Item 1A. Risk Factors
Item 1A. RISK FACTORS
Although we have operated through a number of varying economic cycles, there are several risks that could affect our
ability to conduct our business, which we discuss below. If any of these risks materialize, they could, among other things, (a)
materially and adversely impact our results of operations and consolidated financial statements; and (b) cause our results to
differ materially from the forward-looking and other statements we make in our SEC filings; in our news releases and other
public reports and communications, including those we post on or make available through our websites or other electronic
channels; or orally through our personnel and representatives. These risks, and other factors outside of our control, could also
create or increase volatility in our common stock’s market price. The order in which we discuss the risks below should not be
taken as any indication of their relative importance, likelihood or impact.
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Consumer Demand Risks. The following could negatively affect consumer demand for our products, thereby unfavorably
impacting our net orders, homes delivered, average selling prices, revenues and/or profitability:
• Soft or negative economic or housing market conditions . Adverse conditions in our served markets or nationally could
be caused or worsened by factors outside of our control, including slow or negative economic growth, sustained
elevated mortgage interest rates and inflation, and various other macroeconomic as well as geopolitical concerns, such
as military conflicts in Ukraine and the Middle East, and the U.S. federal government’s financial and regulatory
stability with the recent presidential election and change of administration. Among other impacts, a severe or
sustained economic contraction may trigger a rise in home sales contract cancellations, which we and the
homebuilding industry experienced in our 2022 second half and 2023 first quarter, resulting in significantly lower net
orders as compared to corresponding year-earlier periods. In addition, these conditions, along with heightened
competition from other homebuilders and sellers and landlords of existing homes, as discussed below, may lead us to
reduce our home selling prices or offer other concessions to attract or retain buyers, which we did selectively in 2024
and 2023 (particularly, mortgage-related concessions such as interest rate buydowns), and expect to continue doing in
2025 to varying degrees, negatively affecting our revenues and margins and, to the extent the concessions we offer are
not sufficient to attract and retain buyers, our net orders. An extended downturn in the U.S. housing market could
result in an oversupply of new home and resale inventory and greater foreclosure activity, which would further impair
our ability to sell homes at the same volume, prices and margins as in prior periods.
• Reduced employment levels and job and wage growth . While employment has mostly grown since mid-2020, it may
rise more slowly or decline in 2025. If it does, our core first-time and first move-up homebuyer segments could be
particularly affected, impacting us more severely than homebuilders targeting a different buyer demographic.
• Lower population growth, household formations or other unfavorable demographic changes . These may be driven by,
among other things, birth rate changes, economic factors or U.S. immigration policies.
• Diminished consumer confidence, whether generally or as to purchasing a home . Consumers may be reluctant to
purchase a home compared to housing alternatives (such as renting apartments or homes, or remaining in their existing
home) due to location or lifestyle preferences, affordability and home selling price perceptions (particularly in markets
that experienced rapid home price appreciation), employment instability or otherwise. Consumers may also decide not
to search for a new home, or cancel their home sales contracts with us, due to economic or personal financial
uncertainty. The combination of elevated mortgage interest rates since early 2022, several years of rising housing
prices, volatility across financial markets, persistent inflation and various other macroeconomic and geopolitical
concerns have weighed on consumer budgets and confidence throughout 2024 and may continue to do so in 2025,
including due to the change in U.S. presidential administrations in January and potential attendant regulatory
instability. In addition, homeowners who purchased their home with a relatively low mortgage interest rate, as was
generally the case from mid-2020 to mid-2022, may be reluctant to move given the current higher interest rate levels.
With housing affordability at historically low levels, these conditions are expected to remain, and may worsen, in
2025. Beyond negatively impacting demand, these conditions may require us to continue providing, or to increase,
concessions like those described above to stimulate net orders, adversely affecting our revenues and margins.
• Tightened availability or affordability of mortgage loans and homeowner insurance coverage . Most of our buyers need
a mortgage loan to purchase their home. Their ability to obtain a mortgage loan is largely subject to prevailing interest
rates, lenders’ credit standards and appraisals, and the availability of government-supported programs, such as those
from the Federal Housing Administration, the Veterans Administration, Federal National Mortgage Association (also
known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (also known as Freddie Mac). If mortgage
interest rates increase, credit standards are tightened, appraisals for our homes are lowered or mortgage loan programs
are curtailed, potential buyers of our homes may not be able to obtain necessary mortgage financing to be able to
purchase a home from us.
Since 2022, insurance companies have discontinued, or significantly reduced, underwriting new homeowner insurance
policies in areas that have experienced, or are thought to be at risk of experiencing, significant wildfires, hurricanes,
flooding or other natural disasters, such as in California and Florida. If potential homebuyers are unable to obtain
affordable homeowner insurance coverage, which became more widespread during 2024 and is expected to be
exacerbated by the unprecedented wildfires in the Los Angeles County area in January 2025, they may not be able to
or decide not to pursue purchasing a home or may cancel a home sales contract with us.
