mth-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-9977

Meritage Homes Corporation

(Exact Name of Registrant as Specified in its Charter)

Maryland

86-0611231

(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification No.)

8800 E. Raintree Drive, Suite 300, Scottsdale, Arizona 85260

(Address of Principal Executive Offices) (Zip Code)

(480) 515-8100

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock $.01 par value

MTH

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by a checkmark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Common shares outstanding as of October 23, 2020: 37,612,127

MERITAGE HOMES CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets as of S e ptember 30, 2020 and December 31, 2019			3

Unaudited Consolidated Income Statements for the Three Months and Nine Months Ended S e ptember 30, 2020 and 2019			4

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019			5

Notes to Unaudited Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23

Item 3. Quantitative and Qualitative Disclosures About Market Risk			39

Item 4. Controls and Procedures			40

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			41

Item 1A. Risk Factors			41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42

Items 3-5. Not Applicable

Item 6. Exhibits			43

SIGNATURES			44

INDEX OF EXHIBITS			44

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)



	September 30, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	609,979	$	319,466

Other receivables	96,702		88,492
Real estate	2,741,016		2,744,361

Deposits on real estate under option or contract	62,967		50,901
Investments in unconsolidated entities	3,819		4,443
Property and equipment, net	42,730		50,606
Deferred tax asset	28,425		25,917
Prepaids, other assets and goodwill	101,680		114,063
Total assets	$	3,687,318	$	3,398,249
Liabilities
Accounts payable	$	167,788	$	155,024
Accrued liabilities	274,371		226,008
Home sale deposits	25,509		24,246

Loans payable and other borrowings	23,031		22,876
Senior notes, net	996,770		996,105
Total liabilities	1,487,469		1,424,259
Stockholders’ Equity
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at September 30, 2020 and December 31, 2019	—		—
Common stock, par value $0.01. Authorized 125,000,000 shares; 37,612,127 and 38,199,111 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively	377		382
Additional paid-in capital	460,268		505,352
Retained earnings	1,739,204		1,468,256

Total stockholders’ equity	2,199,849		1,973,990
Total liabilities and stockholders’ equity	$	3,687,318	$	3,398,249

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
Homebuilding:
Home closing revenue	$	1,133,221	$	939,185	$	3,055,229	$	2,500,888
Land closing revenue	4,870		1,695		16,954		12,747
Total closing revenue	1,138,091		940,880		3,072,183		2,513,635
Cost of home closings	(889,654)		(753,068)		(2,412,606)		(2,039,191)
Cost of land closings	(4,360)		(1,721)		(17,509)		(14,149)
Total cost of closings	(894,014)		(754,789)		(2,430,115)		(2,053,340)
Home closing gross profit	243,567		186,117		642,623		461,697
Land closing gross profit/(loss)	510		(26)		(555)		(1,402)
Total closing gross profit	244,077		186,091		642,068		460,295
Financial Services:
Revenue	4,939		4,317		13,329		11,705
Expense	(2,026)		(1,725)		(5,519)		(4,949)
Earnings from financial services unconsolidated entities and other, net	1,402		2,990		3,132		9,559
Financial services profit	4,315		5,582		10,942		16,315
Commissions and other sales costs	(73,282)		(63,450)		(204,863)		(176,130)
General and administrative expenses	(40,737)		(37,191)		(111,083)		(105,536)

Interest expense	(55)		(1,068)		(2,176)		(8,350)
Other income, net	1,188		2,402		3,313		5,816
Earnings before income taxes	135,506		92,366		338,201		192,410
Provision for income taxes	(26,388)		(22,557)		(67,253)		(46,361)
Net earnings	$	109,118	$	69,809	$	270,948	$	146,049
Earnings per common share:
Basic	$	2.90	$	1.82	$	7.17	$	3.83
Diluted	$	2.84	$	1.79	$	7.04	$	3.76
Weighted average number of shares:
Basic	37,607		38,296		37,763		38,119
Diluted	38,405		39,079		38,491		38,841

