What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-05 · 196 added, 113 removed, 350 unchanged (47% of the section changed)

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Las Vegas, NV Colorado Springs, CO Austin, TX Jacksonville, FL Wilmington, NC

Sacramento, CA Oklahoma City, OK Fort Pierce, FL Winston-Salem, NC

Riverside, CA Daytona Beach, FL Columbia, SC

Northern CA Oklahoma City, OK Fort Pierce, FL Winston-Salem, NC

Southern CA Daytona Beach, FL Columbia, SC

Sarasota, FL Greenville, SC

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Since commencing home building operations in 2003, we have constructed and closed over 40,000 homes.

During the three months ended March 31, 2020, we had 1,835 home closings, compared to 1,228 home closings during the three months ended March 31, 2019.

During the six months ended June 30, 2020, we had 3,840 home closings, compared to 3,172 home closings during the six months ended June 30, 2019.

We sell homes under the LGI Homes and Terrata Homes brands.

Our 113 active communities at March 31, 2020 included two Terrata Homes communities.

During the three months ended March 31, 2020, we recorded $44.3 million in wholesale revenues as a result of 199 homes closings, representing 10.8% of the total homes closed during the three months ended March 31, 2020.

During the three months ended March 31, 2019, we recorded $6.1 million in wholesale revenues as a result of 30 wholesale home closings, representing 2.4% of the total homes closed during the three months ended March 31, 2019.

Our 117 active communities at June 30, 2020 included three Terrata Homes communities.

During the three months ended June 30, 2020, we recorded $38.1 million in wholesale revenues as a result of 199 home closings, representing 9.9% of the total homes closed during the three months ended June 30, 2020.

During the three months ended June 30, 2019, we recorded $18.4 million in wholesale revenues as a result of 82 wholesale home closings, representing 4.2% of the total homes closed during the three months ended June 30, 2019.

We believe our wholesale home closings provide opportunities for us to leverage our systems and processes to meet the needs of companies looking to acquire multiple homes for rental purposes, primarily through bulk sales agreements.

On March 11, 2020, the World Health Organization declared the current outbreak of the novel strain of coronavirus (“COVID-19”) to be a global pandemic, and on March 13, 2020, the United States declared a national emergency.

In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in certain of our markets.

In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including business shutdowns and closures, travel restrictions, quarantines, curfews, shelter-in-place orders and “stay-at-home” orders in certain of our markets.

State and local authorities have also implemented multi-step policies with the goal of re-opening.

However, certain jurisdictions have begun re-opening only to return to restrictions in the face of increases in new COVID-19 cases.

We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations.

During the first quarter of 2020, certain markets in which we do business temporarily stopped our construction of homes.

As of the date of this Quarterly Report on Form 10-Q, we have resumed construction of homes in those markets.

Although we continue to build and sell homes in all of our markets, sales have slowed significantly, and sales contract cancellations have been impacted.

In March 2020, certain markets in which we do business temporarily stopped our construction of homes.

Beginning in April 2020, we resumed construction of homes in those markets.

Although we continued to build and sell homes in all of our markets, the pace of sales declined and we experienced an increase in the rate of contract cancellations.

Since May 2020, the pace of sales has rebounded and we have experienced increased demand in our markets.

There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of COVID-19, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns.

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Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, consumer confidence, housing demand, availability of financing for home buyers, availability and prices of new homes compared to existing inventory, and demographic trends.

These factors, and in particular

consumer confidence, can be significantly adversely affected by a variety of factors beyond our control.

These factors, and in particular consumer confidence, can be significantly adversely affected by a variety of factors beyond our control.

The outbreak of COVID-19 has caused the shutdown of large portions of our national economy.

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and international debt and equity markets, which can negatively impact consumer confidence.

In response to COVID-19, we have taken steps to prioritize the health and safety of our employees, customers, subcontractors and suppliers, including enhancing sales office procedures and reducing information center hours for employee protection, adjusting staffing in the field, requiring corporate personnel to work remotely and following Center for Disease Control guidelines.

We are continuing to protect the health and safety of our employees and those of our subcontractors, customers and other business counterparties, and this includes changes to comply with health-related guidelines as they are modified and supplemented.

In response to COVID-19, we continue to take steps to prioritize the health and safety of our employees, customers, subcontractors and suppliers, including expanded safety policies and practices based on Center for Disease Control guidelines to reduce the spread of COVID-19.

Additionally, the majority of our corporate personnel continue to work remotely.

As a homebuilder and developer, we provide an important service to our customers.

During the COVID-19 outbreak, our main focus beyond the health and safety mentioned above, will be to continue our efforts to sell homes and complete our homes under construction.

In addition to the measures discussed above, we have implemented certain cash management policies, including eliminating business air travel, cancelling group meetings, delaying or canceling land acquisitions, deferring new starts to reduce our overall inventory, significantly reducing marketing expenditures and delaying major expenditures.

While we continue to assess the COVID-19 situation, at this time we cannot estimate with any degree of certainty the full impact of the COVID-19 outbreak on our financial condition and future results of operations, although we expect the COVID-19 situation to adversely impact future quarters.

In addition to the measures discussed above, beginning in March 2020, we implemented certain cash management policies, including eliminating business air travel, cancelling group meetings, delaying or canceling land acquisitions, deferring new starts to manage our overall inventory, significantly reducing marketing expenditures and delaying major expenditures.