• Poor lender performance . We depend on third-party lenders, including GR Alliance Ventures, LLC (“ GR Alliance ”), a
subsidiary of Guaranteed Rate, Inc. and our third-party partner in KBHS , to provide mortgage loans to our
homebuyers, unlike homebuilders with a wholly-owned mortgage lender. These lenders may be unable or unwilling to
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complete, timely or at all, the loan originations they start for our homebuyers, including if adequate homeowner
insurance is not available. Poorly or non-performing lenders can significantly delay home closings, disrupting our
production schedules and delivery forecasts, or cause home sales contract cancellations. In addition, if GR Alliance or
KBHS perform poorly and our customers use another lender, the income from and value of our KBHS equity interest
would decline.
• Adverse tax law changes . If federal or state laws are changed to eliminate or reduce the income tax benefits associated
with homeownership, such as personal tax deductions for mortgage interest costs and real estate taxes, the after-tax
cost of homeownership could measurably increase and diminish consumer interest in buying a home, as could
increases in personal income tax rates. At the same time, favorable tax law changes will not necessarily increase
demand or allow for higher selling prices for homes generally or for the homes we sell.
• Competition . We face significant competition for customers from other homebuilders, sellers of resale homes and
other housing industry participants, including single-family and other rental-housing operators. This competitive
environment may, among other things, cause us to reduce our home selling prices or offer other concessions to attract
or retain buyers. While the historically low level of resale home inventory reduced the competition from sellers of
resale homes in 2023 and 2024, resale inventory levels rose in our served markets in the 2024 second half and we can
provide no assurance that this favorable factor will continue to the same degree, or at all, in 2025. In addition,
volatility in buyer demand since 2022 increased competitive pressures for our business and is expected to continue into
the next fiscal year.
• Seasonality . As discussed above under Item 1 – Business in this report, we historically have experienced fluctuations
in our quarterly operating results with measurably more homes delivered and revenues generated in our third and
fourth fiscal quarters. However, as was the case in recent years, this pattern may not continue in the future at all or to
the same degree as in the past.
• Inflation . Since 2021, product and labor costs and general inflation in the economy have increased and remained
elevated compared to the prior decade. In turn, we experienced rising land and construction costs, particularly for
building materials and construction service providers’ rates, warranty repair costs, and compensation and benefit
expenses to attract and retain talent. These trends are expected to continue to an extent in 2025, though they may
worsen compared to prior years. Inflation has also tempered consumer demand for homes, disrupted credit and
lending markets and may increase our financing costs, as borrowings, if any, under our unsecured revolving credit
facility with various banks (“ Credit Facility ”) and our senior unsecured term loan with the lenders party thereto (“ Term
Loan ”) typically accrue interest at a variable rate based on short-term Secured Overnight Financing Rate (“ SOFR ”).
While we attempt to pass on increases in our costs through increased selling prices, including for design choices and
options, market forces and buyer affordability constraints can limit our ability to do so. If we are unable to raise
selling prices enough to compensate for higher costs, or our borrowing costs increase significantly, our revenues,
housing gross profit margin and net income could be adversely affected.
Supply Risks . The following could negatively affect our ability to increase our owned and controlled lot inventory,
community count, operational scale and market share, and to grow our business, if at all:
• Lack of available land . Securing sufficient developable land that meets our investment return standards is critical for
us to meet our strategic goals and profitably expand our business’ scale. Land availability depends on several factors,
including geographical/topographical/governmental constraints, sellers’ business relationships and reputation within
the residential real estate community, and competition from other parties, some of which can bid more for land.
Reflecting the housing market slowdown in the 2022 second half and 2023 first quarter, we and other homebuilders
reduced land acquisition spending during the period. With market conditions having improved since the 2023 first
quarter, we and other homebuilders have measurably increased land investments, pressuring availability and pricing.
Whether we increase, decrease or maintain our current pace of land spend, we expect to continue to face competition
for desirable land in our served markets in 2025 and beyond, limiting our ability to profitably develop communities
and sell homes on such land.
• Supply chain and construction services shortages . Our business relies on a network of suppliers and trade partners to
source materials and services to build homes. However, our industry and the U.S. economy have experienced since
mid-2020 labor shortages, supply chain constraints and rising and volatile raw material prices and availability, as well
as delays with respect to state and municipal construction permitting, inspections and utility processes. Such
constraints, cost pressures and delays have increased our costs, reduced our revenues in certain reporting periods,
particularly in 2022 and 2023, and in some instances, led to home sales contract cancellations or lower customer
satisfaction. These trends could continue into 2025. In an effort to manage our build times and deliver homes to our
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homebuyers, we, among other things, expanded our supplier base and added new construction service providers;
worked with our national suppliers to get products and materials; ordered items in advance of starting homes;
implemented construction process workarounds; simplified our design choices and options; paced lot releases to align
with our production capacity; and balanced pace, price and construction starts to enhance margins. Although we have
achieved meaningful sequential improvement in our build times since the 2023 second quarter, we believe these
challenging conditions may persist to a certain degree into and potentially throughout 2025, as discussed below under
“Outlook.” We may also face increased home warranty and construction defect claims associated with replacing or
servicing substitute products or materials used in some instances to address supply shortages in certain served markets
or communities.
