What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-27 compared with 2022-07-28 · 249 added, 191 removed, 406 unchanged (52% of the section changed)

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Statements regarding the following subjects, among others, may be forward-looking and subject to risks and uncertainties including among others:

 econo mic changes, either nationally or in the markets in which we operate, including increased interest rates, inflation, and employment levels;

 econo mic changes, either nationally or in the markets in which we operate, including increased interest rates and inflation, and decreased employment levels;

 shortages of or increased prices for labor, land or raw materials, including lumber, used in housing construction and resource shortages;

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 delays in land development or home construction resulting from adverse weather conditions or other events outside our control;

 delays in completion of projects, land development or home construction, or reduced consumer demand for housing resulting from significant weather conditions and natural disasters in the geographic areas where we operate

 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 r eceipt of municipal, utility and other regulatory approvals and the opening of projects;

 the timing of r eceipt of municipal, utility and other regulatory approvals and the opening of projects and construction and completion of our homes;

 the i mpact and cost of compliance with evolving environmental, health and safety and other laws and regulations and third-party challenges to required permits and other approvals and potential legal liability in connection therewith;

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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

revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Except as required by law, we are not obligated to, and do not intend to, update or 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.

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Our Century Complete brand targets entry-level homebuyers, primarily sells homes through retail studios and the internet and generally provides no option or upgrade opportunities.

We now have six states where both Century brands have a presence and we believe there are more opportunities for increased penetration within our over 45 high-growth markets to enable both brands to benefit from increased scale and enhanced operational efficiencies.

Our homebuilding operations are organized into the following five reportable segments:

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Additionally, we prefer 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 homes and deploy our capital.

Of the 5,061 homes delivered during the first six months of 2022, approximately 77% of our deliveries were made to entry-level homebuyers and approximately 96% of homes delivered were built as move-in ready homes.

During the second quarter of 2022 we experienced a moderation of sales pace across our markets resulting in a decrease of 28.4% in our net new home contracts as compared to the prior year period.

This decrease in our sales pace was consistent with second quarter 2022 trends seen in the overall housing market, as increases in interest rates on mortgages, rising inflation, and macro-economic uncertainty caused demand for home sales to decrease from the historically strong market conditions experienced since the second quarter of 2020.

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.

Of the 7,691 homes delivered during the first nine months of 2022, approximately 76% of our deliveries were made to entry-level homebuyers that were below the Federal Housing Administration-insured mortgage limits and approximately 96% of homes delivered were built as move-in ready homes.

In recent months, the Federal Reserve’s ongoing raising of the federal funds interest rate to mitigate inflation has now considerably impacted the U.S.

housing market.

Beginning in the second quarter of 2022 and continuing through the third quarter of 2022, we experienced a moderation of sales pace across our markets, resulting in a third quarter decrease of 51.9% in our net new home contracts as compared to the prior year period.

In addition, we experienced an increase in cancellation rates to a combined 35%, with a 31% cancellation rate for Century Communities and a 41% cancellation rate for Century Complete, primarily driven by the increases in mortgage rates.

This decrease in our sales pace was consistent with third quarter 2022 trends seen in the overall housing market, as increases in interest rates on mortgages, rising inflation, and macro-economic uncertainty caused demand for home sales to decrease from the historically strong market conditions experienced since the second quarter of 2020.

Further, this uncertainty has led a majority

of our recent homebuyers to seek homes with near-term completion schedules, allowing them to lock interest rates closer to a home closing.

In response to the interest rate volatility and to maintain sales momentum, we have increased incentive offerings across our communities, including discounts on option and upgrades and financing incentives, which we expect will result in downward pressure to our homebuilding margins during the first half of 2023.

We have also taken steps to reduce our fixed costs in light of decreased demand for our homes compared to prior periods.

We anticipate the homebuilding markets in each of our operating segments will continue to be tied to both the macro-economic environment and the local economy.

We believe future demand for our homes is uncertain as future economic and market conditions are uncertain, in particular with respect to inflation;

the impact of raising the federal funds interest rate by the Federal Reserve;

the extent to which and how long COVID-19 and related government directives, actions, and economic relief efforts will impact the U.S.

the impact of recent and anticipated future increases to the federal funds interest rate by the Federal Reserve;

the extent to which and how long government monetary directives, actions, and economic relief efforts will impact the U.S.

economy, financial markets, credit and mortgage markets;

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levels of new and existing homes for sale;

prevailing home prices, availability and cost of land, labor and construction materials;

prevailing home and rental prices;

availability and cost of land, labor and construction materials;

demographic trends;

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As a result, our past performance may not be indicative of our future results.

Despite the future macro-economic uncertainty, we believe we are well-positioned to benefit from the ongoing shortage of both new and resale homes available for purchase in our key markets and the favorable demographics that support the need for new housing.

Subject to further 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 both span the home buying segment, and focus on affordable price points, and our current and future inventories of attractive land positions.

As we have grown, we have continued to focus on maintaining an appropriate balance of home and land inventories in relation to anticipated future demand, as well as prudent leverage, and, as a result, we believe we are well positioned to continue to execute on our strategy in order to grow and optimize stockholder returns.

Despite the future macro-economic uncertainty, especially in relation to the recent higher interest rate environment, we believe we are well-positioned to benefit from the ongoing shortage of both new and resale homes available for purchase in our key markets and the favorable demographics that support the need for new housing.

We believe our operations are well-positioned to withstand volatility in future market conditions as a result of our product offerings which both span the home buying segment and focus on affordable price points, and our current and future inventories of attractive land positions.

We have continued to focus on maintaining an appropriate balance of home and land inventories in relation to anticipated future demand, as well as prudent leverage, and, as a result, we believe we are well positioned to continue to execute on our strategy in order to optimize stockholder returns.

Results of Operations

During the three and six months ended June 30, 2022, we generated $213.6 million and $402.4 million in income before income tax expense, respectively, and net income of $158.7 million, or $4.78 per diluted share, and $301.2 million, or $8.97 per diluted share, respectively, representing substantial increases as compared to the respective prior year periods, and resulting in a 33.7% return on equity on an annualized basis for the three months ended June 30, 2022.

During the first six months of 2022, we paid cash dividends to our stockholders of $0.20 per share, and we also returned capital to our stockholders via share repurchases of 1.8 million shares for $98.3 million or a weighted average price of $54.46 per share.

Our second quarter 2022 financial results for the second quarter are reflective of the strength of our markets during previous quarters when the homes were contracted for which allowed us to pass on higher costs through higher selling prices and thereby positively affecting our margins during the first six months of 2022.

While we continued to experience labor and raw material shortages and municipal and utility delays in many of our markets, the severity of the shortages and delays moderated during the second quarter of 2022.

During the three and six months ended June 30, 2022, we delivered 2,713 and 5,061 homes, respectively, with an average sales price of $418.2 thousand and $419.5 thousand, respectively.

Average sales price increased 15.3% and 18.9% during the three and six months ended June 30, 2022 as compared to the respective prior year period, driving homebuilding revenues of $1.1 billion and $2.1 billion, respectively, representing increases of 12.9% and 7.3% over the respective prior year period.

The number of homes delivered represent decreases of 2.1% and 9.1%, respectively, as compared to the respective prior year period, which were primarily driven by the timing of new community openings.

As of June 30, 2022, we had a backlog of 4,767 homes, a 7.2% increase as compared to June 30, 2021, representing approximately $2.0 billion in sales value, and a 12.2% increase as compared to June 30, 2021.

