Century Communities, Inc. 10-K

ITEM 7 . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. 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. In July 2019, the Financial Accounting Standards Board (which we refer to as “FASB”) issued Accounting Standards Update 2019-07, “Codification Updates to SEC Sections-Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification", which changes were meant to simplify certain disclosures in financial condition and results of operations, particularly by eliminating year-to-year comparisons between prior periods previously disclosed. This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and 42 Table of Contents Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Business Overview We are 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. We build and sell an extensive range of home types across a variety of price points with an emphasis on homes at affordable price points in their markets. Our Century Communities brand targets a wide range of buyer profiles including: entry-level, 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 home buyers have been identified as our Financial Services segment . 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 began to sharply rebound 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 remainder 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 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 remainder 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. 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 remainder of 2020, we ended 2020 with no amounts outstanding on our revolving line of credit, $394.0 million of cash and cash equivalents, $23.1 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 27.2%. Driven by the strong housing market, we increased our land acquisition and development activities during the second half of 2020 to bolster our lot pipeline and support future community growth, which resulted in 49,965 lots owned and controlled at December 31, 2020, a 43.4% increase as compared to June 30, 2020 and a 28.3% increase as compared to December 31, 2019. 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 43 Table of Contents 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 – Years Ended December 31, 2020 and 2019 During the year ended December 31, 2020, we generated record home sales revenues of $3.0 billion, an increase of 22.0% over 2019. The increase was fueled by an 18.2% increase in the number of homes delivered to 9,453 and a 3.2% increase in the average sales price per home to $320,200. This increase in home sales revenue, combined with a $37.8 million increase in income from our Financial Services segment, a 70 basis point increase in homebuilding gross margin percent, and a 90 basis point decrease in the percentage of selling, general and administrative expense as a percent of home sales revenues, resulted in a record $270.2 million in income before income tax expense for the year ended December 31, 2020. Our financial results for the year ended December 31, 2020 were driven by advantageous macro-economic conditions during the second half of 2020. These conditions included an increase in demand for new housing, particularly entry-level housing, as a result of the COVID-19 pandemic, which accelerated the trend of migration out of high-density urban areas and into suburban areas, historically low interest rates on mortgage products, including rates on 30-year fixed mortgages, which decreased over 100 basis points during the year to 2.68% as of December 31, 2020, a low supply of available inventories and positive demographic trends. These conditions, coupled with our strategy to focus on entry-level housing (approximately 80% of our deliveries in 2020 qualified for FHA mortgages) resulted in a positive sales environment, which we leveraged in 2020 to increase net new home contracts by 37.7% to 10,822, and our average absorption rate per community of 4.6 per month, an increase of 48.4%, in each case over 2019. The increase in demand has also resulted in increased prices for and shortages of labor, land and raw materials, including in particular lumber. During 2020, we successfully offset most of these cost increases through increases in our selling prices. We generated $340.6 million of cash flows from operations during 2020, which we utilized to decrease our net homebuilding debt to net capital to 27.2% as of December 31, 2020 down from 45.2% as of December 31, 2019. We believe our current net homebuilding debt to net capital position allows us the flexibility to continue to grow our operations and our approximately 50,000 lots owned and controlled in future periods. Subject to deteriorating market conditions, we believe our operations are well positioned for future growth as a result of the markets in which we operate, our product offerings which span the home buying segment, but focus on affordable price points, as well as current and future inventories of attractive land positions. As we have grown, we have continued to focus on maintaining prudent leverage, and, as a result, we believe we are well positioned to execute on our growth strategy in order to optimize stockholder returns. We anticipate the homebuilding markets in each of our operating segments will continue to be tied to both the local economy and the macro-economic environment. Accordingly, our net sales, home deliveries, and average sales price in future years could be negatively affected by economic conditions such as decreases in employment and median household incomes, as well as decreases in household formations and increasing supply of inventories. Additionally, our results could be impacted by a decrease in home affordability as a result of price appreciation or increases in mortgage interest rates or tightening of mortgage lending standards. Strategy Our strategy is focused on increasing the returns on our inventory while generating strong profitability. In general, we are focused on the following initiatives:  Maintaining a strong balance sheet and prudent use of leverage;  While we offer homes that appeal to a broad range of entry-level, move-up, and lifestyle homebuyers, offerings are heavily weighted towards providing affordable housing options in each of our homebuyer segments;  Preferring building move-in-ready homes over built-to-order homes, which we believe allows for a faster construction process, advantageous pricing with subcontractors, and shortened time period from home sale to home delivery, thus allowing us to more appropriately price the home;  Maintaining a strong pipeline of future land holdings, including favoring lot option contracts to manage our risk to land holdings;  Increasing our market share within our existing markets through organic growth and/or acquisitions of other homebuilders already operating in the market; 44 Table of Contents  Expanding into new markets that meet our underwriting criteria either through organic start-up operations or through acquisitions of existing homebuilders; and  Controlling costs, including costs of home sales revenue and selling, general and administrative expenses, and generating further efficiencies, including through the increased reliance on digital marketing and direct outreach to potential customers through our website and digital tools, to achieve increased profitability. Our operating strategy has resulted in significant growth in revenue and income before income taxes over the last five years, and we believe it will continue to produce positive results. We expect our operating strategy will continue to adapt to market changes, and we cannot provide any assurance that our strategies will continue to be successful. The following table summarizes our results of operations for the years ended December 31, 2020 and 2019. 