Century Communities, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND A NALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Some of the statements included in this Quarterly Report on Form 10-Q (which we refer to as this “Form 10-Q”) constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events and results of operations could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential,” the negative of such terms and other comparable terminology and the use of future dates. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. The forward-looking statements included in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking and subject to risks and uncertainties including among others:  the impact of the COVID-19 pandemic on our business operations  uncertainties related to and the impact, if any, of the U.S. presidential, congressional, and numerous state and local elections on our business, our industry and the economy in general;  economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;  shortages of or increased prices for labor, land or raw materials, including lumber, used in housing construction;  a downturn in the homebuilding industry , including a reduction in demand or a decline in real estate values or market conditions resulting in impairment of our assets ;  changes in assumptions used to make industry forecasts or trends affecting housing demand or prices;  continued volatility and uncertainty in the credit markets and broader financial markets;  our future operating results and financial condition;  our business operations;  changes in our business and investment strategy;  availability of land to acquire, and our ability to acquire such land on favorable terms or at all;  availability, terms and deployment of capital;  availability or cost of mortgage financing or an increase in the number of foreclosures in the market;  delays in land development or home construction resulting from adverse weather conditions or other events outside our control;  impact of construction defect, product liability, and/or home warranty claims, including the adequacy of accruals and the applicability and sufficiency of our insurance coverage;  changes in, or the failure or inability to comply with, governmental laws and regulations;  the timing of receipt of regulatory approvals and the opening of projects;  the impact and cost of compliance with evolving environmental laws and regulations and third-party challenges to required permits and other approvals;  the degree and nature of our competition;  our leverage, debt service obligations and exposure to changes in interest rates;  our ability to continue to fund and succeed in our mortgage lending business;  availability of qualified personnel and our ability to retain our key personnel;  t axation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance; and  changes in United States generally accepted accounting principles (which we refer to as “GAAP”). Forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described above and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K, and other risks and uncertainties detailed in this report, including “Part II, Item 1A. Risk Factors”, and our other reports and filings with the SEC. If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or 16 Table of Contents revise any forward-looking statements, whether as a result of new information, future events or otherwise. Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Form 10-Q. As used in this Form 10-Q, references to “we,” “us,” “our,” “Century” or the “Company” refer to Century Communities, Inc., a Delaware corporation, and, unless the context otherwise requires, its subsidiaries and affiliates. The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our Company, business, operations and present business environment and is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. We use certain non-GAAP financial measures that we believe are important for purposes of comparison to prior periods. This information is also used by our management to measure the profitability of our ongoing operations and analyze our business performance and trends. Some of the numbers included herein have been rounded for the convenience of presentation. Overview Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in 17 states. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land. We build and sell homes under our Century Communities and Century Complete brands. Our Century Communities brand targets a wide range of buyer profiles including: first time, first and second time move up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Our Century Complete brand targets first time homebuyers, primarily sells homes through retail studios and the internet and provides no option or upgrade selections. Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Century Complete. Additionally, our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our homebuyers have been identified as our Financial Services segment. We build and sell an extensive range of home types across a variety of price points . Impact of COVID-19 Pandemic The outbreak of the novel coronavirus, (COVID-19), which was declared a pandemic by the World Health Organization on March 11, 2020, created significant volatility, disruption, and uncertainty across the nation and abroad. It resulted in government restrictions, such as “stay-at-home” or “shelter-in-place” directives, quarantines, travel advisories and the implementation of social distancing measures, leading to the closure of businesses and weakened economic conditions resulting in an economic slowdown and recession. The homebuilding industry started to experience slowing sales trends in mid-March through April of 2020 at the outset of the widespread uncertainty concerning the pandemic. However, home sales sharply rebounded in May and June of 2020, aided by historically low interest rates, lack of supply, and potentially renewed desire from customers to move out of urban areas and/or apartments and into new homes in suburban areas, which desire was likely accelerated by the COVID-19 pandemic. These positive trends continued throughout the third quarter of 2020. In response to the pandemic and government restrictions, we shifted our sales process to offer additional virtual online tours and appointments and, where permitted, appointment-only in-person meetings that comply with social distancing and other health and safety requirements and protocols. Construction and sale of residential real estate were deemed essential businesses in almost all of our markets; and accordingly, our operations, other than in certain markets during the first weeks of April, were exempted from applicable health orders. While these circumstances did not materially adversely affect our second or third quarter 2020 financial results, we recognize that long term macro-economic effects of the pandemic that could ultimately impact the homebuilding industry have yet to be known. There is still uncertainty regarding the extent and duration of the COVID-19 pandemic as the situation has continued to evolve and associated government and consumer responses have remained in a state of flux. Recent increases in COVID-19 positive cases have resulted and could continue to result in the slowing or altering of the “re-opening” plans of numerous state and local municipalities. Despite overall strong demand and sales of our homes during the second and third quarters of 2020, continued future demand is uncertain as economic conditions are uncertain, in particular with respect to unemployment levels, which remain at historically high levels, and the extent to which and how long COVID-19 and related government directives, actions, and economic relief efforts will impact the U.S. economy, unemployment levels, financial markets, credit and mortgage markets, consumer confidence, availability of mortgage loans to homebuyers, and other factors, including those described elsewhere in this report. A decrease in demand for our homes would adversely affect our operating results in future periods, as well as have a direct effect on the origination volume of and revenues from our Financial Services segment. In addition, because the full magnitude and duration of the COVID-19 pandemic is uncertain and difficult to predict, changes in our cash flow projections may change our conclusions on the recoverability of inventories in the future. 