During the three and six months ended June 30, 2022, we generated financial services revenue of $22.8 million and $49.1 million, respectively, representing decreases of 23.7% and 22.7% over the respective prior year period, driven by a reduced number of mortgages originated, as well as reduced gain on sale margins on loans sold to third parties.

We ended the second quarter of 2022 with $141.0 million outstanding under our revolving line of credit, $78.0 million of cash and cash equivalents, $82.5 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 33.6%.

Additionally, we increased our land acquisition and development activities during the first six months of 2022 to bolster our lot pipeline and support future community growth, which resulted in 75,551 lots owned and controlled at June 30, 2022, a 15.2% increase as compared to June 30, 2021 and a 5.4% decrease as compared to December 31, 2021.

During the six months ended June 30, 2022, our Century Living operations commenced construction on a 425-unit multi-family project in Lone Tree, Colorado, which we anticipate will be available for leasing in 2024.

The following table summarizes our results of operations for the three and six months ended June 30, 2022 and 2021.

During the three and nine months ended September 30, 2022, we generated $172.1 million and $574.5 million in income before income tax expense, respectively, and net income of $144.5 million, or $4.44 per diluted share, and $445.6 million, or $13.41 per diluted share, respectively, representing substantial increases as compared to the respective prior year periods, and resulting in a 33.2% return on equity on an annualized basis for the trailing twelve months.

During the first nine months of 2022, we paid cash dividends to our stockholders of $0.20 per share, and we also returned capital to our stockholders via share repurchases of 2.3 million shares for $120.6 million or a weighted average price of $52.32 per share.

Our results for the third quarter of 2022 are reflective of the strength of our markets during previous quarters when the homes were contracted for which allowed us to pass on higher costs through higher selling prices and thereby positively affecting our margins during the third quarter of 2022.

While we continued to experience labor and raw material shortages and municipal and utility delays in many of our markets, the severity of the shortages and delays began to moderate in the second quarter of 2022 and continued through the third quarter of 2022, resulting in improvements to our construction cycle times.

During the three and nine months ended September 30, 2022, we generated homebuilding revenues of $1.1 billion and $3.3 billion, respectively, representing increases of 20.7% and 11.6% over the respective prior year period.

During the three and nine months ended September 30, 2022, we delivered 2,630 and 7,691 homes, respectively, with an average sales price of $425.3 thousand and $421.5 thousand, respectively.

The number of homes delivered during the three and nine months ended September 30, 2022 represent an increase of 13.3% and a decrease of 2.5%, respectively, as compared to the respective prior year period, and were primarily driven by the timing of new community openings.

Average sales price increased 7.6% and 15.4% during the three and nine months ended September 30, 2022 as compared to the respective prior year period.

As of September 30, 2022, we had a backlog of 3,455 homes, a 29.0% decrease as compared to September 30, 2021, representing approximately $1.4 billion in sales value, a 28.3% decrease as compared to September 30, 2021.

During third quarter of 2022, Hurricane Ian had a modest impact on our total deliveries, primarily affecting our Century Complete segment, and we expect additional impacts in the fourth quarter of 2022 in those affected regions due to disruptions to the supply chain, municipalities and labor availability.

During the three and nine months ended September 30, 2022, we generated financial services revenue of $23.3 million and $72.4 million, respectively, representing decreases of 20.0% and 21.8% over the respective prior year period, driven by a reduced number of mortgages originated, as well as reduced gain on sale margins on loans sold to third parties.

We ended the third quarter of 2022 with $165.0 million outstanding under our revolving line of credit, $98.2 million of cash and cash equivalents, $84.0 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 32.5%.

Additionally, we have continued to strategically manage our lot pipeline, while selectively reducing our land acquisition and development activities by terminating certain contracts in our markets that did not meet our investment criteria, resulting in 62,788 lots owned and controlled at September 30, 2022, a 16.9% decrease as compared to September 30, 2021 and a 21.4% decrease as compared to December 31, 2021.

During the nine months ended September 30, 2022, our Century Living operations commenced construction on two multi-family projects in Colorado.

First, a 425-unit multi-family project was commenced in Lone Tree, Colorado, which we anticipate will be available for leasing in 2024, and second, a 227-unit multi-family project was commenced in Highlands Ranch, Colorado, which we anticipate will be available for leasing in the second half of 2023.

The following table summarizes our results of operations for the three and nine months ended September 30, 2022 and 2021.

(in thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Consolidated Statements of Operations:

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Selling, general, and administrative

Loss on debt extinguishment

Inventory impairment and other

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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 includes inventory impairment, which is included within inventory impairment and other on our condensed consolidated financial statements.

No inventory impairments were recognized for the three and six months ended June 30, 2022 and we recognized nominal inventory impairment for the three and six months ended June 30, 2021.

(2) Homebuilding gross margin percentage for the nine months ended September 30, 2021 includes inventory impairment, which is included within inventory impairment and other on our condensed consolidated financial statements.

No inventory impairments were recognized for the three and nine months ended September 30, 2022 and for the three months ended September 30, 2021.

Results of Operations by Segment

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New Homes Delivered

Average Sales Price of Homes Delivered

Average Sales Price

of Homes Delivered

Home Sales Revenues

Income before Income Tax Expense

Three Months Ended June 30,

Income before

Income Tax Expense

Three Months Ended

September 30,

Three Months Ended

September 30,

Three Months Ended

September 30,

Three Months Ended September 30,

Century Complete

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New Homes Delivered

Average Sales Price of Homes Delivered

Average Sales Price

of Homes Delivered

Home Sales Revenues

Income before Income Tax Expense

Six Months Ended June 30,

Income before

Income Tax Expense

Nine Months Ended

September 30,

Nine Months Ended

September 30,

Nine Months Ended

September 30,

Nine Months Ended

September 30,

Century Complete

Financial Services

During the three and six months ended June 30, 2022, our West segment generated income before income tax expense of $77.9 million and $149.2 million, respectively, a 90.6% and 118.2% increase, respectively, over the respective prior year period.

These increases were driven by increases in home sales revenue of $56.3 million and $133.3 million, respectively, and increases of 931 basis points and 1,066 basis points, respectively, in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margins on home sales.

The revenue increases during the three and six months ended June 30, 2022 were primarily generated by increases of 10.6% and 16.8% in the number of homes delivered, as well as increases of 11.8% and 12.6% in the average sales price per home.

For both the three and six month comparisons, the increases in the number of homes delivered were driven by an increase in the number of open communities as compared to the prior year period and the average sales price increase were driven by the mix of deliveries within individual communities.

During the three months ended June 30, 2022, our Mountain segment generated income before income tax expense of $51.5 million, a 7.7% decrease over the respective prior year period.

This decrease was primarily driven by a decrease in home sales revenue of $13.8 million.

During the six months ended June 30, 2022, our Mountain segment generated income before income tax expense of $108.5 million, remaining relatively flat over the respective prior year period.

Revenue decreased during the three and six months ended June 30, 2022, primarily driven by decreases of 25.0% and 25.0%, respectively, in the number of homes delivered, partially offset by increases of 27.0% and 28.0%, respectively, in the average sales price per home.

For both the three and six month comparisons, the decreases in the number of homes delivered were driven by the timing of new community openings between the periods and the average sales price increases were driven by the mix of deliveries within individual communities.

During the three and six months ended June 30, 2022, our Texas segment generated income before income tax expense of $25.3 million and $45.9 million, respectively, a 32.3% and 65.9% increase, respectively, over the respective prior year period.

During the three months ended June 30, 2022, the increase was driven by an increase of 602 basis points in the percentage of income before income tax expense to home sales revenues, as a result of increased gross margins on home sales, partially offset by a decrease in home sales revenue of $8.1 million.