45 Table of Contents (in thousands, except per share amounts) Year ended December 31, Increase (Decrease) 2020 2019 Amount % Consolidated Statements of Operations: Revenue Home sales revenues $ 3,027,167 $ 2,481,465 $ 545,702 22.0 % Land sales revenues 30,717 11,184 19,533 174.7 % 3,057,884 2,492,649 565,235 22.7 % Financial services revenue 103,308 43,262 60,046 138.8 % Total revenues 3,161,192 2,535,911 625,281 24.7 % Homebuilding cost of revenues Cost of home sales revenues (2,468,133) (2,040,241) (427,892) 21.0 % Cost of land sales and other revenues (21,929) (8,130) (13,799) 169.7 % (2,490,062) (2,048,371) (441,691) 21.6 % Financial services costs (54,797) (32,575) (22,222) 68.2 % Selling, general, and administrative (341,710) (301,525) (40,185) 13.3 % Loss on debt extinguishment — (10,832) 10,832 (100.0) % Inventory impairment and other (2,172) (4,783) 2,611 (54.6) % Other income (expense) (2,211) (5,190) 2,979 (57.4) % Income before income tax expense 270,240 132,635 137,605 103.7 % Income tax expense (64,083) (19,641) (44,442) 226.3 % Net income $ 206,157 $ 112,994 $ 93,163 82.4 % Earnings per share: Basic $ 6.19 $ 3.66 $ 2.53 69.1 % Diluted $ 6.13 $ 3.62 $ 2.51 69.3 % Adjusted diluted earnings per share (1) $ 6.22 $ 4.05 $ 2.17 53.6 % Other Operating Information (dollars in thousands): Number of homes delivered 9,453 8,000 1,453 18.2 % Average sales price of homes delivered $ 320.2 $ 310.2 $ 10.0 3.2 % Homebuilding gross margin percentage (2) 18.4 % 17.7 % 0.7 3.9 % Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1) 20.8 % 20.3 % 0.5 2.6 % Backlog at end of period, number of homes 3,439 2,070 1,369 66.1 % Backlog at end of period, aggregate sales value $ 1,294,202 $ 637,751 $ 656,451 102.9 % Average sales price of homes in backlog $ 376.3 $ 308.1 $ 68.2 22.1 % Net new home contracts 10,822 7,861 2,961 37.7 % Selling communities at period end (3) 198 212 (14) (6.6) % Average selling communities (3) 217 218 (1) (0.5) % Total owned and controlled lot inventory 49,965 38,942 11,023 28.3 % Adjusted EBITDA (1) $ 356,414 $ 224,522 $ 131,892 58.7 % Adjusted income before income tax expense (1) $ 273,996 $ 149,974 $ 124,022 82.7 % Adjusted net income (1) $ 209,022 $ 126,171 $ 82,851 65.7 % Net homebuilding debt to net capital (1) 27.2 % 45.2 % (18.0) % (39.9) % (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 within our Homebuilding Gross Margin section in this Management’s Discussion and Analysis of Financial Condition and Results of Operations . 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 $2.2 million and $2.0 million for the years ended December 31, 2020 and 2019, respectively, in inventory impairment included within inventory impairment and other on our consolidated statements of operations. See Note 13 – Fair Value Disclosures in the Notes to the Consolidated Financial Statements for further detail. (3) The selling communities at period end for 2019 has been adjusted from prior year presentations to reflect selling communities in our Century Complete segment of 95, which business was acquired in 2018, and for which selling communities was previously not disclosed. ‎ 46 Table of Contents Results of Operations by Segment (in thousands) New Homes Delivered Average Sales Price of Homes Delivered Home Sales Revenues Income before Income Tax Year ended December 31, Year ended December 31, Year ended December 31, Year ended December 31, 2020 2019 2020 2019 2020 2019 2020 2019 West 1,242 1,029 $ 545.7 $ 519.3 $ 677,755 $ 534,373 $ 71,417 $ 43,027 Mountain 1,973 1,665 $ 424.8 $ 431.7 838,055 718,847 114,722 89,201 Texas 1,338 903 $ 251.8 $ 279.9 336,882 252,728 34,694 25,866 Southeast 1,903 1,592 $ 353.1 $ 344.3 672,034 548,109 57,181 31,435 Century Complete 2,997 2,811 $ 167.6 $ 152.0 502,441 427,408 33,449 22,044 Financial Services — — $ — $ — — — 48,511 10,687 Corporate — — $ — $ — — — (89,734) (89,625) Total 9,453 8,000 $ 320.2 $ 310.2 $ 3,027,167 $ 2,481,465 $ 270,240 $ 132,635 West Our West segment generated income before income tax of $71.4 million for the year ended December 31, 2020, a 66.0% increase over the prior year. The increase was driven by the increase in homes sales revenue of $143.4 million and an increase of 250 basis points in the percentage of income before income tax to home sales revenues, as a result of increasing revenues on a partially fixed cost base, for the year ended December 31, 2020 as compared to the prior year. The increase in revenue was generated by both an increase in the number of homes delivered of 20.7%, as well as an increase of 5.1% in the average price per home. The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 33.9%, and the increase in the average sales price was driven by both the mix of deliveries within individual communities and markets between years, as well as increased pricing power as a result of strong market dynamics. Mountain Our Mountain segment generated income before income tax of $114.7 million for the year ended December 31, 2020, a 28.6% increase over the prior year. The increase was driven by the increase in homes sales revenue of $119.2 million and an increase of 130 basis points in the percentage of income before income tax to home sales revenues, as a result of increasing revenues on a partially fixed cost base, for the year ended December 31, 2020 as compared to the prior year. The increase in revenue was generated by an increase in the number of homes delivered of 18.5%, which was partially offset by a decrease of 1.6% in the average price per home. The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 40.5%, and the decrease in the average sales price was driven by a decrease in the average sales price in our Las Vegas division of 7.4%, as we shifted to more affordable communities period over period. Texas Our Texas segment generated income before income tax of $34.7 million for the year ended December 31, 2020, a 34.1% increase over the prior year. The increase was driven by the increase in homes sales revenue of $84.2 million and a consistent percentage of income before income tax to home sales revenues for the year ended December 31, 2020 as compared to the prior year. The increase in revenue was generated by an increase in the number of homes delivered of 48.2%, which was partially offset by a decrease of 10.0% in the average price per home. The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 90.5%, and the decrease in the average sales price was driven by a decrease in the average sales price in our Austin division of 20.6%, as we shifted to more affordable communities period over period. Southeast Our Southeast