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net earnings	$	270,948	$	146,049
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	22,496		19,553
Stock-based compensation	15,724		15,719


Equity in earnings from unconsolidated entities	(2,821)		(8,934)

Distributions of earnings from unconsolidated entities	2,449		11,261
Other	1,881		3,902
Changes in assets and liabilities:
Decrease/(increase) in real estate	9,080		(110,295)
(Increase)/decrease in deposits on real estate under option or contract	(12,910)		5,773
Decrease/(increase) in other receivables, prepaids and other assets	4,933		(3,108)
Increase in accounts payable and accrued liabilities	60,039		84,632
Increase in home sale deposits	1,263		2,808
Net cash provided by operating activities	373,082		167,360
Cash flows from investing activities:
Investments in unconsolidated entities	(4)		(1,112)
Distributions of capital from unconsolidated entities	1,000		7,250
Purchases of property and equipment	(14,771)		(18,376)
Proceeds from sales of property and equipment	528		267
Maturities/sales of investments and securities	632		675
Payments to purchase investments and securities	(632)		(675)
Net cash used in investing activities	(13,247)		(11,971)
Cash flows from financing activities:

Repayment of loans payable and other borrowings	(8,509)		(3,086)




Repurchase of shares	(60,813)		(8,957)

Net cash used in financing activities	(69,322)		(12,043)
Net increase in cash and cash equivalents	290,513		143,346
Cash and cash equivalents, beginning of period	319,466		311,466
Cash and cash equivalents, end of period	$	609,979	$	454,812

See Supplemental Disclosure of Cash Flow Information in Note 13.

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

Organization. Meritage Homes is a leading designer and builder of single-family homes. We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed to appeal to the first-time and first move-up markets. We have homebuilding operations in three regions: West, Central and East, which are comprised of nine states: Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee. We also operate a wholly-owned title company, Carefree Title Agency, Inc. ("Carefree Title"). Carefree Title's core business includes title insurance and closing/settlement services we offer to our homebuyers. Beginning in the fourth quarter of 2019, we commenced operations of wholly-owned Meritage Homes Insurance Agency, Inc. (“Meritage Insurance”). Meritage Insurance works in collaboration with insurance companies nationwide to offer homeowners insurance and other insurance products to our homebuyers. We commenced our homebuilding operations in 1985 through our predecessor company known as Monterey Homes. Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation.

Our homebuilding activities are conducted under the name of Meritage Homes in each of our homebuilding markets. At September 30, 2020, we were actively selling homes in 204 communities, with base prices ranging from approximately $188,000 to $1,300,000.

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019. The unaudited consolidated financial statements include the accounts of Meritage Homes Corporation and those of our consolidated subsidiaries, partnerships and other entities in which we have a controlling financial interest, and of variable interest entities (see Note 3) in which we are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full fiscal year.

Cash and Cash Equivalents. Liquid investments with an initial maturity of three months or less are classified as cash equivalents. Amounts in transit from title companies or closing agents for home closings of approximately $58.9 million and $54.5 million are included in cash and cash equivalents at September 30, 2020 and December 31, 2019, respectively.

Real Estate. Real estate is stated at cost unless the asset is determined to be impaired, at which point the inventory is written down to fair value as required by Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment (“ASC 360-10”). Inventory includes the costs of land acquisition, land development, home construction, capitalized interest, real estate taxes, and capitalized direct overhead costs incurred during development, less impairments, if any. Land and development costs are typically allocated and transferred to homes when home construction begins. Home construction costs are accumulated on a per-home basis, while selling and marketing costs are expensed as incurred. Cost of home closings includes the specific construction costs of the home and all related allocated land acquisition, land development and other common costs (both incurred and estimated to be incurred) that are allocated based upon the total number of homes expected to be closed in each community or phase. Any changes to the estimated total development costs of a community or phase are allocated to the remaining homes in that community or phase. When a home closes, we may have incurred costs for goods and services that have not yet been paid. An accrued liability to capture such obligations is recorded in connection with the home closing and charged directly to Cost of home closings.

