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
For the transition period from ____ to ____
Commission File Number: 1-12378
NVR, Inc.
(Exact name of registrant as specified in its charter)
Virginia
54-1394360
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
11700 Plaza America Drive, Suite 500
Reston, Virginia20190
(703) 956-4000
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Not Applicable
(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, par value $0.01 per share
NVR
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 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, 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2022 there were 3,289,666 total shares of common stock outstanding.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR”, the “Company”, "we", "us" or "our") and its subsidiaries and certain other entities in which the Company is deemed to be the primary beneficiary (see Notes 2 and 3 to the accompanying condensed consolidated financial statements). Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
For the three months ended March 31, 2022 and 2021, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.
Cash and Cash Equivalents
The beginning-of-period and end-of-period cash, restricted cash, and cash equivalent balances presented on the accompanying condensed consolidated statements of cash flows includes cash related to a consolidated joint venture which is included in homebuilding "Other assets" on the accompanying condensed consolidated balance sheets. The cash related to this consolidated joint venture as of March 31, 2022 and December 31, 2021 was $262 and $268, respectively, and as of March 31, 2021 and December 31, 2020 was $273 and $269, respectively.
Revenue Recognition
Homebuilding revenue is recognized on the settlement date at the contract sales price, when control is transferred to our customers. Our contract liabilities, which consist of deposits received from customers on homes not settled, were $453,178 and $417,463 as of March 31, 2022 and December 31, 2021, respectively. We expect that substantially all of the customer deposits held at December 31, 2021 will be recognized in revenue in 2022. Our contract assets consist of prepaid sales compensation and totaled approximately $26,300 and $25,200, as of March 31, 2022 and December 31, 2021, respectively. Prepaid sales compensation is included in homebuilding “Other assets” on the accompanying condensed consolidated balance sheets.
2. Variable Interest Entities ("VIEs")
Fixed Price Finished Lot Purchase Agreements (“LPAs”)
We generally do not engage in the land development business. Instead, we typically acquire finished building lots at market prices from various development entities under LPAs. The LPAs require deposits that may be forfeited if we fail to perform under the LPAs. The deposits required under the LPAs are in the form of cash or letters of credit in varying amounts, and typically range up to 10% of the aggregate purchase price of the finished lots.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
The deposit placed by us pursuant to the LPA is deemed to be a variable interest in the respective development entities. Those development entities are deemed to be VIEs. Therefore, the development entities with which we enter into LPAs, including the joint venture limited liability corporations discussed below, are evaluated for possible consolidation by us. We have concluded that we are not the primary beneficiary of the development entities with which we enter into LPAs, and therefore, we do not consolidate any of these VIEs.
As of March 31, 2022, we controlled approximately 124,600 lots under LPAs with third parties through deposits in cash and letters of credit totaling approximately $529,600 and $8,800, respectively. Our sole legal obligation and economic loss for failure to perform under these LPAs is limited to the amount of the deposit pursuant to the liquidated damage provisions contained in the LPAs and, in very limited circumstances, specific performance obligations. For the three months ended March 31, 2022 and 2021, we recorded a net reversal of approximately $5,900 and $6,200, respectively, related to previously impaired lot deposits as market conditions have improved. Our contract land deposit asset is shown net of a $24,115 and $30,041 impairment reserve at March 31, 2022 and December 31, 2021, respectively.
In addition, we have certain properties under contract with land owners that are expected to yield approximately 18,500 lots, which are not included in the number of total lots controlled. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits in cash totaling approximately $6,600 as of March 31, 2022, of which approximately $4,600 is refundable if certain contractual conditions are not met. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into an LPA with the assignee if the project is determined to be feasible.
Our total risk of loss related to contract land deposits is limited to the amount of the deposits pursuant to the liquidated damages provision of the LPAs. As of March 31, 2022 and December 31, 2021, our total risk of loss was as follows:
March 31, 2022
December 31, 2021
Contract land deposits
$
536,157
$
527,180
Loss reserve on contract land deposits
(24,115)
(30,041)
Contract land deposits, net
512,042
497,139
Contingent obligations in the form of letters of credit
8,829
10,145
Total risk of loss
$
520,871
$
507,284
3. Joint Ventures
On a limited basis, we obtain finished lots using joint venture limited liability corporations (“JVs”). The JVs are typically structured such that we are a non-controlling member and are at risk only for the amount we have invested, or have committed to invest, in addition to any deposits placed under LPAs with the joint venture. We are not a borrower, guarantor or obligor on any debt of the JVs, as applicable. We enter into LPAs to purchase lots from these JVs, and as a result have a variable interest in these JVs.
At March 31, 2022, we had an aggregate investment totaling approximately $18,800 in four JVs that are expected to produce approximately 2,200 finished lots, of which approximately 1,850 lots were controlled by us and the remaining approximately 350 lots were either under contract with unrelated parties or not currently under contract. We had additional funding commitments totaling approximately $2,000 to one of the JVs at March 31, 2022.
We determined that we are not the primary beneficiary in three of the JVs because we and the other JV partner either share power or the other JV partner has the controlling financial interest. The aggregate investment in unconsolidated JVs was approximately $18,800 and $20,300 at March 31, 2022 and December 31, 2021, respectively, and is reported in the homebuilding “Other assets” line item on the accompanying condensed consolidated balance sheets. None of the unconsolidated JVs had any indicators of impairment as of March 31,
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
2022. For the remaining JV, we concluded that we are the primary beneficiary because we have the controlling financial interest in the JV. All activities under the consolidated JV had been completed and as of March 31, 2022, we had no remaining investment in the JV. The JV had remaining balances of $262 in cash and $235 in accrued expenses, which are included in homebuilding "Other assets" and "Accrued expenses and other liabilities," respectively, in the accompanying condensed consolidated balance sheets.
We recognize income from the JVs as a reduction to the lot cost of the lots purchased from the respective JVs when the homes are settled, based on the expected total profitability and the total number of lots expected to be produced by the respective JVs.
We classify distributions received from unconsolidated JVs using the cumulative earnings approach. As a result, distributions received up to the amount of cumulative earnings recognized by us are reported as distributions of earnings and those in excess of that amount are reported as a distribution of capital. These distributions are classified within the accompanying condensed consolidated statements of cash flows as cash flows from operating activities and investing activities, respectively.
4. Land Under Development
On a limited basis, we directly acquire raw land parcels already zoned for its intended use to develop into finished lots. Land under development includes the land acquisition costs, direct improvement costs, capitalized interest, where applicable, and real estate taxes.