• Insufficient financial resources . Our business needs considerable cash to, among other things, acquire and develop
land, build homes and provide customer service. We expect to meet our needs with existing cash, future operational
cash flow, our Credit Facility and unsecured letter of credit facility with certain financial institutions (“ LOC Facility ”),
or outside sources, including loans that are specifically obtained for, or secured by, particular communities or other
inventory assets, which we refer to as “project financing.” However, outside financing may be unavailable, costly and/
or considerably dilute stockholders. For instance:
◦ Tight or volatile capital or financial market conditions may hinder our ability to obtain external financing or
performance bonds, or use or expand our Credit Facility and LOC Facility , on favorable terms or at all. Also, if a
rating agency downgrades our credit rating or outlook, external financing may be difficult and costly for us to
obtain.
◦ Noncompliance with our Credit Facility , Term Loan and senior notes covenants may restrict our ability to borrow;
accelerate repayment of our debt, which may not be feasible for us; or cause our lenders to impose significant fees
or cease lending to us.
◦ As described in Note 15 – Notes Payable in the Notes to Consolidated Financial Statements in this report, if a
change of control or fundamental change occurs before our senior notes mature, we may need to offer to purchase
certain of them. This may require us to refinance or restructure our debt, which we may be unable to do on
favorable terms or at all.
◦ Our debt and ratio of debt to capital levels could require us to dedicate substantial cash flow to debt service;
inhibit our ability to respond to business changes or adjust our debt maturity schedule; curb execution on our
current strategies; and/or make us more vulnerable in a downturn than our less-leveraged competitors. The Term
Loan will mature on August 25, 2026 or earlier under certain circumstances. The Credit Facility will mature on
February 18, 2027 . Our next senior note maturity is our $300.0 million in aggregate principal amount of 6.875%
senior notes due June 15, 2027 (“ 6.875% Senior Notes due 2027 ”).
• Decreased land inventory value . Our land inventory’s value depends on market conditions, including our estimates of
applicable future demand and revenue generation. If conditions deteriorate during the typically significant amount of
time between our acquiring ownership/control of land and delivering homes on that land; if we cannot sell land held
for sale at its estimated fair value; or if we make strategic changes, we may need to record inventory-related charges.
We may also record charges if we decide to sell land at a loss or activate or sell land held for future development.
In addition, our business could be negatively affected if our net orders, homes delivered or backlog-to-homes delivered
conversion rate fall; if often-volatile building materials prices or construction services costs increase, which has been
the trend over the past few years; or if our community openings are delayed due to, among other things, prolonged
development from supply chain disruptions, construction services shortages or otherwise, our strategic adjustments, or
protracted government approvals or utility service activations from staff or resource cuts or reallocations for public
safety priorities ( e.g ., earthquakes, wildfires, flooding, hurricanes or other natural disasters). Though the extent is
uncertain as of the date of this report, given the scope of the unprecedented wildfires in the Los Angeles County area
in January 2025, we expect the recovery efforts to create some of these types of disruptions in the Southern California
region during the year and beyond.
• Trade disputes and defective materials . The federal government has imposed, and may in the future impose, new or
increased import tariffs or sanctions, and other countries have implemented retaliatory measures, raising the cost and
reducing the supply of several home construction items. For example, the U.S., European Union and other countries
have imposed wide-ranging sanctions on Russian business sectors, financial organizations, individuals and raw
materials due to the military conflict in Ukraine that, in combination with restrictions caused by the hostilities,
contributed to higher costs and shortages of building materials. Military conflicts and other attacks in the Middle East
region, including in or near shipping channels, may have a similar impact on the cost and availability of raw or
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finished building materials and components. Further, the new U.S. presidential administration has promoted plans to
raise tariffs and pursue other trade policies intended to restrict imports. In addition, shortages or rising prices of
building materials may ensue from manufacturing defects, resulting in recalls of materials. If such disputes continue
or recalls occur, our costs and supply chain disruptions, as described above, could increase further.
• Poor contractor availability and performance . Independent contractors perform essentially all of our land development
and home construction work. Though we schedule and oversee such activities at our community sites, we have no
control over our independent contractors’ availability or work methods. If qualified contractors are not available (due
to general shortages in a tight labor market, competition from other builders or otherwise), or do not timely perform,
we may incur production delays and other inefficiencies, or higher costs for substitute services. Also, if our trade
partners’ work or materials quality does not meet our standards, we could face more home warranty and construction
defect claims, and they or their insurers may not be able to cover the associated repair costs.