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. It is possible that actual results could differ from budgeted amounts for various reasons, including construction and weather delays, labor or material shortages, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues or delays encountered during construction and development and other factors beyond our control. To

address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate home construction and land development costs.

Typically, a community's life cycle ranges from three to five years, commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the sale, construction and closing of the homes. Actual community lives will vary based on the size of the community, the sales absorption rate and whether the land purchased was raw, partially-developed or in finished status. Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be shorter.

All of our land inventory and related real estate assets are reviewed for recoverability, as our inventory is considered “long-lived” in accordance with GAAP. Impairment charges are recorded to write down an asset to its estimated fair value if the undiscounted cash flows expected to be generated by the asset are lower than its carrying amount. 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. Such an analysis is conducted if there is an indication of a decline in value of our land and real estate assets. If an impairment of a community is required, the impairment charges are allocated to each lot on a straight-line basis.

Deposits. Deposits paid for land options and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased. Deposits are reclassified as a component of Real estate at the time the deposit is applied to the acquisition price of the land based on the terms of the underlying agreements. To the extent they are non-refundable, deposits are charged to expense if the land acquisition contract is terminated or no longer considered probable. Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of the non-refundable deposits and any ancillary capitalized costs. Our Deposits on real estate under option or contract were $63.0 million and $50.9 million as of September 30, 2020 and December 31, 2019, respectively.

Goodwill. In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test. Such qualitative factors include: (1) macroeconomic conditions, such as a deterioration in general economic conditions, (2) industry and market considerations such as deterioration in the environment in which the entity operates, (3) cost factors such as increases in raw materials and labor costs, and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings. If the qualitative analysis determines that additional impairment testing is required, impairment testing in accordance with ASC 350 would be initiated. We continually evaluate our qualitative inputs to assess whether events and circumstances have occurred that indicate the goodwill balance may not be recoverable. See Note 9 for additional information on our goodwill assets.

Leases. We lease certain office space and equipment for use in our operations. We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842, Leases ("ASC 842"). In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration. Leases that meet the criteria of ASC 842 are recorded on our unaudited consolidated balance sheet as right-of-use ("ROU") assets and lease liabilities. ROU assets are classified within Prepaids, other assets and goodwill on our unaudited consolidated balance sheet, while lease liabilities are classified within Accrued liabilities on our unaudited consolidated balance sheet.

The table below outlines our ROU assets and lease liabilities (in thousands):


	As of
	September 30, 2020		December 31, 2019
ROU assets	$	22,881	$	26,332
Lease liabilities	29,739		34,231

Off-Balance Sheet Arrangements - Joint Ventures. We may participate in land development joint ventures as a means of accessing larger parcels of land and lot positions, expanding our market opportunities, managing our risk profile and leveraging our capital base, although our participation in such ventures is currently very limited. See Note 4 for additional discussion of our investments in unconsolidated entities.

Off-Balance Sheet Arrangements - Other. In the normal course of business, we may acquire lots from various development entities pursuant to option and purchase agreements. The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators). See Note 3 for additional information on these off-balance sheet arrangements.

Surety Bonds and Letters of Credit. We may provide surety bonds or letters of credit in support of our obligations relating to the development of our projects and other corporate purposes. Surety bonds are generally posted in lieu of letters of credit or cash deposits. The amount of these obligations outstanding at any time varies depending on the stage and level of completion of our development activities. Bonds are generally not released until all applicable development activities under the bond are complete. In the event a bond or letter of credit is drawn upon, we would be obligated to reimburse the issuer for any amounts advanced under the bond or letter of credit. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon.

