What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-27 compared with 2022-10-27 · 212 added, 300 removed, 355 unchanged (59% of the section changed)

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We caution that forward-looking statements are not guarantees.

Actual events and results of operations could differ materially from those expressed or implied in the forward-looking statements.

Actual results could differ materially from those expressed or implied in the forward-looking statements.

Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential,” “outlook,” the negative of such terms and other comparable terminology and the use of future dates.

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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 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;

 econo mic changes, either nationally or in the markets in which we operate, including increased interest rates and the resulting impact on the accessibility of mortgage loans to homebuyers, persistent inflation, and decreased employment levels;

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

 a downturn in the homebuilding industry, including a reduction in demand or a decline in real estate values or market conditions resulting in an adverse impact on our business, operating results and financial condition, including an impairment of our assets;

 changes in assumptions used to make industry forecasts, population growth rates or trends affecting housing demand or prices;

 continued volatility and uncertainty in the credit markets and broader financial markets;

 the impact of the COVID-19 pandemic and measures taken in response to the COVID-19 pandemic on our business operations, operating results and financial condition, as well as the general economy and housing market in particular;

 our future operating results and financial condition;

 our business operations;

 changes in our business and investment strategy;

 volatility and uncertainty in the credit markets and broader financial markets and the impact on such markets and our ability to access them in the event of a threatened or actual U.S.

sovereign default;

 our future business operations, operating results and financial condition, and changes in our business and investment strategy;

 availability and price of land to acquire, and our ability to acquire such land on favorable terms or at all;

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 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;

 the 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;

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 taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance.

 changes in United States generally accepted accounting principles (which we refer to as “GAAP”).

Forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part I, Item 1A.

Risk Factors” in our Annual Report on Form 10-K, and other risks and uncertainties detailed in this report, including “Part II, Item 1A.

Risk Factors” in our Annual Report on Form 10-K, and other risks and uncertainties detailed in

this report, including “Part II, Item 1A.

Risk Factors,” and our other reports and filings with the SEC.

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Our indirect wholly-owned subsidiaries, Inspire Home Loans Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, primarily to our homebuyers, have been identified as our Financial Services segment.

Additionally, our wholly owned subsidiary, Century Living, LLC, is engaged in the development, construction and management of multi-family rental properties, primarily in Colorado, with the intent to dispose of properties shortly after achieving stabilized rental operations.

Additionally, our wholly owned subsidiary, Century Living, LLC, is engaged in the development, construction and management of multi-family rental properties, primarily in Colorado.

During the quarter ended March 31, 2023, our Century Living operations were engaged in construction on three multi-family projects in Colorado, which commenced in 2022.

Century Living, LLC is included in our Corporate segment.

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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 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.

Of the 1,912 homes delivered during the first quarter of 2023, approximately 89% of our deliveries were made to entry-level homebuyers that were below the Federal Housing Administration-insured mortgage limits and approximately 98% of homes delivered were built as move-in ready homes.

Despite experiencing challenging market conditions as compared to the prior year period, we generated solid results during the first quarter of 2023 and believe that we are well positioned to operate in this more normalized higher interest rate environment.

The Federal Reserve’s ongoing federal funds interest rate increases to mitigate inflation 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.

Beginning in the second quarter of 2022 and continuing through the first quarter of 2023, we experienced a decline in sales pace across our markets, resulting in a decrease of 31.3% in our net new home contracts for the three months ended March 31, 2023 as compared to the same period in 2022.

This decrease in our sales pace was consistent with trends seen in the overall housing market, as increased mortgage interest rates, 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.

Even with these challenges, we are encouraged by trends in demand, as during the first quarter of 2023, we experienced cancellation rates of a combined 18%, with a 16% cancellation rate for Century Communities and a 20% cancellation rate for Century Complete, which represents a significant reduction from cancellation rates we experienced in the latter half of 2022.

We continue to focus our strategy on more near-term completions, as economic uncertainty has led a majority of our recent homebuyers to seek homes with near-term completion schedules, allowing them to lock in interest rates closer to a home closing.

Further, in response

to the significant mortgage rate increases experienced in the latter half of 2022, and to maintain sales momentum, we have increased incentive offerings across our communities, including discounts on options and upgrades and financing incentives, which resulted in downward pressure to our homebuilding gross margin during the first quarter of 2023.