The revenue decrease during the three months ended June 30, 2022 was primarily generated by a decrease of 23.9% in the number of homes delivered, partially offset by an increase of 23.2% in the average sales price per home.

During the six months ended June 30, 2022, the increase in income before income tax expense was driven by an increase in home sales revenue of $28.4 million and an increase of 593 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margins on home sales.

The revenue increase during the six months ended June 30, 2022 was primarily generated by an increase of 24.8% in the average sales price per home, partially offset by a 9.4% decrease in the number of homes delivered.

For both the three and six month comparisons, the decreases in the number of homes delivered were driven by the timing of new community openings, and the average sales price increases were driven by the mix of deliveries within individual communities.

During the three and six months ended June 30, 2022, our Southeast segment generated income before income tax expense of $38.8 million and $69.6 million, respectively, a 48.6% and 40.6% increase, respectively, over the respective prior year period.

During the three months ended June 30, 2022, the increase was driven by an increase in home sales revenue of $11.9 million and an increase of 601 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margins on home sales.

The revenue increase during the three months ended June 30, 2022 was primarily generated by an increase of 13.7% in the average sales price per home.

During the six months ended June 30, 2022, the increase in income before income tax expense was driven by an increase of 837 basis points in the percentage of income before income tax expense to home sales revenues, as a result of increased gross margins on home sales, partially offset by a decrease in home sales revenue of $58.7 million.

The revenue decrease during the six months ended June 30, 2022 was primarily generated by a decrease of 22.8% in the number of homes delivered, partially offset by an increase of 9.9% in the average sales price per home.

For both the three and six month comparisons, the decreases in the number of homes delivered were driven by timing of new community openings.

During the three months ended September 30, 2022, our West segment generated income before income tax expense of $51.0 million, a 16.2% decrease over the respective prior year period.

This decrease was primarily driven by a decrease in home sales revenue of $13.3 million, primarily due to a decrease of 7.6% in the number of homes delivered, partially offset by an increase of 2.8% in the average sales price per home.

During the nine months ended September 30, 2022, our West segment generated income before income tax expense of $200.2 million, a 54.9% increase over the respective prior year period.

This increase was primarily driven by an increase in home sales revenue of $119.9 million and an increase of 598 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margins on home sales.

The revenue increase during the nine months ended September 30, 2022 was primarily driven by an increase of 7.8% in the number of homes delivered and an increase of 8.8% in the average sales price per home.

For both the three- and nine- month comparisons, the changes in the number of homes delivered were driven by the timing of new community openings, and the average sales price increases were driven by the mix of deliveries within individual communities and home price appreciation over each respective period.

During the three and nine months ended September 30, 2022, our Mountain segment generated income before income tax expense of $51.1 million and $159.6 million, respectively, remaining relatively flat over the respective prior year period.

Home sales revenue increased during the three and nine months ended September 30, 2022 by $32.9 million and $9.7 million, respectively, primarily generated by increases of 16.3% and 24.5% in the average sales price per home, respectively, partially offset by decreases of 2.9% and 18.8%, respectively, in the number of homes delivered.

For both the three- and nine-month comparisons, the decreases in the number of homes delivered were driven by timing of new community openings, and the average sales price increases were driven by the mix of deliveries within individual communities and home price appreciation over each respective period.

During the three and nine months ended September 30, 2022, our Texas segment generated income before income tax expense of $17.1 million and $63.0 million, respectively, a 43.8% and 59.2% increase, respectively, over the respective prior year period.

During the three months ended September 30, 2022, the increase was driven by an increase in home sales revenue of $30.0 million, primarily generated by an increase of 14.6% in the number of homes delivered and an increase of 17.7% in the average sales price per home.

During the nine months ended September 30, 2022, the increase in income before income tax expense was driven by an increase in home sales revenue of $58.3 million and an increase of 437 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margins on home sales.

The revenue increase during the nine months ended September 30, 2022 was primarily generated by an increase of 23.3% in the average sales price per home, partially offset by a 3.3% decrease in the number of homes delivered.

For both the three- and nine- month comparisons, the change in the number of homes delivered were driven by the timing of new community openings, and the average sales price increases were driven by the mix of deliveries within individual communities and home price appreciation over each respective period.

During the three and nine months ended September 30, 2022, our Southeast segment generated income before income tax expense of $38.4 million and $108.1 million, respectively, a 92.0% and 55.4% increase, respectively, over the respective prior year period.

During the three months ended September 30, 2022, the increase was driven by an increase in home sales revenue of $65.1 million and an increase of 432 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margins on home sales.

The revenue increase during the three months ended September 30, 2022 was primarily generated by an increase of 30.2% in the number of homes delivered and an increase of 14.9% in the average sales price per home.

During the nine months ended September 30, 2022, the increase in income before income tax expense was driven by an increase in home sales revenue of $6.4 million and an increase of 716 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margins on home sales.

The revenue increase during the nine months ended September 30, 2022 was primarily generated by an increase of 12.2% in the average sales price per home, partially offset by a 9.8% decrease in the number of homes delivered.

Century Complete

During the three and six months ended June 30, 2022, our Century Complete segment generated income before income tax expense of $40.1 million and $64.8 million, respectively, a 73.8% and 44.6% increase, respectively, over the respective prior year period.

During the three and nine months ended September 30, 2022, our Century Complete segment generated income before income tax expense of $36.9 million and $101.8 million, respectively, a 48.7% and 46.1% increase, respectively, over the respective prior year period.

These increases were driven by increases in home sales revenue of $86.7 million and $165.8 million, respectively.

The revenue increase during the three months ended June 30, 2022 was primarily generated by an increase of 22.2% in the number of homes delivered, driven by an increase in the number of open communities as compared to the prior year period, as well as an increase of 19.9% in the average sales price per home.

The revenue increase during the six months ended June 30, 2022 was primarily generated by an increase of 22.1% in the average sales price per home.

For both the three and six month comparisons, the average sales price increases were driven by the mix of deliveries within individual communities.

The revenue increases during the three and nine months ended September 30, 2022 were primarily generated by increases of 26.8% and 8.5%, respectively, in the number of homes delivered, as well as increases of 17.4% and 20.9%, respectively, in the average sales price per home.

For both the three- and nine- month comparisons, the increases in the number of homes delivered were driven by the timing of new community openings, and the average sales price increases were driven by the mix of deliveries within individual communities and home price appreciation over each respective period.

Financial Services

Our Financial Services segment originates mortgages for primarily our homebuyers, and as such, performance typically correlates to the number of homes delivered.

Our Financial Services segment generated income before income tax of $8.6 million for the three months ended June 30, 2022, a 26.4% decrease over the prior year period.

This decrease was primarily the result of a $7.1 million decrease in financial services revenue during the three months ended June 30, 2022 compared to the prior year period, due to (1) a 31.5% decrease to 1,465 in the number of mortgages originated during the three months ended June 30, 2022, due in part to a decrease in originations related to refinancing, and (2) reduced gain on sale margins on loans sold to third parties period over period.

Our Financial Services segment generated income before income tax of $19.8 million for the six months ended June 30, 2022, a 26.9% decrease over the prior year period.

This decrease was primarily the result of a $14.4 million decrease in financial services revenue during the six months ended June 30, 2022 compared to the prior year period, due to (1) a 32.8% decrease to 2,985 in the number of mortgages originated during the six months ended June 30, 2022, due in part to a decrease in originations related to refinancing, and (2) reduced gain on sale margins on loans sold to third parties period over period.