• Potential expansion of employment-related obligations . Governmental agencies or others might assert that we should
be subjected to California law and associated regulations that, in certain circumstances, impose responsibility upon
direct contractors for certain wages and benefits that subcontractors of the direct contractor have failed to pay to their
employees. It might also be alleged that California law and regulations impose other liabilities upon us with respect to
the employees of our trade partners. Further efforts in California or elsewhere to impose such external labor-related
obligations on us could create substantial exposure for us in situations beyond our control.
Strategy Risks . Our strategies, and any related initiatives or actions, and any changes thereto, may not be successful in
achieving our goals or generate any growth, earnings or returns, particularly in the highly volatile business environment of the
past few years and as may occur in 2025, due to significant inflation, interest rate and financial market volatility, or political or
social distress. We may not achieve positive operational or financial results, or results equal to or better than we did in any
prior period or in comparison to other homebuilders. We may also incur higher costs, or experience sourcing or supply chain
disruptions that result in extended times to build our homes, as compared to other homebuilders due to our commitment to
sustainability. However, we expect there could be an unfavorable reputational impact if we do not maintain our sustainability
programs, including if we decide not to construct homes that are designed to be ENERGY STAR certified or are otherwise as
energy efficient as those we currently build; fail to achieve ENERGY STAR certification or any other voluntarily elected or
mandatory energy-efficiency standard for our homes, which has occurred in a few instances in recent years; or if we fail to meet
our sustainability objectives. Among other strategic risks, our business is presently concentrated in California, Florida, Nevada
and Texas. Poor conditions in any of those markets could have a measurable negative impact on our results, and the impact
could be larger for us than for other less-concentrated homebuilders.
Adverse conditions in California would have particular significance to our business. We generate the highest proportion of
our revenues from and make significant inventory investments in our California operations. However, we may be constrained
or delayed in entitling land and selling and delivering homes in California, and incur higher development or construction costs,
from water conservation or wildfire protection measures (including precautionary and event-induced electricity blackouts,
temporary or extended local or regional evacuations, development moratoriums in high-risk areas, and community resiliency
design requirements) that are intended to address severe drought and climate conditions that have arisen in recent years. In
addition, as large-scale wildfires and flooding, as well as hurricanes, heavy rains and other climate change-driven natural
disasters in our served markets become more frequent and intense, as discussed below under “ Climate Risk ,” we may
experience greater disruption to our land development and homebuilding activities, delaying orders and homes delivered,
among other impacts. Though the extent is uncertain and none of our communities or operations have been directly affected as
of the date of this report, given the scope of the unprecedented wildfires in the Los Angeles County area in January 2025, we
may experience some disruption in our homebuilding activities, and potentially with our orders and homes delivered, in the
Southern California region during the year and beyond .
Also, California’s highly regulated and litigious business environment has made the state an increasingly difficult place for
us to operate. This includes implementing regulations under the state’s Global Warming Solutions Act of 2006 intended to
lower GHG emissions. For instance, we have and will continue to incur higher construction costs because of a state law
requirement that effectively requires that all newly-built homes have solar power systems, and we may be unable to offset
(through customer leases) or cover such costs through selling price increases due to competition and consumer affordability
concerns. We also face an uncertain solar power system provider environment largely due to changes in California net
metering regulations that created significant instability in the solar power industry, with several providers going out of business
or entering bankruptcy. This has disrupted the supply and installation of solar power systems, causing delays in system
completions and permissions to operate and, in turn, home deliveries.
In 2022, the California Air Resources Board adopted a plan to eliminate installing natural gas appliances in new homes
built in 2026 and beyond. In addition, the state’s energy commission issued new energy efficiency standards requiring all new
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residences to be electric-ready for heating, cooling, cooking, clothes drying and water heating systems. California and certain
of its local governments have implemented restrictions on or disincentives for new suburban and exurban residential
communities, generally in favor of higher-density, urban developments that can be attractive to some buyers, but in many cases
are on smaller parcels with higher building costs and more complicated entitlement requirements and may be subject to
affordable housing mandates, prevailing wage requirements, greater local opposition and/or additional site remediation work.
These efforts have and could further significantly increase our land acquisition and development costs and, along with
competition from other homebuilders and investors for available developable land, limit our California operations’ growth,
while making new homes less affordable to potential buyers in the state, including as a result of its public utilities commission’s
decision to significantly reduce net metering payments to homeowners for the rooftop solar power they export to the grid from
systems installed.