segment generated income before income tax of $57.2 million for the year ended December 31, 2020, an 81.9% increase over the prior year. The increase was driven by the increase in homes sales revenue of $123.9 million and an increase of 280 basis points in the percentage of income before income tax to home sales revenues, as a result of increasing revenues on a partially fixed cost base, for the year ended December 31, 2020 as compared to the prior year. The increase in revenue was generated by both an increase in the number of homes delivered of 19.5%, as well as an increase of 2.6% in the average price per home. The increase in the number of homes delivered was driven by an increase in our monthly absorption rate of 133.3%, partially offset by a decrease in our selling communities. Century Complete 47 Table of Contents Our Century Complete segment generated income before income tax of $33.4 million for the year ended December 31, 2020, a 51.7% increase over the prior year. The increase was driven by the increase in homes sales revenue of $75.0 million and an increase of 150 basis points in the percentage of income before income tax to home sales revenues, primarily the result of increasing revenues on a partially fixed cost base, for the year ended December 31, 2020 as compared to the prior year. The increase in revenue was generated by both an increase in the number of homes delivered of 6.6%, as well as an increase of 10.3% in the average price per home. The increase in the number of homes delivered was driven by an increase in the number of selling communities open period over period. The increase in our average price per home was driven by increased pricing power as a result of strong market dynamics. Income before income tax for the year ended December 31, 2019 includes $4.5 million of non-recurring items including $2.8 million of impairment charges associated with the rebranding of Wade Jurney Homes to Century Complete and $1.7 million associated with purchase accounting. Financial Services Our Financial Services segment generated income before income tax of $48.5 million for the year ended December 31, 2020, a 353.9% increase over the prior year. The increase was driven by the year over year increase in the number of mortgages originated of 98% to 6,918 for the year ended December 31, 2020, coupled with increasing spreads on loans sold to third parties as a result of the demand for mortgages. The increase in the number of mortgages originated was due to an increase in our capture rate from 43% for the year ended December 31, 2019 to 64% for the year ended December 31, 2020 and the increase in the number of homes delivered by our Century Communities and Century Complete brands year over year. The following table presents selected operational data for our Financial Services segment (dollars in thousands): Year Ended December 31, 2020 2019 Total originations: Number of loans 6,918 3,497 Principal $ 2,045,871 $ 1,044,885 Loan capture rate of Century homebuyers 64 % 43 % Century 74 % 56 % Century Complete 40 % 19 % Average FICO score 735 736 Loans sold to third parties: Number of loans sold 6,587 3,241 Principal $ 1,945,113 $ 967,616  Corporate During the year ended December 31, 2020, our Corporate segment generated losses of $89.7 million, as compared to losses of $89.6 million during 2019. During 2020, we experienced an increase in compensation costs for our Corporate segment of approximately $14.5 million as a result of increased non-cash stock-based compensation expense, and increase in bonus expense due to record company performance in 2020. This increase was partially offset by the non-recurring loss on debt extinguishment of $10.8 million during 2019 and a $3.6 million decrease across various corporate selling, general, and administrative costs due to certain restrictions from the COVID-19 pandemic. Homebuilding Gross Margin Homebuilding gross margin represents home sales revenue less cost of home sales revenues and inventory impairment. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, increased for the year ended December 31, 2020 to 18.4%, as compared to 17.7% for the year ended December 31, 2019. The increase is partially driven by purchase accounting for acquired work in process inventory in the prior year period. In the following table, we calculate our homebuilding gross margin adjusted to exclude interest in cost of home sales revenues, inventory impairment, and purchase price accounting for acquired work in process inventory. See “Critical Accounting Policies” below and Note 3 - Business Combinations in the Notes to the Consolidated Financial Statements for additional discussion regarding our methodology for estimating the fair value of acquired work in process inventory. 48 Table of Contents ( dollars in thousands) Year ended December 31, 2020 % 2019 % Home sales revenues $ 3,027,167 100.0 % $ 2,481,465 100.0 % Cost of home sales revenues (2,468,133) (81.5) % (2,040,241) (82.2) % Inventory impairment (2,172) (0.1) % (1,993) (0.1) % Gross margin from home sales 556,862 18.4 % 439,231 17.7 % Add: Inventory impairment 2,172 0.1 % 1,993 0.1 % Add: Interest in cost of home sales revenues 72,002 2.4 % 61,150 2.5 % Adjusted homebuilding gross margin excluding interest and inventory impairment (1) 631,036 20.8 % 502,374 20.2 % Add: Purchase price accounting for acquired work in process inventory — — % 1,724 0.1 % Adjusted homebuilding gross margin excluding interest, inventory impairment and purchase price accounting for acquired work in process inventory (1) $ 631,036 20.8 % $ 504,098 20.3 % (1) This non-GAAP financial measure should not be used as a substitute for the Company’s operating results in accordance with GAAP . An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. Excluding inventory impairments, interest in cost of home sales and purchase price accounting, our adjusted homebuilding gross margin percentage was 20.8% for the year ended December 31, 2020, as compared to 20.3% for the year ended December 31, 2019. We believe the above information is meaningful as it isolates the impact that indebtedness and acquisitions have on our homebuilding gross margin and allows for comparability of our gross margins to previous periods and our competitors. Selling, General and Administrative Expense (dollars in thousands) Year ended December 31, Increase (Decrease) 2020 2019 Amount % Selling, general and administrative $ 341,710 $ 301,525 $ 40,185 13.3 % As a percentage of home sales revenue 11.3 % 12.2 % Our selling, general and administrative costs increased $40.2 million for the year ended December 31, 2020 as compared to 2019. The increase was primarily attributable to the following: (1) an increase of $21.4 million in commission expense resulting from a 22.0% increase in home sales revenues, and (2) an increase of $24.6 million in compensation related expenses, including incentive compensation and benefits, as a result of record performance. These increases were partially offset by a $5.7 million decrease in advertising costs as many of our advertising initiatives shifted online due to the COVID-19 pandemic. Income Tax Expense Our income tax expense for the year ended December 31, 