Our Financial Services segment generated income before income tax of $9.3 million for the three months ended September 30, 2022, a 18.2% decrease over the prior year period.

This decrease was primarily the result of a $5.8 million decrease in financial services revenue during the three months ended September 30, 2022 compared to the prior year period, due to (1) a 23.6% decrease to 1,375 in the number of mortgages originated during the three months ended September 30, 2022, and (2) reduced gain on sale margins on loans sold to third parties period over period.

Our Financial Services segment generated income before income tax of $29.1 million for the nine months ended September 30, 2022, a 24.3% decrease over the prior year period.

This decrease was primarily the result of a $20.2 million decrease in financial services revenue during the nine months ended September 30, 2022 compared to the prior year period, due to (1) a 30.1% decrease to 4,360 in the number of mortgages originated during the nine months ended September 30, 2022, due in part to a decrease in originations related to refinancing, and (2) reduced gain on sale margins on loans sold to third parties period over period.

During the three and nine months ended September 30, 2022, the capture rate of Century homebuyers has decreased to 66% and 71%, respectively, primarily driven by the impact of market uncertainty on the financial services competitive environment.

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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Total originations:

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Number of loans sold

During the three and six months ended June 30, 2022, our Corporate segment generated losses of $28.7 million and $55.4 million, respectively, as compared to losses of $24.6 million and $42.0 million, respectively, for the same respective period in 2021 .

This increase in losses is primarily attributed to higher compensation costs and other corporate costs to support our growth.

During the three and nine months ended September 30, 2022, our Corporate segment generated losses of $31.8 million and $87.2 million, respectively, as compared to losses of $33.9 million and $75.9 million, respectively, for the same respective period in 2021 .

The decrease in net loss for the three-month comparison is primarily attributed to a $14.5 million loss on debt extinguishment during the three months ended September 30, 2021 related to the redemption of our 5.75% senior notes due 2025, partially offset by higher corporate costs to support our homebuilding operations during the three months ended September 30, 2022 .

The increase in loss for the nine-month comparison is primarily attributed to higher compensation costs and other corporate costs to support our homebuilding operations, partially offset by the loss on debt extinguishment during the nine months ended September 30, 2021.

Homebuilding Gross Margin

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Homebuilding gross margin represents home sales revenues less cost of home sales revenues and inventory impairment and other.

Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, increased during the three and six months ended June 30, 2022 to 28.2%, as compared to 23.9% and 22.5%, respectively, for the same periods in 2021.

Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased during the three months ended September 30, 2022 to 24.8% as compared to 25.7% for the same period in 2021, primarily driven by higher incentives during the quarter.

Our homebuilding gross margin percentage increased during the nine months ended September 30, 2022 to 27.0% as compared to 23.5% for the same period in 2021.

This increase was driven by (1) our ability to increase sales price in excess of an increase in our labor and direct costs period over period, (2) benefits from our increased scale driving building efficiencies and streamlined production processes, and (3) the realization of less interest in cost of home sales revenue over the prior period.

In the following table, we calculate our homebuilding gross margin, as adjusted to exclude inventory impairment and other and interest in cost of home sales revenues.

Three Months Ended June 30,

Three Months Ended September 30,

Home sales revenues

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Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1)

Six Months Ended June 30,

Nine Months Ended September 30,

Home sales revenues

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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 six months ended June 30, 2022, excluding inventory impairment and other, and interest in cost of home sales revenues, our adjusted homebuilding gross margin percentage was 29.4%, as compared to 25.7% and 24.4%, respectively, for the same periods in 2021.

For the three and nine months ended September 30, 2022, excluding inventory impairment and other, and interest in cost of home sales revenues, our adjusted homebuilding gross margin percentage was 26.0% and 28.2%, as compared to 27.2% and 25.3%, respectively, for the same periods in 2021.

We believe the above information is meaningful as it isolates the impact that inventory impairment, indebtedness and acquisitions (if applicable) have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.

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(dollars in thousands)

Three Months Ended June 30,

Three Months Ended September 30,

Selling, general and administrative

As a percentage of home sales revenue

Six Months Ended June 30,

Nine Months Ended September 30,

Selling, general and administrative

As a percentage of home sales revenue

Our selling, general and administrative expense increased $9.5 million and $19.0 million, respectively, for the three and six months ended June 30, 2022 as compared to the same periods in 2021.

These increases were primarily attributable to increases of $8.5 million and $17.4 million, respectively, in salaries and wages expense as compared to the same respective period in 2021 due to increased headcount, increased base pay due to market conditions, and increased incentive based compensation accruals, as well as increases in expenses in numerous areas to support our growth.

The increases for the three and six months ended June 30, 2022 were partially offset by decreases in internal and external commission expense of $2.7 million and $8.4 million, respectively.

During the three months ended June 30, 2022, our selling, general, and administrative expense decreased 30 basis points as a percentage of home sales revenue as compared to the same period in 2021, and during the six months ended June 30, 2022, our selling, general, and administrative expense increased slightly by 10 basis points as a percentage of home sales revenue as compared to the same period in 2021, which increase was partially offset by increased revenues on a partially fixed cost base.

Our selling, general and administrative expense increased $20.5 million and $39.5 million, respectively, for the three and nine months ended September 30, 2022 as compared to the same respective periods in 2021.

These increases were primarily attributable to increases of $6.4 million and $23.8 million, respectively, in salaries and wages expense as compared to the same respective period in 2021 due to increased headcount, increased base pay due to market conditions, and increased incentive based compensation accruals, as well as increases in expenses in numerous areas to support our homebuilding operations.

The increase for the nine months ended September 30, 2022 was partially offset by a decrease in internal and external commission expense of $3.8 million.

During the three and nine months ended September 30, 2022, our selling, general, and administrative expense increased each by 10 basis points, respectively, as a percentage of home sales revenue as compared to the same respective period in 2021.

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 2022 estimated annual effective tax rate, before discrete items, of 25.6% is driven by our blended federal and state statutory rate of 24.8%, and certain permanent differences between GAAP and tax, including disallowed deductions for executive compensation which increased our rate by 0.8%.

For the six months ended June 30, 2022, our estimated annual rate of 25.6% was impacted by discrete items which had a net impact of decreasing our rate by 0.4%, including excess tax benefits for vested stock-based compensation and federal energy tax credits claimed on prior year home deliveries in excess of previous estimates .

Our estimated annual rate for the six months ended June 30, 2022 of 25.6% increased by 340 basis points as compared to our effective tax rate for the year ended December 31, 2021 of 22.2%.

The increase in our estimated rate is driven by the expiration of the Energy Efficient Home Credit on December 31, 2021.

The Energy Efficient Home Credit provided a $2,000 tax credit for each home delivered that met the energy saving and certification requirements under the statute.

For the three months ended June 30, 2022 and 2021, we recorded income tax expense of $55.0 million and $34.2 million, respectively.

For the six months ended June 30, 2022 and 2021, we recorded income tax expense of $101.3 million and $63.6 million, respectively.

Our 2022 estimated annual effective tax rate, before discrete items, of 23.6% is driven by our blended federal and state statutory rate of 24.8%, and certain permanent differences between GAAP and tax, including disallowed deductions for executive compensation and estimated federal energy home credits for the current year home deliveries, which combined resulted in a net decrease of 1.2%.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law.

The IRA extended the energy efficient home credit which provides a tax credit for each home delivered that met the energy saving and certification requirements for homes delivered from January 1, 2022 (retroactively) through December 31, 2022, as well as modifies and increases the tax credit starting in 2023 through 2032.