As of March 31, 2022, we owned land parcels with a carrying value of $14,668 that we intend to develop into approximately 350 finished lots. We have additional funding commitments of approximately $2,000 under a joint development agreement related to one parcel, a portion of which we expect will be offset by development credits of approximately $600. None of the raw parcels had any indicators of impairment as of March 31, 2022.
5. Capitalized Interest
We capitalize interest costs to land under development during the active development of finished lots. In addition, we capitalize interest costs on our JV investments while the investments are considered qualified assets pursuant to ASC Topic 835-20 - Interest. Capitalized interest is transferred to sold or unsold inventory as the development of finished lots is completed, then charged to cost of sales upon our settlement of homes and the respective lots. Interest incurred in excess of the interest capitalizable based on the level of qualified assets is expensed in the period incurred.
The following table reflects the changes in our capitalized interest during the three months ended March 31, 2022 and 2021:
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6. Earnings per Share
The following weighted average shares and share equivalents were used to calculate basic and diluted earnings per share ("EPS") for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022
2021
Weighted average number of shares outstanding used to calculate basic EPS
3,385,259
3,673,394
Dilutive securities:
Stock options and restricted share units
270,258
262,095
Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS
3,655,517
3,935,489
The following non-qualified stock options ("Options") issued under equity incentive plans were outstanding during the three months ended March 31, 2022 and 2021, but were not included in the computation of diluted EPS because the effect would have been anti-dilutive.
Three Months Ended March 31,
2022
2021
Anti-dilutive securities
21,032
22,862
7. Shareholders’ Equity
A summary of changes in shareholders’ equity for the three months ended March 31, 2022 is presented below:
Common Stock
Additional Paid-In Capital
Retained Earnings
Treasury Stock
Deferred Compensation Trust
Deferred Compensation Liability
Total
Balance, December 31, 2021
$
206
$
2,378,191
$
10,047,839
$
(9,423,858)
$
(16,710)
$
16,710
$
3,002,378
Net income
—
—
426,100
—
—
—
426,100
Purchase of common stock for treasury
—
—
—
(748,788)
—
—
(748,788)
Equity-based compensation
—
11,668
—
—
—
—
11,668
Proceeds from Options exercised
—
34,241
—
—
—
—
34,241
Treasury stock issued upon Option exercise and restricted share vesting
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
A summary of changes in shareholders’ equity for the three months ended March 31, 2021 is presented below:
Common Stock
Additional Paid-In Capital
Retained Earnings
Treasury Stock
Deferred Compensation Trust
Deferred Compensation Liability
Total
Balance, December 31, 2020
$
206
$
2,214,426
$
8,811,120
$
(7,922,678)
$
(16,710)
$
16,710
$
3,103,074
Net income
—
—
248,762
—
—
—
248,762
Purchase of common stock for treasury
—
—
—
(377,425)
—
—
(377,425)
Equity-based compensation
—
14,471
—
—
—
—
14,471
Proceeds from Options exercised
—
57,625
—
—
—
—
57,625
Treasury stock issued upon Option exercise and restricted share vesting
—
(14,516)
—
14,516
—
—
—
Balance, March 31, 2021
$
206
$
2,272,006
$
9,059,882
$
(8,285,587)
$
(16,710)
$
16,710
$
3,046,507
We repurchased 146,054 and 86,523 shares of our outstanding common stock during the three months ended March 31, 2022 and 2021, respectively. We settle Option exercises and vesting of restricted stock units ("RSUs") by issuing shares of treasury stock. Approximately 13,323 and 30,555 shares were issued from the treasury account during the three months ended March 31, 2022 and 2021, respectively, in settlement of Option exercises and vesting of RSUs. Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares.
8. Product Warranties
We establish warranty and product liability reserves (“Warranty Reserve”) to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to our homebuilding business. Liability estimates are determined based on management’s judgment, considering such factors as historical experience, the estimated current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with our general counsel and outside counsel retained to handle specific product liability cases.
The following table reflects the changes in our Warranty Reserve during the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022
2021
Warranty reserve, beginning of period
$
134,859
$
119,638
Provision
17,967
22,329
Payments
(17,485)
(17,131)
Warranty reserve, end of period
$
135,341
$
124,836
9. Segment Disclosures
We disclose four homebuilding reportable segments that aggregate geographically our homebuilding operating segments, and our mortgage banking operations presented as one reportable segment. The homebuilding
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
reportable segments are comprised of operating divisions in the following geographic areas:
Mid Atlantic:
Maryland, Virginia, West Virginia, Delaware and Washington, D.C.
North East:
New Jersey and Eastern Pennsylvania
Mid East:
New York, Ohio, Western Pennsylvania, Indiana and Illinois
South East:
North Carolina, South Carolina, Florida and Tennessee
Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses and a corporate capital allocation charge. The corporate capital allocation charge is eliminated in consolidation and is based on the segment’s average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker (“CODM”) to determine whether the operating segment’s results are providing the desired rate of return after covering our cost of capital.
Assets not allocated to the operating segments are not included in either the operating segment’s corporate capital allocation charge or the CODM’s evaluation of the operating segment’s performance. We record charges on contract land deposits when it is determined that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the termination of an LPA with the developer, or the restructuring of an LPA resulting in the forfeiture of the deposit. Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs. Mortgage banking operations are not charged a corporate capital allocation charge.
In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between segment profit and consolidated profit before tax include unallocated corporate overhead (including all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions such as accounting, treasury and human resources are centrally performed and these costs are not allocated to our operating segments. Consolidation adjustments consist of such items necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. External corporate interest expense primarily consists of interest charges on our 3.95% Senior Notes due 2022 and 3.00% Senior Notes due 2030 (the “Senior Notes”), which are not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.
The following tables present segment revenues, profit and assets with reconciliations to the amounts reported for the consolidated enterprise, where applicable:
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
Three Months Ended March 31,
2022
2021
Income before taxes:
Homebuilding Mid Atlantic
$
249,781
$
129,067
Homebuilding North East
25,928
15,227
Homebuilding Mid East
71,183
48,941
Homebuilding South East
113,454
56,665
Mortgage Banking
50,106
59,562
Total segment profit before taxes
510,452
309,462
Reconciling items:
Contract land deposit recoveries (1)
5,926
6,196
Equity-based compensation expense (2)
(11,668)
(14,471)
Corporate capital allocation (3)
69,744
61,551
Unallocated corporate overhead
(45,261)
(39,717)
Consolidation adjustments and other (4)
49,507
1,967
Corporate interest expense
(12,755)
(12,982)
Reconciling items sub-total
55,493
2,544
Consolidated income before taxes
$
565,945
$
312,006
(1)This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. See further discussion of lot deposit impairment charges in Note 2.