17 Table of Contents Given the significant uncertainty regarding the impact of COVID-19, and in particular during the late March and April 2020 timeframe, we took significant steps to preserve cash and ensure we were positioned appropriately from a working capital perspective, including but not limited to initially extending the timing of certain land acquisitions, slowing or altering our land development activities, drawing additional amounts on our revolving line of credit, and implementing a reduction in our workforce, along with other cost savings measures. As a result, and aided by strong demand for our homes during the second and third quarters of 2020, we ended the third quarter of 2020 with no amounts outstanding on our revolving line of credit, $288.3 million of cash and cash equivalents, $26.3 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 32.9%. Driven by the strong housing market, we increased our land acquisition and development activities during the third quarter of 2020 to bolster our lot pipeline and support future community growth, which resulted in 44,963 lots owned and controlled at September 30, 2020, a 29.1% increase as compared to June 30, 2020. Although the trajectory and strength of our markets continues to remain strong, we experienced some building cost pressures, particularly with respect to lumber, that could negatively impact our margins in future periods. While the impact of the COVID-19 pandemic will continue to evolve and at any given time recovery could be slowed or reversed by a number of factors, we believe we are well positioned from a cash and liquidity standpoint not only to operate in an uncertain environment, but also continue to grow with the market, pay down debt and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise. Results of Operations During the three and nine months ended September 30, 2020, we delivered 2,283 and 6,627 homes, respectively, with an average sales price of $333.0 thousand and $313.9 thousand, respectively. These deliveries represent increases of 20.7% and 20.0%, respectively, as compared to the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2020, we generated approximately $760.2 million and $2,080.4 million in home sales revenues, respectively, approximately $64.9 million and $149.1 million in income before income tax expense, respectively, and approximately $49.8 million and $114.3 million, respectively, in net income, in each case representing substantial increases over the respective prior year periods. For the three and nine months ended September 30, 2020, our new home contracts, net of cancelations, totaled 3,204 and 8,256, respectively, a 56.6% and 35.7% increase over the same respective periods in 2019. As of September 30, 2020, we had a backlog of 3,699 homes, a 34.7% increase as compared to September 30, 2019, representing approximately $1,309.4 million in sales value, a 53.2% increase as compared to September 30, 2019. ‎ 18 Table of Contents The following table summarizes our results of operations for the three and nine months ended September 30, 2020 and 2019. (in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Consolidated Statements of Operations: Revenue Home sales revenues $ 760,239 $ 573,860 $ 2,080,364 $ 1,705,798 Land sales revenues 2,105 6,083 25,516 8,837 762,344 579,943 2,105,880 1,714,635 Financial services revenues 32,017 10,419 67,534 28,734 Total revenues 794,361 590,362 2,173,414 1,743,369 Homebuilding cost of revenues Cost of home sales revenues (627,364) (469,834) (1,718,545) (1,407,519) Cost of land sales and other revenues (2,046) (4,624) (18,597) (6,115) (629,410) (474,458) (1,737,142) (1,413,634) Financial services costs (14,511) (8,174) (36,841) (22,750) Selling, general, and administrative (85,806) (72,834) (246,131) (216,987) Loss on debt extinguishment — — — (10,832) Inventory impairment and other — — (1,691) — Other income (expense) 251 (56) (2,533) (499) Income before income tax expense 64,885 34,840 149,076 78,667 Income tax expense (15,121) (7,816) (34,736) (19,031) Net income $ 49,764 $ 27,024 $ 114,340 $ 59,636 Earnings per share: Basic $ 1.49 $ 0.88 $ 3.43 $ 1.96 Diluted $ 1.48 $ 0.87 $ 3.41 $ 1.95 Adjusted diluted earnings per share (1) $ 1.48 $ 0.87 $ 3.48 $ 2.26 Other Operating Information (dollars in thousands): Number of homes delivered 2,283 1,891 6,627 5,521 Average sales price of homes delivered $ 333.0 $ 303.5 $ 313.9 $ 309.0 Homebuilding gross margin percentage (2) 17.5 % 18.1 % 17.3 % 17.5 % Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1) 20.0 % 20.6 % 19.9 % 20.0 % Backlog at end of period, number of homes 3,699 2,746 3,699 2,746 Backlog at end of period, aggregate sales value $ 1,309,449 $ 854,856 $ 1,309,449 $ 854,856 Average sales price of homes in backlog $ 354.0 $ 311.3 $ 354.0 $ 311.3 Net new home contracts 3,204 2,046 8,256 6,086 Selling communities at period end (3) 110 129 110 129 Average selling communities (3) 113 127 122 127 Total owned and controlled lot inventory 44,963 39,315 44,963 39,315 Adjusted EBITDA (1) $ 86,998 $ 52,695 $ 212,839 $ 142,530 Adjusted income before income tax expense (1) $ 64,885 $ 34,840 $ 152,351 $ 91,223 Adjusted net income (1) $ 49,764 $ 27,024 $ 116,852 $ 69,154 Net homebuilding debt to net capital (1) 32.9 % 53.8 % 32.9 % 53.8 % (1) This is a non-GAAP financial measure and should not be used as a substitute for the Company’s operating results prepared in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information under “Non-GAAP Financial Measures .” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP . (2) Homebuilding gross margin percentage is inclusive of a $0 million and $1.7 million inventory impairment for the three and nine months ended September 30, 2020, respectively, included within inventory impairment and other on our consolidated financial statements. (3) As Century Complete does not sell homes by community, but through studios and online, that segment is excluded from the count of selling communities. ‎ 19 Table of Contents Results of Operations by Segment (dollars in thousands) New Homes Delivered Average Sales Price of Homes Delivered Income before Income Tax Three Months Ended September 30, Three Months Ended September 30, Home Sales Revenues Three Months Ended September 30, Three Months Ended September 30, 2020 2019 2020 2019 2020 2019 2020 2019 West 316 228 $ 596.5 $ 512.4 $ 188,484 $ 116,826 $ 13,627 $ 9,013 Mountain 514 390 $ 429.3 $ 424.8 220,680 165,666 28,695 20,552 Texas 307 247 $ 249.0 $ 278.4 76,440 68,753 6,904 8,290 Southeast 421 341 $ 362.7 $ 347.8 152,683 118,584 13,414 7,079 Century Complete 725 685 $ 168.2 $ 151.9 121,952 104,031 7,826 6,032 Financial Services — — $ — $ — — — 17,506 2,245 Corporate — — $ — $ — — — (23,087) (18,371) Total 