Previously, the federal tax credit expired for homes delivered after December 31, 2021.

During the three months ended September 30, 2022, our effective tax rate was benefited by a $13.6 million benefit as a result of the retroactive extension energy efficient home credit.

For the nine months ended September 30, 2022, our estimated annual rate of 23.6% was impacted by discrete items which had a net impact of decreasing our rate by 1.2%, including federal energy home tax credits claimed and the impact of excess tax benefits for vested stock-based compensation.

For the three months ended September 30, 2022 and 2021, we recorded income tax expense of $27.6 million and $31.8 million, respectively.

For the nine months ended September 30, 2022 and 2021, we recorded income tax expense of $128.9 million and $95.4 million, respectively.

Segment Assets

(dollars in thousands)

September 30,

Increase (Decrease)

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Financial Services

Total assets increased to $3.8 billion as of June 30, 2022 as compared to December 31, 2021, primarily as a result of overall growth of the Company and increased in investment in homebuilding inventory, partially offset by a decrease in Financial Services assets primarily related to a decrease in mortgage loans held for sale period over period.

Total assets increased to $3.9 billion as of September 30, 2022 as compared to December 31, 2021, primarily as a result of an increase in investment in homebuilding inventory, partially offset by a decrease in Financial Services assets primarily related to a decrease in mortgage loans held for sale period over period.

The decrease in our Corporate assets was driven by a decrease in our cash and cash equivalents, partially offset by increases related to Century Living.

Lots owned and controlled

June 30, 2022

September 30, 2022

December 31, 2021

Century Complete

Of our total lots owned and controlled as of June 30, 2022, 46.5% were owned and 53.5% were controlled, as compared to 41.1% owned and 58.9% controlled as of December 31, 2021.

Of our total lots owned and controlled as of September 30, 2022, 54.9% were owned and 45.1% were controlled, as compared to 41.1% owned and 58.9% controlled as of December 31, 2021.

The decrease in the number of controlled lots was driven by the termination of certain contracts in our markets that did not meet our investment criteria.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Increase (Decrease)

September 30,

Increase (Decrease)

Century Complete

Net new home contracts (new home contracts net of cancellations) for the three months ended June 30, 2022 decreased by 887 homes, or 28.4%, to 2,233, as compared to 3,120 for the same period in 2021.

Net new home contracts for the six months ended June 30, 2022 decreased by 1,398 homes, or 21.3%, to 5,177, as compared to 6,575 for the same period in 2021.

During the second quarter of 2022 we experienced a moderation of home sales pace across our markets as compared to prior periods.

These decreases were primarily driven by the impact on demand for new homes of increasing interest rates, rising inflation, and macro-economic uncertainty, and to some extent, an increase in cancellations primarily due to interest rate increases.

Net new home contracts (new home contracts net of cancellations) for the three months ended September 30, 2022 decreased by 1,424 homes, or 51.9%, to 1,318, as compared to 2,742 for the same period in 2021.

Net new home contracts for the nine months ended September 30, 2022 decreased by 2,822 homes, or 30.3%, to 6,495, as compared to 9,317 for the same period in 2021.

Beginning in the second quarter of 2022 and continuing through the third quarter of 2022, we experienced a moderation of home sales pace across our markets as compared to prior periods.

These decreases were primarily driven by the impact on demand for new homes from increasing interest rates, rising inflation, and macro-economic uncertainty, and to some extent, an increase in cancellations primarily due to interest rate increases.

Monthly absorption rate

Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three and six months ended June 30, 2022 and 2021 by segment are included in the tables below:

Three Months Ended June 30,

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, 2022 and 2021 by segment are included in the tables below:

Three Months Ended September 30,

Increase (Decrease)

Century Complete

Six Months Ended June 30,

Nine Months Ended September 30,

Increase (Decrease)

Century Complete

During the three and six months ended June 30, 2022, our absorption rates decreased by 38.6% and 31.7%, respectively, to 3.5 and 4.1 per month, respectively, as compared to the same periods in 2021.

During the second quarter of 2022, we experienced a moderation of sales pace across our markets compared to prior periods.

The second quarter 2022 decrease in sales pace was consistent with trends seen in the overall housing market, as increases in interest rates on mortgages, rising inflation, and macro-economic uncertainty caused demand to decrease from the historically strong market conditions experienced since the second quarter of 2020.

During the three and nine months ended September 30, 2022, our absorption rates decreased by 59.2% and 41.1%, respectively, to 2.0 and 3.3 per month, respectively, as compared to the same respective periods in 2021.

Beginning in the second quarter of 2022 and continuing through the third quarter of 2022, we experienced a moderation of sales pace across our markets compared to prior periods, as well as an increase in cancellation rates to a combined 35%, with a 31% cancellation rate for Century Communities and a 41% cancellation rate for Century Complete, primarily driven by the increases in mortgage rates.

The third quarter 2022 decrease in sales pace was consistent with trends seen in the overall housing market, as interest rate increases on mortgages, rising inflation, and macro-economic uncertainty caused demand to decrease from the historically strong market conditions experienced since the second quarter of 2020 .

Selling communities at period end

As of June 30,

As of September 30,

Increase/(Decrease)

Century Complete

Our selling communities increased to 213 communities at June 30, 2022 as compared to 184 at June 30, 2021.

This increase was a result of new community openings.

Our selling communities increased to 217 communities at September 30, 2022 as compared to 186 at September 30, 2021.

This increase was a result of new community openings during the past year.

(dollars in thousands)

As of June 30,

As of September 30,

Average Sales Price

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Backlog reflects the number of homes, net of cancellations, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home.

At June 30, 2022, we had 4,767 homes in backlog with a total value of $2.0 billion, which represents increases of 7.2% and 12.2%, respectively, as compared to 4,446 homes in backlog with a total value of $1.8 billion at June 30, 2021.

The increase in backlog dollar value is primarily attributable to the increase in backlog units and a 4.6% increase in the average sales price of homes in backlog.

At September 30, 2022, we had 3,455 homes in backlog with a total value of $1.4 billion, which represents decreases of 29.0% and 28.3%, respectively, as compared to 4,866 homes in backlog with a total value of $1.9 billion at September 30, 2021.

The decrease in backlog dollar value is primarily attributable to the decrease in backlog units, partially offset by a 1.0% increase in the average sales price of homes in backlog.

Supplemental Guarantor Information

Our 6.750% senior notes due 2027 (which we collectively refer to as our “2027 Notes”) and our 3.875% senior notes due 2029 (which we collectively refer to as our “2029 Notes” and together with the 2027 Notes, the “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”).

In addition, our former 5.875% senior notes due 2025 (which we collectively refer to as our “2025 Notes”), which were extinguished during the year ended December 31, 2021, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors.

In addition, our former 5.875% senior notes due 2025 (which we collectively refer to as our “2025 Notes”), which were extinguished during the third quarter of 2021, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors.

Our subsidiaries associated with our Financial Services operations (referred to as “Non-Guarantors”) do not guarantee the Senior Notes.

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The guarantees are effectively subordinated to any secured debt of the Guarantors.

As of June 30, 2022, Century Communities, Inc.

As of September 30, 2022, Century Communities, Inc.

had outstanding $1.0 billion in total principal amount of Senior Notes.

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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.

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.

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As the guarantees for the 2027 Notes and the guarantees for the former 2025 Notes were made in connection with the issuance of the 2027 Notes and former 2025 Notes and exchange offers effected under the Securities Act in February 2015, October 2015 and April 2017, the Guarantors’ condensed supplemental financial information is presented in this report as if the guarantees existed during the periods presented pursuant to applicable SEC rules and guidance.