(2)The decrease in equity-based compensation expense for the three-month period ended March 31, 2022 was primarily attributable to options issued under the 2018 Equity Incentive Plan becoming fully vested as of December 31, 2021.
(3)This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and was as follows for the periods presented:
Three Months Ended March 31,
2022
2021
Corporate capital allocation charge:
Homebuilding Mid Atlantic
$
34,087
$
30,596
Homebuilding North East
7,087
6,038
Homebuilding Mid East
11,417
10,624
Homebuilding South East
17,153
14,293
Total
$
69,744
$
61,551
(4)The increase in consolidation adjustments and other for the three-month period ended March 31, 2022 compared to the respective 2021 period was driven by higher lumber prices quarter over quarter. Our reportable segments' results include the intercompany profits of our production facilities for home packages delivered to our homebuilding divisions, which were negatively impacted by the increase in lumber costs. The increase in lumber costs related to homes not yet settled is reversed through the consolidation adjustment. As the homes currently in inventory are settled in subsequent quarters, our consolidated homebuilding margins will be negatively impacted by these higher lumber costs.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
March 31, 2022
December 31, 2021
Assets:
Homebuilding Mid Atlantic
$
1,355,052
$
1,322,818
Homebuilding North East
286,796
235,048
Homebuilding Mid East
478,605
438,700
Homebuilding South East
706,244
629,198
Mortgage Banking
406,543
371,685
Total segment assets
3,233,240
2,997,449
Reconciling items:
Cash and cash equivalents
2,138,706
2,545,069
Deferred taxes
135,136
132,894
Intangible assets and goodwill
49,368
49,368
Operating lease right-of-use assets
59,819
59,010
Finance lease right-of-use assets
14,386
14,578
Contract land deposit reserve
(24,115)
(30,041)
Consolidation adjustments and other
119,673
66,148
Reconciling items sub-total
2,492,973
2,837,026
Consolidated assets
$
5,726,213
$
5,834,475
10. Fair Value
GAAP assigns a fair value hierarchy to the inputs used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs.
Financial Instruments
The following table presents the estimated fair values and carrying values of our Senior Notes as of March 31, 2022 and December 31, 2021. The estimated fair value is based on recent market prices of similar transactions, which is classified as Level 2 within the fair value hirarchy.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
Except as otherwise noted below, we believe that insignificant differences exist between the carrying value and the fair value of our financial instruments, which consist primarily of cash equivalents, due to their short term nature.
Derivative Instruments and Mortgage Loans Held for Sale
In the normal course of business, our wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), enters into contractual commitments to extend credit to our homebuyers with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by NVRM. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, NVRM enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. NVRM does not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives and, accordingly, are marked to fair value through earnings. At March 31, 2022, there were rate lock commitments to extend credit to borrowers aggregating $2,146,716 and open forward delivery contracts aggregating $2,301,443, which hedge both the rate lock commitments and closed loans held for sale.
The fair value of NVRM’s rate lock commitments to borrowers and the related input levels include, as applicable:
i)the assumed gain/loss of the expected resultant loan sale (Level 2);
ii)the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and
iii)the value of the servicing rights associated with the loan (Level 2).
The assumed gain/loss considers the excess servicing to be received or buydown fees to be paid upon securitization of the loan. The excess servicing and buydown fees are calculated pursuant to contractual terms with investors. To calculate the effects of interest rate movements, NVRM utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. NVRM sells all of its loans on a servicing released basis, and receives a servicing released premium upon sale. Thus, the value of the servicing rights is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. NVRM assumes a fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which NVRM does not close a mortgage loan and is based on historical experience.
The fair value of NVRM’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold. Fair value is measured using Level 2 inputs. As of March 31, 2022, the fair value of loans held for sale of $312,726 included on the accompanying condensed consolidated balance sheet was decreased by $5,959 from the aggregate principal balance of $318,685. As of
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
December 31, 2021, the fair value of loans held for sale of $302,192 was increased by $4,296 from the aggregate principal balance of $297,896.
The fair value measurement of NVRM's undesignated derivative instruments was as follows:
March 31, 2022
December 31, 2021
Rate lock commitments:
Gross assets
$
39,547
$
15,949
Gross liabilities
44,238
1,790
Net rate lock commitments
$
(4,691)
$
14,159
Forward sales contracts:
Gross assets
$
40,007
$
708
Gross liabilities
1,011
926
Net forward sales contracts
$
38,996
$
(218)
As of March 31, 2022, the net rate lock commitments are reported in mortgage banking "Accrued expenses and other liabilities" and the net forward sales contracts are reported in mortgage banking "Other assets" on the accompanying condensed consolidated balance sheets. As of December 31, 2021, the net rate lock commitments are reported in mortgage banking "Other assets" and the net forward sales contracts are reported in mortgage banking "Accrued expenses and other liabilities".
The fair value measurement as of March 31, 2022 was as follows:
Notional or Principal Amount
Assumed Gain From Loan Sale
Interest Rate Movement Effect
Servicing Rights Value
Security Price Change
Total Fair Value Measurement
Rate lock commitments
$
2,146,716
$
9,863
$
(43,284)
$
28,730
$
—
$
(4,691)
Forward sales contracts
$
2,301,443
—
—
—
38,996
38,996
Mortgages held for sale
$
318,685
1,472
(12,263)
4,832
—
(5,959)
Total fair value measurement
$
11,335
$
(55,547)
$
33,562
$
38,996
$
28,346
The total fair value measurement as of December 31, 2021 was $18,237. NVRM recorded a fair value adjustment to income of $10,109 for the three months ended March 31, 2022. NVRM recorded a fair value adjustment to income of $548 for the three months ended March 31, 2021. Unrealized gains/losses from the change in the fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying condensed consolidated statements of income. The fair value measurement will be impacted in the future by the change in the value of the servicing rights, interest rate movements, security price fluctuations, and the volume and product mix of NVRM’s closed loans and locked loan commitments.
11. Debt
As of March 31, 2022, we had the following debt instruments outstanding:
3.95% Senior Notes due 2022 ("2022 Senior Notes")
The 2022 Senior Notes have a principal balance of $600,000. The 2022 Senior Notes mature on September 15, 2022 and bear interest at 3.95%, payable semi-annually in arrears on March 15 and September 15. The 2022 Senior Notes were issued at a discount to yield 3.97% and have been reflected net of the unamortized discount and unamortized debt issuance costs in the accompanying condensed consolidated balance sheet.