2,283 1,891 $ 333.0 $ 303.5 $ 760,239 $ 573,860 $ 64,885 $ 34,840 New Homes Delivered Average Sales Price of Homes Delivered Income before Income Tax Nine Months Ended September 30, Nine Months Ended September 30, Home Sales Revenues Nine Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 2020 2019 2020 2019 West 862 683 $ 558.2 $ 533.0 $ 481,134 $ 364,005 $ 42,716 $ 27,634 Mountain 1,327 1,168 $ 415.8 $ 430.3 551,771 502,648 67,789 62,386 Texas 951 626 $ 247.3 $ 288.6 235,137 180,661 22,012 17,626 Southeast 1,304 1,036 $ 351.7 $ 343.5 458,577 355,817 33,743 17,467 Century Complete 2,183 2,008 $ 162.0 $ 150.7 353,745 302,667 17,159 18,323 Financial Services — — $ — $ — — — 30,693 5,984 Corporate — — $ — $ — — — (65,036) (70,753) Total 6,627 5,521 $ 313.9 $ 309.0 $ 2,080,364 $ 1,705,798 $ 149,076 $ 78,667 West In our West segment, for the three and nine months ended September 30, 2020, our income before income tax increased by $4.6 million and $15.1 million, respectively, to $13.6 million and $42.7 million, respectively, compared to the same periods in 2019. These increases were primarily due to increases in new home deliveries of 38.6% and 26.2%, respectively, compared to the same periods in 2019, and the benefit of non-recurring land sales in the current year periods. During the three and nine months ended September 30, 2020, we delivered 316 homes and 862 homes, respectively, with an average sales price of $596.5 thousand and $558.2 thousand, respectively, and generated $188.5 million and $481.1 million, respectively, in home sales revenue. Mountain In our Mountain segment, for the three and nine months ended September 30, 2020, our income before income tax increased by $8.1 million and $5.4 million, respectively, to $28.7 million and $67.8 million, respectively, compared to the same periods in 2019. These increases were primarily related to increases in new home deliveries of 31.8% and 13.6%, respectively, for the three and nine months ended September 30, 2020 compared to the same periods in 2019. Texas In our Texas segment, for the three months ended September 30, 2020, our income before income tax decreased by $1.4 million to $6.9 million compared to the same period in 2019, and for the nine months ended September 30, 2020 our income before tax increased by $4.4 million to $22.0 million compared to the same period in 2019. The decrease for the three month comparison was primarily due to a 10.6% decrease in average home sales prices as we continued to shift towards first time homebuyers, partially offset by a 24.3% increase in number of homes delivered. The increase for the nine month comparison was primarily related to a 51.9% increase in the number of homes delivered during the nine months ended September 30, 2020 as compared to the same period in 2019, which was 20 Table of Contents partially offset by the decrease in the average sales price. For the nine months ended September 30, 2020, the increase in income before income tax was partially offset by a $0.9 million impairment charge reflected during the nine months ended September 30, 2020. Southeast In our Southeast segment, for the three and nine months ended September 30, 2020, our income before income tax increased by $6.3 million and $16.3 million, respectively, to $13.4 million and $33.7 million, respectively, as compared to $7.1 million and $17.5 million for the same periods in 2019. These increases were primarily related to 23.5% and 25.9% increases in the number of homes delivered during the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. Century Complete In our Century Complete segment, for the three and nine months ended September 30, 2020, we delivered 725 homes and 2,183 homes, respectively, with an average price of $168.2 thousand and $162.0 thousand, respectively, and generated $122.0 million and $353.7 million in home sales revenues, respectively. Our income before income tax for the three and nine months ended September 30, 2020 was $7.8 million and $17.2 million, respectively, as compared to $6.0 million and $18.3 million for the same periods in 2019. The increase in income before income tax for the three month comparison is primarily attributable to a 5.8% increase in new home deliveries in conjunction with a 10.7% increase in average sales price. The decrease in income before income tax for the nine month comparison is primarily attributable to an increase in certain fixed costs and $0.8 million in inventory impairment charges. Financial Services Our indirect wholly owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, to our homebuyers have been identified as our Financial Services segment. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. During the three and nine months ended September 30, 2020, income before income tax for our Financial Services segment increased $15.3 million and $24.7 million, respectively, to $17.5 million and $30.7 million, respectively, compared to the same periods in 2019. These increases were primarily the result of $21.6 million and $38.8 million overall increases in financial services revenue during the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The increases in financial services revenue from the prior year periods were directly attributable to increases in the volume of loans sold during the three and nine month periods ended September 30, 2020 as compared to the same period in the previous year, of 116% and 97%, respectively. Our Financial Services segment primarily originates mortgages for our homebuyers, and as such, performance correlates to the increase in the number of homes delivered. The following table presents selected operational data for our Financial Services segment in relation to our loan origination activities (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Total originations: Number of loans 1,873 880 4,530 2,254 Principal $ 560,135 $ 257,316 $ 1,325,461 $ 679,541 Average FICO score 738 736 738 736 Loans sold to third parties: Number of loans sold 2,000 926 4,499 2,278 Principal $ 588,592 $ 278,327 $ 1,317,619 $ 688,962 Corporate During the three and nine months ended September 30, 2020, our Corporate segment generated losses of $23.1 million and $65.0 million, respectively, as compared to losses of $18.4 million and $70.8 million, respectively, for the same periods in 2019. The increase for the three month comparison was primarily attributed to the following: a $7.3 million increase in salaries and wages related to higher bonus and stock compensation expense, partially offset by (1) a decrease in legal costs of $0.4 million, (2) a decrease in IT expenses of $0.5 21 Table of Contents million, and (3) a decrease in other taxes and licenses of $0.5 million. The decrease for nine month comparison was primarily attributed to the loss on debt extinguishment of $10.8 million that occurred during the prior year period in conjunction with decreases in other taxes and licenses of $0.9 million and travel and entertainment costs of $0.8 million, partially offset by an $8.5 million increase in salaries and wages related to higher bonus and stock compensation expense. Homebuilding Gross Margin (dollars in thousands) Homebuilding gross margin represents home sales revenues less cost of home sales revenues. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased during the three months ended September 30, 2020 to 17.5% as compared to 18.1% for the same period in 2019, which was primarily driven by 0.6% increase in cost of home sales revenues as a percentage of home sales revenues. Our homebuilding gross margin decreased for the nine months ended September 30, 2020 to 17.3% compared to 17.5% for the same period in 2019. 