We expect we will continue to experience downward pressure to our homebuilding gross margins during the first half of 2023 compared to the prior year period, impacted by elevated construction costs during the first and second quarters of 2022 when the homes were started, as well as incentives.

We have also taken steps to reduce our fixed costs in light of the overall market, including a reduction in staff during the first quarter of 2023.

During the first quarter of 2023, our direct construction costs on our starts decreased by approximately 11% as compared to the high point of our direct construction costs during the second quarter of 2022.

Further, the severity of the labor and raw material shortages and municipal and utility delays have continued to moderate for completed homes that were started in the second half of 2022, and we expect cycle times to continue to decline in future quarters.

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.

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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;

consumer confidence;

interest rates;

availability and cost of mortgage loans to homebuyers;

financial markets, credit and mortgage markets;

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

economy, consumer confidence;

household formations;

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

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.

Despite future macro-economic uncertainty, especially in relation to the 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 affordable 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.

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Results of Operations

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.

During the three months ended March 31, 2023, we generated $44.0 million in income before income tax expense, as compared to $188.8 million in the prior year period, and net income of $33.3 million, or $1.04 per diluted share, as compared to $142.5 million, or $4.20 per share, in the prior year period.

During the three months ended March 31, 2023, we generated total revenues of $753.0 million and home sales revenues of $735.6 million, as compared to $1.0 billion and $988.4 million, respectively, in the prior year period.

During the three months ended March 31, 2023, we delivered 1,912 homes with an average sales price of $384.7 thousand, as compared to 2,348 homes delivered with an average sales price of $421.0 in the prior year period.

We ended the first quarter of 2023 with no amounts outstanding under our revolving line of credit, $405.7 million of cash and cash equivalents, $12.7 million of cash held in escrow, a homebuilding debt to capital ratio of 31.8%, and a net homebuilding debt to net capital ratio of 21.5%.

During the three months ended March 31, 2023, we paid quarterly cash dividends to our stockholders of $0.23 per share, a 15% increase from the previous quarterly dividend of $0.20 per share.

During the three months ended March 31, 2023, we generated financial services revenue of $15.9 million, representing a decrease of 39.7% as compared to the prior year period, driven by a reduced number of mortgages originated, as well as reduced margins on loans sold to third parties.

Our Century Living operations are engaged in construction on three multi-family projects in Colorado, which commenced in 2022, comprising over 900 units, which we anticipate will be available for leasing beginning in the second half of 2023 and into 2024.

The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022.

(in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Increase (Decrease)

Consolidated Statements of Operations:

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Selling, general, and administrative

Loss on debt extinguishment

Inventory impairment and other

Other income (expense)

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Adjusted diluted earnings per share (1)

Other Operating Information (dollars in thousands):

Other Operating Information

(dollars in thousands):

Number of homes delivered

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Homebuilding gross margin percentage (2)

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

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

Backlog at end of period, number of homes

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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 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.

(2) Homebuilding gross margin percentage is inclusive of impairment charges, if applicable.

No impairment charges were recorded for the three months ended March 31, 2023 and 2022.

Results of Operations by Segment

Commencing in the first quarter of 2023, our Century Complete operations in Texas were realigned and are now managed under our Texas segment.

Accordingly, we have presented segment information under this new basis for the three months ended March 31, 2023, and we have restated the corresponding segment information for those segments for the three months ended March 31, 2022.

(dollars in thousands)

New Homes Delivered

Average Sales Price

of Homes Delivered

Home Sales Revenues

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

Financial Services

New Homes Delivered

Average Sales Price

of Homes Delivered

Average Sales Price of Homes Delivered

Home Sales Revenues

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,

Income before Income Tax Expense

Three Months Ended March 31,

Century Complete

Financial Services

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.

During the three months ended March 31, 2023, our West segment generated income before income tax expense of $8.0 million, an 88.8% decrease over the prior year period, which was primarily driven by a decrease in home sales revenue of $133.8 million and a decrease of 2,093 basis points in the percentage of income before income tax expense to home sales revenues.

The revenue decrease during the three months ended March 31, 2023 was primarily driven by a 48.7% decrease in the number of homes delivered, and a 4.3% decrease in the average sales price per home.

The decrease in the number of homes delivered was primarily driven by fewer homes available for delivery given a decrease in home starts during the latter half of 2022, and a 30.2% decrease in monthly absorption rate.

The average sales price decrease was driven by the mix of deliveries and pricing to market within individual communities.