3.00% Senior Notes due 2030 ("2030 Senior Notes")
The 2030 Senior Notes have an aggregate principal balance of $900,000 and mature on May 15, 2030. The 2030 Senior Notes bear interest at 3.00%, payable semi-annually in arrears on May 15 and November 15. The 2030
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
Senior Notes were issued in three separate issuances, $600,000 issued at a discount to yield 3.02%, and the two additional issuances totaling $300,000 issued at a premium to yield 2.00%. The 2030 Senior Notes have been reflected net of the unamortized discount or premium, as applicable, and the unamortized debt issuance costs in the accompanying condensed consolidated balance sheet.
Credit Agreement
We have an unsecured Credit Agreement (the “Credit Agreement”), which provides for aggregate revolving loan commitments of $300,000 (the “Facility”). Under the Credit Agreement, we may request increases of up to $300,000 to the Facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments. The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit, of which approximately $15,000 was outstanding at March 31, 2022. The Credit Agreement termination date is February 12, 2026. There was no debt outstanding under the Facility at March 31, 2022.
Repurchase Agreement
NVRM provides for its mortgage origination and other operating activities using cash generated from its operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase agreement (the “Repurchase Agreement”), which is non-recourse to NVR. The Repurchase Agreement provides for loan purchases up to $150,000, subject to certain sub-limits. Amounts outstanding under the Repurchase Agreement are collateralized by the Company’s mortgage loans held for sale.
The Repurchase Agreement expires on July 20, 2022. At March 31, 2022, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. There was no debt outstanding under the Repurchase Agreement at March 31, 2022.
12. Commitments and Contingencies
We are involved in various litigation arising in the ordinary course of business. In the opinion of management, and based on advice of legal counsel, this litigation is not expected to have a material adverse effect on our financial position, results of operations or cash flows. Legal costs incurred in connection with outstanding litigation are expensed as incurred.
13. Leases
We have operating leases for our corporate and division offices, production facilities, model homes, and certain office and production equipment. Additionally, we have finance leases for certain plant equipment and one of our production facilities which are recorded in homebuilding "Property, plant and equipment, net" and "Accrued expenses and other liabilities" on the accompanying condensed consolidated balance sheets. Our finance lease ROU assets and finance lease liabilities were $14,386 and $15,329, respectively, as of March 31, 2022, and $14,578 and $15,413, respectively, as of December 31, 2021. Our leases have remaining lease terms of up to 18.4 years, some of which include options to extend the lease for up to 20 years, and some of which include options to terminate the lease.
We recognize operating lease expense on a straight-line basis over the lease term. We have elected to use the portfolio approach for certain equipment leases which have similar lease terms and payment schedules. Additionally, for certain equipment we account for the lease and non-lease components as a single lease component. Our sublease income is de minimis.
We have certain leases, primarily the leases of model homes, which have initial lease terms of twelve months or less ("Short-term leases"). We elected to exclude these leases from the recognition requirements under Topic 842, and these leases have not been included in our recognized ROU assets and lease liabilities.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
The components of lease expense were as follows:
Three Months Ended March 31,
2022
2021
Lease expense
Operating lease expense
$
8,101
$
7,577
Finance lease expense:
Amortization of ROU assets
464
443
Interest on lease liabilities
104
110
Short-term lease expense
6,332
5,890
Total lease expense
$
15,001
$
14,020
Other information related to leases was as follows:
Three Months Ended March 31,
2022
2021
Supplemental Cash Flows Information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
7,169
$
6,810
Operating cash flows from finance leases
104
110
Financing cash flows from finance leases
356
329
ROU assets obtained in exchange for lease obligations:
Operating leases
$
5,813
$
3,013
Finance leases
$
272
$
89
March 31, 2022
December 31, 2021
Weighted-average remaining lease term (in years):
Operating leases
6.2
6.3
Finance leases
11.4
11.7
Weighted-average discount rate:
Operating leases
3.0
%
3.0
%
Finance leases
2.8
%
2.8
%
14. Income Taxes
Our effective tax rate for the three months ended March 31, 2022 was 24.7% compared to 20.3% for the three months ended March 31, 2021. The increase in the effective tax rate quarter over quarter is primarily attributable to recognizing a lower income tax benefit related to excess tax benefits from stock option exercises in the first quarter of 2022. For the three months ended March 31, 2022 and 2021, we recognized $8,446 and $17,377, respectively, in such income tax benefits.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands, except per share data)
Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases or other public communications, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should” or “anticipates” or the negative thereof or other comparable terminology. All statements other than of historical facts are forward-looking statements. Forward-looking statements contained in this document may include those regarding market trends, our financial position and financial results, business strategy, the impact of the COVID-19 pandemic on our business and customers, supply chain disruptions, the outcome of pending litigation, investigations or similar contingencies, projected plans and objectives of management for future operations. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results or performance to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to the following: the economic impact of COVID-19 and related supply chain disruption; general economic and business conditions (on both a national and regional level); interest rate changes; access to suitable financing by us and our customers; increased regulation in the mortgage banking industry; the ability of our mortgage banking subsidiary to sell loans it originates into the secondary market; competition; the availability and cost of land and other raw materials used by us in our homebuilding operations; shortages of labor; weather related slow-downs; building moratoriums; governmental regulation; fluctuation and volatility of stock and other financial markets; mortgage financing availability; and other factors over which we have little or no control. We undertake no obligation to update such forward-looking statements except as required by law. For additional information regarding risk factors, see Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Unless the context otherwise requires, references to “NVR,” “we,” “us,” or “our” include NVR and its consolidated subsidiaries.
Results of Operations for the Three Months Ended March 31, 2022 and 2021
Business Environment and Current Outlook
Despite experiencing rising mortgage interest rates during the quarter, demand for new homes remained strong during the first quarter of 2022 driven by limited housing supply. As a result, the market has seen significant appreciation in home prices, allowing us to improve profitability despite rising material and labor costs. Additionally, strong housing demand has resulted in increased construction activity and demand for building materials and contractor labor, which, coupled with the ongoing effects of the COVID-19 pandemic, has led to supply chain disruptions and longer construction cycle times. We expect to continue to face these disruptions well into 2022, and we continue to work closely with our suppliers and trade partners to manage these disruptions.