The table below outlines our surety bond and letter of credit obligations (in thousands):


	As of
	September 30, 2020						December 31, 2019
	Outstanding		Estimated work remaining to complete		Outstanding		Estimated work remaining to complete
Sureties:

Sureties related to owned projects and lots under contract	$	428,912	$	160,639	$	405,017	$	186,986
Total Sureties	$	428,912	$	160,639	$	405,017	$	186,986
Letters of Credit (“LOCs”):

LOCs for land development	70,860		N/A		57,192		N/A
LOCs for general corporate operations	3,750		N/A		3,750		N/A
Total LOCs	$	74,610	N/A		$	60,942	N/A

Accrued Liabilities. Accrued liabilities at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):


	As of
	September 30, 2020		December 31, 2019
Accruals related to real estate development and construction activities	$	97,028	$	74,448
Payroll and other benefits	64,331		67,734
Accrued interest	23,979		8,758
Accrued taxes	17,311		8,459
Warranty reserves	23,259		22,015
Lease liabilities	29,739		34,231
Other accruals	18,724		10,363
Total	$	274,371	$	226,008

Warranty Reserves. We provide home purchasers with limited warranties against certain building defects and we have certain obligations related to those post-construction warranties for closed homes. The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty for the first year after the close of the home, a major mechanical warranty for two years after the close of the home and a structural warranty that typically extends up to 10 years after the close of the home. With the assistance of an actuary, we have estimated the reserves for the structural warranty based on the number of homes still under warranty and our historical data and trends for our communities. We may use industry data with respect to similar product types and geographic areas in markets where our experience is incomplete to draw a meaningful conclusion. We regularly review our warranty reserves and adjust them, as necessary, to reflect changes in trends as information becomes available. Based on such reviews of warranty costs incurred, we did not adjust the warranty reserve balance in the three or nine months ended September 30, 2020 or 2019. Included in the warranty reserve balances at September 30, 2020 and December 31, 2019 reflected in the table below are case-specific reserves for a warranty matter related to alleged stucco defects in Florida and water drainage issues in a single community in Florida. See Note 15 in the accompanying unaudited financial statements for additional information regarding these case-specific reserves.

A summary of changes in our warranty reserves follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
Balance, beginning of period	$	21,578	$	20,927	$	22,015	$	24,552
Additions to reserve from new home deliveries	4,592		4,150		12,620		11,425
Warranty claims	(2,911)		(3,766)		(11,376)		(14,666)
Adjustments to pre-existing reserves	—		—		—		—
Balance, end of period	$	23,259	$	21,311	$	23,259	$	21,311

Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves, if any, are included in Cost of home closings within the accompanying unaudited consolidated income statements. We believe that our total reserves, coupled with our contractual relationships and rights with our trade partners and the general liability insurance we maintain, are sufficient to cover our general warranty obligations. However, as unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, future costs could differ significantly from our estimates.

Revenue Recognition. In accordance with ASC 606, Revenue from Contracts with Customers, we apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy the performance obligations. The performance obligations and subsequent revenue recognition for our three sources of revenue are outlined below:

•Revenue from closings of residential real estate is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.

•Revenue from land sales is recognized when a significant down payment is received, title passes, and collectability of the receivable, if any, is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.

•Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.

Home closing and land sale revenue expected to be recognized in any future year related to remaining performance obligations (if any) and the associated contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. Revenue from financial services includes estimated future insurance policy renewal commissions as our performance obligations are satisfied upon issuance of the initial policy with a third party broker. The related contract assets for these estimated future renewal commissions are not material at September 30, 2020 and December 31, 2019. Our three sources of revenue are disaggregated by type in the accompanying unaudited consolidated income statements.

Recent Accounting Pronouncements.

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ("ASU 2018-15"), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Entities need to consider both the nature of the costs and the phase of development in which the implementation costs are incurred to determine whether the costs should be capitalized or expensed. ASU 2018-15 was effective for us beginning January 1, 2020 on a prospective basis to all implementation costs incurred after the date of adoption. The adoption of ASU 2018-15 did not have a material impact on our financial statement disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which eliminates, adds, and modifies certain disclosure requirements for fair value measurements. Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies are required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 was effective for us beginning January 1, 2020. As we currently only have Level 2 financial instruments, the adoption of ASU 2018-13 did not have a material impact on our financial statement disclosures.

