Quarterly report pursuant to Section 13 or 15(d)

Investments in Unconsolidated Entities

v2.4.0.6
Investments in Unconsolidated Entities
 9 Months Ended
Sep. 30, 2012
Equity Method Investments and Joint Ventures [Abstract]  
INVESTMENTS IN UNCONSOLIDATED ENTITIES
NOTE 4 — INVESTMENTS IN UNCONSOLIDATED ENTITIES
In the past, we have entered into 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. Due to the current homebuilding environment, although we view our involvement with land joint ventures to be beneficial, we do not view such involvement as critical to the success of our homebuilding operations. Based on the structure of these joint ventures, they may or may not be consolidated into our results. Our joint venture partners generally are 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, 2012, we had two active equity-method land ventures.
We also participate in five mortgage and title business joint ventures. The mortgage joint ventures are engaged in mortgage activities and they provide services to both our clients and other homebuyers. Although some of these ventures originate mortgage loans, we have limited recourse related to any mortgages originated by these ventures. Our investments in mortgage and title joint ventures as of September 30, 2012 and December 31, 2011 were $2.0 million and $1.2 million, respectively.
For land development joint ventures, we, and in some cases our joint venture partners, usually receive an option or other similar arrangement to purchase portions of the land held by the joint venture. Option prices are generally negotiated prices that approximate market value when we enter into the option contract. For these ventures, our share of the joint venture profit relating to lots we purchase from the joint ventures is deferred until homes are delivered by us and title passes to a homebuyer. Therefore, we allocate the portion of such joint venture profit to the land acquired by us as a reduction in the basis of the property.
Summarized condensed financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):
 
 
At September 30, 2012
 
At December 31, 2011
Assets:
 
 
 
Cash
$
3,802

 
$
4,530

Real estate
45,804

 
44,764

Other assets
3,622

 
3,946

Total assets
$
53,228

 
$
53,240

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
4,529

 
$
4,534

Notes and mortgages payable
20,658

 
20,923

Equity of:
 
 
 
Meritage (1)
9,303

 
9,351

Other
18,738

 
18,432

Total liabilities and equity
$
53,228

 
$
53,240


 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Revenue
$
10,268

 
$
6,116

 
$
18,733

 
$
13,764

Costs and expenses
(3,711
)
 
(3,164
)
 
(8,250
)
 
(8,399
)
Net earnings of unconsolidated entities
$
6,557

 
$
2,952

 
$
10,483

 
$
5,365

Meritage’s share of pre-tax earnings (1)(2)(3)
$
2,975

 
$
1,797

 
$
6,626

 
$
3,931

 
(1)
Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reflected in our condensed consolidated balance sheets due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) income deferrals as discussed in Note (3) below and (iv) the cessation of allocation of losses from joint ventures in which we have previously impaired our investment balance to zero and where we have no commitment to fund additional losses.
(2)
The joint venture financial statements above represent the most recent information available to us.
(3)
Our share of pre-tax earnings is recorded in “Earnings from unconsolidated entities, net” on our consolidated statements of operations 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.
Our investments in unconsolidated entities include $1.0 million at September 30, 2012 and December 31, 2011, related to the difference between the amounts at which our investments are carried and the amount of our portion of the venture’s equity. These amounts are amortized as the assets of the respective joint ventures are sold. No amortization was recorded for these assets in the first nine months of 2012 or 2011.
The joint venture assets and liabilities noted in the table above primarily represent two active land ventures, five mortgage and title ventures and various inactive ventures in which we have a total investment of $12.0 million. As of September 30, 2012, we believe these ventures are in compliance with their respective debt agreements, if applicable, and except for $249,000 of our limited repayment guarantees as discussed in Note 1 to these unaudited consolidated financial statements, the joint venture debt reflected above is non-recourse to us.