Meritage Homes Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN UNCONSOLIDATED ENTITIES

INVESTMENTS IN UNCONSOLIDATED ENTITIES

9 Months Ended

Sep. 30, 2016

Equity Method Investments and Joint Ventures [Abstract]

In the past, we have entered 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, in recent years they have not been a significant source of land for us. Based on the structure of these joint ventures, they may or may not be consolidated into our results. 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. As of September 30, 2016, we had two active equity-method land ventures.

We have two separate ongoing legal proceedings related to a minority ownership interest in one of our inactive joint ventures, the South Edge joint venture. The first involves pending litigation regarding the amount of attorneys' fees that are payable by us relating to resolved litigation about the guarantee related to that venture. The other South Edge related matter involves pending arbitration proceedings regarding claims we have asserted against certain members of the inactive joint venture. See Note 15 regarding the outstanding litigation related to this joint venture.

As of September 30, 2016, we also participated in one mortgage joint venture, which is engaged in mortgage activities and provides services to both our homebuyers as well as other buyers. Our investment in this mortgage joint venture as of September 30, 2016 and December 31, 2015 was $1.8 million and $2.5 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, 2016		December 31, 2015
Assets:
Cash	$	10,311	$	7,888
Real estate	31,233		33,366
Other assets	5,129		4,514
Total assets	$	46,673	$	45,768
Liabilities and equity:
Accounts payable and other liabilities	$	5,858	$	7,331
Notes and mortgages payable	12,594		13,345
Equity of:
Meritage ⁽¹⁾	9,136		8,194
Other	19,085		16,898
Total liabilities and equity	$	46,673	$	45,768



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenue	$	13,374		$	10,252		$	34,875		$	25,406
Costs and expenses	(5,762		)	(4,649		)	(15,408		)	(12,057		)
Net earnings of unconsolidated entities	$	7,612		$	5,603		$	19,467		$	13,349
Meritage’s share of pre-tax earnings ^{(1) (2)}	$	4,681		$	3,754		$	11,719		$	8,763

(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 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. As discussed in Note 2 to these unaudited combined financial statements, balances do not include $383,000 and $445,000 of capitalized interest that is a component of our investment balances at September 30, 2016 and December 31, 2015, respectively.


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

The joint venture assets and liabilities noted in the table above primarily represent two active land ventures, one mortgage venture and various inactive ventures. Our total investment in all of these joint ventures is $11.8 million and $11.4 million as of September 30, 2016 and December 31, 2015, respectively. We believe these ventures are in compliance with their respective debt agreements, if applicable, and such debt is non-recourse to us.