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST

Real estate consists of the following (in thousands):


	As of
	September 30, 2020		December 31, 2019
Homes under contract under construction ⁽¹⁾	$	967,222	$	564,762
Unsold homes, completed and under construction ⁽¹⁾	395,151		686,948
Model homes ⁽¹⁾	86,933		121,340
Finished home sites and home sites under development ⁽²⁾	1,291,710		1,371,311
Total	$	2,741,016	$	2,744,361

(1)Includes the allocated land and land development costs associated with each lot for these homes.

(2)Includes raw land, land held for development and land held for sale, less impairments, if any. Land held for development primarily reflects land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.

We capitalize our development period interest costs incurred to applicable qualifying assets in connection with our real estate development and construction activities. Capitalized interest is allocated to active real estate when incurred and charged to cost of closings when the related property is delivered. A summary of our capitalized interest is as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
Capitalized interest, beginning of period	$	72,882	$	88,307	$	82,014	$	88,454
Interest incurred	16,103		21,319		50,188		64,227
Interest expensed	(55)		(1,068)		(2,176)		(8,350)
Interest amortized to cost of home and land closings	(21,380)		(20,363)		(62,476)		(56,136)
Capitalized interest, end of period	$	67,550	$	88,195	$	67,550	$	88,195

NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED

We enter into purchase and option agreements for land or lots as part of the normal course of business. These purchase and option agreements enable us to acquire properties at one or multiple future dates at pre-determined prices. We believe these acquisition structures reduce our financial risk associated with land acquisitions and allow us to better leverage our balance sheet.

Based on the provisions of the relevant accounting guidance, we have concluded that when we enter into a purchase or option agreement to acquire land or lots from an entity, a variable interest entity, or “VIE”, may be created. We evaluate all purchase and option agreements for land to determine whether they are a VIE. ASC 810, Consolidation, requires that for each VIE, we assess whether we are the primary beneficiary and, if so, consolidate the VIE in our financial statements and reflect such assets and liabilities as Real estate not owned. The liabilities related to consolidated VIEs are generally excluded from our debt covenant calculations.

In order to determine if we are the primary beneficiary, we must first assess whether we have the ability to control the activities of the VIE that most significantly impact its economic performance. Such activities include, but are not limited to: the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability of the VIE to acquire additional land or dispose of land not under contract with Meritage; and the ability to change or amend the existing option contract with the VIE. If we are not determined to control such activities, we are not considered the primary beneficiary of the VIE. If we do have the ability to control such activities, we will continue our analysis to determine if we are also expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if we will benefit from a potentially significant amount of the VIE’s expected gains.

In substantially all cases, creditors of the entities with which we have option agreements have no recourse against us and the maximum exposure to loss in our option agreements is limited to non-refundable option deposits and any capitalized pre-acquisition costs. Often, we are at risk for items over budget related to land development on property we have under option if we are the land developer. In these cases, we have contracted to complete development at a fixed cost for subsequent purchase, but on behalf of the land owner, and any budget savings or shortfalls are typically borne by us. Some of our option deposits may be refundable to us if certain contractual conditions are not performed by the party selling the lots.

The table below presents a summary of our lots under option at September 30, 2020 (dollars in thousands):


	Projected Number of Lots	Purchase Price		Option/ Earnest Money Deposits–Cash
Purchase and option contracts recorded on balance sheet as Real estate not owned	—	$	—	$	—
Option contracts — non-refundable deposits, committed (1)	8,740	469,067		36,885
Purchase contracts — non-refundable deposits, committed (1)	9,298	336,146		21,332
Purchase and option contracts —refundable deposits, committed	2,208	59,719		1,075
Total committed	20,246	864,932		59,292
Purchase and option contracts — refundable deposits, uncommitted (2)	15,059	432,573		3,675
Total lots under contract or option	35,305	$	1,297,505	$	62,967
Total purchase and option contracts not recorded on balance sheet (3)	35,305	$	1,297,505	$	62,967	(4)

(1)Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.

(2)Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots.