The decrease in the percentage of income before income tax expense to home sales revenue was primarily a result of (1) decreased revenue on a partially fixed cost base and (2) decreased gross margins on home sales.

During the three months ended March 31, 2023, our Mountain segment generated income before income tax expense of $27.8 million, a 51.2% decrease over the prior year period, which was primarily driven by a decrease in home sales revenue of $35.1 million and a decrease of 899 basis points in the percentage of income before income tax expense to home sales revenues.

The revenue decrease during the three months ended March 31, 2023 was primarily driven by an 11.5% decrease in the number of homes delivered and a 1.1% decrease in the average sales price per home.

The decrease in the number of homes delivered was primarily driven by fewer homes available for delivery given a decrease in home starts during the latter half of 2022, and a 50.0% decrease in monthly absorption rate.

The average sales price decrease was driven by the mix of deliveries and pricing to market within individual communities.

During the three months ended March 31, 2023, our Texas segment generated income before income tax expense of $3.7 million, an 83.9% decrease over the prior year period, which was primarily driven by a decrease in home sales revenue of $48.8 million and a decrease of 1,241 basis points in the percentage of income before income tax expense to home sales revenues.

The revenue decrease during the three months ended March 31, 2023 was primarily driven by a 22.7% decrease in the number of homes delivered and a 16.3% decrease in the average sales price per home.

The decrease in the number of homes delivered was primarily driven by fewer homes available for delivery given a decrease in home starts during the latter half of 2022, and a 37.5% decrease in monthly absorption rate.

The average sales price decrease was driven by the mix of deliveries and pricing to market within individual communities.

During the three months ended March 31, 2023, our Southeast segment generated income before income tax expense of $12.0 million, a 61.2% decrease over the prior year period, which was primarily driven by a decrease in home sales revenue of $62.5 million and a decrease of 688 basis points in the percentage of income before income tax expense to home sales revenues.

The revenue decrease was primarily driven by a 45.9% decrease in the number of homes delivered, and partially offset by a 7.5% increase in the average sales price per home.

The decrease in the number of homes delivered was primarily driven by fewer homes available for delivery given a decrease in home starts during the latter half of 2022, and a 53.2% decrease in monthly absorption rate.

The average sales price increase was driven by the mix of deliveries within individual communities.

Century Complete

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 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.

During the three months ended March 31, 2023, our Century Complete segment generated income before income tax expense of $14.0 million, a 37.8% decrease over the prior year period, which was primarily driven by a decrease of 670 basis points in the percentage of income before income tax expense to home sales revenues, and partially offset by an increase in home sales revenue of $27.4 million.

The decrease in the percentage of income before income tax expense to home sales revenue was primarily a result of decreased gross margins on home sales.

The revenue increase was primarily driven by a 12.3% increase in the number of homes delivered, as well as a 4.5% increase in the average sales price per home.

The increase in the number of homes delivered was driven by an increase in selling communities as compared to the prior year period, and a larger number of homes under construction at the beginning of the period as compared to the prior year period.

The average sales price increase was driven by the mix of deliveries within individual communities.

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 $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.

Our Financial Services segment generated income before income tax of $5.1 million for the three months ended March 31, 2023, a 54.5% decrease over the prior year period.

This decrease was primarily the result of a $10.5 million decrease in financial services revenue during the three months ended March 31, 2023 compared to the prior year period, primarily driven by (1) a 34.9% decrease in the number of mortgages originated during the three months ended March 31, 2023, and (2) reduced margins on loans sold to third parties period over period.

The following table presents selected operational data for our Financial Services segment in relation to our loan origination activities (dollars in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Total originations:

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Number of loans sold

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.

During the three months ended March 31, 2023, our Corporate segment generated a loss of $26.4 million, remaining consistent with a loss of $26.7 million during the same period in 2022.

Homebuilding Gross Margin

(dollars in thousands)

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, 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 September 30,

Home sales revenues

Cost of home sales revenues

Inventory impairment and other

Gross margin from home sales

Inventory impairment and other

Interest in cost of home sales revenues

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

Nine Months Ended September 30,

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

Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased to 18.2% for the three months ended March 31, 2023, as compared to 28.3% for the three months ended March 31, 2022.

This decrease was driven by deliveries in the first quarter of 2023 that carried both higher incentives and elevated construction costs due to homes commencing construction during high costs periods in 2022, both of which we expect to continue to adversely impact our gross margins through the first half of 2023.

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

Three Months Ended March 31,

Home sales revenues

Cost of home sales revenues

Inventory impairment and other

Gross margin from home sales

Inventory impairment and other

Inventory impairment

Homebuilding gross margin

Inventory impairment

Interest in cost of home sales revenues

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

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

(1) This non-GAAP financial measure should not be used as a substitute for the Company’s operating results in accordance with GAAP.

See the reconciliations to the most comparable GAAP measure and other information under “Non-GAAP Financial Measures.” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

For the three and nine months ended September 30, 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.

For the three months ended March 31, 2023, our adjusted homebuilding gross margin percentage excluding inventory impairment and interest in cost of home sales revenues, was 19.6% as compared to 29.5% for the same period in 2022.

We believe the above information is meaningful as it isolates the impact that indebtedness, inventory impairment (if applicable), 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 .

Selling, General and Administrative Expense

(dollars in thousands)

Three Months Ended September 30,

Selling, general and administrative

As a percentage of home sales revenue

Nine Months Ended September 30,

Three Months Ended March 31,

Selling, general and administrative

As a percentage of home sales revenue

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.

Our selling, general and administrative expense decreased $3.3 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

This decrease was primarily attributable to a $3.0 million decrease in internal and external commission expense, as well as a $1.7 million decrease in salaries and wages due to decreased headcount, and partially offset by an increase in expenses in numerous areas to support our homebuilding operations.

As a percentage of home sales revenue, our selling, general and administrative expense increased 310 basis points during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, driven primarily by decreased revenue on a partially fixed cost base.

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 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.

Our 2023 estimated annual effective tax rate, before discrete items, of 25.0% is driven by our blended federal and state statutory rate of 24.6%, 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 increase of 0.4%.

For the three months ended March 31, 2023, our estimated annual rate of 25.0% was benefitted by discrete items which had a net impact of decreasing our rate by 0.7%, including excess tax benefits for vested stock-based compensation.

Our estimated annual rate for the three months ended March 31, 2023 of 25.0% increased by 260 basis points as compared to our effective tax rate for the year ended December 31, 2022 of 22.4%.

The increase in our estimated rate is a result of the enactment of the Inflation Reduction Act of 2022 during the third quarter of 2022, which modified the energy efficient home credit beginning with homes closed on or after January 1, 2023 and provided for more stringent energy standards than previous periods.

For the three months ended March 31, 2023 and 2022, we recorded income tax expense of $10.7 million and $46.3 million, respectively.

Segment Assets

Commencing in the first quarter of 2023, our Century Complete operations in Texas were realigned and are now managed under our Texas segment.

Accordingly, we have presented segment information under this new basis as of March 31, 2023, and we have restated the corresponding segment information for those segments as of December 31, 2022.

(dollars in thousands)

September 30,

Increase (Decrease)

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Financial Services

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.

Total assets decreased slightly to $3.7 billion as of March 31, 2023 as compared to December 31, 2022, primarily as a result of changes in our inventory balances within our homebuilding segments related to timing of home and land development construction activities, and a decrease in Financial Services assets primarily related to a decrease in mortgage loans held for sale period over period.

These decreases were partially offset by an increase in our Corporate assets, primarily driven by increases in cash and cash equivalents and increases related to Century Living .

Lots owned and controlled

September 30, 2022

March 31, 2023

December 31, 2022

Century Complete

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.

Of our total lots owned and controlled as of March 31, 2023, 60.8% were owned and 39.2% were controlled, as compared to 60.5% owned and 39.5% controlled as of December 31, 2022.

Other Homebuilding Operating Data

Commencing in the first quarter of 2023, our Century Complete operations in Texas were realigned and are now managed under our Texas segment.

Accordingly, we have presented segment information under this new basis as of and for the three months ended March 31, 2023, and we have restated the corresponding segment information for those segments as of and for the three months ended March 31, 2022.

Net new home contracts

Three 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 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.

Net new home contracts (new home contracts net of cancellations) for the three months ended March 31, 2023 decreased by 922 homes, or 31.3%, to 2,022 as compared to 2,944 for the three months ended March 31, 2022.

Beginning in the second quarter of 2022 and continuing through the first quarter of 2023, we experienced a decline in home sales pace across our markets as compared to prior year periods.

