still in place and the possibility for restrictions to be increased again in the future. We continue to construct, market and sell homes in all markets in which we operate, but increased restrictions could have a negative impact on traffic at our sales centers and model homes, cancellation rates and our ability to physically construct homes. While the extent to which the pandemic will impact our financial results in the coming periods depends on future developments, including whether there are additional outbreaks of COVID-19 and the actions taken to contain or address the virus, the pandemic and its associated impact on the U.S. economy and consumer confidence could have a material impact to the Company’s future results of operations, financial condition and cash flows.
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17.    Derivative Financial Instruments
The derivative instruments we utilize in the normal course of business are interest rate lock commitments and forward sales of mortgage-backed securities, both of which typically are short-term in nature. Forward sales of mortgage-backed securities are utilized to hedge changes in fair value of our interest rate lock commitments as well as mortgage loans held-for-sale not under commitments to sell. For forward sales of mortgage-backed securities, as well as interest rate lock commitments that are still outstanding at the end of a reporting period, we record the changes in fair value of the derivatives in revenues in the financial services section of our consolidated statements of operations and comprehensive income with an offset to other assets or accounts payable and accrued liabilities in the financial services section of our consolidated balance sheets, depending on the nature of the change.
At March 31, 2022, we had interest rate lock commitments with an aggregate principal balance of $521.1 million. Additionally, we had $66.2 million of mortgage loans held-for-sale at March 31, 2022 that had not yet been committed to a mortgage purchaser. In order to hedge the changes in fair value of our interest rate lock commitments and mortgage loans held-for-sale that had not yet been committed to a mortgage purchaser, we had forward sales of securities totaling $378.5 million at March 31, 2022.
For the three months ended March 31, 2022 and 2021, we recorded net gains on derivatives of $3.6 million and $9.0 million, respectively, in revenues in the financial services section of our consolidated statements of operations and comprehensive income.
18.    Lines of Credit
Revolving Credit Facility. We have an unsecured revolving credit agreement (“Revolving Credit Facility”) with a group of lenders which may be used for general corporate purposes. This agreement was amended on December 28, 2020 to (1) increase the aggregate commitment from $1.0 billion to $1.2 billion (the “Commitment”), (2) extend the Revolving Credit Facility maturity of $1.125 billion of the Commitments to December 18, 2025 with the remaining Commitment continuing to terminate on December 18, 2023 and (3) provide that the aggregate amount of the commitments may increase to an amount not to exceed $1.7 billion upon our request, subject to receipt of additional commitments from existing or additional lenders and, in the case of additional lenders, the consent of the co-administrative agents. As defined in the Revolving Credit Facility, interest rates on base rate borrowings are equal to the highest of (1) 0.0%, (2) a prime rate, (3) a federal funds effective rate plus 1.50%, and (4) a specified eurocurrency rate plus 1.00% and, in each case, plus a margin that is determined based on our credit ratings and leverage ratio. Interest rates on eurocurrency borrowings are equal to a specified eurocurrency rate plus a margin that is determined based on our credit ratings and leverage ratio. At any time at which our leverage ratio, as of the last day of the most recent calendar quarter, exceeds 55%, the aggregate principal amount of all consolidated senior debt borrowings outstanding may not exceed the borrowing base. There is no borrowing base requirement if our leverage ratio, as of the last day of the most recent calendar quarter, is 55% or less.
The Revolving Credit Facility provides for a transition from the eurocurrency rate to a benchmark replacement upon the occurrence of certain events.
The Revolving Credit Facility is fully and unconditionally guaranteed, jointly and severally, by most of our homebuilding segment subsidiaries. The facility contains various representations, warranties and covenants that we believe are customary for agreements of this type. The financial covenants include a consolidated tangible net worth test and a leverage test, along with a consolidated tangible net worth covenant, all as defined in the Revolving Credit Facility. A failure to satisfy the foregoing tests does not constitute an event of default, but can trigger a “term-out” of the facility. A breach of the consolidated tangible net worth covenant (but not the consolidated tangible net worth test) or a violation of anti-corruption or sanctions laws would result in an event of default.
The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including breach of the consolidated tangible net worth covenant, a violation of anti-corruption or sanctions laws, failure to make timely payments, breaches of certain representations or covenants, failure to pay other material indebtedness, or another person becoming beneficial owner of 50% or more of our outstanding common stock. We believe we were in compliance with the representations, warranties and covenants included in the Revolving Credit Facility as of March 31, 2022.