Climate Risk . While there is considerable debate over its drivers and magnitude, and about the physical, regulatory and/or
technical/scientific mitigation or adaptation measures, if any, that should be implemented, global climate change and responses
to it present potential risks to our operations, ranging from more frequent extreme weather events to extensive governmental
policy developments and shifts in consumer preferences, which could individually or collectively significantly disrupt our
business as well as negatively affect our suppliers, independent contractors and customers. Experiencing or addressing the
various risks from climate change may significantly reduce our revenues and profitability, or cause us to generate losses. For
instance, incorporating greater resource efficiency into our home designs, whether to comply with upgraded building codes or
recommended practices given a region’s particular exposure to climate conditions, or undertaken to satisfy demand from
increasingly environmentally conscious customers or to meet our own sustainability goals, often raises our costs to construct
homes. In evaluating whether to implement voluntary improvements, we also consider that choosing not to enhance our homes’
resource efficiency can make them less attractive to municipalities, and increase the vulnerability of residents in our
communities to rising energy and water expenses and use restrictions. We weigh the impact of the costs associated with
offering more resource-efficient products against our priorities of generating higher returns and delivering homes that are
affordable to our core first-time and first move-up buyers. We also consider whether our buyers may face higher costs for, or
may be unable to obtain, fire, flood or other hazard insurance coverage in certain areas due to local environmental conditions or
historical events. In balancing these objectives, we may determine we need to absorb most or all the additional operating costs
that come with making our homes more efficient and/or from operating in areas with more extensive regulatory requirements,
such as California, or certain climates. While our years of experience in sustainable homebuilding, as discussed above under
“ Sustainability Principles and Practices ,” and ability to leverage economies of scale may give us an advantage over other
homebuilders in managing these absorbed costs, they may be substantial for us.
Beyond the commercial pressures implicated by climate change concerns, our operations in any of our served markets may
face potential adverse physical effects. For example, California, our largest market, has historically experienced, and is
projected to continue to experience, climate-related events at an increasing frequency including drought, water scarcity, heat
waves, wildfires (such as the unprecedented wildfires in the Los Angeles County area in January 2025), and resultant air quality
impacts and power shutoffs associated with wildfire prevention. In addition, based on an Arizona state order in June 2023, new
housing subdivisions will not be permitted in some parts of Phoenix unless developers, like us, secure water supplies other than
local groundwater. While we have health and safety protocols in place for our construction sites and take steps to safeguard our
administrative functions, including our IT resources, as described below under “ Information Technology and Information
Security Risks ,” we can provide no assurance that we or our suppliers or trade partners can successfully operate in areas
experiencing frequent or persistent adverse climate-related conditions, and we or they may be more impacted and take longer,
and with higher costs, to resume operations in an affected location than other homebuilders or businesses, depending on the
nature of the conditions or other circumstances.
As discussed above under “ Strategy Risks ,” and below under “ Legal and Compliance Risks ,” international, federal, state
and local authorities and legislative bodies have issued, implemented or proposed regulations, penalties, standards or guidance
intended to restrict, moderate or promote activities consistent with resource conservation, GHG emission reduction,
environmental protection or other climate-related objectives. Compliance with those directed at or otherwise affecting our
business or our suppliers’ (or their suppliers’) operations, products or services, could increase our costs, such as with
California’s requirement that all new homes have solar power systems and agency requirements for all-electric readiness and
plans to potentially eliminate natural gas appliances in new homes built in the state by 2026; delay or complicate home
construction, for example, due to a need to reformulate or redesign building materials or components, or source updated or
upgraded items or equipment, or specially trained or certified independent contractors, in limited or restricted supply, which has
been a challenge for us in certain cases in the past few years, such as with paint, garage doors, insulation, electrical materials,
cabinets, HVAC equipment and water heaters that have been out of stock and delayed home construction or required us to
install or use temporary or permanent substitutes due to the supply chain disruptions we have experienced; or diminish
consumer interest in homes mandated to include or omit certain features, amenities or appliances, particularly if home prices
increase as a result.
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Adapting to or transitioning from the use of certain items or methods in home construction, or adjusting the products we
offer to our buyers, whether due to climate-related governmental rules affecting home construction or our supply chain, market
dynamics or consumer preferences, can negatively affect our costs and profitability, production operations in affected markets
and customer satisfaction during the transition period, which could be prolonged. For instance, in certain local markets in
California where natural gas use is banned in new homes, we have faced some disruptions in reorienting our purchase order,
independent contractor engagement, design studio and home construction processes to accommodate the restriction and, longer
term, have implemented certain architectural design changes for all-electric homes. To the extent other jurisdictions or the state
adopt such bans and as we implement the state’s all-electric readiness requirements, as discussed above, we will face similar
issues.