(3)Except for our specific performance contracts recorded on our balance sheet as Real estate not owned (if any), none of our purchase or option contracts require us to purchase lots.

(4)Amount is reflected on our unaudited consolidated balance sheet in Deposits on real estate under option or contract as of September 30, 2020.

Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement. Although the pre-established number is typically structured to approximate our expected rate of home construction starts and sales absorptions, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our sales and home starts pace in order to meet the pre-established minimum number of lots or we will work to restructure our original contract to include terms that more accurately reflect our revised orders pace expectations.

NOTE 4 - INVESTMENTS IN UNCONSOLIDATED ENTITIES

We may enter into land development joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile and leveraging our capital base. While purchasing land through a joint venture can be beneficial, currently we do not view joint ventures as a primary source of land acquisitions. Our joint venture partners are generally other homebuilders, land sellers or other real estate investors. We generally do not have a controlling interest in these ventures, which means our joint venture partners could cause the venture to take actions we disagree with or fail to take actions we believe should be undertaken, including the sale of the underlying property to repay debt or recoup all or part of the partners' investments. Based on the structure of each joint venture, it may or may not be consolidated into our results. As of September 30, 2020, we had one active equity-method land venture with limited operations.

As of September 30, 2020, we also participated in one mortgage joint venture, which is engaged in mortgage activities and provides services to our homebuyers. Our investment in this mortgage joint venture as of September 30, 2020 and December 31, 2019 was $0.6 million and $0.7 million, respectively.

Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):


	As of
	September 30, 2020		December 31, 2019
Assets:
Cash	$	4,662	$	6,329
Real estate	6,212		6,654
Other assets	3,599		4,382
Total assets	$	14,473	$	17,365
Liabilities and equity:
Accounts payable and other liabilities	$	4,756	$	6,580

Equity of:
Meritage ⁽¹⁾	5,205		5,678
Other	4,512		5,107
Total liabilities and equity	$	14,473	$	17,365


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue	$	9,630	$	13,232	$	26,903	$	33,076
Costs and expenses	(8,138)		(7,491)		(21,945)		(17,206)
Net earnings of unconsolidated entities	$	1,492	$	5,741	$	4,958	$	15,870
Meritage’s share of pre-tax earnings ^{(1) (2)}	$	1,129	$	3,106	$	2,864	$	8,934

(1)Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported in our unaudited consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.

(2)Our share of pre-tax earnings is recorded in Earnings from financial services unconsolidated entities and other, net and Other income, net on our unaudited consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any. Such profit is deferred until homes are delivered by us and title passes to a homebuyer.

NOTE 5 — LOANS PAYABLE AND OTHER BORROWINGS

Loans payable and other borrowings consist of the following (in thousands):


	As of
	September 30, 2020		December 31, 2019
Other borrowings, real estate notes payable ⁽¹⁾	$	23,031	$	22,876
$780.0 million unsecured revolving credit facility with interest approximating LIBOR (approximately 0.15% at September 30, 2020) plus 1.375% or Prime (3.25% at September 30, 2020) plus 0.375%	—		—
Total	$	23,031	$	22,876

(1)Reflects non-recourse non-interest bearing notes payable in connection with land purchases.

The Company entered into an amended and restated unsecured revolving credit facility ("Credit Facility") in 2014 that has been amended from time to time. In June 2019, the Credit Facility was amended, extending the maturity date to July 2023, along with minor administrative changes. The Credit Facility's aggregate commitment is $780.0 million with an accordion feature permitting the size of the facility to increase to a maximum of $880.0 million, subject to certain conditions, including the availability of additional bank commitments. Borrowings under the Credit Facility are unsecured, but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $1.1 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of September 30, 2020.

We had no outstanding borrowings under the Credit Facility as of September 30, 2020 and December 31, 2019. During the first quarter of 2020 we borrowed $500.0 million on our Credit Facility, which we repaid in full during the second quarter of 2020. There were no borrowings or repayments during the three months ended September 30, 2020. There were no borrowings or repayments during the three and nine months ended September 30, 2019. As of September 30, 2020, we had outstanding letters of credit issued under the Credit Facility totaling $74.6 million, leaving $705.4 million available under the Credit Facility to be drawn.