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We incur costs associated with unused commitment fees pursuant to the terms of the Revolving Credit Facility. At March 31, 2022 and December 31, 2021, there were $51.7 million and $40.1 million, respectively, in letters of credit outstanding, which reduced the amounts available to be borrowed under the Revolving Credit Facility. At March 31, 2022 and December 31, 2021, we had $10.0 million and $10.0 million, respectively, outstanding under the Revolving Credit Facility. As of March 31, 2022, availability under the Revolving Credit Facility was approximately $1.14 billion.

Mortgage Repurchase Facility. HomeAmerican has a Master Repurchase Agreement (the “Mortgage Repurchase Facility”) with U.S. Bank National Association (“USBNA”). The Mortgage Repurchase Facility provides liquidity to HomeAmerican by providing for the sale of up to an aggregate of $75 million (subject to increase by up to $75 million under certain conditions) of eligible mortgage loans to USBNA with an agreement by HomeAmerican to repurchase the mortgage loans at a future date. Until such mortgage loans are transferred back to HomeAmerican, the documents relating to such loans are held by USBNA, as custodian, pursuant to the Custody Agreement (“Custody Agreement”), dated as of November 12, 2008, by and between HomeAmerican and USBNA. In the event that an eligible mortgage loan becomes ineligible, as defined under the Mortgage Repurchase Facility, HomeAmerican may be required to repurchase the ineligible mortgage loan immediately. The Mortgage Repurchase Facility was amended on September 24, 2020, March 25, 2021, May 20, 2021, and December 21, 2021 to adjust the commitments to purchase for specific time periods. As part of the amendments, the commitments to purchase (subject to increase by up to $75 million under certain conditions) were increased as follows: (1) $200 million for the periods December 22, 2020 through February 4, 2021, (2) $175 million for the periods March 25, 2021 through April 22, 2021, June 23, 2021 through July 22, 2021, September 22, 2021 through October 21, 2021, and March 23, 2022 through April 21, 2022 and (3) $400 million for the period December 21, 2021 through February 15, 2022. The Mortgage Repurchase Facility is scheduled to terminate on May 19, 2022.