In May 2020, we began to acquire land and release starts for home construction in addition to increasing marketing expenditures.

We cannot estimate with any degree of certainty the full impact of COVID-19 on our financial condition and future results of operations.

We also cannot predict the full impact that the significant disruption and volatility currently being experienced in the markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties.

The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of COVID-19, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, but not limited to, the duration and geographic spread of COVID-19, the impact of government actions designed to prevent the spread of COVID-19, the development of effective treatments, actions taken by customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.

For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A.

Risk Factors in Part II of this Quarterly Report on Form 10-Q.

While we expect COVID-19 to continue to have an influence on our future results, we believe that the desire for single-family homes outside of densely populated urban areas combined with historically low mortgage rates and low availability of existing homes is driving an increase in demand for new homes.

Recent Developments

During the three months ended March 31, 2020, we continued our previously announced stock repurchase program with the purchase of 567,028 shares of our common stock for $31.3 million through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws.

During the three months ended March 31, 2020, we increased our market presence in two of our operating segments with the entry into the Sarasota, Florida and Greenville, South Carolina markets.

Key financial results as of and for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, were as follows:

During the three months ended June 30, 2020, we increased our market presence in three of our operating segments with the opening of additional communities in Northern California, Seattle, Denver, and Raleigh.

Key financial results as of and for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019, were as follows:

• Home sales revenues increased 4.3% to $481.6 million from $461.8 million.

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• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 16.2% from 14.8%.

• Total owned and controlled lots increased 4.6% to 50,273 lots at March 31, 2020 from 48,062 lots at December 31, 2019.

• Total owned and controlled lots decreased 11.9% to 44,307 lots at June 30, 2020 from 50,273 lots at March 31, 2020.

For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “ —Non-GAAP Measures .”

Key financial results as of and for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019, were as follows:

• Home sales revenues increased 24.9% to $936.3 million from $749.4 million.

• Homes closed increased 21.1% to 3,840 homes from 3,172 homes.

• Average sales price of our homes increased 3.2% to $243,836 from $236,262.

• Gross margin as a percentage of home sales revenues increased to 24.0% from 23.7%.

• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 26.1% from 25.8%.

• Net income before income taxes increased 50.2% to $123.5 million from $82.2 million.

• Net income increased 52.9% to $98.5 million from $64.4 million.

• EBITDA (non-GAAP) as a percentage of home sales revenues increased to 15.1% from 12.9%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 15.1% from 12.8%.

• Total owned and controlled lots decreased 7.8% to 44,307 lots at June 30, 2020 from 48,062 lots at December 31, 2019.

Results of Operations

The following table sets forth our results of operations for the periods indicated:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

(dollars in thousands, except per share data and average home sales price)

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67,834 58,441 121,712 79,516

Loss on extinguishment of debt — 169 — 169

Other income, net (763) (2,263) (1,774) (2,882)

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Other Financial and Operating Data:

Active communities at end of period 113 87

Average Community Count 116.0 93.0 112.3 88.7

Community Count at end of period 117 93 117 93

Home closings 2,005 1,944 3,840 3,172

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EBITDA margin % (2)(4)

16.1 % 15.1 % 15.1 % 12.9 %

Adjusted EBITDA (4)

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Adjusted EBITDA margin % (2)(4)

16.2 % 14.8 % 15.1 % 12.8 %

(1) Gross margin is home sales revenues less cost of sales.

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Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business.

EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by

fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring.

EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring.

Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period.

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Please see “ —Non-GAAP Measures ” for reconciliations of EBITDA and adjusted EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable.

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Our home sales revenues, home closings, average sales price (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the three months ended March 31, 2020 and 2019 were as follows (revenues in thousands):

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Our home sales revenues, home closings, average sales price (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the three months ended June 30, 2020 and 2019 were as follows (revenues in thousands):

Three Months Ended June 30, 2020

Revenues Home Closings ASP Average Community Count Average

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Total $ 481,602 2,005 $ 240,200 116.0 5.8

Three Months Ended March 31, 2019

Revenues Home Closings ASP Average Community Count Average Monthly

Three Months Ended June 30, 2019

Revenues Home Closings ASP Average Community Count Average

Absorption Rate

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Total $ 461,830 1,944 $ 237,567 93.0 7.0

As of March 31,

As of June 30,

Community count 2020 2019

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Total community count 117 93

Home sales revenues for the three months ended March 31, 2020 were $454.7 million, an increase of $167.1 million, or 58.1%, from $287.6 million for the three months ended March 31, 2019.

The increase in home sales revenues is primarily due to a 49.4% increase in homes closed and an increase in the average sales price per home during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

The average sales price per home closed during the three months ended March 31, 2020 was $247,808, an increase of $13,611, or 5.8%, from the average sales price per home of $234,197 for the three months ended March 31, 2019.

While direct immediate impacts related to the COVID-19 pandemic remain short lived to date, we believe that the long term effects of the pandemic will take an extended time to work through our operational results.

Although our home closings for the second quarter of 2020 were higher than our home closing for the second quarter of 2019, shutdowns and stay-at-home orders slowed the pace of our sales in March 2020 and April 2020, which ultimately resulted in home closings during the second quarter of 2020 being lower than we would have predicted prior to the pandemic.