2020 was $64.1 million, or 23.7% of income before income tax expense, as compared to $19.6 million, or 14.8% of income before income tax expense, for the year ended December 31, 2019. Our effective tax rate for the year ended December 31, 2019 was benefited by a $17.3 million benefit related to the Energy Efficient Home Credit. Our effective tax rate of 23.7% for the year ended December 31, 2020 is comprised of our statutory federal and blended state rate of 25.1% offset by certain permanent differences between taxable income and GAAP income before tax expense. These differences include certain compensation paid to executive officers which is not deductible for federal income tax purposes and increased our effective tax rate by 1.7%, and the Energy Efficient Home Credit which benefited our effective tax rate by 3.2%. The Energy Efficient Home Credit provides eligible contractors a federal income tax credit of $2,000 for each home delivered that meets the energy saving and certification requirements under the statute. On December 20, 2019, an extension of the Federal Energy Credits was enacted into law, which extended the availability of the credit to homes delivered during the years ended December 31, 2020, 2019 and 2018. Of the $17.3 million benefit recognized during the year ended December 31, 2019, approximately $6.9 million, $6.1 million and $4.3 million were related to homes closed during the years ended 2019, 2018 and 2017 and prior, respectively. On December 27, 2020, an additional extension of the Federal Energy Credit was enacted which extended the current provisions through December 31, 2021. 49 Table of Contents Segment Assets (dollars in thousands) December 31, December 31, Increase (Decrease) 2020 2019 Amount Change West $ 536,907 $ 610,248 $ (73,341) (12.0) % Mountain 778,198 635,201 142,997 22.5 % Texas 207,746 232,887 (25,141) (10.8) % Southeast 329,930 441,818 (111,888) (25.3) % Century Complete 218,604 244,827 (26,223) (10.7) % Financial Services 421,153 254,282 166,871 65.6 % Corporate 352,555 80,704 271,851 336.8 % Total assets $ 2,845,093 $ 2,499,967 $ 345,126 13.8 % Lots owned and December 31, 2020 December 31, 2019 % Change controlled Owned Controlled Total Owned Controlled Total Owned Controlled Total West 3,266 3,392 6,658 3,133 1,413 4,546 4.2 % 140.1 % 46.5 % Mountain 7,951 5,910 13,861 4,771 7,949 12,720 66.7 % (25.7) % 9.0 % Texas 3,035 5,873 8,908 3,326 2,278 5,604 (8.7) % 157.8 % 59.0 % Southeast 3,076 6,389 9,465 4,160 3,827 7,987 (26.1) % 66.9 % 18.5 % Century Complete 3,473 7,600 11,073 3,324 4,761 8,085 4.5 % 59.6 % 37.0 % Total 20,801 29,164 49,965 18,714 20,228 38,942 11.2 % 44.2 % 28.3 % Of our total lots owned and controlled as of December 31, 2020, 41.6% were owned and 58.4% were controlled, as compared to 48.1% owned and 51.9% controlled as of December 31, 2019. Total assets increased by $345.1 million, or 13.8%, to $2.8 billion at December 31, 2020, as compared to $2.5 billion at December 31, 2019. The increase is primarily driven by excess cash generated from homes sales in 2020 and an increase in mortgage loans originated and closed in our Financial Services segment. Other Homebuilding Operating Data Net new home contracts Year ended December 31, Increase 2020 2019 Amount % Change West 1,526 1,013 513 50.6 % Mountain 2,389 1,637 752 45.9 % Texas 1,448 997 451 45.2 % Southeast 2,191 1,635 556 34.0 % Century Complete 3,268 2,579 689 26.7 % Total 10,822 7,861 2,961 37.7 % Net new home contracts (new home contracts net of cancellations) for the year ended December 31, 2020 increased by 2,961 homes, or 37.7%, to 10,822, as compared to 7,861 for the year ended December 31, 2019. The increase in our net new home contracts was primarily driven by stronger sales across all of our segments as the homebuilding industry continued to experience positive trends during 2020. Since the 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 years ended December 31, 2020 and 2019 by segment is included in the table below: Year ended December 31, Increase 2020 2019 Amount % Change West 7.5 5.6 1.9 33.9 % Mountain 5.2 3.7 1.5 40.5 % Texas 8.0 4.2 3.8 90.5 % 50 Table of Contents Southeast 7.0 3.0 4.0 133.3 % Century Complete 2.7 2.3 0.4 17.4 % Total 4.6 3.1 1.5 48.4 % Our absorption rate increased from 3.1 per month for the year ended December 31, 2019 to 4.6 per month during the year ended December 31, 2020. Selling communities at period end As of December 31, Increase/(Decrease) 2020 2019 Amount % Change West 17 15 2 13.3 % Mountain 38 37 1 2.7 % Texas 15 20 (5) (25.0) % Southeast 26 45 (19) (42.2) % Century Complete 102 95 7 7.4 % Total 198 212 (14) (6.6) % Our selling communities decreased by 14 communities to 198 communities at December 31, 2020, as compared to 212 communities at December 31, 2019. The decrease was a result of the strong sales environment, which outpaced new community openings. Century Complete sells primarily from retail studios and online via the internet, instead of from traditional model homes. While Century Complete has historically purchased land and constructed homes within traditional communities similar to our Century Communities brand, we also purchase land and construct a significant number of homes on scattered lots outside of traditional communities. As the brand has grown, entered new markets and expanded its land pipeline, we have increasingly operated within traditional communities, and now rely, to a lesser degree, on scattered lots. Additionally, we have organized our construction and sales operations for scattered lot positions within “pods” which are clustered together lot positions, which we operate more like a traditional community. Accordingly, our selling communities at period end for the 2019 period has been updated from amounts previously disclosed to reflect the above for our Century Complete brand. As of December 31, Backlog 2020 2019 % Change (dollars in thousands) Homes Dollar Value Average Sales Price Homes Dollar Value Average Sales Price Homes Dollar Value Average Sales Price West 486 $ 294,113 $ 605.2 202 $ 104,652 $ 518.1 140.6 % 181.0 % 16.8 % Mountain 789 365,328 463.0 373 159,248 426.9 111.5 % 129.4 % 8.5 % Texas 385 134,023 348.1 275 72,906 265.1 40.0 % 83.8 % 31.3 % Southeast 801 306,644 382.8 513 186,307 363.2 56.1 % 64.6 % 5.4 % Century Complete 978 194,094 198.5 707 114,638 162.1 38.3 % 69.3 % 22.5 % Total / Weighted Average 3,439 $ 1,294,202 $ 376.3 2,070 $ 637,751 $ 308.1 66.1 % 102.9 % 22.1 % Backlog reflects the number of homes, net of 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 December 31, 2020, we had 3,439 homes in backlog with a total value of $1.3 billion, which represents an increase of 66.1% and 102.9%, respectively, as compared to 2,070 homes in backlog with a total value of $637.8 million at December 31, 2019. The increase in backlog value is primarily attributable to the increase in backlog units and a 22.1% increase in the backlog average sales price. Liquidity and Capital Resources Overview Our principal uses of capital for the year ended December 31, 2020 were our land purchases, land development, home construction, and 51 Table of Contents the payment of routine liabilities. We use funds