The maximum aggregate commitment of the Mortgage Repurchase Facility was temporarily increased by $75 million on March 23, 2022 effective through April 26, 2022. The maximum aggregate commitment of the Mortgage Repurchase Facility was not temporarily increased as of December 31, 2021. At March 31, 2022 and December 31, 2021, HomeAmerican had $178.2 million and $256.3 million, respectively, of mortgage loans that HomeAmerican was obligated to repurchase under the Mortgage Repurchase Facility. Mortgage loans that HomeAmerican is obligated to repurchase under the Mortgage Repurchase Facility are accounted for as a debt financing arrangement and are reported as mortgage repurchase facility in the consolidated balance sheets. The December 21, 2021 amendment also provides for a transition from a pricing rate based on the London Interbank Offered Rate (LIBOR) to one based on the Secured Overnight Financing Rate (SOFR).
The Mortgage Repurchase Facility contains various representations, warranties and affirmative and negative covenants that we believe are customary for agreements of this type. The negative covenants include, among others, (i) a minimum Adjusted Tangible Net Worth requirement, (ii) a maximum Adjusted Tangible Net Worth ratio, (iii) a minimum adjusted net income requirement, and (iv) a minimum Liquidity requirement. The foregoing capitalized terms are defined in the Mortgage Repurchase Facility. We believe HomeAmerican was in compliance with the representations, warranties and covenants included in the Mortgage Repurchase Facility as of March 31, 2022.
19.    Related Party Transactions
The Company has a sublease agreement with CVentures, Inc. Larry A. Mizel, the Executive Chairman of the Company, is the President of CVentures, Inc. The sublease is for office space that CVentures, Inc. has continuously leased from the Company as disclosed in the Form 8-K filed July 27, 2005 and the Form 8-K filed March 28, 2006. The current sublease term commenced November 1, 2016 and will continue through October 31, 2026. The sublease agreement is for approximately 5,437 rentable square feet at a base rent that increases over the term from $26.50 to $31.67 per rentable square foot per year. The sublease rent is an allocation of the rent under the master lease agreement based on the sublease square footage.
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20.    Supplemental Guarantor Information
Our senior notes are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the following subsidiaries (collectively, the "Guarantor Subsidiaries"), which are 100%-owned subsidiaries of the Company:
M.D.C. Land Corporation
RAH of Florida, Inc.
Richmond American Construction, Inc.
Richmond American Construction NM, Inc.
Richmond American Homes of Arizona, Inc.
Richmond American Homes of Colorado, Inc.
Richmond American Homes of Florida, LP
Richmond American Homes of Idaho, Inc. (formerly known as Richmond American Homes of Illinois, Inc.)
Richmond American Homes of Maryland, Inc.
Richmond American Homes of Nevada, Inc.
Richmond American Homes of New Mexico, Inc.
Richmond American Homes of Oregon, Inc.
Richmond American Homes of Pennsylvania, Inc.
Richmond American Homes of Tennessee, Inc. (formerly known as Richmond American Homes of New Jersey, Inc.)
Richmond American Homes of Texas, Inc.
Richmond American Homes of Utah, Inc.
Richmond American Homes of Virginia, Inc.
Richmond American Homes of Washington, Inc.
The senior note indentures do not provide for a suspension of the guarantees. Other than for the senior notes due 2061, the senior note indentures, provide that any Guarantor may be released from its guarantee so long as (1) no default or event of default exists or would result from release of such guarantee, (2) the Guarantor being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (3) the Guarantors released from their guarantees in any year-end period comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of the Company’s consolidated net worth as of the end of the most recent fiscal quarter, (4) such release would not have a material adverse effect on the homebuilding business of the Company and its subsidiaries and (5) the Guarantor is released from its guarantee(s) under all Specified Indebtedness (other than by reason of payment under its guarantee of Specified Indebtedness). The indenture for the senior notes due 2061 provides that, if a Guarantor is released under its guarantees of our credit facilities or other publicly traded debt securities, the Guarantor will also be released under its guarantee of the senior notes due 2061. Upon delivery of an officers’ certificate and an opinion of counsel stating that all conditions precedent provided for in the indenture relating to such transactions have been complied with and the release is authorized, the guarantee will be automatically and unconditionally released. “Specified Indebtedness” means indebtedness under the senior notes, the Company’s Indenture dated as of December 3, 2002, the Revolving Credit Facility, and any refinancing, extension, renewal or replacement of any of the foregoing.
As the combined assets, liabilities and results of operations of M.D.C. Holdings, Inc. and the Guarantor Subsidiaries (the “Obligor Group”) are not materially different from those in the homebuilding section of our consolidated balance sheets and consolidated statements of operations and comprehensive income, separate summarized financial information of the Obligor Group has not been included. As of March 31, 2022 and December 31, 2021, amounts due to non-guarantor subsidiaries from the Obligor Group totaled $58.9 million and $60.2 million, respectively.
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21.    Subsequent Events
On April 21, 2022, our subsidiary, Richmand American Homes of Tennessee, Inc., entered into an asset purchase agreement ("Purchase Agreement") to acquire substantially all of the homebuilding assets of The Jones Company of Tennessee, L.L.C. (“Seller”) for a purchase price of $117.3 million, subject to the adjustments outlined below, which is expected to be paid entirely in cash. The Seller is a leading homebuilder in the Nashville, Tennessee area, and this acquisition provides us with the opportunity to quickly scale our operations and increase our footprint in one of our newest markets.

The purchase price is subject to adjustments for the amount of land being conveyed at closing, the number of land purchase contracts being assigned at closing, work in process, home closings, and other customary adjustments. The consummation of the transaction is subject to the approval of the MDC board of directors and customary conditions. We currently expect the transaction to close near the end of the second quarter of 2022.

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Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by, the Unaudited Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are based upon management’s experiences, observations, and analyses. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2021 and this Quarterly Report on Form 10-Q.
Three Months Ended
March 31,
20222021
(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues
$1,240,520 $1,041,858 
Home cost of sales
(921,378)(813,888)
Inventory impairments
(660)— 
Total cost of sales
(922,038)(813,888)
Gross profit
318,482 227,970 
Gross margin
25.7