Although current demand for new homes is strong, there is uncertainty regarding the extent and timing of the supply chain disruption and the effects of the ongoing pandemic and related economic relief efforts on the U.S. economy, which have contributed to high inflation during the first quarter of 2022. Demand for new homes and home affordability may be negatively impacted by both rising inflation and mortgage interest rates. We expect to continue to face cost pressures related to building materials, labor and land costs, which will impact profit margins based on our ability to manage these costs while balancing sales pace and pricing. Although we are unable to predict the extent to which this will impact our operational and financial performance, we believe that we are well positioned to take advantage of opportunities that may arise from future economic and homebuilding market volatility due to the strength of our balance sheet.
Our primary business is the construction and sale of single-family detached homes, townhomes and condominiums, all of which are primarily constructed on a pre-sold basis. To fully serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We primarily conduct our operations in mature markets. Additionally, we generally grow our business through market share gains in our existing markets and by expanding into markets contiguous to our current active markets. Our four homebuilding reportable segments consist of the following regions:
Mid Atlantic:
Maryland, Virginia, West Virginia, Delaware and Washington, D.C.
North East:
New Jersey and Eastern Pennsylvania
Mid East:
New York, Ohio, Western Pennsylvania, Indiana and Illinois
South East:
North Carolina, South Carolina, Florida and Tennessee
Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development. We generally do not engage in land development (see discussion below of our land development activities). Instead, we typically acquire finished building lots from various third party land developers pursuant to fixed price finished lot purchase agreements (“LPAs”). These LPAs require deposits, typically ranging up to 10% of the aggregate purchase price of the finished lots, in the form of cash or letters of credit that may be forfeited if we fail to perform under the LPA. This strategy has allowed us to maximize inventory turnover, which we believe enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital.
In addition to constructing homes primarily on a pre-sold basis and utilizing what we believe is a conservative lot acquisition strategy, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets, which we believe contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets. Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build.
In certain specific strategic circumstances, we deviate from our historical lot acquisition strategy and engage in joint venture arrangements with land developers or directly acquire raw ground already zoned for its intended use for development. Once we acquire control of raw ground, we determine whether to sell the raw parcel to a developer and enter into an LPA with the developer to purchase the finished lots or to hire a developer to develop the land on our behalf. While joint venture arrangements and direct land development activity are not our preferred method of acquiring finished building lots, we may enter into additional transactions in the future on a limited basis where there exists a compelling strategic or prudent financial reason to do so. We expect, however, to continue to acquire substantially all our finished lot inventory using LPAs with forfeitable deposits.
As of March 31, 2022, we controlled approximately 126,800 lots as described below.
Lot Purchase Agreements
We controlled approximately 124,600 lots under LPAs with third parties through deposits in cash and letters of credit totaling approximately $529,600 and $8,800, respectively. Included in the number of controlled lots are approximately 4,300 lots for which we have recorded a contract land deposit impairment reserve of approximately $24,100 as of March 31, 2022.
We had an aggregate investment totaling approximately $18,800 in four JVs, expected to produce approximately 2,200 lots. Of the lots to be produced by the JVs, approximately 1,850 lots were controlled by us and approximately 350 were either under contract with unrelated parties or currently not under contract. We had additional funding commitments totaling approximately $2,000 to one of the JVs at March 31, 2022.
Land Under Development
We owned land with a carrying value of approximately $14,700 that we intend to develop into approximately 350 finished lots. We had additional funding commitments of approximately $2,000 under a joint development
agreement related to one parcel, a portion of which we expect will be offset by development credits of approximately $600.
See Notes 2, 3 and 4 to the condensed consolidated financial statements included herein for additional information regarding LPAs, JVs and land under development, respectively.
Raw Land Purchase Agreements
In addition, we have certain properties under contract with land owners that are expected to yield approximately 18,500 lots, which are not included in the number of total lots controlled. Some of these properties may require rezoning or other approvals to achieve the expected yield. As of March 31, 2022, these properties are controlled with deposits in cash totaling approximately $6,600, of which approximately $4,600 is refundable if certain contractual conditions are not met. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into an LPA with the assignee if the project is determined to be feasible.
Key Financial Results
Our consolidated revenues for the first quarter of 2022 totaled $2,378,409, a 17% increase from the first quarter of 2021. Net income for the first quarter ended March 31, 2022 was $426,100, or $116.56 per diluted share, increases of 71% and 84% when compared to net income and diluted earnings per share in the first quarter of 2021, respectively. Our homebuilding gross profit margin percentage increased to 28.5% in the first quarter of 2022 from 19.7% in the first quarter of 2021. New orders, net of cancellations (“New Orders”) decreased by 6% in the first quarter of 2022 compared to the first quarter of 2021. The average sales price for New Orders in the first quarter of 2022 increased by 13% to $465.7 compared to the first quarter of 2021.
Homebuilding Operations
The following table summarizes the results of operations and other data for our homebuilding operations:
Three Months Ended March 31,
2022
2021
Financial Data:
Revenues
$
2,309,227
$
1,963,711
Cost of sales
$
1,651,365
$
1,577,453
Gross profit margin percentage
28.5
%
19.7
%
Selling, general and administrative expenses
$
129,510
$
121,419
Operating Data:
New orders (units)
5,927
6,314
Average new order price
$
465.7
$
410.5
Settlements (units)
5,214
5,072
Average settlement price
$
442.9
$
387.2
Backlog (units)
13,443
12,791
Average backlog price
$
463.7
$
406.9
New order cancellation rate
10.3
%
9.6
%
Consolidated Homebuilding - Three Months Ended March 31, 2022 and 2021
Homebuilding revenues increased 18% in the first quarter of 2022 compared to the same period in 2021, as a result of a 3% increase in the number of units settled and a 14% increase in the average settlement price. The increase in the number of units settled was attributable to a 10% higher backlog unit balance entering 2022 compared to the backlog unit balance entering 2021, offset partially by a lower backlog turnover rate quarter over quarter attributable in part to the impact of supply chain issues on our construction cycle times. The increase in the
average settlement price was primarily attributable to a 15% higher average sales price of units in backlog entering 2022 compared to backlog entering 2021.
Gross profit margin percentage in the first quarter of 2022 increased to 28.5%, from 19.7% in the first quarter of 2021. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters, lower lumber costs and improved leveraging of certain operating costs attributable to the increase in settlement activity in the first quarter of 2022.
The number of New Orders decreased 6% while the average sales price of New Orders increased 13% in the first quarter of 2022 compared to the first quarter of 2021. New Orders were lower due primarily to a 9% decrease in the average number of active communities in the first quarter of 2022 compared to the same period in 2021. The increase in the average sales price of New Orders was attributable to strong price appreciation attributable to sustained demand driven by favorable market conditions.