22 Table of Contents In the following table, we calculate our homebuilding gross margin, as adjusted to exclude inventory impairment and other, interest in cost of home sales revenues, and purchase price accounting for acquired work in process inventory. Three Months Ended September 30, 2020 % 2019 % Home sales revenues $ 760,239 100.0 % $ 573,860 100.0 % Cost of home sales revenues (627,364) (82.5) % (469,834) (81.9) % Gross margin from home sales 132,875 17.5 % 104,026 18.1 % Add: Interest in cost of home sales revenues 19,050 2.5 % 14,258 2.5 % Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1) 151,925 20.0 % 118,284 20.6 % Add: Purchase price accounting for acquired work in process inventory — — % — — % Adjusted homebuilding gross margin excluding interest, inventory impairment and other and purchase price accounting for acquired work in process inventory (1) $ 151,925 20.0 % $ 118,284 20.6 % Nine Months Ended September 30, 2020 % 2019 % Home sales revenues $ 2,080,364 100.0 % $ 1,705,798 100.0 % Cost of home sales revenues (1,718,545) (82.6) % (1,407,519) (82.5) % Inventory impairment and other (1,691) (0.1) % — — % Gross margin from home sales 360,128 17.3 % 298,279 17.5 % Add: Inventory impairment and other 1,691 0.1 % — — % Add: Interest in cost of home sales revenues 51,429 2.5 % 41,499 2.4 % Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1) 413,248 19.9 % 339,778 19.9 % Add: Purchase price accounting for acquired work in process inventory — — % 1,724 0.1 % Adjusted homebuilding gross margin excluding interest, inventory impairment and other and purchase price accounting for acquired work in process inventory (1) $ 413,248 19.9 % $ 341,502 20.0 % (1) This non-GAAP financial measure should not be used as a substitute for the Company’s operating results in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information under “—Non-GAAP Financial Measures.” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. For the three and nine months ended September 30, 2020, excluding impairment and other, interest in cost of home sales revenues and purchase price accounting for acquired work in process inventory, our adjusted homebuilding gross margin percentage was 20.0% and 19.9%, respectively, as compared to 20.6% and 20.0% for the same periods in 2019. We believe the above information is meaningful as it isolates the impact that inventory impairment, indebtedness and acquisitions have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors. ‎ 23 Table of Contents Selling, General and Administrative Expense (dollars in thousands) Three Months Ended September 30, Increase 2020 2019 Amount % Selling, general and administrative $ (85,806) $ (72,834) $ (12,972) 17.8 % As a percentage of home sales revenue 11.3 % 12.7 % Nine Months Ended September 30, Increase 2020 2019 Amount % Selling, general and administrative $ (246,131) $ (216,987) $ (29,144) 13.4 % As a percentage of homes sales revenue 11.8 % 12.7 % Our selling, general and administrative expense increased $13.0 million and $29.1 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The increase for the three months ended September 30, 2020 was primarily attributable to the following: (1) an increase of $6.0 million in commission expense due to the 32.5% increase in home sales revenues, and (2) an increase of $7.7 million in our estimate of bonuses for 2020 as a result of our third quarter 2020 results. The increase for the nine months ended September 30, 2020 was primarily attributable to the following: (1) an increase of $16.5 million in commission expense due to the 22.0% increase in home sales revenues, (2) an increase of $8.8 million in our estimate of bonuses for 2020 as a result of our year to date results, and (3) an increase of $3.0 million in our stock-based compensation expense. Income Tax Expense At the end of each interim period we are required to estimate our annual effective tax rate for the fiscal year, and to use that rate to provide for income taxes for the current year-to-date reporting period. Our 2020 estimated annual effective tax rate of 23.4% is driven by our blended federal and state statutory rate of 25.1%, and certain other permanent differences between GAAP and tax which decreased our rate by 1.7%. For the nine months ended September 30, 2020, our estimated annual rate of 23.4% was impacted by discrete items which had a net impact of decreasing our rate by 0.1%, including excess tax benefits for vested stock-based compensation. For the three months ended September 30, 2020 and 2019, we recorded income tax expense of $15.1 million and $7.8 million, respectively. For the nine months ended September 30, 2020 and 2019, we recorded income tax expense of $34.7 million and $19.0 million, respectively . Segment Assets (Dollars in thousands) September 30, December 31, Increase (Decrease) 2020 2019 Amount Change West $ 542,622 $ 610,248 $ (67,626) (11.1) % Mountain 708,076 635,201 72,875 11.5 % Texas 202,177 232,887 (30,710) (13.2) % Southeast 360,424 441,818 (81,394) (18.4) % Century Complete 170,126 244,827 (74,701) (30.5) % Financial Services 299,887 254,282 45,605 17.9 % Corporate 308,049 80,704 227,345 281.7 % Total assets $ 2,591,361 $ 2,499,967 $ 91,394 3.7 % Total assets increased by $91.4 million, or 3.7%, to $2.6 billion at September 30, 2020 as compared to December 31, 2019. The increase is driven by a 281.7% increase in corporate assets related to excess cash generated partially offset by a decrease in inventories across our markets, which are both attributable to our record home sales during the current year period. 24 Table of Contents Lots owned and September 30, 2020 December 31, 2019 % Change controlled Owned Controlled Total Owned Controlled Total Owned Controlled Total West 3,299 2,287 5,586 3,133 1,413 4,546 5.3 % 61.9 % 22.9 % Mountain 6,762 6,295 13,057 4,771 7,949 12,720 41.7 % (20.8) % 2.6 % Texas 3,308 4,094 7,402 3,326 2,278 5,604 (0.5) % 79.7 % 32.1 % Southeast 3,571 5,046 8,617 4,160 3,827 7,987 (14.2) % 31.9 % 7.9 % Century Complete 3,027 7,274 10,301 3,324 4,761 8,085 (8.9) % 52.8 % 27.4 % Total 19,967 24,996 44,963 18,714 20,228 38,942 6.7 % 23.6 % 15.5 % Of our total lots owned and controlled as of September 30, 2020, 44.4% were owned and 55.6% were controlled, as compared to 48.1% owned and 51.9% controlled as of December 31, 2019. Other Homebuilding Operating Data Three Months Ended Nine Months Ended Net new home contracts September 30, Increase September 30, Increase (Decrease) 2020 2019 Amount % Change 2020 2019 Amount % Change West 470 235 235 100.0 % 1,195 767 428 55.8 % Mountain 653 419 234 55.8 % 1,741 1,290 451 35.0 % Texas 411 260 151 58.1 % 1,135 733 402 54.8 % Southeast 660 494 166 33.6 % 1,742 1,250 492 39.4 % Century Complete 1,010 638 372 58.3 % 2,443 2,046 397 19.4 % Total 3,204 2,046 1,158 56.6 % 8,256 6,086 2,170 35.7 % Net new home contracts (new home contracts net of cancellations) for the three months ended September 30, 2020 increased by 1,158 homes, or 56.6%, to 3,204, compared to 2,046 for the same period in 2019. Net new home contracts for the nine months ended September 30, 2020 increased by 2,170 homes, or 35.7%, to 8,256, compared to 6,086 for the same period in 2019. The increases in our net new home contracts were primarily driven by stronger sales across all of our segments as the homebuilding industry continued to experience positive trends. Since market conditions and future impacts from COVID-19 remain uncertain, it is difficult to predict our future net new home contracts . Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three and nine months ended September 30, 2020 by segment are included in the tables below: Three Months Ended September 30, Increase (Decrease) 2020 2019 Amount % Change West 8.7 3.7 5.0 135.1 % Mountain 5.6 3.0 2.6 86.7 % Texas 7.6 4.6 3.0 65.2 % Southeast 6.3 3.8 2.5 65.8 % Century Complete N/A N/A N/A N/A Total 6.6 3.6 3.0 83.3 % Nine Months Ended September 30, Increase 2020 2019 Amount % Change West 7.4 4.1 3.3 80.5 % Mountain 5.0 3.1 1.9 61.3 % Texas 7.0 4.3 2.7 62.8 % Southeast 5.5 3.2 2.3 71.9 % Century Complete N/A N/A N/A N/A Total 5.9 3.5 2.4 68.6 % 25 Table of Contents During the three and nine months ended September 30, 2020, our absorption rates increased by 83.3% and 68.6%, respectively, to 6.6 and 5.9 per month, respectively, as compared to the same periods in 2019. These increases are attributable to historically low interest rates and strong demand for new homes during current year periods, in particular during the three months ended September 30, 2020. Selling communities at period end As of September 30, Increase/(Decrease) 2020 2019 Amount % Change West 18 21 (3) (14.3) % Mountain 39 46 (7) (15.2) % Texas 18 19 (1) (5.3) % Southeast 35 43 (8) (18.6) % Century Complete N/A N/A N/A N/A Total 110 129 (19) (14.7) % N/A – Not Applicable Our selling communities decreased to 110 communities at September 30, 2020 as compared to 129 at September 30, 2019. As Century Complete does not sell homes by community, but through studios and online, there are no communities or absorptions presented for that segment. Backlog (Dollars in thousands) As of September 30, 2020 2019 % Change Homes Dollar Value Average Sales Price Homes Dollar Value Average Sales Price Homes Dollar Value Average Sales Price West 535 $ 291,905 $ 545.6 302 $ 153,626 $ 508.7 77.2 % 90.0 % 7.3 % Mountain 787 348,908 443.3 523 230,203 440.2 50.5 % 51.6 % 0.7 % Texas 459 141,044 307.3 288 79,536 276.2 59.4 % 77.3 % 11.3 % Southeast 951 346,323 364.2 684 243,712 356.3 39.0 % 42.1 % 2.2 % Century Complete 967 181,269 187.5 949 147,779 155.7 1.9 % 22.7 % 20.4 % Total / Weighted Average 3,699 $ 1,309,449 $ 354.0 2,746 $ 854,856 $ 311.3 34.7 % 53.2 % 13.7 % Backlog reflects the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home. At September 30, 2020, we had 3,699 homes in backlog with a total value of $1,309.4 million, which represents an increase of 34.7% and 53.2%, respectively, as compared to September 30, 2019. The increase in backlog dollar value is primarily attributable to the increases in backlog units and a 13.7% increase in the backlog average sales price. Supplemental Guarantor Information Our 5.875% senior notes due 2025 and 6.750% senior notes due 2027 (which we collectively refer to as our “Senior Notes”) are our unsecured senior obligations and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our direct and indirect wholly-owned operating subsidiaries (which we refer to collectively as “Guarantors”). Our subsidiaries associated with our financial services operations (referred to as “Non-Guarantors”) do not guarantee the Senior Notes. The guarantees are senior unsecured obligations of the Guarantors that rank equal with all existing and future senior debt of the Guarantors and senior to all subordinated debt of the Guarantors. The guarantees are effectively subordinated to any secured debt of the Guarantors. In addition, our former 6.875% senior notes due 2022 which were extinguished during the second quarter of 2019, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors. As of September 30, 2020, Century Communities, Inc. had outstanding $900.0 million in total principal amount of Senior Notes. Each of the indentures governing our Senior Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the respective indentures), which sale, transfer, exchange or other disposition does not constitute an “Asset Sale” (as defined in the respective 26 Table of Contents indentures) or is made in compliance with applicable provisions of the applicable indenture; (2) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the assets of such Guarantor, which sale, transfer, exchange or other disposition does not constitute an Asset Sale or is made in compliance with applicable provisions of the applicable indenture; provided, that after such sale, transfer, exchange or other disposition, such Guarantor is an “Immaterial Subsidiary” (as defined in the respective indentures); (3) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the applicable indenture; provided that if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the applicable Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the applicable Indenture; (4) upon the designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the respective Indentures), in accordance with the applicable indenture; (5) if the Company exercises its legal defeasance option or covenant defeasance option under the applicable indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the applicable indenture, upon such exercise or discharge; or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the applicable indenture. The indenture governing our former 6.875% senior notes due 2022 contained a similar provision. If a guarantor were to become a debtor in a case under the US Bankruptcy Code, a court may decline to enforce its guarantee of the Senior Notes. This may occur when, among other factors, it is found that the guarantor originally received less than fair consideration for the guarantee and the guarantor would be rendered insolvent by enforcement of the guarantee. On the basis of historical financial information, operating history and other factors, we believe that each of the guarantors, after giving effect to the issuance of its guarantee of the Senior Notes when the guarantee was issued, was not insolvent and did not and has not incurred debts beyond its ability to pay such debts as they mature. The Company cannot predict, however, what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. As the guarantees were made in connection with exchange offers effected in February 2015, October 2015 and April 2017 and the issuance of the 5.875% senior notes due 2025 and of the 6.750% senior notes due 2027, the Guarantors’ condensed financial information is presented as if the guarantees existed during the periods presented. If any Guarantors are released from the guarantees in future periods, the changes are reflected prospectively. We have determined that separate, full financial statements of the Guarantors would not be material to investors, and accordingly, supplemental financial information is presented below. On March 2, 2020, the SEC adopted amendments to Rules 3-10 and 3-16 of Regulation S-X, under Rule Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (“Rule 33-10762”), that reduce and simplify the financial disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities (which we previously included within the notes to our financial statements in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q). The amendments under Rule 33-10762 are effective January 4, 2021, but voluntary compliance is permitted in advance of the effective date. We adopted the new disclosure requirements permitted under Rule 33-10762, beginning with the three and six month period ending June 30, 2020. The following summarized financial information is presented for Century Communities, Inc. and the Guarantor Subsidiaries on a combined basis after eliminating intercompany transactions and balances among Century Communities, Inc. and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from