If any Guarantors are released from the guarantees in future periods,

the changes are reflected prospectively.

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.

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Summarized Balance Sheet Data (in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

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Summarized Statements of Operations Data (in thousands)

Six Months Ended

June 30, 2022

Nine Months Ended

September 30, 2022

December 31, 2021

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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, 2021, filed with the SEC on February 3, 2022, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.” During the three and nine months ended September 30, 2022, we have updated our critical accounting policies to include the following disclosure about our self-insurance accounting policy:

Self-Insurance

We maintain general liability insurance coverage, including coverage for certain construction defects.

These insurance policies protect us against a portion of the risk of loss from claims, subject to certain self-insured per occurrence and aggregate retentions, deductibles, and available policy limits.

Prior to the year ended December 31, 2021, we generally maintained construction defect policies with lower self-insurance limits.

In circumstances where we have elected to retain a higher portion of the overall risk for construction defect claims in return for a lower initial premium, we reserve for the estimated costs that we will incur that are above our coverage limits or that are not covered by our insurance policies.

The reserve is recorded on an undiscounted basis at the time revenue is recognized for each home closing.

Our self-insurance liability is presented on a gross basis without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any.

Estimates of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such recoveries are considered probable.

As of September 30, 2022, our self-insurance reserve for incurred but not reported construction defect claims was $13.9 million, compared to $5.1 million as of December 31, 2021.

The self-insurance reserve estimate requires significant management judgment and assumptions, and is based on a third-party actuarial analysis that relies primarily upon industry data and partially on our historical claims to estimate overall costs.

These estimates are subject to uncertainty due to a variety of factors, the most significant being the long period of time between the delivery of a home to a homebuyer and when a construction defect claim may be made, and the ultimate resolution of any such construction defect claim.

Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend for 10 years or more.

As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported.

Assumptions used in developing estimates can fluctuate as a result of unforeseen developments in claims relative to markets in which we operate, inflation rates, regulatory or legal changes, and other factors.

While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded reserves.

Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs.

Historically, adjustments to our estimates have not been material, as we increased our self-insurance reserve by $0.9 million during the three and nine months ended September 30, 2022 and recorded no change to our reserve during the three and nine months ended September 30, 2021, respectively.

Liquidity and Capital Resources

Our liquidity, consisting of our cash and cash equivalents and cash held in escrow and Credit Facility availability, was $819.5 million as of June 30, 2022, compared to $1.2 billion as of December 31, 2021.

Our principal uses of capital for the three and six months ended June 30, 2022 were our land purchases, land development, home construction, share repurchases, and the payment of routine liabilities.

We increased our investment in homebuilding inventory during 2022, which resulted in 35,133 lots owned at June 30, 2022, a 6.9% increase as compared to December 31, 2021.

Our liquidity, consisting of our cash and cash equivalents and cash held in escrow and Credit Facility availability, was $817.2 million as of September 30, 2022, compared to $1.2 billion as of December 31, 2021.

Our principal uses of capital for the three and nine months ended September 30, 2022 were our land purchases, land development, home construction, share repurchases, and the payment of routine liabilities.

We increased our investment in homebuilding inventory during 2022, including an increase of $408.8 million in homes under construction and $235.0 million in land and land development, which resulted in 34,477 lots owned at September 30, 2022, a 4.9% increase as compared to December 31, 2021.

Cash flows for each of our communities depend on the stage in the development cycle and can differ substantially from reported earnings.

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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.

From a liquidity standpoint, we continue to acquire and develop lots in our markets when they meet our current investment criteria, During the three months ended September 30, 2022, we reduced our land acquisition and development activities by terminating certain contracts in our markets that did not meet our investment criteria, resulting in a charge of $4.4 million recorded as other expense included in our condensed consolidated statements of operations.

Under our shelf registration statement, which we filed with the SEC on July 1, 2021 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 August 2021, 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.

Short-term Liquidity and Capital Resources

We use funds generated by operations, available borrowings under our Credit Facility, and proceeds from issuances of debt or equity, 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, home construction activities, and other cash needs.

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.

Our Century Living operations use excess cash from our operations as well as project specific secured financing to fund development of multi-family projects.

We believe that we will be able to fund our current liquidity needs for at least the next twelve months 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, 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 and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise.

Our Century Living operations use excess cash from our operations as well as project specific secured financing under construction loan agreements to fund development of multi-family projects.

We believe that we will be able to fund our current liquidity needs for at least the next twelve months 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 based on the macro-economy, and market conditions at the time.

In a higher interest rate environment, we may incur additional interest expense on borrowings that bear floating interest rates, such as our revolving line of credit.

We believe we are well positioned from a cash and liquidity standpoint to operate in an uncertain environment, and to pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise.

Long-term Liquidity and Capital Resources

Beyond the next twelve months, we believe that our principal uses of capital will be land and inventory purchases and other expenditures to invest in our future growth, as well as principal and interest payments on our long-term debt obligations.

We believe that we will be able to fund our long-term liquidity needs with 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.

Beyond the next twelve months, we believe that our principal uses of capital will be land and inventory purchases and other expenditures, as well as principal and interest payments on our long-term debt obligations.

We believe that we will be able to fund our long-term liquidity needs with 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 favorable terms, especially in light of rising interest rates.

In a higher interest rate environment, we may incur additional interest expense on borrowings that bear floating interest rates, such as our revolving line of credit.

To the extent these sources of capital are insufficient to meet our needs, we may also conduct additional public or private offerings of our securities, refinance debt, or dispose of certain assets to fund our operating activities and capital needs.

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These obligations impact our short-term and long-term liquidity and capital resource needs.

For the three and six months ended June 30, 2022, 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, 2021 that was filed with the SEC on February 3, 2022.

For the three and nine months ended September 30, 2022, 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, 2021 that was filed with the SEC on February 3, 2022.

In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of our homes.

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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 June 30, 2022, we had outstanding purchase contracts and option contracts for 40,418 lots, totaling approximately $1.7 billion, and we had $66.8 million of deposits for land contracts, of which $36.5 million were non-refundable cash deposits pertaining to land contracts.

Subject to the terms of the outstanding contracts continuing to meet our investment criteria, we currently anticipate performing on the majority of the purchase and option contracts during the next twelve to eighteen months, with performance on the remaining purchase and option contacts occurring in future periods.

As of September 30, 2022, we had outstanding purchase contracts and option contracts for 28,301 lots, totaling approximately $1.2 billion, and we had $61.1 million of deposits for land contracts, of which $33.1 million were non-refundable cash deposits pertaining to land contracts.

For contracts for which cash deposits were non-refundable, and subject to the terms of the outstanding contracts continuing to meet our investment criteria, we currently anticipate performing on the majority of our purchase and option contracts during the next twenty-four months.

Our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change and dependent on future market conditions.

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.

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.

Outstanding Debt Obligations and Debt Service Requirements

Our outstanding debt obligations included the following as of June 30, 2022 and December 31, 2021 (in thousands):

Our outstanding debt obligations included the following as of September 30, 2022 and December 31, 2021 (in thousands):

September 30,

3.875% senior notes, due August 2029 (1)

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(1) The carrying value of the 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.

(2) As of June 30, 2022, other financing obligations included $18.2 million related to insurance premium notes and certain secured borrowings, as well as $0.9 million outstanding under the Construction Loan Agreement.

As of June 30, 2021, other financing obligations included $9.2 million related to insurance premium notes and certain secured borrowings.

(2) As of September 30, 2022, other financing obligations included $22.7 million related to insurance premium notes and certain secured borrowings, as well as $3.0 million outstanding under the construction loan agreements, as described below.

As of December 31, 2021, other financing obligations included $9.2 million related to insurance premium notes and certain secured borrowings.

A summary of our debt obligations is included in Note 9 to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 3, 2022 and in Note 9 to our condensed consolidated financial statements in this Form 10-Q.

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In the normal course of business, we post letters of credit and performance and other bonds primarily related to our land development performance obligations with local municipalities.

As of June 30, 2022 and December 31, 2021, we had $564.0 million and $492.5 million, respectively, in letters of credit and performance and other bonds issued and outstanding.

As of September 30, 2022 and December 31, 2021, we had $565.8 million and $492.5 million, respectively, in letters of credit and performance and other 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 and other bonds are not generally released until all development and construction activities are completed.

Construction Loan Agreement

On March 17, 2022, a wholly owned subsidiary of Century Living entered into a Construction Loan Agreement with U.S.

Bank National Association, a national banking association, d/b/a Housing Capital Company (which we refer to as “the Lender”).

The Construction Loan Agreement provides that we may borrow up to $80.0 million from the Lender for purposes of construction of a multi-family project in Colorado, with advances made by the Lender upon the satisfaction of certain conditions.

Borrowings under the Construction Loan Agreement bear interest at a rate per annum equal to a forward-looking term rate based on the secured overnight financing rate (which we refer to as “SOFR”) plus 210 basis points.

The outstanding principal balance and all accrued and unpaid interest is due on the maturity date of March 17, 2026, and prepayments of the unpaid principal balance and accrued interest may be prepaid in full or in part, without premium or penalty.

We have the option to extend the maturity date for a period of 12 months if certain conditions are satisfied.

The Construction Loan Agreement contains customary affirmative and negative covenants (including covenants related to construction completion, and limitations on the use of loan proceeds, transfers of land, equipment, and improvements), as well as customary events of default.

As of June 30, 2022, $0.9 million was outstanding under the Construction Loan Agreement, and we were in compliance with all covenants thereunder.

Construction Loan Agreements

On August 9, 2022 and March 17, 2022, certain wholly owned subsidiaries of Century Living, LLC entered into construction loan agreements with PNC Bank, National Association and U.S.

Bank National Association, a national banking association, d/b/a Housing Capital Company (which we collectively refer to as “the Lenders”), respectively.

The construction loan agreements (which we refer to as the “Construction Loan Agreements”), collectively provide that we may borrow up to $128.0 million from the Lenders for purposes of construction of multi-family projects in Colorado, with advances made by the Lenders upon the satisfaction of certain conditions.

Borrowings under the Construction Loan Agreements bear interest at floating interest rates per annum equal to the Secured Overnight Financing Rate and the Bloomberg Short-term Bank Yield Index, plus an applicable margin.

The outstanding principal balances and all accrued and unpaid interest is due on varying maturity dates through August 9, 2026, with the option to extend the maturity dates for a period of 12 months if certain conditions are satisfied.

The Construction Loan Agreements contain customary affirmative and negative covenants (including covenants related to construction completion, and limitations on the use of loan proceeds, transfers of land, equipment, and improvements), as well as customary events of default.

As of September 30, 2022, $3.0 million was outstanding under the Construction Loan Agreements, with borrowings bearing a weighted average interest rate of 4.423%, and we were in compliance with all covenants thereunder.

Revolving Line of Credit

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Borrowings under the Second A&R Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.05% and 2.65% per annum, and if made available in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.05% and 1.65% per annum.

As of June 30, 2022, we had $141.0 million outstanding under the Credit Facility and were in compliance with all covenants under the Second A&R Credit Agreement.

As of September 30, 2022, we had $165.0 million outstanding under the Credit Facility and were in compliance with all covenants under the Second A&R Credit Agreement.

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 of $325.0 million as of June 30, 2022, secured by the mortgage loans financed thereunder.

Inspire is party to mortgage warehouse facilities with Comerica Bank, J.P.

Morgan, and Wells Fargo (which we refer to as the “Repurchase Facilities”), which provide Inspire with uncommitted repurchase facilities of up to an aggregate of $275.0 million as of September 30, 2022, secured by the mortgage loans financed thereunder.

The Repurchase Facilities have varying short term maturity dates through August 15, 2023 and bear a weighted average interest rate of 4.208%.

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 June 30, 2022, we had $209.0 million outstanding under these Repurchase Facilities and were in compliance with all covenants thereunder.

During the three and six months ended June 30, 2022, we incurred interest expense on the Repurchase Facilities of $0.4 million and $0.6 million, respectively.

During the same periods in 2021, we incurred interest expense on the Repurchase Facilities of $0.8 million and $1.4 million, respectively.

As of September 30, 2022, we had $195.0 million outstanding under these Repurchase Facilities and were in compliance with all covenants thereunder.

During the three months ended September 30, 2022 and 2021, we incurred interest expense on the Repurchase Facilities of $0.6 million and $0.4 million, respectively.

During the nine months ended September 30, 2022 and 2021, we incurred interest expense on the Repurchase Facilities of $1.4 million and $1.8 million, respectively.

Interest expense on the Repurchase Facilities is included in financial services costs on our condensed consolidated statements of operations .

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This Distribution Agreement, which superseded and replaced a prior similar distribution agreement, and was amended in July 2021 to acknowledge our filing of a new registration statement on Form S-3 registering the issuance and sale of shares of our common stock under the Distribution Agreement and replace Citigroup Global Markets Inc.

with Wells Fargo Securities, LLC as a sales agent, had all $100.0 million available for sale as of June 30, 2022.

We did not sell or issue any shares of our common stock during the three and six months ended June 30, 2022 and 2021, respectively.

with Wells Fargo Securities, LLC as a sales agent, had all $100.0 million available for sale as of September 30, 2022.

We did not sell or issue any shares of our common stock during the three and nine months ended September 30, 2022 and 2021, 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.

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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, general market and economic conditions, as well as the future 1% excise tax on stock repurchases after December 31, 2022 included in the Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022.

We intend to finance any stock repurchases through available cash and our Credit Facility.

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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 six months ended June 30, 2022, an aggregate of 0.8 million and 1.8 million shares, respectively, of our common stock were repurchased for a total purchase price of approximately $35.9 million and $98.3 million, respectively, and a weighted average price of $45.42 and $54.46 per share, respectively.

During the three and six months ended June 30, 2021, we did not repurchase any shares of our common stock.

The maximum number of shares available to be purchased under the stock repurchase program as of June 30, 2022 was 2,008,994 shares.

The following table sets forth cash dividends declared by our Board of Directors to holders of record of our common stock during the six months ended June 30, 2022, (in thousands, except per share information):

Cash Dividends Declared

During the three and nine months ended September 30, 2022, an aggregate of 0.5 million and 2.3 million shares, respectively, of our common stock were repurchased for a total purchase price of approximately $22.3 million and $120.6 million, respectively, and a weighted average price of $44.58 and $52.32 per share, respectively.

During the three and nine months ended September 30, 2021, we did not repurchase any shares of our common stock.

The maximum number of shares available to be purchased under the stock repurchase program as of September 30, 2022 was 1,508,169 shares.

The following table sets forth cash dividends declared by our Board of Directors to holders of record of our common stock during the nine months ended September 30, 2022 and 2021, respectively (in thousands, except per share information):

Nine months ended September 30, 2022

Cash Dividends Declared and Paid

Declaration Date

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June 15, 2022

August 17, 2022

August 31, 2022

September 14, 2022

Nine months ended September 30, 2021

Cash Dividends Declared and Paid

Declaration Date

June 16, 2021

August 18, 2021

September 1, 2021

September 15, 2021

The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our Board of Directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.

Cash Flows— Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

For the six months ended June 30, 2022 and 2021, the comparison of cash flows is as follows:

Cash Flows— Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

For the nine months ended September 30, 2022 and 2021, 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 are 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 used in operating activities was $102.9 million during the six months ended June 30, 2022 as compared to net cash provided by operating activities of $143.4 million during 2021.

The increase in cash used in operations is primarily a result of increased investment in our homebuilding inventories for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, partially offset by a decrease in originations of mortgage loans held for sale and a $81.6 million increase in net income during six months ended June 30, 2022 as compared to the six months ended June 30, 2021 .

 Net cash used in investing activities increased to $25.3 million during the six months ended June 30, 2022, compared to $4.4 million used during the same period in 2021.

The increase was primarily related to expenditures related to the development, construction, and management of multi-family rental properties by our wholly owned subsidiary Century Living.

 Net cash used in financing activities decreased to $96.3 million during the six months ended June 30, 2022, compared to net cash used by financing activities of $112.5 million during the same period in 2021.

The decrease in cash used in financing activities was primarily attributable to a $141.0 million cash inflow from borrowings under our revolving line of credit for the six months ended June 30, 2022 compared to no revolving line of credit borrowings outstanding for the six months ended June 30, 2021 partially offset by (1) a $23.6 million increase in net payments on the Repurchase Facilities (2) a $98.3 million increase in repurchases of our common stock and (3) an $8.2 million increase in dividend payments during the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

As of June 30, 2022, our cash and cash equivalents and restricted cash balance was $97.8 million.

Net cash used in operating activities was $67.1 million during the nine months ended September 30, 2022 as compared to net cash provided by operating activities of $82.8 million during the same period in 2021.

The increase in cash used in operations is primarily a result of increased investment in our homebuilding inventories for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, partially offset by a decrease in originations of mortgage loans held for sale and a $112.1 million increase in net income for nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

 Net cash used in investing activities increased to $37.3 million during the nine months ended September 30, 2022, compared to $4.3 million used during the same period in 2021.

The increase was primarily related to expenditures related to the development, construction, and management of multi-family rental properties by our wholly owned subsidiary, Century Living, and a $8.6 million increase in purchases of property and equipment for the nine months ended September 30, 2022 as compared to the nine months ended September 30,2021.

 Net cash used in financing activities was $108.5 million during the nine months ended September 30, 2022, compared to net cash provided by financing activities of $20.6 million during the same period in 2021.

The increase in cash used in financing activities was primarily attributable (1) a $120.6 million increase in repurchases of our common stock during the current year period, (2) a $89.4 million increase in net payments on the Repurchase Facilities during the current year period, (3) $88.2 million in net proceeds from the issuance of senior notes due 2029 in the prior year period, partially offset by the simultaneous extinguishment of our former senior notes due 2025 and (4) a $9.6 million increase in dividend payments during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

These increases were offset by $165.0 million net cash inflow from borrowings under our revolving line of credit for the nine months ended September 30, 2022 compared to no revolving line of credit borrowings outstanding for the nine months ended September 30, 2021.

As of September 30, 2022, our cash and cash equivalents and restricted cash balance was $109.3 million, as compared to $322.2 million as of December 31, 2021.

Non-GAAP Financial Measures

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EBITDA and Adjusted EBITDA

The following table presents EBITDA and Adjusted EBITDA for the three and six months ended June 31, 2022 and 2021.

The following table presents EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021.

Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance.

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(dollars in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Income tax expense

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Depreciation and amortization expense

Loss on debt extinguishment

Inventory impairment and other

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We calculate this by dividing net homebuilding debt (homebuilding debt less cash and cash equivalents, and cash held in escrow) by net capital (net homebuilding debt plus total stockholders’ equity).

Homebuilding debt is our total debt minus our outstanding borrowings under our Construction Loan Agreement and our Repurchase Facilities.

Homebuilding debt is our total debt minus our outstanding borrowings under our Construction Loan Agreements and our Repurchase Facilities.

The most directly comparable GAAP measure is the ratio of debt to total capital.

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(dollars in thousands)

September 30,

Notes payable

Revolving line of credit

Construction loan agreement

Construction loan agreements

Total homebuilding debt

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We define Adjusted Net Income as consolidated net income before (i) income tax expense, (ii) inventory impairment and other (iii) restructuring costs, and (iv) loss on debt extinguishment, less adjusted income tax expense, calculated using the Company’s estimated annual effective tax rate after discrete items for the applicable period.

Adjusted Diluted EPS is calculated by excluding the effect of loss on inventory impairment and other, restructuring costs and loss on debt extinguishment from the calculation of reported EPS .

Adjusted Diluted EPS is calculated by dividing Adjusted Net Income by weighted average common shares – diluted.

(in thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Weighted average common shares outstanding - basic

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Inventory impairment and other

Loss on debt extinguishment

Adjusted income before income tax expense

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Adjusted diluted earnings per share

(1) The tax rates used in calculating adjusted net income for the three and six months ended June 30, 2022 was 25.7% and 25.2%, respectively, and for the three and six months ended June 30, 2021 was 22.5%, which are reflective of the Company’s GAAP tax rates for the applicable periods.

(1) The tax rates used in calculating adjusted net income for the three and nine months ended September 30, 2022 were 16.0% and 22.4%, respectively, and for the three and nine months ended September 30, 2021 were 21.8% and 22.2%, respectively, which are reflective of the Company’s GAAP tax rates for the applicable periods.

QUANTIT ATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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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 risks associated with our Second A&R Credit Agreement and Construction Loan Agreement.

Our primary exposure to market risk is interest rate risks associated with our Second A&R Credit Agreement and Construction Loan Agreements.

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The Second A&R 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 senior unsecured revolving line of credit.

Borrowings under the Construction Loan Agreement bear interest at a rate per annum equal to a forward-looking term rate based on the SOFR plus 210 basis points.

Borrowings under the Construction Loan Agreements bear interest at floating interest rate per annum equal to the Secured Overnight Financing Rate and the Bloomberg Short-term Bank Yield Index, plus an applicable margin.

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.

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In addition, inflation has led and could continue to lead to higher mortgage rates, which has and could continue to significantly affect the affordability of mortgage financing to homebuyers and lead to weakened demand for our homes, as well as increased cancellations.

As inflation remained elevated during the three and six months ended June 30, 2022, interest rates on 30-year fixed mortgages have risen, coupled with the Federal Reserve raising the federal funds interest rate during the first and second quarters of 2022.

While we were generally able to pass on cost increases from inflationary impacts to customers through increased home prices during the three and six months ended June 30, 2022, we may not be able to continue to offset cost increases with higher home selling prices in the future if weak housing market conditions exist.

As inflation remained elevated during the three and nine months ended September 30, 2022, interest rates on 30-year fixed mortgages have risen, coupled with the Federal Reserve raising the federal funds interest rate during the first, second, and third quarters of 2022.

While we were generally able to pass on cost increases from inflationary impacts to customers through increased home prices during the three and nine months ended September 30, 2022, we may not be able to continue to offset cost increases with higher home selling prices in the future if weak housing market conditions exist.

Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements.

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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 industry, supply chain challenges, changes in demand for our homes, and the COVID-19 pandemic.

We expect this seasonal pattern to continue over the long term, although it may be affected by volatility in the homebuilding industry, supply chain challenges, and changes in demand for our homes.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis