Century Communities, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND A NALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Some of the statements included in this Quarterly Report on Form 10-Q (which we refer to as this “Form 10-Q”) constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual 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. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors. The forward-looking statements included in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking and subject to risks and uncertainties including among others:  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;  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;  availability, terms and deployment of capital;  availability or cost of mortgage financing or an increase in the number of foreclosures in the market;  delays in land development or home construction resulting from adverse weather conditions or other events outside our control;  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;  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;  the timing of r eceipt of municipal, utility and other regulatory approvals and the opening of projects and construction and completion of our homes;  the i mpact and cost of compliance with evolving environmental, health and safety and other laws and regulations and third-party challenges to required permits and other approvals and potential legal liability in connection therewith;  the degree and nature of our competition;  our leverage, debt service obligations and exposure to changes in interest rates and our ability to refinance our debt when needed or on favorable terms;  our ability to continue to fund and succeed in our mortgage lending business and the additional risks involved in that business;  availability of qualified personnel and contractors and our ability to retain key personnel and contractor relationships;  our ability to pay dividends in the future; and  taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance. Forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described above and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K, and other risks and uncertainties detailed in 17 Table of Contents this report, including “Part II, Item 1A. Risk Factors,” and our other reports and filings with the SEC. If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Form 10-Q. As used in this Form 10-Q, references to “we,” “us,” “our,” “Century” or the “Company” refer to Century Communities, Inc., a Delaware corporation, and, unless the context otherwise requires, its subsidiaries and affiliates. The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our Company, business, operations and present business environment and is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. We use certain non-GAAP financial measures that we believe are important for purposes of comparison to prior periods. This information is also used by our management to measure the profitability of our ongoing operations and analyze our business performance and trends. Some of the numbers included herein have been rounded for the convenience of presentation. Business Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 18 states. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land. We build and sell homes under our Century Communities and Century Complete brands. Our Century Communities brand offers a wide range of buyer profiles including: entry-level, first and second time move-up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade opportunities. Our Century Complete brand targets entry-level homebuyers, primarily sells homes through retail studios and the internet, and generally provides no option or upgrade opportunities. Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Century Complete. 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. 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. While we offer homes that appeal to a broad range of entry-level, move-up, and lifestyle homebuyers, our offerings are heavily weighted towards providing affordable housing options in each of our homebuyer segments. 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 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. Overview 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 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 18 Table of Contents 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. We believe future demand for our homes is uncertain as future economic and market conditions are uncertain, in particular with respect to inflation; the impact of recent and anticipated future increases to the federal funds interest rate by the Federal Reserve; 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; wage growth; household formations; levels of new and existing homes for sale; prevailing home and rental prices; availability and cost of land, labor and construction materials; demographic trends; housing demand; and other factors, including those described elsewhere in this Form 10-Q. Specifically, the recent rise in interest rates increases the costs of owning a home and adversely affects the purchasing power of our customers. Increased interest rates also could decrease homebuyer confidence and hinder not only demand for our homes, but also our ability to realize our backlog. A decrease in demand for our homes or an increase in cancellations due to increased interest rates or otherwise would adversely affect our operating results in future periods, including our net sales, home deliveries, gross margin, origination volume of and revenues from our Financial Services segment, and net income. As a result, our past performance may not be indicative of our future results. 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. We have continued to focus on maintaining an appropriate balance of home and land inventories in relation to anticipated future demand, as well as prudent leverage, and, as a result, we believe we are well positioned to continue to execute on our strategy in order to optimize stockholder returns. Results of Operations During the three 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. ‎ 19 Table of Contents 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 March 31, Increase (Decrease) 2023 2022 Amount % Consolidated Statements of Operations: Revenues Home sales revenues $ 735,600 $ 988,415 $ (252,815) (25.6) % Land sales and other revenues 1,535 1,630 (95) (5.8) % Total homebuilding revenues 737,135 990,045 (252,910) (25.5) % Financial services revenues 15,855 26,305 (10,450) (39.7) % Total revenues 752,990 1,016,350 (263,360) (25.9) % Homebuilding cost of revenues Cost of home sales revenues (601,385) (709,073) 107,688 (15.2) % Cost of land sales and other revenues — (846) 846 (100.0) % (601,385) (709,919) 108,534 (15.3) % Financial services costs (10,781) (15,154) 4,373 (28.9) % Selling, general, and administrative (98,313) (101,639) 3,326 (3.3) % Other income (expense) 1,498 (862) 2,360 (273.8) % Income before income tax expense 44,009 188,776 (144,767) (76.7) % Income tax expense (10,698) (46,280) 35,582 (76.9) % Net income $ 33,311 $ 142,496 $ (109,185) (76.6) % Earnings per share: Basic $ 1.04 $ 4.25 $ (3.21) (75.5) % Diluted $ 1.04 $ 4.20 $ (3.16) (75.2) % Adjusted diluted earnings per share (1) $ 1.04 $ 4.20 $ (3.16) (75.2) % Other Operating Information (dollars in thousands): Number of homes delivered 1,912 2,348 (436) (18.6) % Average sales price of homes delivered $ 384.7 $ 421.0 $ (36.3) (8.6) % Homebuilding gross margin percentage (2) 18.2 % 28.3 % (10.1) % (35.7) % Adjusted homebuilding gross margin excluding interest and inventory impairment (1) 19.6 % 29.5 % (9.9) % (33.6) % Backlog at end of period, number of homes 1,920 5,247 (3,327) (63.4) % Backlog at end of period, aggregate sales value $ 713,612 $ 2,170,865 $ (1,457,253) (67.1) % Average sales price of homes in backlog $ 371.7 $ 413.7 $ (42.0) (10.2) % Net new home contracts 2,022 2,944 (922) (31.3) % Selling communities at period end 234 197 37 18.8 % Average selling communities 223 198 25 12.6 % Total owned and controlled lot inventory 51,614 85,577 (33,963) (39.7) % Adjusted EBITDA (1) $ 54,744 $ 203,663 $ (148,919) (73.1) % Adjusted income before income tax expense (1) $ 44,009 $ 188,776 $ (144,767) (76.7) % Adjusted net income (1) $ 33,311 $ 142,496 $ (109,185) (76.6) % Net homebuilding debt to net capital (1) 21.5 % 29.3 % (7.8) % (26.6) % (1) This is a non-GAAP financial measure and should not be used as a substitute for the Company’s operating results prepared in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information under “Non-GAAP Financial Measures .” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP . (2) Homebuilding gross margin percentage is inclusive of impairment charges, if applicable. No impairment charges were recorded for the three months ended March 31, 2023 and 2022. ‎ 20 Table of Contents 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 March 31, Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31, 2023 2022 2023 2022 2023 2022 2023 2022 West 203 396 $ 634.9 $ 663.5 $ 128,894 $ 262,732 $ 7,973 $ 71,242 Mountain 455 514 539.8 546.0 245,594 280,655 27,808 56,999 Texas 327 423 273.5 326.8 89,434 138,237 3,673 22,837 Southeast 198 366 439.0 408.4 86,929 149,477 11,966 30,865 Century Complete 729 649 253.4 242.4 184,749 157,314 13,950 22,425 Financial Services — — — — — — 5,074 11,151 Corporate — — — — — — (26,435) (26,743) Total 1,912 2,348 $ 384.7 $ 421.0 $ 735,600 $ 988,415 $ 44,009 $ 188,776 West 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. Mountain 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. 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. Texas 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. 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. 21 Table of Contents Southeast 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. 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. Century Complete 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 $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 March 31, 2023 2022 Total originations: Number of loans 989 1,520 Principal $ 343,081 $ 552,056 Capture rate of Century homebuyers 66 % 77 % Century Communities 72 % 81 % Century Complete 56 % 64 % Average FICO score 724 732 Century Communities 729 739 Century Complete 713 708 Loans sold to third parties: Number of loans sold 1,139 1,959 Principal $ 389,810 $ 692,064 Corporate 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. 22 Table of Contents Homebuilding Gross Margin (dollars in thousands) 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, 2023 % 2022 % Home sales revenues $ 735,600 100.0 % $ 988,415 100.0 % Cost of home sales revenues (601,385) (81.8) % (709,073) (71.7) % Inventory impairment — — % — — % Homebuilding gross margin 134,215 18.2 % 279,342 28.3 % Add: Inventory impairment — — % — — % Add: Interest in cost of home sales revenues 9,807 1.3 % 12,146 1.2 % Adjusted homebuilding gross margin excluding interest and inventory impairment (1) $ 144,022 19.6 % $ 291,488 29.5 % (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 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 March 31, Increase 2023 2022 Amount % Selling, general and administrative $ 98,313 $ 101,639 $ (3,326) (3.3) % As a percentage of home sales revenue 13.4 % 10.3 % 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 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%. 23 Table of Contents 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) March 31, December 31 Increase (Decrease) 2023 2022 Amount Change West $ 632,820 $ 665,827 $ (33,007) (5.0) % Mountain 1,017,045 1,122,892 (105,847) (9.4) % Texas 506,763 508,862 (2,099) (0.4) % Southeast 420,158 415,887 4,271 1.0 % Century Complete 339,254 376,131 (36,877) (9.8) % Financial Services 321,703 372,284 (50,581) (13.6) % Corporate 475,234 311,884 163,350 52.4 % Total assets $ 3,712,977 $ 3,773,767 $ (60,790) (1.6) % 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 March 31, 2023 December 31, 2022 % Change Owned Controlled Total Owned Controlled Total Owned Controlled Total West 4,279 763 5,042 4,433 509 4,942 (3.5) % 49.9 % 2.0 % Mountain 10,314 2,325 12,639 10,845 1,566 12,411 (4.9) % 48.5 % 1.8 % Texas 7,578 3,217 10,795 7,432 3,876 11,308 2.0 % (17.0) % (4.5) % Southeast 5,610 3,658 9,268 5,576 5,733 11,309 0.6 % (36.2) % (18.0) % Century Complete 3,585 10,285 13,870 3,826 9,323 13,149 (6.3) % 10.3 % 5.5 % Total 31,366 20,248 51,614 32,112 21,007 53,119 (2.3) % (3.6) % (2.8) % 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. 24 Table of Contents Net new home contracts Three Months Ended March 31, Increase (Decrease) 2023 2022 Amount % Change West 343 417 (74) (17.7) % Mountain 333 586 (253) (43.2) % Texas 475 496 (21) (4.2) % Southeast 242 409 (167) (40.8) % Century Complete 629 1,036 (407) (39.3) % Total 2,022 2,944 (922) (31.3) % 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 months ended March 31, 2023 and 2022 by segment are included in the tables below: Three Months Ended March 31, Increase (Decrease) 2023 2022 Amount % Change West 4.4 6.3 (1.9) (30.2) % Mountain 2.8 5.6 (2.8) (50.0) % Texas 4.5 7.2 (2.7) (37.5) % Southeast 2.9 6.2 (3.3) (53.2) % Century Complete 2.0 3.6 (1.6) (44.4) % Total 2.9 5.0 (2.1) (42.0) % 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 March 31, Increase/(Decrease) 2023 2022 Amount % Change West 26 22 4 18.2 % Mountain 40 35 5 14.3 % Texas 35 23 12 52.2 % Southeast 28 22 6 27.3 % Century Complete 105 95 10 10.5 % Total 234 197 37 18.8 % 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. 25 Table of Contents Backlog (dollars in thousands) As of March 31, 2023 2022 % Change Homes Dollar Value Average Sales Price Homes Dollar Value Average Sales Price Homes Dollar Value Average Sales Price West 220 $ 133,249 $ 605.7 545 $ 412,519 $ 756.9 (59.6) % (67.7) % (20.0) % Mountain 319 152,521 478.1 1,117 641,820 574.6 (71.4) % (76.2) % (16.8) % Texas 303 95,464 315.1 564 188,648 334.5 (46.3) % (49.4) % (5.8) % Southeast 249 110,864 445.2 756 356,413 471.4 (67.1) % (68.9) % (5.6) % Century Complete 829 221,514 267.2 2,265 571,465 252.3 (63.4) % (61.2) % 5.9 % Total / Weighted Average 1,920 $ 713,612 $ 371.7 5,247 $ 2,170,865 $ 413.7 (63.4) % (67.1) % (10.2) % ‎ 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 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”). Our subsidiaries associated with our Financial Services operations (referred to as “Non-Guarantors”) do not guarantee the Senior Notes. The guarantees are senior unsecured obligations of the Guarantors that rank equal with all existing and future senior debt of the Guarantors and senior to all subordinated debt of the Guarantors. The guarantees are effectively subordinated to any secured debt of the Guarantors. As of March 31, 2023, Century Communities, Inc. had outstanding $1.0 billion in total principal amount of Senior Notes. Each of the indentures governing our Senior Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the respective indentures), which sale, transfer, exchange or other disposition does not constitute an “Asset Sale” (as defined in the respective indentures) or is made in compliance with applicable provisions of the applicable indenture; (2) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the assets of such Guarantor, which sale, transfer, exchange or other disposition does not constitute an Asset Sale or is made in compliance with applicable provisions of the applicable indenture; provided, that after such sale, transfer, exchange or other disposition, such Guarantor is an “Immaterial Subsidiary” (as defined in the respective indentures); (3) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the applicable indenture; provided that if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the applicable Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the applicable Indenture; (4) upon the designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the respective Indentures), in accordance with the applicable indenture; (5) if the Company exercises its legal defeasance option or covenant defeasance option under the applicable indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the applicable indenture, upon such exercise or discharge; or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the applicable indenture. 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 26 Table of Contents 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 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. 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. We have determined that separate, full financial statements of the Guarantors would not be material to investors, and accordingly, supplemental financial information is presented below. The following summarized financial information is presented for Century Communities, Inc. and the Guarantor Subsidiaries on a combined basis after eliminating intercompany transactions and balances among Century Communities, Inc. and the Guarantor Subsidiaries , as well as their investment in, and equity in earnings from Non-Guarantor Subsidiaries. Century Communities, Inc. and Guarantor Subsidiaries Summarized Balance Sheet Data (in thousands) March 31, 2023 December 31, 2022 Assets Cash and cash equivalents $ 303,208 $ 191,541 Cash held in escrow 12,691 56,569 Accounts receivable 46,870 46,326 Inventories 2,741,187 2,830,645 Prepaid expenses and other assets 203,259 193,824 Property and equipment, net 32,726 31,326 Deferred tax assets, net 20,939 20,856 Goodwill 30,395 30,395 Total assets $ 3,391,275 $ 3,401,482 Liabilities and stockholders’ equity Liabilities: Accounts payable $ 105,436 $ 105,727 Accrued expenses and other liabilities 281,921 310,330 Notes payable 1,026,615 1,019,412 Revolving line of credit — — Total liabilities 1,413,972 1,435,469 Stockholders’ equity: 1,977,303 1,966,013 Total liabilities and stockholders’ equity $ 3,391,275 $ 3,401,482 Summarized Statements of Operations Data (in thousands) Three Months Ended Year Ended March 31, 2023 December 31, 2022 Total homebuilding revenues $ 737,135 $ 4,410,483 Total homebuilding cost of revenues (601,385) (3,315,994) Selling, general and administrative (98,313) (430,742) Inventory impairment — (10,149) Other income (expense) 1,018 (15,894) Income before income tax expense 38,455 637,704 Income tax expense (9,348) (142,986) Net income $ 29,107 $ 494,718 ‎ 27 Table of Contents Critical Accounting Policies Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates , and the estimates included in our financial statements might be impacted if we used different assumptions or conditions. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 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 Overview 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. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and not recognized in our consolidated statements of operations until a home closes, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we 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 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. Our Century Living operations use excess cash from our operations, as well as project specific secured financing under construction loan agreements to fund development of multi-family projects. We believe that we will be able to fund our current liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations, and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available or on acceptable terms based on the macro-economy and market conditions at the time. In a higher interest rate environment, we may incur additional interest expense on borrowings that bear floating interest rates, such as our revolving line of credit. We believe we are well positioned from a cash and liquidity standpoint to operate in an uncertain environment, and to pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise . Long-term Liquidity and Capital Resources Beyond the next twelve months, we believe that our principal uses of capital will be land and inventory purchases and other expenditures, as well as principal and interest payments on our long-term debt obligations. We believe that we will be able to fund our long-term liquidity needs with cash generated from operations and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available, or on favorable terms, especially in light of rising interest rates. In a higher interest rate environment, we may incur additional interest expense on borrowings that bear floating interest rates, such as 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. 28 Table of Contents Material Cash Requirements In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations impact our short-term and long-term liquidity and capital resource needs. 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. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. Purchase and option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties until we have determined whether to exercise our option, which may serve to reduce our financial risks associated with long-term land holdings. These purchase contracts typically require a cash deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and others as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Option contracts generally require payment by us of a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. Our obligations with respect to purchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits. As of 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. 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 24 months. Our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change and dependent on future market conditions. Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. 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 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): March 31, December 31, 2023 2022 3.875% senior notes, due August 2029 (1) $ 495,077 $ 494,884 6.750% senior notes, due May 2027 (1) 496,598 496,394 Other financing obligations (2) 34,940 28,134 Notes payable 1,026,615 1,019,412 Revolving line of credit — — Mortgage repurchase facilities 149,784 197,626 Total debt $ 1,176,399 $ 1,217,038 (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 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. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may or may not be material during any particular reporting period. 29 Table of Contents Letters of Credit and Performance Bonds 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 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 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 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 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. 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 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 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. 30 Table of Contents At-the-Market Offerings 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. 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 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, 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. The stock repurchase program has no expiration date and may be extended, suspended or discontinued by our Board of Directors at any time without notice at our discretion. All shares of common stock repurchased under the program will be cancelled and returned to the status of authorized but unissued shares of common stock. During the three 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. Dividends 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 Declaration Date Record Date Paid Date Per Share Amount February 8, 2023 March 1, 2023 March 15, 2023 $ $0.23 $ 7,365 Three Months ended March 31, 2022 Cash Dividends Declared and Paid Declaration Date Record Date Paid Date Per Share Amount February 16, 2022 March 2, 2022 March 16, 2022 $ 0.20 $ 6,657 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. 31 Table of Contents 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 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. ‎ 32 Table of Contents Non-GAAP Financial Measures In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net homebuilding debt to net capital, 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. We believe these non-GAAP financial measures provide useful information to investors because they are used to evaluate our performance on a comparable year-over-year basis. These non-GAAP financial measures are not in accordance with, or an alternative for, GAAP measures and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of our non-GAAP financial measures may differ from the definitions of other companies using the same or similar names limiting, to some extent, the usefulness of such measures for comparison purposes. Non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our financial results as determined in accordance with GAAP. These measures should only be used to evaluate our financial results in conjunction with the corresponding GAAP measures. Accordingly, we qualify our use of non-GAAP financial information in a statement when non-GAAP financial information is presented. EBITDA and Adjusted EBITDA The following table presents EBITDA and Adjusted EBITDA for the three 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 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. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Adjusted EBITDA should be considered in addition to, and not as a substitute for, consolidated net income in accordance with GAAP as a measure of performance. Our presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our Adjusted EBITDA is limited as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. (dollars in thousands) Three Months Ended March 31, 2023 2022 % Change Net income $ 33,311 $ 142,496 (76.6) % Income tax expense 10,698 46,280 (76.9) % Interest in cost of home sales revenues 9,807 12,146 (19.3) % Interest expense (income) (2,364) 135 NM % Depreciation and amortization expense 3,292 2,606 26.3 % EBITDA 54,744 203,663 (73.1) % Inventory impairment — — NM Adjusted EBITDA $ 54,744 $ 203,663 (73.1) % NM – Not Meaningful ‎ 33 Table of Contents Net Homebuilding Debt to Net Capital The following table presents our ratio of net homebuilding debt to net capital, which is a non-GAAP financial measure. We calculate this by dividing net homebuilding debt (homebuilding debt less cash and cash equivalents, and cash held in escrow) by net capital (net homebuilding debt plus total stockholders’ equity). Homebuilding debt is our total debt minus our outstanding borrowings under our construction loan agreements and our repurchase facilities. The most directly comparable GAAP measure is the ratio of debt to total capital. We believe the ratio of net homebuilding debt to net capital is a relevant and useful financial measure to investors in understanding the leverage employed in our operations and as an indicator of our ability to obtain external financing. (dollars in thousands) March 31, December 31, 2023 2022 Notes payable $ 1,026,615 $ 1,019,412 Revolving line of credit — — Construction loan agreements (14,526) (7,389) Total homebuilding debt 1,012,089 1,012,023 Total stockholders' equity 2,171,641 2,150,215 Total capital $ 3,183,730 $ 3,162,238 Homebuilding debt to capital 31.8% 32.0% Total homebuilding debt $ 1,012,089 $ 1,012,023 Cash and cash equivalents (405,722) (296,724) Cash held in escrow (12,691) (56,569) Net homebuilding debt 593,676 658,730 Total stockholders' equity 2,171,641 2,150,215 Net capital $ 2,765,317 $ 2,808,945 Net homebuilding debt to net capital 21.5% 23.5% ‎ 34 Table of Contents Adjusted Net Income and Adjusted Diluted Earnings per Share Adjusted net income and adjusted diluted earnings per share (which we refer to as “Adjusted EPS”) are non-GAAP financial measures that we believe are useful to management, investors and other users of our financial information in evaluating our operating results and understanding our operating trends without the effect of certain non-recurring items. We believe excluding certain non-recurring items provides more comparable assessment of our financial results from period to period. 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, 2023 2022 Numerator Net income $ 33,311 $ 142,496 Denominator Weighted average common shares outstanding - basic 31,914,414 33,530,610 Dilutive effect of stock-based compensation awards 202,668 411,624 Weighted average common shares outstanding - diluted 32,117,082 33,942,234 Earnings per share: Basic $ 1.04 $ 4.25 Diluted $ 1.04 $ 4.20 Adjusted earnings per share Numerator Net income $ 33,311 $ 142,496 Income tax expense 10,698 46,280 Income before income tax expense 44,009 188,776 Inventory impairment — — Adjusted income before income tax expense 44,009 188,776 Adjusted income tax expense (1) (10,698) (46,280) Adjusted net income $ 33,311 $ 142,496 Denominator - Diluted 32,117,082 33,942,234 Adjusted diluted earnings per share $ 1.04 $ 4.20 (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. ‎ 35 Table of Contents ITEM 3. QUANTIT ATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rates Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our 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. As interest rates increase, the fair value of the debt instrument will decrease. Our Financial Services business utilizes mortgage backed securities forward commitments, option contracts and investor commitments to protect the value of rate-locked commitments and loans held for sale from fluctuations in mortgage-related interest rates. To mitigate interest risk associated with loans held for sale, we typically use derivative financial instruments to hedge our exposure to risk from the time a borrower locks a loan until the time the loan is securitized. We also typically hedge our interest rate exposure through entering into interest rate swap futures. Inflation Our homebuilding operations have been and may continue to be adversely impacted by inflation, primarily from higher land, financing, labor, material , 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 compared to prior year periods. 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. Seasonality Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity during the spring, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it 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 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.