NOTE 6 — SENIOR NOTES, NET

Senior notes, net consist of the following (in thousands):


	As of
	September 30, 2020		December 31, 2019


7.00% senior notes due 2022	300,000		300,000
6.00% senior notes due 2025. At September 30, 2020 and December 31, 2019 there was approximately $3,818 and $4,432 in net unamortized premium, respectively.	403,818		404,432
5.125% senior notes due 2027	300,000		300,000
Net debt issuance costs	(7,048)		(8,327)
Total	$	996,770	$	996,105

The indentures for all of our senior notes contain non-financial covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers. We were in compliance with all such covenants as of September 30, 2020.

Obligations to pay principal and interest on the senior notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, collectively, the “Guarantor Subsidiaries”), each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees are full and unconditional, and joint and several. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor may be released and relieved of any obligations under its note guarantee. There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan. We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several. Subsidiaries of Meritage Homes Corporation that are non-guarantor subsidiaries are, individually and in the aggregate, minor.

NOTE 7 — FAIR VALUE DISCLOSURES

ASC 820-10 Fair Value Measurement ("ASC 820") defines fair value and establishes a framework for measuring fair value and addresses required disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from market participants external to the company while unobservable inputs are generally developed internally, utilizing management’s estimates, assumptions and specific knowledge of the assets/liabilities and related markets. The three levels are defined as follows:

•Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.

•Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.

•Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the company’s own estimates about the assumptions that market participants would use to value the asset or liability.

Financial Instruments: The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (level 2 inputs as per the discussion above) and is as follows (in thousands):


	As of
	September 30, 2020						December 31, 2019
	Aggregate Principal		Estimated Fair Value		Aggregate Principal		Estimated Fair Value


7.00% senior notes	$	300,000	$	318,000	$	300,000	$	327,390
6.00% senior notes	$	400,000	$	444,520	$	400,000	$	449,200
5.125% senior notes	$	300,000	$	333,030	$	300,000	$	319,500

Due to the short-term nature of other financial assets and liabilities, including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.

NOTE 8 — EARNINGS PER SHARE

Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
Basic weighted average number of shares outstanding	37,607		38,296		37,763		38,119
Effect of dilutive securities:

Unvested restricted stock	798		783		728		722
Diluted average shares outstanding	38,405		39,079		38,491		38,841
Net earnings	$	109,118	$	69,809	$	270,948	$	146,049


Basic earnings per share	$	2.90	$	1.82	$	7.17	$	3.83
Diluted earnings per share	$	2.84	$	1.79	$	7.04	$	3.76

NOTE 9 — ACQUISITIONS AND GOODWILL

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

A summary of the carrying amount of goodwill follows (in thousands):


	West		Central		East		Financial Services		Corporate		Total
Balance at December 31, 2019	$	—	$	—	$	32,962	$	—	$	—	$	32,962
Additions	—		—		—		—		—		—

Balance at September 30, 2020	$	—	$	—	$	32,962	$	—	$	—	$	32,962

NOTE 10 — STOCKHOLDERS’ EQUITY

A summary of changes in stockholders’ equity is presented below (in thousands):


	Nine Months Ended September 30, 2020
	(In thousands)
	Number of Shares	Common Stock		Additional Paid-In Capital		Retained Earnings		Total
Balance at December 31, 2019	38,199	$	382	$	505,352	$	1,468,256	$	1,973,990
Net earnings	—	—		—		71,152		71,152
Stock-based compensation expense	—	—		6,437		—		6,437
Issuance of stock	398	4		(4)		—		—
Share repurchases	(1,000)	(10)		(60,803)		—		(60,813)
Balance at March 31, 2020	37,597	$	376	$	450,982	$	1,539,408	$	1,990,766
Net earnings	—	—		—		90,678		90,678
Stock-based compensation expense	—	—		3,157		—		3,157
Issuance of stock