Additionally, as a result of reducing starts in March 2020 and April 2020 to preserve cash, our availability of completed homes was reduced, which could slow the pace of our home closings in later periods.

Home sales revenues for the three months ended June 30, 2020 were $481.6 million, an increase of $19.8 million, or 4.3%, from $461.8 million for the three months ended June 30, 2019.

The increase in home sales revenues is primarily due to a 3.1% increase in homes closed and an increase in the average sales price per home during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

The average sales price per home closed during the three months ended June 30, 2020 was $240,200, an increase of $2,633, or 1.1%, from the average sales price per home of $237,567 for the three months ended June 30, 2019.

This increase in the average sales price per home is primarily due to changes in product mix, higher price points in new markets and a favorable pricing environment.

The increase in homes closed was largely due to

deepening our presence within certain markets in the Southeast and Florida reportable segments during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Home sales revenues in our Central reportable segment decreased by $22.0 million, or 11.6%, during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to a 15.9% decrease in the number of homes closed, partially offset by an increase in the average sales price per home in this segment.

Home sales revenues in our Southeast reportable segment increased by $50.8 million, or 65.2%, primarily due to an increase in community count within existing markets.

Home sales revenues in our Northwest reportable segment decreased by $22.6 million, or 28.6%, primarily due to a decrease in the number of homes closed and due to the close out of or transition between, and to a lesser extent available inventory in, certain active communities for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Home sales revenues in our West reportable segment decreased by $6.3 million, or 9.5%, during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, primarily due to a 4.9% decrease in average sales price and a 4.8% decrease in the number of homes closed in this reportable segment, as a result of close out of or transition between, and to a lesser extent available inventory in, certain active communities.

Home sales revenues in our Florida reportable segment increased by $20.0 million, or 41.4%, largely due to an increase in the number of homes closed resulting from an increase in community count for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Our community count at June 30, 2020 increased to 117 from 93 at June 30, 2019.

All reportable segments added communities by deepening our presence within existing markets during the three months ended June 30, 2020.

Cost of Sales and Gross Margin (home sales revenues less cost of sales).

Cost of sales increased for the three months ended June 30, 2020 to $363.6 million, an increase of $13.1 million, or 3.7%, from $350.5 million for the three months ended June 30, 2019, primarily due to the increase in homes closed and product mix.

As a percentage of home sales revenues, we experienced higher lot costs offset by lower capitalized interest costs and operating leverage driven by the increase in home sales revenues benefiting our home construction costs during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Gross margin for the three months ended June 30, 2020 was $118.0 million, an increase of $6.7 million, or 6.0%, from $111.3 million for the three months ended June 30, 2019.

Gross margin as a percentage of home sales revenues was 24.5% for the three months ended June 30, 2020 and 24.1% for the three months ended June 30, 2019.

This increase in gross margin as a percentage of home sales revenues is primarily due to operating leverage and lower capitalized interest costs recognized for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Selling Expenses.

Selling expenses for the three months ended June 30, 2020 were $30.0 million, a decrease of $3.9 million, or 11.6%, from $33.9 million for the three months ended June 30, 2019.

Sales commissions remained flat at $18.0 million for both the three months ended June 30, 2020 and 2019.

Selling expenses as a percentage of home sales revenues were 6.2% and 7.3% for the three months ended June 30, 2020 and 2019, respectively.

The decrease in selling expenses as a percentage of home sales revenues reflects cost saving measures implemented and the increased demand for our homes in response to the COVID-19 pandemic, as well as operating leverage realized from the increase in home sales revenues duri ng the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

General and Administrative.

General and administrative expenses for the three months ended June 30, 2020 were $20.2 million, an increase of $1.2 million, or 6.3%, from $19.0 million for the three months ended June 30, 2019.

The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase of active communities during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

General and administrative expenses as a percentage of home sales revenues were 4.2% and 4.1% for the three months ended June 30, 2020 and 2019, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues reflects costs associated with an increase of active communities during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Operating Income, Net Income before Taxes and Net Income.

Operating income for the three months ended June 30, 2020 was $67.8 million, an increase of $9.4 million, or 16.1%, from $58.4 million for the three months ended June 30, 2019.

Net income before income taxes for the three months ended June 30, 2020 was $68.6 million, an increase of $8.1 million, or 13.3%, from $60.5 million for the three months ended June 30, 2019.

All reportable segments contributed to net income before income taxes during the three months ended June 30, 2020 as follows:

Central - $29.6 million or 43.2%;

Southeast - $16.9 million or 24.6%;

Northwest - $8.5 million or 12.4%;

West - $6.9 or 10.1%;

and Florida - $7.9 or 11.5%.

Net income for the three months ended June 30, 2020 was $55.6 million, an increase of $9.6 million, or 20.8%, from $46.1 million for the three months ended June 30, 2019.