Though practically available technology and resources allow us only to make certain estimates, and not definitive
measurements, of the effectiveness and overall impact of our longstanding and broad-based environmental sustainability
initiatives described above under “ Sustainability Principles and Practices ,” we feel these initiatives and their evolution over
time represent how we can best address climate change risks in the context of our business, industry and the wider, and rapidly
changing, economic, social and political environment. However, climate change is an intrinsically complex global phenomenon
with inherent residual risks across its physical, regulatory and adaptation/transition dimensions that cannot be mitigated given
their wide-ranging, (sometimes unexpectedly) interdependent and largely unpredictable potential scope, nature, timing or
duration. Therefore, though we have not as of the date of this report identified or experienced any particular material impact,
whether singular or in combination, to our consolidated financial statements from climate change or the associated regulatory,
physical, transition and other risks discussed above, we cannot provide any assurance that we have or can successfully prepare
for, or are or will be able to reduce or manage any of them to the extent they may arise.
Further, we expect that as concerns about climate change and other environmental issues continue to increase,
homebuilders will be required to comply with new and extensive laws and regulations, including recently enacted climate
disclosure laws in California as well as any climate-related disclosure rules that may be adopted by the SEC , each of which we
anticipate will result in additional significant compliance costs. In October 2023, California enacted the Climate Corporate
Data Accountability Act (“SB-253”), which mandates the disclosure of GHG emissions, including Scope 1, Scope 2 and Scope
3 emissions; and the Climate-Related Financial Risk Act (“SB-261”), which mandates the disclosure of climate-related
financial risks, and measures adopted to reduce and adapt to such risks. While the state enacted SB-219 in September 2024 that
amends certain aspects of SB-253 and SB-261, California law currently requires initial disclosures in 2026. California also
enacted a third climate-disclosure law that requires entities that operate in the state and make net zero emissions claims, carbon-
neutral claims or significant GHG reduction claims to disclose, starting in 2024 , information about those claims and the
purchase or use of voluntary carbon offsets used to achieve those claims.
We may also experience substantial negative impacts to our business if an unexpectedly severe weather event or natural
disaster damages our operations or those of our suppliers or independent contractors in our primary markets, such as in
California, Florida, Nevada and Texas, or from the unintended consequences of regulatory changes that directly or indirectly
impose substantial restrictions on our activities or adaptation requirements. Such severe weather events, including impacts
from the unprecedented wildfires in the Los Angeles County area in January 2025, could delay home construction, increase
construction costs, reduce the availability of building materials, and damage roads and/or cause transportation delays that stress
our supply chain and negatively impact the demand for new homes in affected areas, as well as slow down or otherwise impair
the ability of utilities and local government agencies to provide approvals and service to new communities. Further, if our
insurance does not fully cover our costs and other losses from such events, our earnings, liquidity, or capital resources could be
adversely impacted.
Warranty Risks . Our homebuilding business is subject to warranty and construction defect claims. Though we have
insurance coverage to partially reduce our exposure, it is limited and costly, in part due to a shrinking provider market, and we
have high self-insured retentions that are expected to increase. We self-insure some of our risk through a wholly-owned
insurance subsidiary.
Due to our dependence on the performance of independent suppliers and contractors to provide products and materials and
carry out our homebuilding activities, and the associated risks described above under “ Inflation ,” “ Supply chain and
construction services shortages ” and “ Poor contractor availability and performance ,” as well as inherent uncertainties, including
obtaining recoveries from responsible parties and/or their or our insurers, our recorded warranty and other liabilities may be
inadequate to address future claims, which, among other things, could require us to record charges to increase such liabilities.
We may also record charges to reflect our then-current claims experience, including the actual costs incurred. Home warranty
and other construction defect issues may also generate negative publicity, including on social media and the internet, that
detracts from our reputation and efforts to sell homes.
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Tax-Related Risks . Our future income tax rates and expense can fluctuate or be adversely affected due to legislative and
regulatory changes; government or court interpretations of new or existing tax laws and regulations; changes in available tax
credits; adjustments to estimated taxes in finalizing our tax returns and/or due to new regulatory guidance, as occurred in our
2023 fourth quarter; changes in non-deductible expenses, particularly those associated with compensation; tax benefits related
to stock-based compensation; the realization of our deferred tax assets; and the resolution of tax audits with federal or state tax
authorities based on, among other things, tax positions we have taken.
In prior years, we have recognized federal tax credits from our building energy-efficient new homes. In some periods,
these tax credits were not available because Congress had not renewed the program. The 2022 Inflation Reduction Act (“ IRA ”)
extended this federal tax credit under Internal Revenue Code Section 45L (“ Section 45L ”) to 2032. At the same time, the
legislation newly tied qualifying for the Section 45L tax credit on and after January 1, 2023 to new homes achieving ENERGY
STAR certification. Internal Revenue Service (“IRS”) guidance set a qualifying ENERGY STAR version that makes it more
costly to satisfy the Section 45L requirements. Subject to future guidance, regulation or legislation, we have opted to build
homes in many of our markets beginning in 2025 to an alternate version of ENERGY STAR under which our homes delivered
will continue to be highly energy efficient and qualify for ENERGY STAR certification but not qualify for Section 45L tax
credits, as we believe the additional costs necessary for some of our homes to satisfy the higher Section 45L standards outweigh
the possible benefits from meeting them for both our business and our buyers. Therefore, we expect to realize fewer such tax
credits compared to prior periods. Further, should the Section 45L tax credit be reduced or repealed, or if the qualification
standards are revised, or we adjust how we build our homes, such that even fewer of our homes qualify for the Section 45L or
other energy efficiency-related tax credits, our income tax rate and expense would likely increase, which would reduce our net
income and cash flow and may have a material adverse impact on our consolidated financial statements.
Our realization of our deferred tax assets depends on our generating sufficient future taxable income, which may not occur.
Also, our deferred tax assets’ value can increase or decrease with: (a) changes in the federal corporate income tax rate; (b) our
undergoing a “change of ownership” under federal tax rules, which would significantly reduce and possibly eliminate their
value; and (c) adjustments in statutory or taxing authority treatment of such assets.
We have filed our tax returns based on certain positions we believe are appropriate, and we may owe additional taxes if
taxing authorities disagree with those positions.
Human Capital Risks . Our directors, officers and employees are important resources. If we cannot attract, retain and
develop talent at reasonable pay and benefits levels, or, alternatively, if we need to implement personnel or compensation
reductions, our performance, profitability and ability to achieve our strategic goals could be significantly impaired. In addition,
in many of our served markets, we need to have personnel with certain professional licenses, including building contractor and
real estate brokerage licenses. Our home selling and construction activities may be severely disrupted or delayed if we do not
have sufficient licensed individuals in our workforce.
Information Technology and Information Security Risks . We use IT resources to carry out important operational activities
and maintain our business records. Third parties provide and maintain many of our IT resources, including disaster recovery
and business continuity services intended to safeguard access to and use of our IT resources during a general or local network
outage, under agreements with evolving security and service level standards. Our senior IT executives also periodically update
the audit and compliance committee of our board of directors on our cybersecurity practices and risks, most recently in January
2025 . A reporting process has been established, and periodically tested and refined with the assistance of outside experts, to
escalate notice within our organization of and coordinate our response to IT security events. Depending on the severity of an
event, our incident reporting process includes informing as early as practicable our senior corporate management and members
of our board of directors. If a cybersecurity incident is determined to be material, we are subject to additional SEC reporting
requirements. Our cybersecurity policies and procedures are further described below under Item 1C – Cybersecurity in this
report.
Our systems have faced a variety of phishing, denial-of-service and other attacks and occasional theft of encrypted
employee laptops. To help counter the growing volume and sophistication of cyberattacks, including the potential of
fraudulently inducing our employees, customers, trade partners and other third parties to disclose information or unknowingly
provide access to systems or data, as well as state and other actors using artificial intelligence technology, we have implemented
administrative, physical and multi-layered technical controls and processes to help address and mitigate cybersecurity risks and
protect our IT resources, including employee education and awareness training, as well as third-party assessments. Our
technical defense layers are designed to provide multiple, overlapping measures to protect against exploitation of a vulnerability
that may arise or if a security control fails. For these defenses, we rely on a combination of artificial intelligence, machine
learning computer network monitoring, malware and antivirus resources, firewall systems, vendor cloud service defenses,
internet address and content filtering monitoring software that secures against known malicious websites and potential data
exfiltration, and a variety of cyber intelligence threat monitoring sources that provide ongoing updates, all provided from third
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parties that we believe, but cannot guarantee, are capable of performing the protective service for which we have engaged them.
We conduct periodic incident response tabletop exercises, with third-party support and reviews, and have established
communication channels with KBHS security personnel and key partners regarding their breach and incident response
processes. In addition, we perform an annual cybersecurity risk assessment to identify potential areas of focus. We also
depend on our service providers, GR Alliance and other mortgage lenders with whom we share some personal identifying and
confidential information to secure our information and the homebuyer information they collect from us. Our IT security costs,
including cybersecurity insurance, are significant and will likely rise in tandem with the sophistication and frequency of system
attacks.
However, our, GR Alliance ’s and our service providers’ measures may be inadequate and possibly have operational or
security vulnerabilities that could go undetected for some period of time. If our IT resources are compromised by an intentional
attack, natural or man-made disaster, electricity blackout, IT failure or systems misconfiguration, service provider error,
mismanaged user access protocols, personnel action, or otherwise, we may be severely limited in conducting our business and
achieving our strategic goals for an extended period, experience internal control failures or lose access to operational assets or
funds. A substantial disruption, or security breach suffered by GR Alliance / KBHS or a service provider, particularly our cloud
service provider which hosts many of our IT resources, could damage our reputation and result in the loss of customers or
revenues, in sensitive personal information being publicly disclosed or misused and/or legal proceedings against us. We may
incur significant expenses to resolve such issues. While, to date, we have not had a significant cybersecurity breach or attack
that had a material impact on our business or consolidated financial statements, there can be no assurance our efforts to
maintain the security and integrity of these systems will be effective or that attempted security breaches, cyber-attack, data theft
or disruptions would not occur in the future, be successful or damaging.