Non-Guarantor Subsidiaries. ‎ 27 Table of Contents Century Communities, Inc. and Guarantor Subsidiaries Summarized Balance Sheet Data (in thousands) September 30, 2020 December 31, 2019 Assets Cash and cash equivalents $ 222,230 $ 1,577 Cash held in escrow 26,275 35,308 Accounts receivable 26,763 27,690 Inventories 1,872,337 1,995,549 Prepaid expenses and other assets 88,756 110,860 Property and equipment, net 30,557 34,870 Deferred tax assets, net 12,775 10,589 Goodwill 30,395 30,395 Total assets $ 2,310,088 $ 2,246,838 Liabilities and stockholders’ equity Liabilities: Accounts payable $ 47,687 $ 83,840 Accrued expenses and other liabilities 274,819 201,617 Intercompany loan payable 17,600 — Notes payable 895,867 896,704 Revolving line of credit — 68,700 Total liabilities 1,235,973 1,250,861 Stockholders’ equity: 1,074,115 995,977 Total liabilities and stockholders’ equity $ 2,310,088 $ 2,246,838 Summarized Statement of Operations Data (in thousands) Nine Months Ended September 30, 2020 Year Ended December 31, 2019 Total homebuilding revenues 2,105,880 2,492,649 Total homebuilding cost of revenues (1,737,142) (2,048,371) Selling, general and administrative (246,131) (301,525) Loss on debt extinguishment — (10,832) Inventory impairment and other (1,691) (4,783) Other income (expense) (3,113) (5,353) Income before income tax expense 117,803 121,785 Income tax expense (27,449) (16,929) Net income 90,354 104,856 ‎ 28 Table of Contents Critical Accounting Policies Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and the estimates included in our financial statements might be impacted if we used different assumptions or conditions. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 7, 2020, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.” Liquidity and Capital Resources Overview Our principal uses of capital for the three and nine months ended September 30, 2020 were our land purchases, land development, home construction, and the payment of routine liabilities. We use funds generated by operations, available borrowings under our revolving line of credit, and from time to time proceeds from sales of our common stock, including under our current at-the-market facility, and debt securities to fund our short term working capital obligations and fund our purchases of land, as well as land development and home construction activities. Cash flows for each of our communities depend on the stage in the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statements of operations until a home closes, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. In response to the COVID-19 pandemic, we took certain measures to ensure we are positioned with cash flow and liquidity to endure an extended period of lower demand for our homes, should it arise. Specifically commencing in mid-March of 2020, we slowed our land development activities and instituted a variety of actions designed to reduce our operating expenses, including a reduction in the size of our workforce through a targeted layoff in April 2020. In addition, given the uncertainty surrounding the COVID-19 pandemic, we initially increased our borrowings under our revolving line of credit during the end of the first quarter of 2020 and into the beginning of the second quarter of 2020 as a proactive measure in order to expand our financial flexibility at that time. We repaid these borrowings during the second quarter of 2020 in light of our second quarter 2020 operating results and to decrease our interest expense. As of September 30, 2020, we continued to have no amounts outstanding under our revolving line of credit. We increased our land acquisition and development activities during the third quarter, which resulted in 44,963 lots owned and controlled at September 30, 2020, a 29.1% increase as compared to June 30, 2020 Our Financial Services operations use funds generated from operations and availability under our mortgage repurchase facilities to finance operations including originations of mortgage loans to our homebuyers. Under our shelf registration statement, which we filed with the SEC in July 2018 and was automatically effective upon filing, we have the ability to access the debt and equity capital markets in registered transactions from time to time and as needed as part of our ongoing financing strategy and subject to market conditions. In November 2019, we filed a prospectus supplement to offer up to $100.0 million under the shelf registration statement under our at-the-market facility described below. We believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available or on acceptable terms, especially in light of the current COVID-19 pandemic, its impact on the macro-economy, and market conditions at the time . While the impact of the COVID-19 pandemic will continue to evolve, we believe we are well positioned from a cash and liquidity standpoint to not only operate in an uncertain environment, but also continue to grow with the market, pay down debt and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise. Revolving Line of Credit We are party to an Amended and Restated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, the lenders party thereto and certain of our subsidiaries (which we refer to as the “Amended and Restated Credit 29 Table of Contents Agreement”), which, as amended most recently on December 13, 2019, provides us with a revolving line of credit of up to $640.0 million, and unless terminated earlier, will mature on April 30, 2023. Our obligations under the Amended and Restated Credit Agreement are guaranteed by certain of our subsidiaries. The Amended and Restated Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly. Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. As of September 30, 2020, we had no amounts outstanding under the credit facility and were in compliance with all covenants. Mortgage Repurchase Facilities – Financial Services On May 4, 2018, September 14, 2018, and August 1, 2019, Inspire entered into mortgage warehouse facilities, with Comerica Bank, J.P. Morgan, and Wells Fargo, respectively. The mortgage warehouse lines of credit (which we refer to as the “repurchase facilities”) provide Inspire with uncommitted repurchase facilities of up to an aggregate of $275 million, secured by the mortgage loans financed thereunder. Amounts outstanding under the repurchase facilities are not guaranteed by us or any of our subsidiaries and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2020, we had $173.4 million outstanding under these repurchase facilities and were in compliance with all covenants thereunder. During the three and nine months ended September 30, 2020, we incurred interest expense on the repurchase facilities of $0.8 million and $2.0 million, respectively. During the same periods in 2019, we incurred interest expense on the repurchase facilities of $0.6 million and $2.1 million, respectively. Interest expense on mortgage repurchase facilities is included in financial services costs on our condensed consolidated statements of operations . At-the-Market Offerings On November 27, 2019, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, BofA Securities, Inc., Citigroup Global Markets Inc., and Fifth Third Securities, Inc. (which we refer to as the “Distribution Agreement”), as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings, in accordance with the terms and conditions set forth in the Distribution Agreement. This Distribution Agreement, which superseded and replaced a prior similar distribution agreement, had all $100 million available for sale as of September 30, 2020. We did not sell or issue any shares of our common stock during the three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2019, we sold and issued an aggregate of 0.8 million and 0.9 million, respectively, shares of our common stock under the previous distribution agreement, which provided gross proceeds of $23.7 million and $26.5 million, respectively, and in connection with such sales, paid total commissions and fees to the sales agents of $0.6 million and $0.7 million, respectively. The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement. Letters of Credit and Performance Bonds In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of September 30, 2020, and December 31, 2019, we had $360.1 million and $344.1 million, respectively, in letters of credit and performance bonds issued and outstanding. Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and performance bonds are not generally released until all development and construction activities are completed. 30 Table of Contents Debt Our outstanding debt obligations included the following as of September 30, 2020 and December 31, 2019 (in thousands): September 30, December 31, 2020 2019 6.750% senior notes, due May 2027 (1) $ 494,736 $ 494,307 5.875% senior notes, due July 2025 (1) 396,644 396,120 Other financing obligations 4,487 6,277 Notes payable 895,867 896,704 Revolving line of credit, due April 2023 — 68,700 Mortgage repurchase facilities 173,415 174,095 Total debt $ 1,069,282 $ 1,139,499 (1) The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes. A summary of our debt obligations is included in Note 11 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 7, 2020. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may or may not be material during any particular reporting period. Stock Repurchase Program On November 6, 2018, our Board of Directors authorized a stock repurchase program, under which we may repurchase up to 4,500,000 shares of our outstanding common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws. The actual manner, timing, amount and value of repurchases under the stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including the market price of our common stock, trading volume, other capital management objectives and opportunities, applicable legal requirements, and general market and economic conditions. We intend to finance any stock repurchases through available cash and our revolving credit facility. Repurchases also may be made under a trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, which would permit shares to be repurchased when we otherwise may be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The stock repurchase program has no expiration date and may be extended, suspended or discontinued by our Board of Directors at any time without notice at our discretion. All shares of common stock repurchased under the program will be cancelled and returned to the status of authorized but unissued shares of common stock. During the three and nine months ended September 30, 2020, we did not repurchase any shares of common stock. During the three months ended September 30, 2019, we did not repurchase any shares of common stock while during the nine months ended September 30, 2019, we repurchased 83,000 shares of common stock under this program for approximately $1.4 million . The maximum number of shares available to be purchased under the stock repurchase program as of September 30, 2020 is 3,812,939. Cash Flows— Nine months Ended September 30, 2020 Compared to the Nine months Ended September 30, 2019 For the nine months ended September 30, 2020 and 2019, the comparison of cash flows is as follows:  Our primary sources of cash flows from operations are from the sale of single family attached and detached homes and mortgages. Our primary uses of cash flows from operations is the acquisition of land and expenditures associated with the construction of our single family attached and detached homes and the origination of mortgages held for sale. During the nine months ended September 30, 2020 and 2019, we generated $315.8 million and used $149.0 million in cash from operations, respectively. The increase in cash provided by operations is primarily a result of a $54.7 million increase in 31 Table of Contents net income and comparatively favorable changes in assets and liabilities for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.  Net cash used in investing activities decreased to $6.6 million during the nine months ended September 30, 2020, compared to $11.6 million used during the same period in 2019. The decrease was primarily related to less purchases of property and equipment.  Net cash used in financing activities was $76.8 million during the nine months ended September 30, 2020, compared to $165.7 million provided by financing activities during the same period in 2019. The change for the nine months ended September 30, 2020 was primarily attributable to a $145.0 million increase in net payments under our revolving line of credit and a $108.1 million decrease in proceeds from issuance and extinguishments of senior notes. As of September 30, 2020, our cash and cash equivalents and restricted cash balance was $290.9 million. Off-Balance Sheet Arrangements In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchase contracts typically require a cash deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and others as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Option contracts generally require payment by us of a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. Our obligations with respect to purchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits. As of September 30, 2020, we had outstanding purchase contracts and option contracts for 24,996 lots with a total purchase price of approximately $999.4 million and had $31.3 million of non-refundable cash deposits pertaining to land option contracts. While our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change, we currently anticipate performing on 50% to 60% of the purchase and option contracts during the next twelve months, with performance on the remaining purchase and option contracts occurring in future periods, if at all. Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities. As of September 30, 2020, and December 31, 2019, we had $360.1 million and $344.1 million, respectively, in letters of credit and performance bonds issued and outstanding. We anticipate that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business. Contractual Obligations For the three and nine months ended September 30, 2020, there were no material changes to the contractual obligations we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 that was filed with the SEC on February 7, 2020. ‎ 32 Table of Contents Non-GAAP Financial Measures In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net homebuilding debt to net capital, and adjusted net earnings per diluted common shares. These non-GAAP financial measures are presented to provide investors additional information to facilitate the comparison of our past and present operations. We believe these non-GAAP financial measures provide useful information to investors because they are used to evaluate our performance on a comparable year-over-year basis. These non-GAAP financial measures are not in accordance with, or an alternative for, GAAP measures and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of our non-GAAP financial measures may differ from the definitions of other companies using the same or similar names limiting, to some extent, the usefulness of such measures for comparison purposes. Non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our financial results as determined in accordance with GAAP. These measures should only be used to evaluate our financial results in conjunction with the corresponding GAAP measures. Accordingly, we qualify our use of non-GAAP financial information in a statement when non-GAAP financial information is presented. EBITDA and Adjusted EBITDA The following table presents EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2020, and 2019. Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance. We define Adjusted EBITDA as consolidated net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense, (iv) loss on debt extinguishment, (v) inventory impairment and other, (vi) depreciation and amortization expense, and (vii) adjustments resulting from the application of purchase accounting for acquired work in process inventory related to business combinations. We believe Adjusted EBITDA provides an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization, and items considered to be non-recurring. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Adjusted EBITDA should be considered in addition to, and not as a substitute for, consolidated net income in accordance with GAAP as a measure of performance. Our presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our Adjusted EBITDA is limited as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP . Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 % Change 2020 2019 % Change Net income $ 49,764 $ 27,024 84.1 % $ 114,340 $ 59,636 91.7 % Income tax expense 15,121 7,816 93.5 % 34,736 19,031 82.5 % Interest in cost of home sales revenues 19,050 14,258 33.6 % 51,429 41,499 23.9 % Interest expense (income) (182) — NM (1,029) 15 (6,960.0) % Depreciation and amortization expense 3,245 3,597 (9.8) % 10,088 9,793 3.0 % EBITDA 86,998 52,695 65.1 % 209,564 129,974 61.2 % Loss on debt extinguishment — — NM — 10,832 NM Inventory impairment and other — — NM 1,691 — NM Restructuring costs — — NM 1,584 — NM Purchase price accounting for acquired work in process inventory — — NM — 1,724 NM Adjusted EBITDA $ 86,998 $ 52,695 65.1 % $ 212,839 $ 142,530 49.3 % NM – Not Meaningful ‎ 33 Table of Contents Net Homebuilding Debt to Net Capital The following table presents our ratio of net homebuilding debt to net capital, which is a non-GAAP financial measure. We calculate this by dividing net debt (notes payable and borrowings under our revolving line of credit less cash held in escrow and cash and cash equivalents) by net capital (net debt plus total stockholders’ equity). The most directly comparable GAAP measure is the ratio of debt to total capital. We believe the ratio of net homebuilding debt to net capital is a relevant and useful financial measure to investors in understanding the leverage employed in our operations and as an indicator of our ability to obtain external financing . September 30, December 31, 2020 2019 Total homebuilding debt $ 895,867 $ 965,404 Total stockholders' equity 1,184,957 1,061,699 Total capital $ 2,080,824 $ 2,027,103 Homebuilding debt to capital 43.1% 47.6% Total homebuilding debt $ 895,867 $ 965,404 Cash and cash equivalents (288,341) (55,436) Cash held in escrow (26,275) (35,308) Net homebuilding debt 581,251 874,660 Total stockholders' equity 1,184,957 1,061,699 Net capital $ 1,766,208 $ 1,936,359 Net homebuilding debt to net capital 32.9% 45.2% ‎ 34 Table of Contents Adjusted Diluted Earnings per Common Share Adjusted Diluted Earnings per Common Share (which we refer to as “Adjusted EPS”) is a non-GAAP financial measure that we believe is useful to management, investors and other users of our financial information in evaluating our operating results and understanding our operating trends without the effect of certain non-recurring items. We believe excluding certain non-recurring items provides more comparable assessment of our financial results from period to period. Adjusted Diluted EPS is calculated by excluding the effect of acquisition costs and purchase price accounting for acquired work in process from the calculation of reported EPS . Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Numerator Net income $ 49,764 $ 27,024 $ 114,340 $ 59,636 Denominator Weighted average common shares outstanding - basic 33,350,633 30,587,487 33,299,768 30,378,860 Dilutive effect of restricted stock units 380,619 318,748 256,882 262,334 Weighted average common shares outstanding - diluted 33,731,252 30,906,235 33,556,650 30,641,194 Earnings per share: Basic $ 1.49 $ 0.88 $ 3.43 $ 1.96 Diluted $ 1.48 $ 0.87 $ 3.41 $ 1.95 Adjusted earnings per share Numerator Income before income tax expense $ 64,885 $ 34,840 $ 149,076 $ 78,667 Inventory impairment and other — — 1,691 — Restructuring costs — — 1,584 — Loss on debt extinguishment — — — 10,832 Purchase price accounting for acquired work in process inventory — — — 1,724 Adjusted income before income tax expense 64,885 34,840 152,351 91,223 Adjusted income tax expense (1) (15,121) (7,816) (35,499) (22,069) Adjusted net income 49,764 27,024 116,852 69,154 Denominator - Diluted 33,731,252 30,906,235 33,556,650 30,641,194 Adjusted diluted earnings per share $ 1.48 $ 0.87 $ 3.48 $ 2.26 (1) The tax rate used in calculating adjusted net income for the three and nine months ended September 30, 2020 was 23.3%, which is reflective of the Company’s GAAP tax rate for the applicable period, as adjusted for certain discrete items. For the three and nine months ended September 30, 2019 the tax rate utilized was 22.4% and 24.2%, respectively, representing our GAAP tax rate adjusted for certain discrete items. ‎ 35 Table of Contents ITEM 3. QUANTIT ATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rates Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our Amended and Restated Credit Agreement. Borrowings under the Amended and Restated Credit Agreement, which bears interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. The “applicable margins” described above are determined by a schedule based on the leverage ratio of the Company, as defined in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also provides for fronting fees and letter of credit fees payable to the L/C Issuer and commitment fees payable to the Administrative Agent equal to 0.20% of the unused portion of the revolving line of credit. For fixed rate debt, such as our senior notes, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. In our Financial Services business, we utilize mortgage-backed securities, forward commitments, option contracts and investor commitments to protect the value of rate-locked commitments and loans held-for-sale from fluctuations in mortgage-related interest rates. To mitigate interest risk associated with loans held-for-sale, we use derivative financial instruments to hedge our exposure to risk from the time a borrower locks a loan until the time the loan is securitized. We also hedge our interest rate exposure through entering into interest rate swap futures . Inflation Our homebuilding operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices. Seasonality Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity during the spring, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes four to eight months to construct a new home, we deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occurs during the second half of the year. We expect this seasonal pattern to continue over the long term, although it may be affected by volatility in the homebuilding in dustry and the COVID-19 pandemic.