The increases in operating income, net income before income taxes and net income is primarily attributed to operating leverage realized from the increase in home sales revenues, higher average sales price and retroactive tax benefit recognized for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Our home sales revenues, home closings, average sales price (ASP), average community count and average monthly absorption rate by reportable segment for the six months ended June 30, 2020 and 2019 were as follows (revenues in thousands):

Six Months Ended June 30, 2020

Revenues Home Closings ASP Average Community Count Average

Absorption Rate

Central $ 333,699 1,488 $ 224,260 34.0 7.3

Southeast 217,024 962 225,597 34.2 4.7

Northwest 158,317 426 371,636 11.8 6.0

West 119,077 472 252,282 15.0 5.2

Florida 108,212 492 219,943 17.3 4.7

Total $ 936,329 3,840 $ 243,836 112.3 5.7

Six Months Ended June 30, 2019

Revenues Home Closings ASP Average Community Count Average Monthly

Absorption Rate

Central $ 314,091 1,466 $ 214,250 32.7 7.5

Southeast 130,234 590 220,736 21.5 4.6

Northwest 115,250 313 368,211 11.0 4.7

West 112,750 427 264,052 12.2 5.8

Florida 77,099 376 205,051 11.3 5.5

Total $ 749,424 3,172 $ 236,262 88.7 6.0

Home sales revenues for the six months ended June 30, 2020 were $936.3 million, an increase of $186.9 million, or 24.9%, from $749.4 million for the six months ended June 30, 2019.

The increase in home sales revenues is primarily due to a 21.1% increase in homes closed and an increase in the average sales price per home during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

The average sales price per home closed during the six months ended June 30, 2020 was $243,836, an increase of $7,574, or 3.2%, from the average sales price per home of $236,262 for the six months ended June 30, 2019.

This increase in the average sales price per home was primarily due to changes in product mix and higher price points in certain new markets, partially offset by additional wholesale home closings.

All reportable segments experienced an increase in home closings during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

The average monthly absorption rate fluctuations relate to timing associated with the opening, close out or transition between certain of their respective active communities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Home sales revenues in our Northwest reportable segment increased by $65.7 million, or 181.2%, during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, primarily due to a 175.8% increase in the number of homes closed in this reportable segment, which is due to close out or transition between certain of their

respective active communities during the three months ended March 31, 2019.

Home sales revenues in our Southeast reportable segment increased by $36.0 million, or 68.7%, during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, primarily due to an increase in community count associated with deepening our presence in existing markets and to a lesser extent our geographic expansion into certain markets in South Carolina and Virginia at March 31, 2020 as compared to March 31, 2019.

Home sales revenues in our Central reportable segment increased by $41.6 million, or 33.5%, during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, primarily due to a 28.2% increase in the number of homes closed in this reportable segment, which is due to increased community count at a higher absorption rate.

Home sales revenues in all other reportable segments increased, largely due to close out or transition between certain of their respective active communities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Our active selling communities at March 31, 2020 increased to 113 from 87 at March 31, 2019.

All reportable segments added communities by expanding into new markets or deepening existing markets during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

All reportable segments experienced an increase in home closings during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

The average monthly absorption rate fluctuations relate to timing associated with the opening, close out or transition between certain active communities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Home sales revenues in our Central reportable segment increased by $19.6 million, or 6.2%, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to a 1.5% increase in the number of homes closed in this reportable segment, increased average sales price and increased community count at a slightly lower absorption rate.

Home sales revenues in our Southeast reportable segment increased by $86.8 million, or 66.6%, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to an increase in community count associated with deepening our presence within existing markets and to a lesser extent our geographic expansion into certain markets in South Carolina and Virginia at June 30, 2020 as compared to June 30, 2019.

Home sales revenues in our Northwest reportable segment increased by $43.1 million, or 37.4%, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to a 36.1% increase in the number of homes closed in this reportable segment, which is due to close out of or transition between certain active communities during the six months ended June 30, 2019.

Home sales revenues in our West reportable segment increased by $6.3 million, or 5.6%, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily due to a 10.5% increase in the number of homes closed in this reportable segment, offset by a 4.5% decrease in average sales price as a result of close out of or transition between, and to a

lesser extent available inventory in, certain active communities.

Home sales revenues in the Florida reportable segment increased, largely due to increased community count at a slightly lower absorption rate during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Cost of Sales and Gross Margin (home sales revenues less cost of sales).

Cost of sales increased for the three months ended March 31, 2020 to $348.2 million, an increase of $126.9 million, or 57.3%, from $221.3 million for the three months ended March 31, 2019.

This overall increase is primarily due to a 49.4% increase in homes closed, as well as higher lot costs recognized, product mix, increased capitalized interest costs and higher construction costs, during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

In addition, there was an increase in construction overhead due to additional personnel and costs associated with geographic expansion and a 29.9% increase in community count during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Gross margin for the three months ended March 31, 2020 was $106.6 million, an increase of $40.3 million, or 60.7%, from $66.3 million for the three months ended March 31, 2019.

Gross margin as a percentage of home sales revenues was 23.4% for the three months ended March 31, 2020 and 23.1% for the three months ended March 31, 2019.

This increase in gross margin as a percentage of home sales revenues for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 is primarily due to higher average sales price fueled by our product mix, favorable pricing environments and operational leverage obtained, partially offset by an increase in wholesale home closings as a percentage of total home closings.

Cost of sales increased for the six months ended June 30, 2020 to $711.8 million, an increase of $140.0 million, or 24.5%, from $571.8 million for the six months ended June 30, 2019.

This overall increase is primarily due to a 21.1% increase in homes closed and product mix.