Beyond our service providers, we depend on independent third parties to handle certain processes required to complete land
purchases and home closings, including title insurers and escrow/settlement companies. Should these third parties, as well as
independent mortgage lenders and other firms involved in real property transactions, experience their own cybersecurity
incidents or IT resource failures that disrupt or prevent their performance of necessary real estate transaction services, our
ability to close on land transactions or our customers’ ability to close on their homes, as well as our production schedules and
delivery forecasts, may be significantly disrupted and have a material impact on our operations or consolidated financial
statements, including by causing home sales contract cancellations.
Legal and Compliance Risks . As discussed above under Item 1 – Business in this report, our operations are subject to
myriad legal and regulatory requirements, which can delay our operational activities, raise our costs and/or prohibit or restrict
homebuilding in some areas. These requirements often provide broad discretion to government authorities, and they could be
interpreted or revised in ways unfavorable to us. The costs to comply, or associated with any noncompliance, are, or can be,
significant and variable from period to period. With respect to environmental laws, in addition to the risks and potential
operational costs discussed above, we have been, and we may in the future be, involved in federal, state and local air and water
quality agency investigations or proceedings for potential noncompliance with their rules, including rules governing discharges
of materials into the air and waterways; stormwater discharges from community sites; and wetlands and listed species habitat
protection. We could incur penalties and/or be restricted from developing or building at certain community locations during or
as a result of such agencies’ investigations or findings.
Additionally, we are involved in legal, arbitral or regulatory proceedings or investigations incidental to our business, the
outcome or settlement of which could result in material claims, losses, monetary damage awards, penalties, or other direct or
indirect payments recorded against our earnings, or injunctions, consent decrees or other voluntary or involuntary restrictions or
adjustments to our business operations or practices. Any adverse results could be beyond our expectations, insurance coverages
and/or accruals at particular points in time. Unfavorable outcomes, as well as unfavorable investor, analyst or news reports
related to our industry, company, personnel, governance or operations, may also generate negative publicity, including on social
media and the internet, damaging our reputation and resulting in the loss of customers or revenues. We may also face similar
reputational impacts if our sustainability initiatives or objectives and/or our social or governance practices do not meet the
standards set by investors or third-party rating services. Additionally, low third-party ratings could result in our common stock
being excluded from certain indexes or not being recommended for or selected by investors with certain mandates or priorities.
To reduce the risks and expected significant costs of defending intra-corporate proceedings in multiple venues and to help
ensure that such matters are considered within a well-established body of law, our By-Laws provide that, subject to certain
exceptions, Delaware state courts are the exclusive forum for specified internal corporate affairs actions and federal courts are
the exclusive forum for any action asserting a claim arising under the Securities Act of 1933, as amended. These provisions
may limit a stockholder’s ability to bring a claim in their favored forum. At the same time, if a court were to allow for an
alternative forum, or we waive the provision’s application, for a particular matter, we may incur additional costs associated with
resolving an otherwise relevant action in another jurisdiction(s).
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The European Union and state governments, notably California and Nevada, have enacted or enhanced data privacy
regulations, and other governments are considering establishing similar or stronger protections. These regulations impose
certain obligations for securing, and potentially removing, specified personal information in our systems, and for apprising
individuals of the information we have collected about them. We have incurred costs in an effort to address these data privacy
risks and requirements, and our costs may increase significantly as risks become increasingly complex or if new or changing
requirements are enacted, and based on how individuals exercise their rights. Despite our efforts, any noncompliance could
result in our incurring substantial penalties and reputational damage.
KBHS ’ operations are heavily regulated. If GR Alliance , which oversees KBHS ’ operations, or KBHS is found to have
violated regulations, or mortgage investors demand KBHS repurchase mortgage loans it has sold to them, or cover their losses,
for claimed contract breaches, KBHS could face significant liabilities, which, if they exceed its reserves, could result in our
recognizing losses on our KBHS equity interest.
Our financial results may be materially affected by the adoption of new or amended financial accounting standards, and
regulatory or outside auditor guidance or interpretations. In addition, to the extent we expand our disclosures on our
sustainability initiatives in line with certain private reporting frameworks and investor requests, or the proposed SEC rules
mentioned above, if adopted, our failure to report accurately or achieve progress on our metrics on a timely basis, or at all,
could adversely affect our r eputation, business, financial performance and growth.
Other Risks . The risk factors described above are not our only salient risks. Political events, war, terrorism, weather or
other natural/environmental disasters, and other risks that are currently unknown or are currently or may initially be seen as
immaterial, could also have a material adverse impact on our business, consolidated financial statements and/or common
stock’s market price.