The decrease in net new home contracts was primarily driven by the reduced number of homes available for sale and the impact on demand for new homes from increased interest rates, inflation, and macro-economic uncertainty.

Monthly absorption rate

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

Nine Months Ended September 30,

Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three months ended March 31, 2023 and 2022 by segment are included in the tables below:

Three Months Ended March 31,

Increase (Decrease)

Century Complete

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 .

During the three months ended March 31, 2023, our absorption rate decreased by 42.0% to 2.9 per month, as compared to the same period in 2022.

Beginning in the second quarter of 2022 and continuing through the first quarter of 2023, we experienced a decline in sales pace across our markets compared to prior year periods.

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

Even with these challenges, during the three months ended March 31, 2023, we experienced cancellation rates of a combined 18%, with a 16% cancellation rate for Century Communities and a 20% cancellation rate for Century Complete, which represents a significant reduction from cancellation rates we experienced in the latter half of 2022.

Selling communities at period end

As of September 30,

As of March 31,

Increase/(Decrease)

Century Complete

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.

Our selling communities increased by 37 communities to 234 communities at March 31, 2023 as compared to 197 at March 31, 2022.

This increase was a result of new community openings since the end of the prior year period.

(dollars in thousands)

As of September 30,

As of March 31,

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 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.

At March 31, 2023, we had 1,920 homes in backlog with a total value of $713.6 million, which represents decreases of 63.4% and 67.1%, respectively, as compared to 5,247 homes in backlog with a total value of $2.2 billion at March 31, 2022.

The decrease in backlog dollar value is primarily attributable to the decrease in backlog units, and in part due to a 10.2% decrease 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 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 September 30, 2022, Century Communities, Inc.

As of March 31, 2023, Century Communities, Inc.

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

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or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the applicable indenture.

The indenture governing our former 2025 Notes contained a similar provision.

If a guarantor were to become a debtor in a case under the US Bankruptcy Code, a court may decline to enforce its guarantee of the Senior Notes.

This may occur when, among other factors, it is found that the guarantor originally received less than fair consideration for the guarantee and the guarantor would be rendered insolvent by enforcement of the guarantee.

On the basis of historical financial

information, operating history and other factors, we believe that each of the guarantors, after giving effect to the issuance of its guarantee of the Senior Notes when the guarantee was issued, was not insolvent and did not and has not incurred debts beyond its ability to pay such debts as they mature.

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.

Only the 2027 Notes and the related guarantees are, and the former 2025 Notes and the related guarantees were, registered securities under the Securities Act of 1933, as amended (the “Securities Act”).

Only the 2027 Notes and the related guarantees are registered securities under the Securities Act of 1933, as amended (the “Securities Act”).

The offer and sale of the 2029 Notes and the related guarantees were not and will not be registered under the Securities Act or the securities laws of any other jurisdiction and instead were issued in reliance upon an exemption from such registration.

Unless they are subsequently registered under the Securities Act, neither the 2029 Notes nor the related guarantees may be offered and sold only in transactions that are exempt from the registration requirements under the Securities Act and the applicable securities laws of any other jurisdiction.

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.

The Guarantors’ condensed supplemental financial information is presented in this report as if the Senior Note 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.

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Summarized Balance Sheet Data (in thousands)

September 30, 2022

March 31, 2023

December 31, 2022

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Summarized Statements of Operations Data (in thousands)

Nine Months Ended

September 30, 2022

Three Months Ended

March 31, 2023

December 31, 2022

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Selling, general and administrative

Loss on debt extinguishment

Inventory impairment and other

Inventory impairment

Other income (expense)

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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.

A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 2, 2023, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”

Liquidity and Capital Resources

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.

Our liquidity, consisting of our cash and cash equivalents and cash held in escrow and revolving line of credit availability, was $1.2 billion as of March 31, 2023 and December 31, 2022.

Our principal uses of capital for the three months ended March 31, 2023 were our land purchases, land development, home construction, and the payment of routine liabilities.

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 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.

From a liquidity standpoint, we continue to acquire and develop lots in our markets when they meet our current investment criteria.

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, general corporate purposes, and other cash needs.

We use funds generated by operations, available borrowings under our revolving line of credit facility, and proceeds from issuances of debt or equity, including our 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.

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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.

In a higher interest rate environment, we may incur additional interest expense on borrowings that bear floating interest rates, such as under our revolving line of credit, repurchase facilities, and construction loan agreements.