As a percentage of home sales revenues, we experienced higher lot costs offset by lower capitalized interest costs and operating leverage driven by the increase in home sales revenues benefiting our home construction costs during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Gross margin for the six months ended June 30, 2020 was $224.5 million, an increase of $46.9 million, or 26.4%, from $177.6 million for the six months ended June 30, 2019.

Gross margin as a percentage of home sales revenues was 24.0% for the six months ended June 30, 2020 and 23.7% for the six months ended June 30, 2019.

This increase in gross margin as a percentage of home sales revenues for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 is primarily due to higher average sales price fueled by our product mix, favorable pricing environments and operating leverage obtained, partially offset by an increase in wholesale home closings as a percentage of total home closings.

Selling Expenses.

Selling expenses for the three months ended March 31, 2020 were $32.8 million, an increase of $6.0 million, or 22.3%, from $26.8 million for the three months ended March 31, 2019.

Sales commissions increased to $16.5 million for the three months ended March 31, 2020 from $11.6 million for the three months ended March 31, 2019, partially due to a 58.1% increase in home sales revenues during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Selling expenses as a percentage of home sales revenues were 7.2% and 9.3% for the three months ended March 31, 2020 and 2019, respectively.

The decrease in selling expenses as a percentage of home sales revenues reflects operational leverage obtained and reduced advertising and selling expenses primarily associated with active communities, partially offset by increased personnel, during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Selling expenses for the six months ended June 30, 2020 were $62.7 million, an increase of $2.0 million, or 3.4%, from $60.7 million for the six months ended June 30, 2019.

Sales commissions increased to $34.5 million for the six months ended June 30, 2020 from $29.7 million for the six months ended June 30, 2019, partially due to a 24.9% increase in home sales revenues during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Selling expenses as a percentage of home sales revenues were 6.7% and 8.1% for the six months ended June 30, 2020 and 2019, respectively.

The decrease in selling expenses as a percentage of home sales revenues reflects operating leverage obtained from the increase in home sales revenues, our cost saving measures implemented and the increased demand for our homes in response to the COVID-19 pandemic.

This decrease was partially offset by increased community count and increased personnel, during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

General and Administrative.

General and administrative expenses for the three months ended March 31, 2020 were $19.9 million, an increase of $1.5 million, or 8.1%, from $18.4 million for the three months ended March 31, 2019.

The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase of active communities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

General and administrative expenses as a percentage of home sales revenues were 4.4% and 6.4% for the three months ended March 31, 2020 and 2019, respectively.

The decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

General and administrative expenses for the six months ended June 30, 2020 were $40.1 million, an increase of $2.7 million, or 7.2%, from $37.4 million for the six months ended June 30, 2019.

The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase of active communities during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

General and administrative expenses as a percentage of home sales revenues were 4.3% and 5.0% for the six months ended June 30, 2020 and 2019, respectively.

The decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Operating Income, Net Income before Income Taxes and Net Income.

Operating income for the three months ended March 31, 2020 was $53.9 million, an increase of $32.8 million, or 155.6%, from $21.1 million for the three months ended March 31, 2019.

Net income before income taxes for the three months ended March 31, 2020 was $54.9 million, an increase of $33.2 million, or 153.0%, from $21.7 million for the three months ended March 31, 2019.

All reportable segments contributed to net income before income taxes during the three months ended March 31, 2020 as follows:

Operating income for the six months ended June 30, 2020 was $121.7 million, an increase of $42.2 million, or 53.1%, from $79.5 million for the six months ended June 30, 2019.

Net income before income taxes for the six months ended June 30, 2020 was $123.5 million, an increase of $41.3 million, or 50.2%, from $82.2 million for the six months ended June 30, 2019.

All reportable segments contributed to net income before income taxes during the six months ended June 30, 2020 as follows:

Central - $53.8 million or 43.6%;

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and Florida - $10.4 million or 8.4%.

Net income for the three months ended March 31, 2020 was $42.8 million, an increase of $24.5 million, or 133.7%, from $18.3 million for the three months ended March 31, 2019.

The improvement to operating income is primarily attributed to an increase in the number of homes closed with an overall higher gross margin percentage, as a result of higher average sales price realized during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Net income for the six months ended June 30, 2020 was $98.5 million, an increase of $34.1 million, or 52.9%, from $64.4 million for the six months ended June 30, 2019.

The increases in operating income, net income before income taxes and net income is primarily attributed to an increase in the number of homes closed with an overall higher gross margin percentage, as a result of higher average sales price and retroactive tax benefit recognized during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

Non-GAAP Measures

In addition to the results reported in accordance with U.S.

GAAP, we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin, EBITDA and adjusted EBITDA.

In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin, EBITDA and adjusted EBITDA.

Adjusted Gross Margin

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The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Home sales revenues $ 481,602 $ 461,830 $ 936,329 $ 749,424

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Purchase accounting adjustments (1)

1,252 956 1,875 1,586

Adjusted gross margin $ 127,909 $ 121,256 $ 244,026 $ 193,584

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The following table reconciles EBITDA and adjusted EBITDA to net income, which is the GAAP measure that our management believes to be most directly comparable (dollars in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Net income $ 55,624 $ 46,055 $ 98,463 $ 64,389

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Purchase accounting adjustments (1)

1,252 956 1,875 1,586

Loss on extinguishment of debt — 169 — 169

Other income, net (763) (2,263) (1,774) (2,882)

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EBITDA margin % (2)

16.1 % 15.1 % 15.1 % 12.9 %

Adjusted EBITDA margin % (2)

16.2 % 14.8 % 15.1 % 12.8 %

(1) Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.

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Only purchase contracts that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing are included in new (gross) orders.

As a result of COVID-19, it may be more difficult for our homebuyers to qualify for and obtain mortgage financing to purchase a home.

As a result of COVID-19, it has been, and may continue to be, more difficult for our homebuyers to qualify for and obtain mortgage financing to purchase a home.

Our “backlog” consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed and wholesale contracts for which vertical construction is set to occur within the next six months.

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Our backlog at any given time will be affected by cancellations, the number of our active communities and the timing of home closings.

Homes in backlog are generally closed within one to two months, although closings may be delayed during the COVID-19 pandemic.

Homes in backlog are generally closed within one to two months, although home closings have been, and may continue to be, delayed during the COVID-19 pandemic.

In addition, we may experience cancellations of purchase contracts at any time prior to closing.

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Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract.

We also expect to experience decreases in our net orders as a result of the impacts and uncertainties resulting from the COVID-19 pandemic and related mitigation efforts.

As of the dates set forth below, our net orders, cancellation rate and ending backlog homes and value were as follows (dollars in thousands):

Backlog Data Three Months Ended March 31,

Backlog Data Six Months Ended June 30,

Net orders (1)

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Ending backlog is valued at the contract amount.

(4) As of March 31, 2020, we have 338 units related to bulk sales agreements associated with our wholesale business.

(5) As of March 31, 2019, we have 213 units related to bulk sales agreements associated with our wholesale business, of which 67 units and values are not included in the table above.

(4) As of June 30, 2020, we have 208 units related to bulk sales agreements associated with our wholesale business.

(5) As of June 30, 2019, we have 110 units related to bulk sales agreements associated with our wholesale business.

Land Acquisition Policies and Development

We increased our active communities to 113 as of March 31, 2020 from 106 as of December 31, 2019.

Our lot inventory increased to 50,273 owned or controlled lots as of March 31, 2020 from 48,062 owned or controlled lots as of December 31, 2019.

The table below shows (i) home closings by reportable segment for the three months ended March 31, 2020 and (ii) our owned or controlled lots by reportable segment as of March 31, 2020.

Three Months Ended March 31, 2020 As of March 31, 2020

We increased our active communities to 117 as of June 30, 2020 from 106 as of December 31, 2019.

Our lot inventory decreased to 44,307 owned or controlled lots as of June 30, 2020 from 48,062 owned or controlled lots as of December 31, 2019 primarily due to certain cash management policies we implemented beginning in March 2020, which included delaying or canceling land acquisitions to manage our overall inventory.

The table below shows (i) home closings by reportable segment for the six months ended June 30, 2020 and (ii) our owned or controlled lots by reportable segment as of June 30, 2020.

Six Months Ended June 30, 2020 As of June 30, 2020

Reportable Segment Home Closings Owned (1)

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Total 3,840 31,788 12,519 44,307

(1) Of the 31,418 owned lots as of March 31, 2020, 20,003 were raw/under development lots and 11,415 were finished lots.

(1) Of the 31,788 owned lots as of June 30, 2020, 20,506 were raw/under development lots and 11,282 were finished lots.

Homes in Inventory

When entering a new community, we build a sufficient number of move-in ready homes to meet our budgets.

We base future home starts on closings.

We base future home starts on home closings.

As homes are closed, we start more homes to maintain our inventory.

As of March 31, 2020, we had a total of 1,780 completed homes, including information centers, and 1,857 homes in progress.

As of June 30, 2020, we had a total of 1,503 completed homes, including information centers, and 2,105 homes in progress.

Raw Materials and Labor

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Liquidity and Capital Resources

As of March 31, 2020, we had $118.2 million of cash and cash equivalents.

As of June 30, 2020, we had $49.1 million of cash and cash equivalents.

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

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Revolving Credit Facility

On May 6, 2019, we entered into that certain Fourth Amended and Restated Credit Agreement (as amended by the First Amendment (as defined below), the “2019 Credit Agreement”) with several financial institutions and Wells Fargo Bank,

National Association, as administrative agent.

The 2019 Credit Agreement has substantially similar terms and provisions to our third amended and restated credit agreement entered into in May 2018 with several financial institutions and Wells Fargo Bank, National Association, as administrative agent (the “2018 Credit Agreement”), but, among other things, provides for a revolving credit facility of $550.0 million, which could be increased at our request by up to $100.0 million if the lenders make additional commitments, subject to the terms and conditions of the 2019 Credit Agreement (which was requested in December 2019).

On December 6, 2019, we entered into a Lender Addition and Acknowledgement Agreement and First Amendment to Fourth Amended and Restated Credit Agreement (the “First Amendment”) with certain lenders and Wells Fargo Bank, National Association, as an increasing lender and administrative agent, whereby the aggregate revolving commitments under the 2019 Credit Agreement increased by $100.0 million from $550.0 million to $650.0 million in accordance with the relevant provisions of the 2019 Credit Agreement.

The 2019 Credit Agreement matures on May 31, 2022.