generated by operations, available borrowings under our revolving credit facility, and proceeds from sales of common stock, including our current at-the-market facility, 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 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. From a liquidity standpoint, we are actively acquiring and developing lots in our markets to maintain and grow our lot supply and active selling communities. As we continue to expand our business, our cash outlays for land purchases and land development to grow our lot inventory may exceed our cash generated by operations. In response to the COVID-19 pandemic, we took certain measures to ensure we were 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 acquisition and 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 December 31, 2020, we continued to have no amounts outstanding under our revolving line of credit. We increased our land acquisition and development activities during the second half of 2020, which resulted in 49,965 lots owned and controlled at December 31, 2020, a 43.4% increase as compared to June 30, 2020 and a 28.3% increase as compared to December 31, 2019. Our Financial Services operations use funds generated from operations, and availability under our mortgage repurchase facilities to finance its 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 an aggregate offering amount of up to $869 million , 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 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. Debt Our outstanding debt obligations included the following as of December 31, 2020 and 2019 (in thousands): December 31, December 31, 2020 2019 6.750% senior notes, due May 2027 (1) $ 494,768 $ 494,307 5.875% senior notes, due July 2025 (1) 396,821 396,120 Other financing obligations 3,286 6,277 Notes payable 894,875 896,704 Revolving line of credit, due April 2023 — 68,700 Mortgage repurchase facilities 259,050 174,095 Total debt $ 1,153,925 $ 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. 52 Table of Contents 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. 6.750% Senior Notes Due 2027 In May 2019, we completed a private offering of $500.0 million aggregate principal amount of our Initial 6.750% Senior Notes due 2027 (which we refer to as the “Initial Notes due 2027”) in reliance on Rule 144A and Regulation S under the Securities Act of 1933 (which we refer to as the “Securities Act”). The Initial Notes due 2027 were issued under the Indenture, dated as of May 23, 2019, among the Company, our subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee (which we refer to as the “May 2019 Indenture,” as it may be supplemented or amended from time to time). The Initial Notes due 2027 were issued at 100% of their principal amount and we received net proceeds of $493.9 million. In connection with this issuance, we deferred $6.1 million of issuance costs, which is presented in the notes payable line item of the consolidated balance sheet. In February 2020, we completed an offer to exchange approximately $500.0 million in aggregate principal amount of our Initial Notes due 2027, which are registered under the Securities Act (which we refer to as the “Exchange Notes due 2027”), for an equivalent amount of the Initial Notes due 2027 that were tendered and accepted for exchange. The terms of the Exchange Notes due 2027 are identical in all material respects to the Initial Notes due 2027, except that the Exchange Notes due 2027 are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions that are applicable to the Initial Notes due 2027 do not apply to the Exchange Notes due 2027. The Initial Notes due 2027 and Exchange Notes due 2027 (which we refer to collectively, as the “Existing Notes due 2027”) will be treated as a single series of notes under the May 2019 Indenture, and will vote as a single class of notes for all matters submitted to a vote of holders under the May 2019 Indenture. The Existing Notes due 2027 are unsecured senior obligations which are guaranteed on an unsecured senior basis by certain of our current and future subsidiaries. The May 2019 Indenture governing the Existing Notes due 2027 contains certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the Existing Notes due 2027 is due July 2027, with interest only payments due semi-annually in June and December of each year, which began on December 1, 2019. As of December 31, 2020, the aggregate obligation, inclusive of unamortized financing costs on the Existing Notes due 2027, was $494.8 million. 5.875% Senior Notes Due 2025 In May 2017, we completed a private offering of $400 million in aggregate principal amount of our 5.875% Senior Notes due 2025 (which we refer to as the “Initial Notes due 2025”) in reliance on Rule 144A and Regulation S under the Securities Act. The May 2017 Senior Notes were issued under the Indenture, dated as of May 12, 2017, among the Company, our subsidiary guarantors party thereto, and U.S Bank National Association, as trustee (which we refer to as the “May 2017 Indenture,” as it may be supplemented or amended from time to time). The Initial Notes due 2025 were issued at a price equal to 100.0% of their principal amount, and we received net proceeds of approximately $395.5 million. In December 2017, we completed an offer to exchange approximately $400.0 million in aggregate principal amount of our Initial Notes due 2025, which are registered under the Securities Act (which we refer to as the “Exchange Notes due 2025”), for an equivalent amount of the Initial Notes due 2025 that were tendered and accepted for exchange. The terms of the Exchange Notes due 2025 are identical in all material respects to the Initial Notes due 2025, except that the Exchange Notes due 2025 are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions that are applicable to the Initial Notes due 2025 do not apply to the Exchange Notes due 2025. The Initial Notes due 2025 and Exchange Notes due 2025 (which we refer to collectively, as the “Existing Notes due 2025”) will be treated as a single series of notes under the May 2017 Indenture, and will vote as a single class of notes for all matters submitted to a vote of holders under the May 2017 Indenture. The Existing Notes due 2025 are unsecured senior obligations which are guaranteed on an unsecured senior basis by certain of our current and future subsidiaries. The May 2017 Indenture governing the Existing Notes due 2025 contains certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the Existing Notes due 2025 is due July 2025, with interest only payments due semi-annually in January and July of each year. As of December 31, 2020, the aggregate obligation, inclusive of unamortized financing costs on the Existing Notes due 2025, was $396.8 million. Former 6.875% Senior Notes Due 2022 From May 2014 through January 2017, we completed three private offerings totaling $385.0 million in aggregate principal amount of our 6.875% Senior Notes due 2022 (the “Notes due 2022”) , under the Securities Act. The Notes due 2022 were issued under the 53 Table of Contents Indenture, dated as of May 5, 2014, among the Company, our subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee (which we refer to as the “May 2014 Indenture”). The Notes due 2022 were unsecured senior obligations which were guaranteed on an unsecured senior basis by certain of our current and future subsidiaries. The May 2014 Indenture governing the Notes due 2022 contained certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the 2022 Notes was due May 2022, with interest only payments due semi-annually in May and November of each year. During the year ended December 31, 2019, we extinguished $385.0 million in outstanding principal of our Notes due 2022. The extinguishment was the result of two separate transactions whereby a tender offer validly tendered $189.3 million of the Notes due 2022 on March 23, 2019 and the remaining $195.7 million was redeemed in accordance with the Indenture on June 10, 2019. The transaction resulted in a loss of $10.8 million, which is presented in loss on debt extinguishment in the consolidated statement of operations for the year ended December 31, 2019 . 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 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 December 31, 2020, no amounts were 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”), which were increased during 2020, provide Inspire with uncommitted repurchase facilities of up to an aggregate $350 million as of December 31, 2020, 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 December 31, 2020 and 2019, we had $259.1 million and $174.1 million outstanding under these Repurchase Facilities, respectively, and were in compliance with all covenants thereunder. No assurance can be provided, however, that we will remain in compliance with the covenants or have continued access to these Repurchase Facilities or substitute or replacement facilities in an amount sufficient to fund our mortgage lending business. During the years ended December 31, 2020 and 2019, we incurred interest expense on our Repurchase Facilities of $3.0 million and $2.7 million, respectively, which are included in financial services costs on our consolidated statements of operations. 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 and others. As of December 31, 2020 and December 31, 2019, we had $402.7 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. 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 54 Table of Contents 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. 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. The Distribution Agreement superseded and replaced a prior similar distribution agreement. During the year ended December 31, 2020, we sold and issued no shares of our common stock under the Distribution Agreement, resulting in $100.0 million remaining as of December 31, 2020. During the year ended December 31, 2019, we sold and issued an aggregate of 2.7 million shares of our common stock, under the various distribution agreements in effect during this period, which provided gross proceeds to us of $80.1 million and in connection with such sales, we paid total commissions and fees to the sales agents of $0.6 million. 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 year ended December 31, 2020, no shares were repurchased under our stock share repurchase program. The maximum number of shares that may yet be purchased under the stock repurchase program as of December 31, 2020 is 3,812,939. Cash Flows—Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019 For the years ended December 31, 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. Net cash provided by operating activities increased to $340.6 million during the year ended December 31, 2020 from net cash used of $68.8 million during 2019. The increase in cash provided by operations is primarily a result of a $93.2 million increase in net income and comparatively favorable changes in assets and liabilities for the year ended December 31, 2020 as compared to the year ended December 31, 2019.  Net cash used in investing activities was $8.4 million during the year ended December 31, 2020, compared to $14.3 million used during 2019. The decrease was primarily driven by less purchases of property and equipment.  Net cash provided by financing activities was $7.4 million during the year ended December 31, 2020, compared to $105.2 million during 2019. The decrease in cash provided by financing activities was primarily attributable to a $108.1 million decrease in proceeds from issuance and extinguishment of senior notes as compared to the year ended December 31, 2019. As of December 31, 2020, our cash and cash and equivalents and restricted cash was $398.1 million. 55 Table of Contents Contractual Obligations Our contractual obligations as of December 31, 2020 were as follows (in thousands): Payments due by period Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years Long-term debt maturities, including interest (1) $ 1,495,444 $ 325,611 $ 114,500 $ 504,708 $ 550,625 Operating leases (2) 18,527 5,649 9,130 3,748 - Total contractual obligations $ 1,513,971 $ 331,260 $ 123,630 $ 508,456 $ 550,625 (1) Principal payments in accordance with our credit facility, repurchase facilities and long-term debt agreements, and interest payments for outstanding long-term debt obligations. Interest on variable rate debt was calculated using the interest rate as of December 31, 2020. (2) Operating lease obligations do not include payments to property owners covering real estate taxes and common area maintenance. We are subject to certain obligations associated with entering into contracts (including land option contracts) for the purchase, development, and sale of real estate in the routine conduct of our business. Purchase and option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties until we have determined whether to exercise our option, which may serve to reduce our financial risks associated with long-term land holdings. At December 31, 2020, we had $40.0 million of deposits for land option contracts, of which $8.7 million are refundable. We expect to acquire the majority of such land within the next three years. 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 December 31, 2020, we had outstanding purchase contracts and option contracts for 29,164 lots totaling approximately $1.1 billion 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 year ending December 31, 2020, with performance on the remaining purchase and option contacts occurring in future periods. 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. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions. We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities and others. As of December 31, 2020 and 2019, we had $402.7 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. 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 December 31, 2020, Century Communities, Inc. had outstanding $900.0 million in total principal amount of Senior Notes. 56 Table of Contents 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 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’ 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. Summarized Balance Sheet Data (in thousands) December 31, 2020 Assets Cash and cash equivalents $ 307,167 Cash held in escrow 23,149 Accounts receivable 18,742 Inventories 1,929,664 Mortgage loans held for sale — Prepaid expenses and other assets 94,181 Property and equipment, net 27,360 Deferred tax assets, net 12,450 Goodwill 30,395 57 Table of Contents Total assets $ 2,443,108 Liabilities and stockholders’ equity Liabilities: Accounts payable $ 106,288 Accrued expenses and other liabilities 267,708 Intercompany loan payable 17,600 Notes payable 894,875 Revolving line of credit — Total liabilities 1,286,471 Stockholders’ equity: 1,156,637 Total liabilities and stockholders’ equity $ 2,443,108 Summarized Statement of Operations Data (in thousands) Year Ended December 31, 2020 Total homebuilding revenues 3,057,884 Total homebuilding cost of revenues (2,490,062) Selling, general and administrative (341,710) Inventory impairment and other (2,172) Other income (expense) (3,014) Income before income tax expense 220,926 Income tax expense (52,389) Net income 168,537 Critical Accounting Policies Critical accounting estimates are those that we believe are both significant and that 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. Our management believes that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require among the most difficult, subjective or complex judgments: Revenue Recognition Under ASC 606, revenues from home sales and the related profit are recorded when our performance obligations are satisfied, which generally occurs when the respective homes are closed and title has passed to our homebuyers. We generally satisfy our performance obligations in less than one year from the contract date. Proceeds from home closings that are held for our benefit in escrow, are presented as cash held in escrow on our consolidated balance sheets. Cash held for our benefit in escrow is typically held by the escrow agent for less than a few days. When it is determined that the earnings process is not complete and we have remaining performance obligations that are material in the context of the contract, the related revenue and costs are deferred for recognition in future periods until those performance obligations have been satisfied. Prior to satisfying our performance obligations, we typically receive deposits from customers related to sold but undelivered homes. These deposits are classified as earnest money deposits and are included in accrued expenses and other liabilities on our consolidated balance sheets. Earnest money deposits totaled $30.6 million and $10.6 million at December 31, 2020 and December 31, 2019, respectively. Inventories and Cost of Sales We capitalize pre-acquisition, land, development, and other allocated costs, including interest, during development and home construction. Land, development, and other common costs are allocated to inventory using the relative-sales-value method; however, as lots within a project typically have comparable market values, we generally allocate land, development, and common costs equally to each lot within the project. Home construction costs are recorded using the specific-identification method. Cost of sales for homes closed includes the allocation of construction costs of each home and all applicable land acquisition, land development, and related common costs, both incurred and estimated to be incurred. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining homes in the community. 58 Table of Contents When a home is closed, the Company generally has not paid all incurred costs necessary to complete the home, and a liability and a charge to cost of home sales revenues are recorded for the amount that is estimated will ultimately be paid related to completed homes. Impairment of Real Estate Inventories We review all of our communities for an indicator of impairment and record an impairment loss when conditions exist where the carrying amount of inventory is not recoverable and exceeds its fair value. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases to gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses. We prepare and analyze cash flows at the lowest level for which there is identifiable cash flows that are independent of the cash flows of other groups of assets, which we have determined as the community level. If events or circumstances indicate that the carrying amount may be impaired, such impairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective inventories. Such losses, if any, are reported within costs of sales. When estimating undiscounted cash flows, we make various assumptions, including the following: the expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives offered by us or other builders in other communities, and future sales price adjustments based on market and economic trends; the costs incurred to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction, and selling and marketing costs; any alternative product offerings that may be offered that could have an impact on sales, sales prices and/or building costs; and alternative uses for the property. For the years ended December 31, 2020 and 2019, the following table shows the number of communities for which we identified an indicator of impairment and therefore tested for whether an impairment existed, compared to the total number of communities that existed during such period. Number of Communities Tested for Impairment Total Number of Existing Communities Year ended December 31, 2020 13 198 Year ended December 31, 2019 (1) 13 212 (1) The selling communities at period end for 2019 have been adjusted from prior year presentations to reflect selling communities in our Century Complete segment of 95, which business was acquired in 2018, and for which selling communities was previously not disclosed. For the year ended December 31, 2020, we recorded impairment charges on four communities totaling $2.2 million. During the year ended December 31, 2019, we recorded impairment charges on five communities totaling $2.0 million. The impairment charges are included in inventory impairments and other in our consolidated statement of operations. Warranties Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the consolidated balance sheet, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an analysis that incorporates historical payment trends and adjust the amounts recorded if necessary. Mortgage Loans Held for Sale and Revenue Recognition Mortgage loans held for sale, including the rights to service the mortgage loans, mortgage loans in process for which interest rates were committed to the borrowers (referred to as “interest rate lock commitments”), as well as the derivative instruments used to economically hedge our interest rate risk, which are typically forward commitments on mortgage-backed securities and interest rate lock commitments, are carried at fair value. Changes in fair value are reflected in financial services revenue on the consolidated statement of operations. Management believes carrying loans held for sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them. Also included in financial services revenue are gains and losses from the sale of mortgage loans held for sale, that are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale, and loan origination fees. Loan origination fees represent revenue earned from originating mortgage loans which generally represent a flat per loan fee based on a percentage of the original principal loan balance and are recognized at the time the mortgage loans are funded. 59 Table of Contents Stock-Based Compensation We estimate the grant date fair value of stock-based compensation awards and recognize the fair value as compensation costs over the requisite service period, which is generally three years, for all awards that vest. We value the fair value our restricted stock units equal to the closing price of our common stock on the New York Stock Exchange on the date of grant. Stock-based compensation expense associated with outstanding performance share units is measured using the grant date fair value and is based on the estimated achievement of the established performance criteria at the end of each reporting period until the performance period ends, recognized on a straight-line basis over the performance period. Stock-based compensation expense is only recognized for performance share units that we expect to vest, which we estimate based upon an assessment of the probability that the performance criteria will be achieved. The performance share units granted during the fiscal years ended December 31, 2020 and 2019 have a three year performance-based metric measured over performance periods from January 1, 2019 to December 31, 2021 and from January 1, 2019 to December 31, 2020, respectively. Stock-based compensation expense associated with outstanding performance share units is updated for actual forfeitures. Income Taxes We account for income taxes in accordance with ASC 740, Income Taxes , which requires recognition of deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of its assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. In addition, when it is more likely than not that a tax position will be sustained upon examination by a tax authority that has full knowledge of all relevant information, we measure the amount of tax benefit from the position and record the largest amount of tax benefit that is more likely than not of being realized after settlement with a tax authority. Our policy is to recognize interest to be paid on an underpayment of income taxes in interest expense and any related statutory penalties in the provision for income taxes on our consolidated statements of operations. Goodwill We evaluate goodwill for possible impairment in accordance with ASC 350, Intangibles–Goodwill and Other, on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use a two step process to assess whether or not goodwill can be realized. The first step is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. If the qualitative assessment indicates a stable or improved fair value, no further testing is required. If a qualitative assessment indicates that a significant decline to fair value of a reporting unit is more likely than not, we will proceed to the second step where we calculate the fair value of a reporting unit based on discounted future cash flows. If this step indicates that the carrying value of a reporting unit is in excess of its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Business Combinations We account for business combinations in accordance with ASC Topic 850, Business Combinations , if the acquired assets assumed and liabilities incurred constitute a business. We consider acquired companies to constitute a business if the acquired net assets and processes have the ability to create outputs in the form of revenue. For acquired companies constituting a business, we recognize the identifiable assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid over the fair value of the identifiable assets as goodwill. The fair value of acquired inventories largely depends on the stage of production of the acquired land and work in process inventory. For acquired land inventory, we typically utilize, with the assistance of a third party appraiser, a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimates include future per lot development costs, construction and overhead costs, mix of products sold in each community, as well as average sales price. For work in process inventories, we estimate the fair value based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. Non-GAAP Financial Measures In this Form 10-K, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net 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 60 Table of Contents 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 years ended December 31, 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. Year ended December 31, 2020 2019 Net income $ 206,157 $ 112,994 Income tax expense 64,083 19,641 Interest in cost of home sales revenues 72,002 61,150 Interest expense (income) (1,141) 16 Depreciation and amortization expense 13,141 13,382 EBITDA 354,242 207,183 Loss on debt extinguishment — 10,832 Inventory impairment and other 2,172 4,783 Purchase price accounting for acquired work in process inventory — 1,724 Adjusted EBITDA $ 356,414 $ 224,522 61 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.  December 31, 2020 2019 Total homebuilding debt $ 894,875 $ 965,404 Total stockholders' equity 1,280,705 1,061,699 Total capital $ 2,175,580 $ 2,027,103 Homebuilding debt to capital 41.1% 47.6% Total homebuilding debt $ 894,875 $ 965,404 Cash and cash equivalents (394,001) (55,436) Cash held in escrow (23,149) (35,308) Net homebuilding debt $ 477,725 $ 874,660 Total stockholders' equity 1,280,705 1,061,699 Net capital $ 1,758,430 $ 1,936,359 Net homebuilding debt to net capital 27.2% 45.2% ‎ 62 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. Year ended December, 31 2020 2019 Numerator Net income $ 206,157 $ 112,994 Denominator Weighted average common shares outstanding - basic 33,312,554 30,886,382 Dilutive effect of restricted stock units 297,544 300,570 Weighted average common shares outstanding - diluted 33,610,098 31,186,952 Earnings per share: Basic $ 6.19 $ 3.66 Diluted $ 6.13 $ 3.62 Adjusted Earnings per share Numerator Income before income tax expense $ 270,240 $ 132,635 Restructuring costs 1,584 - Loss on debt extinguishment - 10,832 Inventory impairment and other 2,172 4,783 Purchase price accounting for acquired work in process inventory - 1,724 Adjusted income before income tax expense 273,996 149,974 Income tax expense, adjusted (1) (64,974) (23,803) Adjusted net income 209,022 126,171 Denominator - Diluted 33,610,098 31,186,952 Adjusted diluted earnings per share $ 6.22 $ 4.05 (1) For the years ended December 31, 2020 and 2019, our adjusted income tax expense is reflective of our statutory income tax rate adjusted for those permanent differences, including the benefit of Federal Energy Credits of $8.5 million and $17.3 million, respectively, discussed in Note 12 – Income Taxes in the Notes to the Consolidated Financial Statements . For the year ended December 31, 2018, our adjusted income tax expense is reflective of our statutory income tax rate adjusted for those permanent differences, excluding the remeasurement of our deferred tax assets of $1.5 million, discussed in Note 12 – Income Taxes in the Notes to the Consolidated Financial Statements .