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 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.

For the three months ended March 31, 2023, 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, 2022 that was filed with the SEC on February 2, 2023.

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 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.

As of March 31, 2023, we had outstanding purchase contracts and option contracts for 20,248 lots totaling approximately $897.4 million and we had $42.4 million of deposits for land contracts, of which $21.8 were non-refundable cash deposits pertaining to land contracts.

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 September 30, 2022 and December 31, 2021 (in thousands):

September 30,

One of our principal liquidity needs is the payment of principal and interest on our outstanding indebtedness.

Our outstanding indebtedness is described in detail in Note 9 – Debt in the Notes to the Consolidated Financial Statements .

We are required to meet certain covenants, and as of March 31, 2023, we were in compliance with all such covenants and requirements under the agreements governing our revolving line of credit, mortgage repurchase facilities, and construction loan agreements.

See Note 9 – Debt in the Notes to the Consolidated Financial Statements for further detail.

Our outstanding debt obligations included the following as of March 31, 2023 and December 31, 2022 (in thousands):

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 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.

(2) As of March 31, 2023, other financing obligations included $20.4 million related to insurance premium notes and certain secured borrowings, as well as $14.5 million outstanding under the construction loan agreements, as described below.

As of December 31, 2022, other financing obligations included $20.7 million related to insurance premium notes and certain secured borrowings, as well as $7.4 million outstanding under the construction loan agreements.

We may from time to time seek to refinance or increase our outstanding debt or retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise.

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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 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.

As of March 31, 2023 and December 31, 2022, we had $570.8 million and $574.8 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 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.

On March 17, 2023, a wholly owned subsidiary of Century Living, LLC entered into a construction loan agreement with UMB Bank, N.A., and certain wholly owned subsidiaries of Century Living, LLC, are party to construction loan agreements entered into during 2022 with PNC Bank, National Association and U.S.

Bank National Association, a national banking association, d/b/a Housing Capital Company (which along with UMB Bank, N.A., we collectively refer to as “the lenders”), respectively.

The three construction loan agreements collectively provide that we may borrow up to $187.6 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 various rates, including a fixed rate, and floating interest rates per annum equal to the Secured Overnight Financing Rate (which we refer to as “SOFR”) 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 March 17, 2028, with certain of the construction loan agreements allowing for 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.

As of March 31, 2023, $14.5 million was outstanding under the construction loan agreements, with borrowings bearing a weighted average interest rate of 6.778% during the three months ended March 31, 2023, and we were in compliance with all covenants thereunder.

Revolving Line of Credit

On May 21, 2021, we entered into a Second Amended and Restated Credit Agreement (which we refer to as the “Second A&R Credit Agreement”) with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders party thereto.

The Second A&R Credit Agreement , which amended and restated the Amended and Restated Credit Agreement , provides us with a senior unsecured revolving line of credit (which we refer to as the “Credit Facility”) of up to $800 million , and unless terminated earlier, will mature on April 30, 2026 .

The Credit Facility includes a $250.0 million sublimit for standby letters of credit.

Under the terms of the Second A&R Credit Agreement, the Company is entitled to request an increase in the size of the Credit Facility by an amount not exceeding $200 million.

The Second A&R Credit Agreement provides us with a senior unsecured revolving line of credit (which we refer to as the “revolving line of credit”) of up to $800.0 million, and unless terminated earlier, will mature on April 30, 2026.

The revolving line of credit includes a $250.0 million sublimit for standby letters of credit.

Under the terms of the Second A&R Credit Agreement, we are entitled to request an increase in the size of the revolving line of credit by an amount not exceeding $200 million.

Our obligations under the Second A&R Credit Agreement are guaranteed by certain of our subsidiaries.

The Second A&R Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default.

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 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.

On December 21, 2022, we entered into a First Modification Agreement with Texas Capital Bank, as Administrative Agent, amending the Second A&R Credit Agreement pursuant to which, effective January 3, 2023, all existing borrowings using an interest rate based on a LIBOR reference rate had the interest rate replaced with one based on an adjusted term SOFR reference rate, which equals the greater of (i) 0.50% or (ii) the one-month quotation of the secured overnight financing rate administered by the Federal Reserve Bank of New York, plus 0.10%.

As of March 31, 2023, no amounts were outstanding under our revolving line of credit and were in compliance with all covenants under the Second A&R Credit Agreement.

Mortgage Repurchase Facilities – Financial Services

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%.

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

Morgan, and formerly Wells Fargo (since the agreement with Wells Fargo was terminated during the three months ended March 31, 2023) (which facilities we refer to as the “repurchase facilities”), which provide Inspire with uncommitted repurchase facilities of up to an aggregate of $200.0 million as of March 31, 2023, secured by the mortgage loans financed thereunder.

The repurchase facilities have varying short term maturity dates through December 21, 2023 and bear a weighted average interest rate of 6.38% during the three months ended March 31, 2023.

Amounts outstanding under the repurchase facilities are not guaranteed by us or any of our subsidiaries, and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type.

As of September 30, 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 .

As of March 31, 2023 and December 31, 2022, we had $149.8 million and $197.6 million outstanding under the repurchase facilities, respectively, and were in compliance with all covenants thereunder.

At-the-Market Offerings

On November 27, 2019, we entered into a Distribution Agreement with J.P.

Morgan Securities LLC, BofA Securities, Inc., Citigroup Global Markets Inc., and Fifth Third Securities, Inc.

We are party to a Distribution Agreement with J.P.

Morgan Securities LLC, BofA Securities, Inc., Wells Fargo Securities, LLC and Fifth Third Securities, Inc.

(which we refer to as the “Distribution Agreement”), as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings, in accordance with the terms and conditions set forth in the Distribution Agreement.

This Distribution Agreement, which superseded and replaced a prior similar distribution agreement, 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 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.

We did not sell or issue any shares of our common stock during the three months ended March 31, 2023 and 2022, respectively, and as of March 31, 2023, all $100.0 million remained available for sale.

Stock Repurchase Program

On November 6, 2018, our Board of Directors authorized a stock repurchase program, under which we may repurchase up to 4.5 million shares of our outstanding common stock.

Our Board of Directors authorized a stock repurchase program in 2018, under which we may repurchase up to 4.5 million shares of our outstanding common stock.

The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws.

The actual manner, timing, amount and value of repurchases under the stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including the market price of our common stock, trading volume, other capital management objectives and opportunities, applicable legal requirements, 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.

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, applicable tax effects including the 1% excise tax recently instituted under the Inflation Reduction Act of 2022, and general market and economic conditions.

We intend to finance any stock repurchases through available cash and our revolving line of credit.

Repurchases also may be made under a trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, which would permit shares to be repurchased when we otherwise may be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions.

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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 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

During the three months ended March 31, 2023, we did not repurchase any shares of our common stock.

During the three months ended March 31, 2022, an aggregate of 1.0 million shares of our common stock were repurchased for a total purchase price of approximately $62.4 million at a weighted average price of $61.52 per share.

The maximum number of shares available to be repurchased under the stock repurchase program as of March 31, 2023 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 three months ended March 31, 2023 and 2022, respectively (in thousands, except per share information):

Three Months ended March 31, 2023

Cash Dividends Declared and Paid

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March 15, 2023

June 15, 2022

August 17, 2022

August 31, 2022

September 14, 2022

Nine months ended September 30, 2021

Three Months ended March 31, 2022

Cash Dividends Declared and Paid

Declaration Date

June 16, 2021

August 18, 2021

September 1, 2021

September 15, 2021

February 16, 2022

March 2, 2022

March 16, 2022

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— 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:

Cash Flows— Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

For the three months ended March 31, 2023 and 2022, 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 $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.

Net cash provided by operating activities was $191.3 million during the three months ended March 31, 2023 as compared to $109.4 million during the quarter ended March 31, 2022.

The increase in cash provided by operations is primarily a result of a reduction in inventories as a result of reduced land acquisition spend and expenditures associated with the construction of homes during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

This reduction was offset by (1) a decrease in net income of $109.2 million and (2) a reduction in our mortgage loans held for sale of $48.2 million during the three months ended March 31, 2023, as compared to a reduction in mortgage loans held for sale of $144.4 million during the three months ended March 31, 2022.

 Net cash used in investing activities increased to $20.9 million during the three months ended March 31, 2023, compared to $5.1 million used during the three months ended March 31, 2022.

The increase was primarily related to $16.3 million in 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 $58.3 million during the three months ended March 31, 2023, compared to $208.4 million used during the three months ended March 31, 2022.

The decrease in cash used in financing activities was primarily attributable to (1) a $91.0 million decrease in net payments on the repurchase facilities in the first three months of 2023 and (2) $62.4 million of repurchases of common stock during the first three months of 2022, as compared to no repurchases of common stock for the first three months of 2023.

As of March 31, 2023, our cash and cash equivalents and restricted cash balance was $420.6 million, as compared to $308.5 million as of December 31, 2022.

Non-GAAP Financial Measures

In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net homebuilding debt to net capital, and adjusted net earnings per diluted common shares.

In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net homebuilding debt to net capital, adjusted net income and adjusted diluted earnings per share.

These non-GAAP financial measures are presented to provide investors additional information to facilitate the comparison of our past and present operations.

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EBITDA and Adjusted EBITDA

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

The following table presents EBITDA and Adjusted EBITDA for the three months ended March 31, 2023 and 2022.

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

We define Adjusted EBITDA as consolidated net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense, (iv) depreciation and amortization expense, (v) loss on debt extinguishment, and (vi) inventory impairment and other .

We define Adjusted EBITDA as net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense (income), (iv) depreciation and amortization expense, (v) loss on debt extinguishment (if applicable), and (vi) inventory impairment (if applicable) .

We believe Adjusted EBITDA provides an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization, and items considered to be non-recurring.

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(dollars in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Income tax expense

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Depreciation and amortization expense

Loss on debt extinguishment

Inventory impairment and other

Inventory impairment

Adjusted EBITDA

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(dollars in thousands)

September 30,

Notes payable

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We believe excluding certain non-recurring items provides more comparable assessment of our financial results from period to period.

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 dividing Adjusted Net Income by weighted average common shares – diluted.

(in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

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

Adjusted EPS is calculated by dividing adjusted net income by weighted average common shares – diluted.

(in thousands, except share and per share information)

Three Months Ended March 31,

Weighted average common shares outstanding - basic

Dilutive effect of restricted stock units

Dilutive effect of stock-based compensation awards

Weighted average common shares outstanding - diluted

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Income before income tax expense

Inventory impairment and other

Loss on debt extinguishment

Inventory impairment

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 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.

(1) The tax rates used in calculating adjusted net income for the three months ended March 31, 2023 and 2022 were 24.3% and 24.5%, respectively, which are reflective of our 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 Agreements.

The “applicable margins” described above are determined by a schedule based on the leverage ratio of the Company, as defined in the Second A&R Credit Agreement.

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 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.

Our primary exposure to market risk is interest rate risk associated with our Second A&R Credit Agreemen t and construction loan agreements.

On December 21, 2022, we entered into a First Modification Agreement with Texas Capital Bank (formerly known as Texas Capital Bank, National Association), as Administrative Agent, amending the Second A&R Credit Agreement.

Per the First Modification Agreement, effective January 3, 2023, all existing borrowings using an interest rate based on a LIBOR reference rate had the interest rate replaced with one based on an adjusted term SOFR reference rate, which equals the greater of (i) 0.50% or (ii) the one-month quotation of the secured overnight financing rate administered by the Federal Reserve Bank of New York, plus 0.10%.

Borrowings under the construction loan agreements bear interest at various rates, including a fixed rate, and floating interest rates per annum equal to the SOFR 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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We also typically hedge our interest rate exposure through entering into interest rate swap futures.

Our homebuilding operations have been and may continue to be adversely impacted by inflation, primarily from higher land, financing, labor, material, particularly lumber, and construction costs.

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 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.

Our homebuilding operations have been and may continue to be adversely impacted by inflation, primarily from higher land, financing, labor, material , and construction costs.

Inflation remained elevated during the three months ended March 31, 2023 compared to the prior year period, and the Federal Reserve continued to raise the federal funds interest rate during the first quarter of 2023, which continued to impact interest rates on 30-year fixed mortgages.

Due to higher mortgage rates, we were no longer able to offset cost increases with higher home selling prices in the first quarter of 2023 and if weak housing market conditions continue we will likely continue to be unable to offset cost increases with higher home selling prices in the future.

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

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Since it historically has taken four to eight months to construct a new home, we typically deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries.

Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occurs during the second half of the year.

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

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 our cash receipts from home deliveries occurs during the second half of the year.

We expect this seasonal pattern, especially with respect to sales, to return this year after being obscured by the COVID-driven sales boom that began in 2020 and continued until the interest rate led softening in the second half of 2022, and 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