Selling, general and administrative (“SG&A”) expense in the first quarter of 2022 increased by approximately $8,100 compared to the first quarter of 2021, but as a percentage of revenue decreased to 5.6% from 6.2% quarter over quarter due to improved leveraging of SG&A costs. The increase in SG&A expense was attributable primarily to increases of approximately $7,400 in personnel costs and approximately $2,900 in incentive compensation attributable largely to increased headcount.
Our backlog represents homes sold but not yet settled with our customers. As of March 31, 2022, our backlog increased on a unit basis by 5% to 13,443 units and increased on a dollar basis by 20% to $6,232,955 when compared to 12,791 units and $5,204,091, respectively, as of March 31, 2021. The increase in backlog units was primarily attributable to a lower backlog turnover rate quarter over quarter, which was negatively impacted by a longer production cycle attributable to supply chain disruptions and external subcontractor capacity constraints as we work to expand production capacity to meet our increased sales pace. Backlog dollars were higher due to the increase in backlog units and a 14% increase in the average sales price of New Orders during the six-month period ended March 31, 2022 compared to the same period in 2021.
Our backlog may be impacted by customer cancellations for various reasons that are beyond our control, such as failure to obtain mortgage financing, inability to sell an existing home, job loss, or a variety of other reasons. In any period, a portion of the cancellations that we experience are related to new sales that occurred during the same period, and a portion are related to sales that occurred in prior periods and therefore appeared in the opening backlog for the current period. Calculated as the total of all cancellations during the period as a percentage of gross sales during that same period, our first quarter cancellation rate was approximately 10% for both 2022 and 2021. During the most recent four quarters, approximately 3% of a reporting quarter’s opening backlog cancelled during the fiscal quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur during the remainder of 2022 or future years. Other than those units that are cancelled, and subject to potential construction delays resulting from continued supply chain and/or COVID-19 related disruptions, we expect to settle substantially all of our March 31, 2022 backlog within the next twelve months.
The backlog turnover rate is impacted by various factors, including, but not limited to, changes in New Order activity, internal production capacity, external subcontractor capacity, building material supply chain disruptions and other external factors over which we do not exercise control.
Reportable Segments
Homebuilding segment profit includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined by corporate management. The corporate capital allocation charge eliminates in consolidation and is based on the segment’s average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment is providing the desired rate of return after covering our cost of capital.
We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the termination of an LPA with the developer, or the restructuring of an LPA resulting
in the forfeiture of the deposit. We evaluate our entire net contract land deposit portfolio for impairment each quarter. For presentation purposes below, the contract land deposit reserve at March 31, 2022 and December 31, 2021 has been allocated to the respective year’s reportable segments to show contract land deposits on a net basis. The net contract land deposit balances below also include approximately $8,800 and $10,100 at March 31, 2022 and December 31, 2021, respectively, of letters of credit issued as deposits in lieu of cash.
The following tables summarize certain homebuilding operating activity by reportable segment for the three months ended March 31, 2022 and 2021.
(1) The reconciling items between segment inventory and consolidated inventory include certain consolidation adjustments necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes. These consolidation adjustments are not allocated to our operating segments.
Lots Controlled and Land Deposits:
March 31, 2022
December 31, 2021
Total lots controlled:
Mid Atlantic
48,000
47,900
North East
11,900
11,900
Mid East
23,500
23,700
South East
43,400
41,400
Total
126,800
124,900
March 31, 2022
December 31, 2021
Contract land deposits, net:
Mid Atlantic
$
251,314
$
257,244
North East
55,740
51,257
Mid East
53,578
52,537
South East
160,239
146,246
Total
$
520,871
$
507,284
Mid Atlantic
Three Months Ended March 31, 2022 and 2021
The Mid Atlantic segment had an approximate $120,700, or 94%, increase in segment profit in the first quarter of 2022 compared to the first quarter of 2021. The increase in segment profit was driven by an increase in segment revenues of approximately $205,600, or 22%, coupled with an increase in gross profit margins. Segment revenues increased due to increases in the number of units settled and the average settlement price of 8% and 12%, respectively. The increases in the number of units settled and the average settlement price were primarily attributable to a 10% higher backlog unit balance and a 14% higher average sales price of units in backlog entering 2022 compared to backlog entering 2021. The Mid Atlantic segment’s gross profit margin percentage increased to
27.9% in the first quarter of 2022 from 20.4% in the first quarter of 2021. Gross profit margins were favorably impacted by the aforementioned 12% increase in the average settlement price and improved leveraging of certain operating costs attributable to the increase in settlement activity in the first quarter of 2022.
Segment New Orders and the average sales price of New Orders increased 1% and 5%, respectively, in the first quarter of 2022 compared to the first quarter of 2021. The increase in the average sales price of New Orders was attributable to strong price appreciation attributable to sustained demand driven by favorable market conditions.
North East
Three Months Ended March 31, 2022 and 2021
The North East segment had an approximate $10,700, or 70%, increase in segment profit in the first quarter of 2022 compared to the first quarter of 2021, due primarily to an increase in segment revenues of approximately $13,400, or 8%, coupled with an increase in gross profit margins. Segment revenues increased due to an increase in the average settlement price of 16%, offset partially by a 6% decrease in the number of units settled. The increase in the average settlement price was primarily attributable to a 14% higher average sales price of units in backlog entering 2022 compared to backlog entering 2021. The decrease in the number of units settled was attributable to a lower backlog turnover rate attributable in part to the impact of supply chain issues on our construction cycle times. The segment’s gross profit margin percentage increased to 23.8% in the first quarter of 2022 from 17.8% in the first quarter of 2021. Gross profit margins were favorably impacted by the aforementioned 16% increase in the average settlement price, coupled with lower lot costs as a percentage of revenue in the first quarter of 2022.
Segment New Orders and the average sales price of New Orders increased 5% and 10%, respectively, in the first quarter of 2022 compared to the first quarter of 2021. The increase in the average sales price of New Orders was attributable to strong price appreciation attributable to sustained demand driven by favorable market conditions. New Orders were higher due to strong demand which led to higher sales absorption rates in the first quarter of 2022.
Mid East
Three Months Ended March 31, 2022 and 2021
The Mid East segment had an approximate $22,200, or 45%, increase in segment profit in the first quarter of 2022 compared to the first quarter of 2021, due primarily to an increase in segment revenues of approximately $36,500, or 9%, coupled with an increase in gross profit margins. Segment revenues increased due to a 13% increase in the average settlement price, offset partially by a 4% decrease in settlements. The increase in the average settlement price was primarily attributable to an 11% higher average sales price of units in backlog entering 2022 compared to backlog entering 2021. The decrease in the number of units settled was attributable to a lower backlog turnover rate attributable in part to the impact of supply chain issues on our construction cycle times. The segment's gross profit margin percentage increased to 22.0% in the first quarter of 2022 from 18.2% in the first quarter of 2021. Gross profit margins were favorably impacted by the aforementioned 13% increase in the average settlement price, coupled with lower lot costs as a percentage of revenue in the first quarter of 2022.
Segment New Orders decreased 15% in the first quarter of 2022 compared to the first quarter of 2021. The decrease in New Orders was primarily attributable to an 8% decrease in average number of active communities. The average sales price of New Orders increased 14% in the first quarter of 2022 compared to the first quarter of 2021 due primarily to strong price appreciation attributable to sustained demand driven by favorable market conditions.
South East
Three Months Ended March 31, 2022 and 2021
The South East segment had an approximate $56,800, or 100%, increase in segment profit in the first quarter of 2022 compared to the first quarter of 2021. The increase in segment profit was primarily driven by an increase in segment revenues of approximately $90,100, or 20%, coupled with an increase in gross profit margins. The increase in revenues is attributable to a 3% increase in the number of units settled and a 16% increase in the average settlement price quarter over quarter. The increase in the number of units settled was attributable to an 18% higher backlog unit balance entering 2022 compared to the backlog unit balance entering 2021, offset by a lower backlog
turnover rate attributable in part to the impact of supply chain issues on our construction cycle times. The increase in the average settlement price was primarily attributable to a 22% higher average sales price of units in backlog entering 2022 compared to backlog entering 2021. The segment’s gross profit margin percentage increased to 28.7% in the first quarter of 2022 from 20.4% in the first quarter of 2021. Gross profit margins were favorably impacted by the aforementioned 16% increase in the average settlement price and improved leveraging of certain operating costs attributable to the increase in settlement activity in the first quarter of 2022.
Segment New Orders decreased 9% in the first quarter of 2022 compared to the first quarter of 2021. The decrease in New Orders was mainly attributable to a 19% decrease in average number of active communities. The average sales price of New Orders increased 25% in the first quarter of 2022 compared to the first quarter of 2021 due primarily to strong price appreciation attributable to sustained demand driven by favorable market conditions.
Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations
In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated income before tax include unallocated corporate overhead (which includes all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury and human resources, are centrally performed and the costs are not allocated to our operating segments. Consolidation adjustments consist of such items to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. External corporate interest expense primarily consists of interest charges on our Senior Notes, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.
(1)This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. See further discussion of lot deposit impairment charges in Note 2 in the accompanying condensed consolidated financial statements.
(2)The decrease in equity-based compensation expense for the three-month period ended March 31, 2022 was primarily attributable to previously issued options becoming fully vested effective December 31, 2021.
(3)This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and is as follows for the periods presented:
Three Months Ended March 31,
2022
2021
Corporate capital allocation charge:
Mid Atlantic
$
34,087
$
30,596
North East
7,087
6,038
Mid East
11,417
10,624
South East
17,153
14,293
Total
$
69,744
$
61,551
(4)The increase in consolidation adjustments and other for the three-month period ended March 31, 2022 compared to the respective 2021 period is driven by higher lumber prices quarter over quarter. Our reportable segments' results include the intercompany profits of our production facilities for home packages delivered to our homebuilding divisions, which were negatively impacted by the increase in lumber costs. The increase in lumber costs related to homes not yet settled is reversed through the consolidation adjustment. As the homes currently in inventory are settled in subsequent quarters, our consolidated homebuilding margins will be negatively impacted by these higher lumber costs.
We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (“NVRM”), a wholly owned subsidiary. NVRM focuses exclusively on serving the homebuilding segment customer base. NVRM sells all of the mortgage loans it closes to investors in the secondary markets on a servicing-released basis, typically within 30 days from the loan closing. The following table summarizes the results of our mortgage banking operations and certain statistical data for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31,
2022
2021
Loan closing volume:
Total principal
$
1,484,593
$
1,412,879
Loan volume mix:
Adjustable rate mortgages
6
%
1
%
Fixed-rate mortgages
94
%
99
%
Operating profit:
Segment profit
$
50,106
$
59,562
Equity-based compensation expense
(1,048)
(975)
Mortgage banking income before tax
$
49,058
$
58,587
Capture rate:
86
%
89
%
Mortgage banking fees:
Net gain on sale of loans
$
57,978
$
67,550
Title services
11,176
9,997
Servicing fees
28
188
$
69,182
$
77,735
Loan closing volume for the three months ended March 31, 2022 increased by approximately $71,700, or 5%, from the same period in 2021. The increase in loan closing volume during the three months ended March 31, 2022 was primarily attributable to the 11% increase in the average loan balance for loans closed, driven by a 14% increase in the homebuilding segment's average home settlement price in the first quarter of 2022 compared to the same period in 2021. This increase was partially offset by a 5% decrease in number of loans closed, which was primarily attributable to the 3% decrease in the capture rate in the first quarter of 2022.
Segment profit for the three months ended March 31, 2022 decreased by approximately $9,500, or 16%, from the same period in 2021. This decrease was primarily attributable to a decrease of approximately $8,600, or 11%, in mortgage banking fees, primarily due to a decrease in secondary marketing gains on sales of loans.
We generally have higher New Order activity in the first half of the year and higher home settlements, revenue and net income in the second half of the year, however, our typical seasonal New Order and settlement trends have been affected since 2020 by the pandemic and supply chain disruptions.
Effective Tax Rate
Our effective tax rate during the three months ended March 31, 2022 was 24.7% compared to 20.3% for the three months ended March 31, 2021. The increase in the effective tax rate in the first quarter of 2022 is primarily attributable to a lower income tax benefit recognized for excess tax benefits from stock option exercises, which totaled approximately $8,400 and $17,400 for the three months ended March 31, 2022 and March 31, 2021, respectively.
We expect to experience volatility in our effective tax rate in future quarters as the amount of the excess tax benefit from equity-based awards is dependent on our stock price when awards are exercised as well as on the timing of exercises, which historically has varied from quarter to quarter.
Liquidity and Capital Resources
We fund our operations primarily from our current cash holdings and cash flows generated by operating activities. In addition, we have available a short-term unsecured working capital revolving credit facility and revolving mortgage repurchase facility, as further described below. As of March 31, 2022, we had approximately $2,150,000 in cash and cash equivalents, approximately $285,000 in unused committed capacity under our revolving credit facility and $150,000 in unused committed capacity under our revolving mortgage repurchase facility.
Material Cash Requirements
We believe that our current cash holdings, cash generated from operations, and cash available under our short-term unsecured credit agreement and revolving mortgage repurchase facility, as well as the public debt and equity markets, will be sufficient to satisfy both our short term and long term cash requirements for working capital to support our daily operations and meet commitments under our contractual obligations with third parties. Our material contractual obligations primarily consist of (i) payments due to service our debt and interest on that debt. We expect to use cash holdings to repurchase or retire $600,000 in senior notes maturing in September 2022. Future interest payments on our outstanding senior notes total approximately $230,100, with approximately $37,800 due in within the next twelve months, (ii) payment obligations totaling approximately $314,000 under existing LPAs for deposits to be paid to land developers, assuming that contractual development milestones are met by the developers and we exercise our option to acquire finished lots under those LPAs. We expect to make the majority of these payments within the next three years, and (iii) obligations under operating and finance leases related primarily to office space and our production facilities (see Note 13 of this Form 10-Q for additional discussion of our leases).
In addition to funding growth in our homebuilding and mortgage banking operations, we historically have used a substantial portion of our excess liquidity to repurchase outstanding shares of our common stock in open market and privately negotiated transactions. This ongoing repurchase program assists us in accomplishing our primary objective, creating increases in shareholder value. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, of this Form 10-Q for further discussion of repurchase activity during the first quarter of 2022. For the quarter ended March 31, 2022, we repurchased 146,054 shares of our common stock at an aggregate purchase price of $748,788. As of March 31, 2022, we had approximately $259,300 available under Board approved repurchase authorizations.
Capital Resources
Senior Notes
As of March 31, 2022, we had a total of $1,500,000 in outstanding Senior Notes, $600,000 of which mature in September 2022 and the remaining $900,000 mature in May 2030. The Senior Notes are senior unsecured obligations and rank equally in right of payment with any of our existing and future unsecured senior indebtedness,
will rank senior in right of payment to any of our future indebtedness that is by its terms expressly subordinated to the Senior Notes and will be effectively subordinated to any of our existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness. The indenture governing the Senior Notes does not contain any financial covenants; however, it does contain, among other items, and subject to certain exceptions, covenants that restrict our ability to create, incur, assume or guarantee secured debt, enter into sale and leaseback transactions and conditions related to mergers and/or the sale of assets. We were in compliance with all covenants under the Senior Notes at March 31, 2022.
Credit Agreement
We have an unsecured revolving credit agreement (the "Credit Agreement") with a group of lenders which may be used for working capital and general corporate purposes. The Credit Agreement provides for aggregate revolving loan commitments of $300,000 (the "Facility"). Under the Credit Agreement, we may request increases of up to $300,000 to the Facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments. In addition, the Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit of which there was approximately $15,000 outstanding at March 31, 2022. The Credit Agreement termination date is February 12, 2026. There was no debt outstanding under the Facility at March 31, 2022.
Repurchase Agreement
NVRM's revolving mortgage repurchase facility (the “Repurchase Agreement”) provides for aggregate borrowings up to $150,000 and is non-recourse to NVR. The Repurchase Agreement expires on July 20, 2022. At March 31, 2022, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. There was no debt outstanding under the Repurchase Agreement at March 31, 2022.
There have been no changes in our Credit Agreement or Repurchase Agreement during the three months ended March 31, 2022. For additional information regarding lines of credit and notes payable, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.
Cash Flows
For the three months ended March 31, 2022, cash, restricted cash, and cash equivalents decreased by $409,895. Net cash provided by operating activities was $309,326, due primarily to cash provided by earnings for the three months ended March 31, 2022 and an increase in accounts payable and accrued expenses of $127,083 attributable primarily to an increase in income taxes payable. Additionally, cash was provided by an increase in customer deposits of $35,715, attributable to the increase in our ending backlog and by net proceeds of $27,079 from mortgage loan activity. Cash was primarily used to fund the increase in inventory of $246,273, attributable to an increase in units under construction at March 31, 2022 compared to December 31, 2021.
Net cash used in investing activities for the three months ended March 31, 2022 was $4,318. Cash was used primarily for purchases of property, plant and equipment of $4,056.
Net cash used in financing activities was $714,903 for the three months ended March 31, 2022. Cash was used to repurchase 146,054 shares of our common stock at an aggregate purchase price of $748,788 under our ongoing common stock repurchase program, discussed above. Cash was provided from stock option exercise proceeds totaling $34,241.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates as previously disclosed in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in our market risks during the three months ended March 31, 2022. For additional information regarding our market risks, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021.
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have been no changes in our internal control over financial reporting in the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved in various litigation arising in the ordinary course of business. In the opinion of management, and based on advice of legal counsel, this litigation is not expected to have a material adverse effect on our financial position, results of operations or cash flows. Legal costs incurred in connection with outstanding litigation are expensed as incurred.
Item 1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(dollars in thousands, except per share data)
We had three share repurchase authorizations outstanding during the quarter ended March 31, 2022. On August 4, 2021, November 3, 2021 and February 16, 2022, we publicly announced that our Board of Directors authorized the repurchase of our outstanding common stock in one or more open market and/or privately negotiated transactions, up to an aggregate of $500,000 per authorization. The repurchase authorizations do not have expiration dates. We repurchased the following shares of our common stock during the first quarter of 2022:
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - 31, 2022
56,898
$
5,396.33
56,898
$
201,003
February 1 - 28, 2022
40,511
$
5,139.28
40,511
$
492,805
March 1 - 31, 2022
48,645
$
4,801.13
48,645
$
259,254
Total (1)
146,054
$
5,126.79
146,054
(1) Of the 146,054 shares repurchased during the quarter ended March 31, 2022, 1,398 outstanding shares were repurchased under the August authorization, 94,572 outstanding shares were repurchased under the November authorization, and the remaining 50,084 outstanding shares were repurchased under the February authorization. The August and November authorizations have been fully utilized as of March 31, 2022.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NVR, Inc.
Date: May 3, 2022
By:
/s/ Daniel D. Malzahn
Daniel D. Malzahn
Senior Vice President, Chief Financial Officer and Treasurer