On April 30, 2020, we entered into the Second Amendment to Fourth Amended and Restated Credit Agreement (the “Second Amendment”), which amends the Fourth Amended and Restated Credit Agreement, dated as of May 6, 2019 (as amended by the Lender Addition and Acknowledgement Agreement and First Amendment to Fourth Amended and Restated Credit Agreement, dated as of December 6, 2019, the “2019 Credit Agreement” and, together with the Second Amendment, the “Credit Agreement”), with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent.

In the Second Amendment, lenders with $520.0 million, or 80%, of the $650.0 million of commitments under the 2019 Credit Agreement, agreed to extend the maturity of their commitments to May 31, 2023, with the remaining lenders retaining their existing maturity of May 31, 2022.

The Second Amendment also reduced the minimum EBITDA to interest expense ratio from 2.50 to 1.75, increased the sublimit for letters of credit to $40.0 million and established a London Interbank Offered Rate (“LIBOR”) floor of 0.70%.

The Credit Agreement otherwise has substantially similar terms and provisions to the 2019 Credit Agreement and continues to provide for a $650.0 million revolving credit facility, which can be increased at the request of the Company by up to $100.0 million, subject to the terms and conditions of the Credit Agreement.

The Credit Agreement matures on May 31, 2023 with respect to 80% of the commitments thereunder and on May 31, 2022 with respect to 20% of the commitments thereunder.

Before each anniversary of the Credit Agreement, we may request a one-year extension of its maturity date.

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The borrowings and letters of credit outstanding under the Credit Agreement, together with the outstanding principal balance of our 6.875% Senior Notes due 2026 (the “Senior Notes”), may not exceed the borrowing base under the Credit Agreement.

As of March 31, 2020, the borrowing base under the 2019 Credit Agreement was $904.8 million, of which borrowings, including the Senior Notes, of $752.7 million were outstanding, $15.0 million of letters of credit were outstanding and $137.1 million was available to borrow under the 2019 Credit Agreement.

Interest is paid monthly on borrowings under the 2019 Credit Agreement at the London Interbank Offered Rate (“LIBOR”) plus 2.50%.

As of June 30, 2020, the borrowing base under the Credit Agreement was $899.2 million, of which borrowings, including the Senior Notes, of $597.6 million were outstanding, $18.7 million of letters of credit were outstanding and $282.9 million was available to borrow under the Credit Agreement.

Interest is paid monthly on borrowings under the Credit Agreement at LIBOR plus 2.50%.

The Credit Agreement applicable margin for LIBOR loans ranges from 2.35% to 2.75% based on our leverage ratio.

At March 31, 2020, LIBOR was 0.92%.

The 2019 Credit Agreement requires us to maintain (i) a tangible net worth of not less than approximately $486.9 million plus 75% of the net proceeds of all equity issuances plus 50.0% of the amount of our positive net income in any fiscal quarter after December 31, 2018, (ii) a leverage ratio of not greater than 60.0%, (iii) liquidity of at least $50.0 million and (iv) a ratio of EBITDA to interest expense for the most recent four quarters of at least 2.50 to 1.00.

At June 30, 2020, LIBOR was 0.18%;

however, we are subject to the 0.70% LIBOR floor as stipulated in the Credit Agreement.

The Credit Agreement requires us to maintain (i) a tangible net worth of not less than $625.0 million plus 75% of the net proceeds of all equity issuances plus 50.0% of the amount of our positive net income in any fiscal quarter after December 31, 2019, (ii) a leverage ratio of not greater than 60.0%, (iii) liquidity of at least $50.0 million and (iv) a ratio of EBITDA to interest expense for the most recent four quarters of at least 1.75 to 1.00.

The Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments.

At March 31, 2020, we were in compliance with all of the covenants contained in the 2019 Credit Agreement.

At June 30, 2020, we were in compliance with all of the covenants contained in the Credit Agreement.

In July 2017, the Financial Conduct Authority in the United Kingdom, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021.

At the present time, the Credit Agreement has a term that extends beyond 2021, and borrowings under the Credit Agreement bear interest at LIBOR plus an applicable margin.

The Credit Agreement provides for a mechanism to amend the Credit Agreement to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of any applicable interest rate.

Agreement provides for a mechanism to amend the Credit Agreement to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of any applicable interest rate.

However, we have not yet pursued any technical amendment or other contractual alternative to address this matter.

We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate on the Credit Agreement.

On April 30, 2020, we entered into a Second Amendment to Fourth Amended and Restated Credit Agreement (the “Second Amendment”), which amends the 2019 Credit Agreement (as so amended, the “Credit Agreement”).

In the Second Amendment, lenders with $520.0 million, or 80.0%, of the $650.0 million of commitments under the Credit Agreement, agreed to extend the maturity of their commitments to May 31, 2023, with the remaining lenders retaining their existing maturity.

The Second Amendment also reduced the minimum EBITDA to interest expense ratio from 2.50 to 1.75, increased the sublimit for letters of credit to $40.0 million and established a LIBOR floor of 0.70%.

Senior Notes Offering

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Interest on the Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019, and the Senior Notes mature on July 15, 2026.

Terms of the Senior Notes are governed by an Indenture and First Supplemental Indenture thereto, each dated as of July 6, 2018, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.

Terms of the Senior Notes are governed by an Indenture and First Supplemental Indenture thereto, each dated as of July 6, 2018, and a Second Supplemental Indenture thereto, dated as of April 30, 2020, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.

Convertible Notes

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Under these letters of credit, surety bonds and financial guarantees, we are committed to perform certain development and construction activities and provide certain guarantees in the normal course of business.

Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $118.5 million as of March 31, 2020.

Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $120.0 million as of June 30, 2020.

Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and surety bonds are not generally released until all development and construction activities are completed.

We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of March 31, 2020 will be drawn upon.

We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of June 30, 2020 will be drawn upon.

Operating Activities

Net cash provided by operating activities was $58.8 million for the three months ended March 31, 2020.

Net cash provided by operating activities was $146.1 million for the six months ended June 30, 2020.

The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development.

Net cash provided by operating activities during the three months ended March 31, 2020 was primarily driven by net income of $42.8 million, and included cash inflow from the $17.9 million decrease in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity offset by changes in non-inventory balances of $1.9 million.

Net cash used in operating activities was $33.2 million for the three months ended March 31, 2019, primarily driven by net income of $18.3 million, and included cash outlays for the $61.3 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity offset by changes in non-inventory balances of $9.7 million.

Net cash provided by operating activities during the six months ended June 30, 2020 was primarily driven by net income of $98.5 million, and included cash inflow from the $41.7 million decrease in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity offset by changes in non-inventory balances of $5.9 million.

Net cash used in operating activities was $18.9 million for the six months ended June 30, 2019, primarily driven by net income of $64.4 million, and included cash outlays for the $99.7 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity offset by changes in non-inventory balances of $16.4 million.

Investing Activities

Net cash used in investing activities was $1.5 million for the three months ended March 31, 2020, primarily due to the additional investment in an unconsolidated entity and purchase of property and equipment.

Net cash used in investing activities was $0.2 million for the three months ended March 31, 2019, which reflects the purchase of property and equipment.

Net cash used in investing activities was $1.7 million for the six months ended June 30, 2020, primarily due to the additional investment in an unconsolidated entity and purchase of property and equipment.

Net cash used in investing activities was $0.3 million for the six months ended June 30, 2019, which reflects the purchase of property and equipment.

Financing Activities

Net cash provided by financing activities was $22.6 million for the three months ended March 31, 2020, primarily driven by borrowings of $128.1 million under the 2019 Credit Agreement, offset by $75.0 million of payments on the 2019 Credit Agreement and by the $31.3 million payment for shares repurchased under our stock repurchase program to be held as treasury stock.

Net cash provided by financing activities was $21.8 million for the three months ended March 31, 2019, primarily driven by net borrowings under the 2018 Credit Agreement.

Net cash used in financing activities was $133.6 million for the six months ended June 30, 2020, primarily driven by $235.0 million of payments on the Credit Agreement and by the $31.3 million payment for shares repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $133.0 million under the Credit Agreement.

Net cash provided by financing activities was $10.1 million for the six months ended June 30, 2019, primarily driven by net borrowings under the 2019 Credit Agreement.

Off-Balance Sheet Arrangements

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Such contracts generally require a non-refundable deposit for the right to acquire land or lots over a specified period of time at pre-determined prices.

We generally have the right at our discretion to terminate our obligations under purchase contracts during the initial

feasibility period and receive a refund of our deposit, or we may terminate the contracts after the end of the feasibility period by forfeiting our cash deposit with no further financial obligations to the land seller.

We generally have the right at our discretion to terminate our obligations under purchase contracts during the initial feasibility period and receive a refund of our deposit, or we may terminate the contracts after the end of the feasibility period by forfeiting our cash deposit with no further financial obligations to the land seller.

In addition, our deposit may also be refundable if the land seller does not satisfy all conditions precedent in the respective contract.

As of March 31, 2020, we had $34.8 million of cash deposits pertaining to land purchase contracts for 18,855 lots with an aggregate purchase price of $560.7 million.

Approximately $25.1 million of the cash deposits as of March 31, 2020 are secured by third-party guarantees or indemnity mortgages on the related property.

As of June 30, 2020, we had $28.8 million of cash deposits pertaining to land purchase contracts for 12,519 lots with an aggregate purchase price of $436.6 million.

Approximately $20.4 million of the cash deposits as of June 30, 2020 are secured by third-party guarantees or indemnity mortgages on the related property.

Our utilization of land purchase contracts is dependent on, among other things, the availability of land sellers willing to enter into contracts at acceptable terms, which may include option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing conditions and local market dynamics.

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Contractual Obligations

As of March 31, 2020, there have been no material changes to our contractual obligations appearing in the “Contractual Obligations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

As of June 30, 2020, there have been no material changes to our contractual obligations appearing in the “Contractual Obligations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

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Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future.

We believe that there have been no significant changes to our critical accounting policies during the three months ended March 31, 2020 as compared to those disclosed in Management ’ s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

We believe that there have been no significant changes to our critical accounting policies during the six months ended June 30, 2020 as compared to those disclosed in Management ’ s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Cautionary Statement about Forward-Looking Statements

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• other factors we discuss under the section entitled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ”;

• the risk factors set forth in Item 1A.

• the risk factor set forth in Item 1A.

Risk Factors in this Quarterly Report on Form 10-Q;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis