LGI Homes, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of LGI Homes, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of LGI Homes, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated February 25, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 57 Table of Contents Land development costs Description of the Matter At December 31, 2020, the Company’s cost of sales was approximately $1.8 billion, which includes construction costs of each closed home and allocable land acquisition and land development costs, capitalized interest, and other related costs. As discussed in Note 2 to the consolidated financial statements, land development costs that are not specifically identifiable to a home are allocated on a pro rata basis. At the time of home closings, land development activities are not yet finalized. To recognize the appropriate amount of cost of sales, the Company estimates the total remaining development costs. Estimates are affected by changes to the land development project’s schedule; the cost of labor, material, and subcontractors; and potential cost reimbursements from various municipalities. Auditing the Company's land development cost measurement and allocation to unsold lots and homes was complex and subjective due to the significant estimation required to determine the costs to complete land development. Specifically, the land development cost estimate is sensitive to significant management assumptions, including the project’s schedule, estimated cost of labor and potential reimbursements. How We Addressed the Matter in Our Audit We obtained an understanding and tested the design and operating effectiveness of the Company's process and controls over its land development cost measurement and allocation to unsold lots and homes, including controls over management's review of the estimated costs to complete. To test the Company's land development cost measurement and allocation to unsold lots and homes, our audit procedures included, among others, testing the significant assumptions used to develop the estimated costs to complete the land development projects and testing the completeness and accuracy of the underlying data and allocation calculation. For example, we compared the estimated land development costs to actual costs of similar communities developed by the Company; agreed the estimated development costs and cost reimbursements to supporting documentation, including underlying contracts; and performed observational procedures to understand the completeness of development activities included in the estimated land development costs. In addition, we performed lookback analyses to historical actual costs to assess management’s ability to estimate and performed sensitivity analyses of the significant assumptions to evaluate the changes in total costs of land development that would result from changes in these assumptions. /s/ Ernst & Young LLP We have served as the Company's auditor since 2013. Houston, Texas February 25, 2021 58 Table of Contents LGI HOMES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2020 2019 ASSETS Cash and cash equivalents $ 35,942 $ 38,345 Accounts receivable 115,939 56,390 Real estate inventory 1,569,489 1,499,624 Pre-acquisition costs and deposits 37,213 37,244 Property and equipment, net 3,618 1,632 Other assets 44,882 16,241 Deferred tax assets, net 6,986 4,621 Goodwill 12,018 12,018 Total assets $ 1,826,087 $ 1,666,115 LIABILITIES AND EQUITY Accounts payable $ 13,676 $ 12,495 Accrued expenses and other liabilities 135,008 117,868 Notes payable 538,398 690,559 Total liabilities 687,082 820,922 COMMITMENTS AND CONTINGENCIES EQUITY Common stock, par value $ 0.01 , 250,000,000 shares authorized, 26,741,554 shares issued and 24,983,561 shares outstanding as of December 31, 2020 and 26,398,409 shares issued and 25,359,409 shares outstanding as of December 31, 2019 267 264 Additional paid-in capital 270,598 252,603 Retained earnings 934,277 610,382 Treasury stock, at cost, 1,757,993 shares and 1,039,000 shares, respectively ( 66,137 ) ( 18,056 ) Total equity 1,139,005 845,193 Total liabilities and equity $ 1,826,087 $ 1,666,115 See accompanying notes to the consolidated financial statements. 59 Table of Contents LGI HOMES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) For the Year Ended December 31, 2020 2019 2018 Home sales revenues $ 2,367,929 $ 1,838,154 $ 1,504,400 Cost of sales 1,764,832 1,401,675 1,124,484 Selling expenses 148,366 131,561 109,460 General and administrative 90,021 77,380 70,345 Operating income 364,710 227,538 200,111 Loss on extinguishment of debt — 169 3,599 Other income, net ( 3,139 ) ( 4,463 ) ( 2,586 ) Net income before income taxes 367,849 231,832 199,098 Income tax provision 43,954 53,224 43,812 Net income $ 323,895 $ 178,608 $ 155,286 Earnings per share: Basic $ 12.89 $ 7.70 $ 6.89 Diluted $ 12.76 $ 7.02 $ 6.24 Weighted average shares outstanding: Basic 25,135,077 23,191,595 22,551,762 Diluted 25,380,560 25,430,841 24,892,274 See accompanying notes to the consolidated financial statements. 60 Table of Contents LGI HOMES, INC. CONSOLIDATED STATEMENTS OF EQUITY (In thousands, except share data) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Total Equity Shares Amount BALANCE—December 31, 2017 22,845,580 $ 228 $ 229,680 $ 276,488 $ ( 16,550 ) $ 489,846 Net income — — — 155,286 — 155,286 Issuance of shares in settlement of Convertible Notes 486,679 5 ( 482 ) — — ( 477 ) Issuance of shares, Wynn Homes Acquisition 70,746 1 3,999 — — 4,000 Repurchase of shares — — — — ( 1,506 ) ( 1,506 ) Issuance of restricted stock units in settlement of accrued bonuses — — 181 — — 181 Compensation expense for equity awards — — 5,923 — — 5,923 Stock issued under employee incentive plans 343,380 3 2,687 — — 2,690 BALANCE—December 31, 2018 23,746,385 $ 237 $ 241,988 $ 431,774 $ ( 18,056 ) $ 655,943 Net income — — — 178,608 — 178,608 Issuance of shares in settlement of Convertible Notes 2,381,751 24 ( 24 ) — — — Issuance of restricted stock units in settlement of accrued bonuses — — 217 — — 217 Compensation expense for equity awards — — 7,539 — — 7,539 Stock issued under employee incentive plans 270,273 3 2,883 — — 2,886 BALANCE—December 31, 2019 26,398,409 $ 264 $ 252,603 $ 610,382 $ ( 18,056 ) $ 845,193 Net income — — — 323,895 — 323,895 Repurchase of shares — — — — ( 48,081 ) ( 48,081 ) Issuance of restricted stock units in settlement of accrued bonuses — — 222 — — 222 Compensation expense for equity awards — — 13,517 — — 13,517 Stock issued under employee incentive plans 343,145 3 4,256 — — 4,259 BALANCE—December 31, 2020 26,741,554 $ 267 $ 270,598 $ 934,277 $ ( 66,137 ) $ 1,139,005 See accompanying notes to the consolidated financial statements. 61 Table of Contents LGI HOMES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Year Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net income $ 323,895 $ 178,608 $ 155,286 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 710 643 711 Loss on extinguishment of debt — 169 3,588 Loss (gain) on disposal of assets ( 4 ) 37 6 Compensation expense for equity awards 13,517 7,539 5,937 Deferred income taxes ( 2,365 ) ( 1,831 ) ( 724 ) Changes in assets and liabilities: Accounts receivable ( 59,549 ) ( 13,554 ) 1,870 Real estate inventory ( 70,228 ) ( 266,651 ) ( 234,664 ) Pre-acquisition costs and deposits 32 8,507 ( 18,853 ) Other assets ( 25,686 ) 6,228 ( 1,398 ) Accounts payable 1,181 3,254 ( 2,779 ) Accrued expenses and other liabilities 20,655 35,117 ( 25,703 ) Net cash provided by (used in) operating activities 202,158 ( 41,934 ) ( 116,723 ) Cash flows from investing activities: Purchases of property and equipment, net ( 2,692 ) ( 734 ) ( 475 ) Investment in unconsolidated entity ( 2,956 ) ( 1,059 ) — Payment for business acquisition — — ( 74,463 ) Net cash used in investing activities ( 5,648 ) ( 1,793 ) ( 74,938 ) Cash flows from financing activities: Proceeds from notes payable 377,064 309,308 612,717 Payments on notes payable ( 530,000 ) ( 273,762 ) ( 436,238 ) Loan issuance costs ( 2,155 ) ( 2,984 ) ( 6,741 ) Proceeds from sale of stock, net of offering expenses 4,259 2,886 2,690 Stock repurchase ( 48,081 ) — ( 1,506 ) Payment for offering costs — — ( 76 ) Payment for earnout obligation — — ( 132 ) Net cash provided by (used in) financing activities ( 198,913 ) 35,448 170,714 Net decrease in cash and cash equivalents ( 2,403 ) ( 8,279 ) ( 20,947 ) Cash and cash equivalents, beginning of year 38,345 46,624 67,571 Cash and cash equivalents, end of year $ 35,942 $ 38,345 $ 46,624 See accompanying notes to the consolidated financial statements. 62 Table of Contents LGI HOMES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS Organization and Description of the Business LGI Homes, Inc., a Delaware corporation (the “Company”, “we,” “us,” or “our”), is headquartered in The Woodlands, Texas. We engage in the design, construction and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia and Pennsylvania. Acquisition On August 2, 2018, we acquired certain homebuilding assets owned by Crosswind Properties, LLC, Wynn Construction, Inc., Crosswind Development, Inc., Crosswind Investments, Inc. and First Continental Communities, Inc. (collectively, “Wynn Homes”), and assumed certain related liabilities. As a result of the Wynn Homes acquisition, we expanded our North Carolina presence in the Raleigh market, as well as established an immediate presence in the Wilmington market. We acquired approximately 200 homes under construction and more than 4,000 owned and controlled lots. The total purchase price for the Wynn Homes acquisition was approximately $ 78.5 million, consisting of approximately $ 74.5 million in cash and $ 4.0 million in shares of our common stock. The acquisition was accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). COVID-19 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 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 various sectors of the economy. However, certain jurisdictions began re-opening only to return to restrictions in the face of increases in new COVID-19 cases, while other jurisdictions are continuing to re-open or have nearly completed the re-opening process despite increases in COVID-19 cases. The COVID-19 outbreak may significantly worsen in the United States during the upcoming months, which may cause federal, state and local governments to reconsider restrictions on business and social activities. In the event governments increase restrictions, the re-opening of the economy may be further curtailed. We have experienced some resulting disruptions to our business operations, as these restrictions have significantly impacted, and may continue to impact, many sectors of the economy, with various businesses curtailing or ceasing normal operations and subsequently attempting to resume operations. 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, at that time 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 a sustained increase in demand in our markets. 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 availability and timely distribution of effective treatments and vaccines, 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. While we cannot reasonably estimate the length or severity of this pandemic, an extended economic slowdown in the United States could materially impact our consolidated financial statements in 2021 and beyond. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles ( “ GAAP ” ) and include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results 63 Table of Contents could differ from those estimates, and these differences could have a significant impact on the financial statements. The significant accounting estimates include real estate inventory and cost of sales, impairment of real estate inventory and property and equipment, warranty reserves, loss contingencies, incentive compensation expense, and income taxes. Cash and Cash Equivalents and Concentration of Credit Risk Cash and cash equivalents are defined as cash on hand, demand deposits with financial institutions, and short-term liquid investments with an initial maturity date of less than three months. Our cash in demand deposit accounts may exceed federally insured limits and could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or diminished access to cash in our demand deposit accounts. Accounts Receivable Accounts receivable consist primarily of proceeds due from title companies for sales closed prior to period end and are generally collected within a few days from closing. Real Estate Inventory Inventory consists of land, land under development, finished lots, information centers, homes in progress, and completed homes. Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case the affected inventory is written down to fair value. Land, development and other project costs, including interest and property taxes incurred during development and home construction, net of expected reimbursable development costs, are capitalized to real estate inventory. Land development and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate. The costs of lots are transferred to homes in progress when home construction begins. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method. Costs that are not specifically identifiable to a home are allocated on a pro rata basis, which we believe approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots or homes within a community are similar in value. Inventory costs for completed homes are expensed to cost of sales as homes are closed. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining unsold lots and homes in the community on a pro rata basis. The life cycle of a community generally ranges from two to five years , commencing with the acquisition of land, continuing through the land development phase, and concluding with the construction and sale of homes. A constructed home is used as the community information center during the life of the community and then sold. Actual individual community lives will vary based on the size of the community, the sales absorption rate, and whether the property was purchased as raw land or finished lots. In accordance with ASC Topic 360, Property, Plant, and Equipment , real estate inventory is evaluated for indicators of impairment by each community during each reporting period. In conducting its review for indicators of impairment on a community level, management evaluates, among other things, the margins on homes that have been closed, communities with slow moving inventory, projected margins on future home sales over the life of the community, and the estimated fair value of the land. For individual communities with indicators of impairment, additional analysis is performed to estimate the community’s undiscounted future cash flows. If the estimated undiscounted future cash flows are greater than the carrying value of the community group of assets, no impairment adjustment is required. If the undiscounted cash flows are less than the community’s carrying value, the asset group is impaired and is written down to its fair value. We estimate the fair value of communities using a discounted cash flow model. As of December 31, 2020 and 2019, the real estate inventory is stated at cost; there were no inventory impairment charges recorded during the years ended December 31, 2020, 2019 and 2018. Capitalized Interest Interest and other financing costs are capitalized as cost of inventory during community development and home construction activities, in accordance with ASC Topic 835, Interest and expensed in cost of sales as homes in the community are closed. To the extent the debt exceeds qualified assets, a portion of the interest incurred is expensed. Pre-Acquisition Costs and Deposits Amounts paid for land options, deposits on land purchase contracts, and other pre-acquisition costs are capitalized and classified as deposits to purchase. Upon execution of the purchase, these deposits are applied to the acquisition price of the land and recorded as a cost component of the land in real estate inventory. To the extent that any deposits are nonrefundable and the associated land acquisition process is terminated or no longer determined probable, the deposit and related pre-acquisition costs 64 Table of Contents are charged to general and administrative expenses. Management reviews the likelihood of the acquisition of contracted lots in conjunction with its periodic real estate impairment analysis. Under ASC Topic 810, Consolidation (“ASC 810”), a nonrefundable deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Non-refundable land purchase and lot option deposits generally represent our maximum exposure if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to close. Such costs are classified as preacquisition costs, which we would have to absorb should the option not be exercised. Therefore, whenever we enter into a land option or purchase contract with an entity and make a nonrefundable deposit, we may have a variable interest in a variable interest entity (“VIE”). In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE and would consolidate the VIE if we are deemed to be the primary beneficiary. As of December 31, 2020 and 2019, we were not deemed to be the primary beneficiary for any VIEs associated with non-refundable land deposits. Deferred Loan Costs Deferred loan costs represent debt issuance costs related to a recognized debt liability and are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. Other Assets Other assets consist primarily of prepaid insurance, prepaid expenses, security deposits, right-of-use (“ROU”) assets, municipal utility district reimbursements, and income tax receivables related to the federal energy efficient homes tax credit. Our prepaid insurance and prepaid expenses were $ 6.5 million and $ 7.8 million as of December 31, 2020 and 2019, respectively. Property and Equipment, Net Property, building, software, computer equipment and leasehold improvements are stated at cost, less accumulated depreciation. Depreciation expense is recorded in general and administrative expenses. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in other income, net. Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets, ranging from two to five years for property and equipment and 30 years for our building. Leasehold improvements are depreciated over the shorter of the asset life or the term of the lease. Maintenance and repair costs are expensed as incurred. Impairments of long-lived assets are determined periodically when indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on judgments as to the future undiscounted operating cash flows to be generated from these assets throughout the remaining estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related asset, impairment is recognized for the excess of the carrying value over its fair value. There were no impairments of property, equipment and leasehold improvements recorded during the years ended December 31, 2020, 2019 and 2018. Investment in Unconsolidated Entity We have an investment in a unconsolidated entity with an independent third party. The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally, this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we recognize our proportionate share of the earnings and losses of this entity. In the event we buy land from this entity we intend to defer the recognition of profits from such activities until the time we ultimately sell the related land. We evaluate our investment in the unconsolidated entity for recoverability in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures . If we determine that a loss in the value of the investment is other than temporary, we write down the investment to its estimated fair value. Any such losses are recorded to equity in (earnings) loss of unconsolidated entities, which is reflected in other income, net. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates. Goodwill and Intangible Assets The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is capitalized as goodwill in accordance with ASC 805, Business Combinations . Goodwill and intangible assets that do not have finite lives are not amortized, but are assessed for impairment at least annually or more frequently if certain impairment indicators are present. The $ 12.0 million of goodwill is related to the reorganization transactions completed in connection with the initial public offering of our common stock in November 2013. In applying the goodwill impairment test, we have the option to perform a qualitative test. Under the optional qualitative test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than their carrying value. Qualitative factors may include, 65 Table of Contents but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, we determine it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing a quantitative test is necessary. Annually, we have performed a qualitative analysis and determined that it is not “more likely than not” that the fair values of the reporting units were less than their carrying amounts. No goodwill impairment charges were recorded in 2020, 2019 and 2018. Warranty Reserves Future direct warranty costs are accrued and charged to cost of sales in the period when the related home is closed. Our warranty liability is based upon historical warranty cost experience and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our continued expansion. Warranty reserves are reviewed quarterly to assess the reasonableness and adequacy and adjusted, as needed, to reflect changes in trends and historical data as information becomes available. Customer Deposits Customer deposits are received upon signing a purchase contract and are typically $ 1,000 to $ 5,000 . Deposits are generally refundable if the customer is unable to obtain financing. Forfeited buyer deposits related to home sales are recognized in other income in the period in which it is determined that the buyer will not complete the purchase of the property and the deposit is nonrefundable to the buyer. Home Sales In accordance with ASC Topic 606, Revenue from Contracts with Customers , revenues from home sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the customer and we have no significant continuing involvement with the home. Home sales discounts and incentives granted to customers, which are related to the customers’ closing costs that we pay on the customers’ behalf , are recorded as a reduction of revenue in our consolidated financial statements of operations. Cost of Sales As discussed under “—Real Estate Inventory” above, cost of sales for homes closed include the construction costs of each home and allocable land acquisition and land development costs, capitalized interest, and other related common costs (both incurred and estimated to be incurred). Selling and Commission Costs Sales commissions are paid and expensed based on homes closed. Other selling costs are expensed in the period incurred. Advertising Costs Advertising costs are expensed as incurred. Advertising costs were $ 10.7 million, $ 20.2 million and $ 17.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Income Taxes We are a taxable entity subject to federal and state taxes. We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Changes in tax rate are recognized in the year of enactment. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Our ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established, if required. We recognize the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. Earnings Per Share Basic earnings per share is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding. In accordance with ASC 260-10, Earnings Per Share , we calculated the dilutive effect of our 4.25 % Convertible Notes due 2019 (the “Convertible Notes”) using the treasury stock method, since we had the intent and ability to settle the principal amount of 66 Table of Contents the outstanding Convertible Notes in cash. The Convertible Notes matured and were repaid in full on November 15, 2019. Prior to the maturity of the Convertible Notes, we included the effect of the additional potential dilutive shares if our common stock price exceeded the conversion price of $ 21.52 per share under the treasury stock method. Diluted earnings per share excludes all dilutive potential shares of common stock if their effect is antidilutive. Stock-Based Compensation Compensation costs for non-performance-based restricted stock awards are measured using the closing price of our common stock on the date of grant and are expensed on a straight-line basis over the requisite service period of the award. Compensation costs for performance-based restricted stock awards also contain a market condition. These costs are measured using the derived grant date fair value, based on a third party valuation analysis, and are expensed in accordance with ASC 718-10-25-20, Compensation - Stock Compensation , which requires an assessment of probability of attainment of the performance target. Once the performance target outcome is determined to be probable, the cumulative expense is adjusted, as needed, to recognize compensation expense on a straight-line basis over the award’s requisite service period. Recently Adopted Accounting Standards On January 1, 2020, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), which requires entities that are customers in cloud computing arrangements to defer implementation costs if they would be capitalized by the entity in software licensing arrangements under the internal-use software guidance. ASU 2018-15 was effective for us beginning January 1, 2020. The guidance may be applied retrospectively or prospectively to implementation costs incurred after the date of adoption. The adoption of ASU 2018-15 did not have a material effect on our consolidated financial statements or disclosures. On January 1, 2020, we adopted the FASB ASU No. 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements of fair value measurements. ASU 2018-13 was effective for us beginning January 1, 2020. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. The adoption of ASU 2018-13 did not have a material effect on our consolidated financial statements or disclosures. On January 1, 2020, we adopted the FASB ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment” (“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 was effective for us beginning January 1, 2020, with early adoption permitted, and applied prospectively. The adoption of ASU 2017-04 did not have a material effect on our consolidated financial statements or disclosures. On January 1, 2020, we adopted the FASB ASU No. 2016-13, “ Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments from an “incurred loss” approach to a new “expected credit loss” methodology. ASU 2016-13 was effective for us beginning January 1, 2020, with early adoption permitted. The adoption of ASU 2016-13 did not have a material effect on our consolidated financial statements or disclosures. 3. REVENUES Revenue Recognition Revenues from home sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the customer and we have no significant continuing involvement with the home. Home sales discounts and incentives granted to customers, which are related to the customers’ closing costs that we pay on the customers’ behalf , are recorded as a reduction of revenue in our consolidated financial statements of operations. 67 Table of Contents The following table presents our home sales revenues disaggregated by revenue stream (in thousands): For the Year Ended December 31, 2020 2019 2018 Retail home sales revenues $ 2,191,301 $ 1,714,277 $ 1,394,475 Wholesale home sales revenues 176,628 123,877 109,925 Total home sales revenues $ 2,367,929 $ 1,838,154 $ 1,504,400 The following table presents our home sales revenues disaggregated by geography, based on our determined reportable segments in Note 15 (in thousands): For the Year Ended December 31, 2020 2019 2018 Central $ 850,375 $ 724,981 $ 623,751 Southeast 559,226 347,817 271,073 Northwest 389,523 304,294 277,567 West 286,130 271,186 151,059 Florida 282,675 189,876 180,950 Home sales revenues $ 2,367,929 $ 1,838,154 $ 1,504,400 Home Sales Revenues We generate revenues primarily by delivering move-in ready entry-level and move-up spec homes sold under our LGI Homes brand and our luxury series spec homes sold under our Terrata Homes brand. Retail homes sold under both our LGI Homes brand and Terrata Homes brand focus on providing move-in ready homes with standardized features within favorable markets that meet certain demographic and economic conditions. Our LGI Homes brand primarily markets to entry-level or first-time homebuyers, while our luxury Terrata Homes brand primarily markets to move-up homebuyers. Wholesale homes are primarily sold under a bulk sales agreement and focus on providing move-in ready homes with standardized features to real estate investors that will ultimately use the single-family homes as rental properties. Performance Obligations Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms as customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title company within a few business days after closing. Sales and broker commissions are incremental costs incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained. Sales and broker commissions are expensed upon fulfillment of a home closing. Advertising costs are costs to obtain a contract that would have been incurred regardless of whether the contract was obtained and are recognized as an expense when incurred. Sales and broker commissions and advertising costs are recorded within sales and marketing expense presented in our consolidated statements of operations as selling expenses. 4. REAL ESTATE INVENTORY Our real estate inventory consists of the following (in thousands): December 31, 2020 2019 Land, land under development, and finished lots $ 981,838 $ 912,651 Information centers 30,201 26,959 Homes in progress 337,364 234,470 Completed homes 220,086 325,544 Total real estate inventory $ 1,569,489 $ 1,499,624 See “Real Estate Inventory” under Note 2 for more information. 68 Table of Contents Interest and financing costs incurred under our debt obligations, as more fully discussed in Note 7 , are capitalized to qualifying real estate projects under development and homes under construction. 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands): December 31, Asset Life 2020 2019 (years) Computer software and equipment 2 - 5 $ 3,152 $ 1,395 Machinery and equipment 5 147 154 Furniture and fixtures 2 - 5 4,290 3,758 Buildings 30 145 145 Leasehold improvements 5 682 272 Total property and equipment 8,416 5,724 Less: Accumulated depreciation ( 4,798 ) ( 4,092 ) Property and equipment, net $ 3,618 $ 1,632 Depreciation expense incurred for the years ended December 31, 2020, 2019 and 2018 was $ 0.7 million, $ 0.6 million and $ 0.7 million, respectively. 6. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued and other liabilities consist of the following (in thousands): December 31, 2020 2019 Taxes payable $ 26,181 $ 28,679 Real estate inventory development and construction payable 29,938 35,870 Accrued compensation, bonuses and benefits 28,579 16,748 Accrued interest 10,853 11,361 Inventory related obligations 4,515 7,808 Lease liability 5,287 5,645 Warranty reserve 5,350 3,500 Contract deposits 17,151 2,502 Other 7,154 5,755 Total accrued expenses and other liabilities $ 135,008 $ 117,868 Inventory Related Obligations We own lots in certain communities in Arizona, Florida, and Texas that have Community Development Districts or similar utility and infrastructure development special assessment programs that allocate a fixed amount of debt service associated with development activities to each lot. This obligation for infrastructure development is attached to the land, which is typically payable over a 30-year period, and is ultimately assumed by the homebuyer when home sales are closed. Such obligations represent a non-cash cost of the lots. 69 Table of Contents Estimated Warranty Reserve We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems. Changes to our warranty accrual are as follows (in thousands): December 31, 2020 2019 2018 Warranty reserves, beginning of period $ 3,500 $ 2,950 $ 2,450 Warranty provision 7,040 5,286 4,438 Warranty expenditures ( 5,190 ) ( 4,736 ) ( 3,938 ) Warranty reserves, end of period $ 5,350 $ 3,500 $ 2,950 7. NOTES PAYABLE Revolving Credit Agreement 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, certain lenders agreed to extend the maturity of their commitments, while another lender agreed to extend the maturity of its commitment subsequent to the execution of the Second Amendment. Lenders with $ 566.0 million, or 87 %, 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 87 % of the commitments thereunder and on May 31, 2022 with respect to 13 % of the commitments thereunder. Before each anniversary of the Credit Agreement, we may request a one-year extension of its maturity date. The Credit Agreement is guaranteed by each of our subsidiaries that have gross assets equal to or greater than $ 0.5 million. 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 December 31, 2020, the borrowing base under the Credit Agreement was $ 949.6 million, of which borrowings, including the Senior Notes, of $ 546.6 million were outstanding, $ 10.5 million of letters of credit were outstanding and $ 392.5 million was available to borrow under the Credit Agreement. Interest is paid monthly on borrowings under the Credit Agreement at LIBOR plus 2.35 %. The Credit Agreement applicable margin for LIBOR loans ranges from 2.35 % to 2.75 % based on our leverage ratio. At December 31, 2020, LIBOR was 0.15 %; however, the Credit Agreement has a 0.70 % LIBOR floor. The Credit Agreement contains various financial covenants, including a minimum tangible net worth, a leverage ratio, a minimum liquidity amount and an EBITDA to interest expense ratio. 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 December 31, 2020, we were in compliance with all of the covenants contained in the Credit Agreement. Senior Notes Offering On July 6, 2018, we issued $ 300.0 million aggregate principal amount of the Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act. 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, 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. 70 Table of Contents Convertible Notes In November 2014, we issued $ 85.0 million aggregate principal amount of the Convertible Notes pursuant to an exemption from the registration requirements afforded by Section 4(a)(2) of the Securities Act. On November 15, 2019, the Convertible Notes matured, which resulted in the principal payment of $ 70.0 million and the issuance of 2,381,751 shares of our common stock for the premium associated with the Convertible Notes. Notes payable consist of the following (in thousands): December 31, 2020 2019 Notes payable under the Credit Agreement ($ 650.0 million revolving credit facility at December 31, 2020) maturing in part on May 31, 2022 and in part on May 31, 2023; interest paid monthly at LIBOR plus 2.35 %; net of debt issuance costs of approximately $ 4.9 million and $ 5.0 million at December 31, 2020 and December 31, 2019, respectively $ 241,717 $ 394,531 6.875 % Senior Notes due July 15, 2026; interest paid semi-annually at 6.875 %; net of debt issuance costs of approximately $ 1.9 million and $ 2.2 million at December 31, 2020 and December 31, 2019, respectively; and approximately $ 1.4 million and $ 1.8 million in unamortized discount at December 31, 2020 and December 31, 2019, respectively 296,681 296,028 Total notes payable $ 538,398 $ 690,559 As of December 31, 2020, the annual aggregate maturities of notes payable during each of the next five fiscal years are as follows (in thousands): Amount 2021 $ — 2022 32,061 2023 214,560 2024 — 2025 — Thereafter 300,000 Total notes payable 546,621 Less: Debt discount ( 1,438 ) Less: Debt issuance costs ( 6,785 ) Net notes payable $ 538,398 Capitalized Interest Interest activity, including other financing costs, for notes payable for the periods presented is as follows (in thousands): Year Ended December 31, 2020 2019 2018 Interest incurred $ 37,285 $ 45,555 $ 38,216 Less: Amounts capitalized ( 37,285 ) ( 45,555 ) ( 38,216 ) Interest expense $ — $ — $ — Cash paid for interest $ 34,924 $ 42,438 $ 23,376 Included in interest incurred for the year ended December 31, 2020 was amortization of deferred financing costs for notes payable and amortization of the Senior Notes discounts of $ 2.9 million. Included in interest incurred for the years ended December 31, 2019 and 2018 was amortization of deferred financing costs for notes payable and amortization of the Convertible Notes and Senior Notes discounts of $ 4.1 million and $ 4.6 million, respectively. 71 Table of Contents 8. INCOME TAXES The provision for income taxes consisted of the following (in thousands): Year ended December 31, 2020 2019 2018 Current: Federal $ 35,207 $ 47,886 $ 39,053 State 11,112 7,169 5,483 Current tax provision 46,319 55,055 44,536 Deferred: Federal ( 2,136 ) ( 1,637 ) ( 663 ) State ( 229 ) ( 194 ) ( 61 ) Deferred tax benefit ( 2,365 ) ( 1,831 ) ( 724 ) Total income tax provision $ 43,954 $ 53,224 $ 43,812 Income taxes paid were $ 68.4 million, $ 38.0 million and $ 83.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the years ended December 31, 2020, 2019 and 2018 (in thousands): Year Ended December 31, 2020 2019 2018 Tax at federal statutory rate $ 77,248 21.0 % $ 48,685 21.0 % $ 41,816 21.0 % State income taxes (net of federal benefit) 8,530 2.3 5,497 2.4 4,263 2.1 Stock-based compensation ( 994 ) ( 0.3 ) ( 1,749 ) ( 0.8 ) ( 3,107 ) ( 1.5 ) Non deductible expenses and other 439 0.1 771 0.4 850 0.4 Change in tax rates - deferred taxes ( 78 ) — 20 — ( 10 ) — Federal energy efficient homes tax credits ( 11,488 ) ( 3.1 ) — — — — Retroactive federal energy efficient homes tax credits ( 29,703 ) ( 8.1 ) — — — — Tax at effective rate $ 43,954 11.9 % $ 53,224 23.0 % $ 43,812 22.0 % The 2020 effective tax rate differs from the federal statutory rate primarily due to benefits associated with the federal energy efficient homes tax credits enacted into law in December 2019, partially offset by state income tax expense on current year earnings. Income tax expense for 2020 includes a benefit of $ 41.2 million associated with the extension of federal energy efficient homes tax credits, including $ 29.7 million related to homes closed in prior open tax years. This provision, which had previously expired in 2017, has been extended to apply to homes closed through December 31, 2021. The 2019 effective tax rate differs from the federal statutory rate primarily due to non-deductible salaries related to Section 162(m) of the Internal Revenue Code of 1986, as amended, and state income tax expense on current year earnings offset by the deductions in excess of compensation cost (“windfalls”) for share-based payments. The 2018 effective tax rate differs from the federal statutory rate primarily due to state income tax expense on current year earnings, partially offset by windfalls for share-based payments. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 72 Table of Contents The components of net deferred tax assets and liabilities at December 31, 2020 and 2019 are as follows (in thousands): December 31, 2020 2019 Deferred tax assets: Accruals and reserves $ 5,149 $ 3,035 Leases 946 1,026 Inventory 239 692 Stock-based compensation 4,347 2,892 Debt Extinguishment — 134 Other 56 79 Total deferred tax assets 10,737 7,858 Deferred tax liabilities: Prepaids ( 1,372 ) ( 1,382 ) Leases ( 1,124 ) ( 1,219 ) Tax depreciation in excess of book depreciation ( 499 ) ( 19 ) Goodwill and other assets amortized for tax ( 738 ) ( 617 ) Other ( 18 ) — Total deferred tax liabilities ( 3,751 ) ( 3,237 ) Total net deferred tax assets $ 6,986 $ 4,621 All Company operations are domestic. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The statute of limitations with regard to our federal income tax filings is three years. The statute of limitations for our state tax jurisdictions is three to four years depending on the jurisdiction. In the normal course of business, we are subject to tax audits in various jurisdictions, and such jurisdictions may assess additional income taxes. We do not expect the outcome of any audit to have a material effect on our consolidated financial statements; however, audit outcomes and the timing of audit adjustments are subject to significant uncertainty. 9. EQUITY We are authorized to issue 250,000,000 shares of common stock, par value $ 0.01 per share, and 5,000,000 shares of preferred stock, par value $ 0.01 per share. As of December 31, 2020 and 2019, no shares of preferred stock were issued or outstanding. At December 31, 2020, we had 26,741,554 shares of common stock issued and 24,983,561 shares of common stock outstanding, including 1,757,993 treasury shares of our common stock. At December 31, 2019, we had 26,398,409 shares of common stock issued and 25,359,409 shares of common stock outstanding, including 1,039,000 treasury shares of our common stock. On November 15, 2019, the Convertible Notes matured, which resulted in the principal payment of $ 70.0 million and the issuance of 2,381,751 shares of our common stock for the premium associated with the Convertible Notes. Shelf Registration Statement We have an effective shelf registration statement on Form S-3 (Registration No. 333-227012) that was filed on August 24, 2018 with the Securities and Exchange Commission, registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these securities. Stock Repurchase Program In November 2018, we announced that our Board of Directors (the “Board”) authorized a stock repurchase program, pursuant to which we may purchase up to $ 50.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws. On October 30, 2020, the Board approved an increase in our stock repurchase program by an additional $ 300.0 million. For the year ended December 31, 2020, we repurchased 718,993 shares of our common stock for $ 48.1 million to be held as treasury stock. For the year ended December 31, 2019, we did not repurchase any shares of our common stock. For the year ended December 31, 2018, we repurchased 39,000 shares of 73 Table of Contents our common stock for $ 1.5 million to be held as treasury stock. As of December 31, 2020, we may purchase up to $ 300.4 million of shares of our common stock under our stock repurchase program. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2020, 2019, and 2018. For the Year Ended December 31, 2020 2019 2018 Numerator (in thousands): Net income (Numerator for basic and dilutive earnings per share) $ 323,895 $ 178,608 $ 155,286 Denominator: Basic weighted average shares outstanding 25,135,077 23,191,595 22,551,762 Effect of dilutive securities: Convertible Notes - treasury stock method — 1,966,639 2,030,023 Stock-based compensation units 245,483 272,607 310,489 Diluted weighted average shares outstanding 25,380,560 25,430,841 24,892,274 Basic earnings per share $ 12.89 $ 7.70 $ 6.89 Diluted earnings per share $ 12.76 $ 7.02 $ 6.24 Antidilutive non-vested restricted stock units excluded from calculation of diluted earnings per share 9,482 14,211 20,462 In accordance with ASC 260-10, Earnings Per Share , we calculated the dilutive effect of the Convertible Notes using the treasury stock method, since we had the intent and ability to settle the principal amount of the outstanding Convertible Notes in cash. The Convertible Notes matured and were repaid in full on November 15, 2019. Prior to the maturity of the Convertible Notes, we included the effect of the additional potential dilutive shares if our common stock price exceeded the conversion price of $ 21.52 per share under the treasury stock method. Throughout each fiscal year presented to the maturity date of the Convertible Notes, the average market price of our common stock exceeded the conversion price of $ 21.52 per share; therefore, the calculation of diluted earnings per share for all years presented prior to the maturity date includes the effect of our common stock related to the conversion spread of the Convertible Notes. 10. STOCK-BASED COMPENSATION Non-performance Based Restricted Stock Units A total of 3,000,000 shares of our common stock have been reserved for issuance under the LGI Homes, Inc. Amended and Restated 2013 Equity Incentive Plan (the “2013 Incentive Plan”). There were 142,738 restricted stock units (“RSUs”) outstanding at December 31, 2020, issued at a $ 0.00 exercise price. 74 Table of Contents The following table summarizes the activity of our time-vested RSUs: Shares Weighted Average Grant Date Fair Value Balance at December 31, 2017 175,100 $ 27.66 Granted 54,874 $ 57.60 Vested ( 51,694 ) $ 20.79 Forfeited ( 7,225 ) $ 34.77 Balance at December 31, 2018 171,055 $ 39.04 Granted 62,512 $ 60.72 Vested ( 55,230 ) $ 26.47 Forfeited ( 15,651 ) $ 47.73 Balance at December 31, 2019 162,686 $ 50.84 Granted 56,735 $ 67.63 Vested ( 73,360 ) $ 40.77 Forfeited ( 3,323 ) $ 57.26 Balance at December 31, 2020 142,738 $ 62.54 In 2020, we issued 22,141 RSUs to senior management for the time-based portion of our 2020 long-term incentive compensation program and 15,585 RSUs for 2019 annual bonuses to managers, which generally cliff vest on the third anniversary of the grant date. In 2019, we issued 20,847 RSUs to senior management for the time-based portion of our 2019 long-term incentive compensation program and 16,159 RSUs for 2018 annual bonuses to managers, which generally cliff vest on the third anniversary of the grant date. In 2018, we issued 15,867 RSUs to senior management for the time-based portion of our 2018 long-term incentive compensation program and 11,780 RSUs for 2017 annual bonuses to managers, which generally cliff vest on the third anniversary of the grant date. In addition, during the years ended December 31, 2020, 2019 and 2018, we issued 19,009 , 25,506 and 27,227 RSUs, respectively, to certain employees, executives and non-employee directors, which vest over periods ranging from one to three years . Under the terms of the grant award agreements, all of the RSUs may only be settled in shares of our common stock. We recognized $ 3.5 million, $ 2.2 million, and $ 2.0 million of stock-based compensation expense related to RSUs for the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020, we had unrecognized compensation cost of $ 4.2 million related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.7 years. Performance Based Restricted Stock Units The Compensation Committee of the Board has granted awards of performance-based RSUs (“PSUs”) under the 2013 Incentive Plan to certain members of senior management based on three-year performance cycles. At December 31, 2020, there were 229,820 PSUs outstanding that have been granted to certain members of management at a $ 0.00 exercise price. The PSUs provide for shares of our common stock to be issued based on the attainment of certain performance metrics over the applicable three-year periods. The number of shares of our common stock that may be issued to the recipients for the PSUs range from 0 % to 200 % of the target amount depending on actual results as compared to the target performance metrics. The terms of the PSUs provide that the payouts will be capped at 100% of the target number of PSUs granted if absolute total stockholder return is negative during the performance period, regardless of EPS performance; this market condition applies for amounts recorded above target. The compensation expense associated with the PSU grants is determined using the derived grant date fair value, based on a third-party valuation analysis, and expensed over the applicable period. The PSUs vest upon the determination date for the actual results at the end of the three-year period and require that the recipients continue to be employed by us through the determination date. The PSUs can only be settled in shares of our common stock. 75 Table of Contents Period Granted Performance Period Target PSUs Outstanding at December 31, 2019 Target PSUs Granted Target PSUs Vested Target PSUs Forfeited Target PSUs Outstanding at December 31, 2020 Weighted Average Grant Date Fair Value 2017 2017 - 2019 104,770 — ( 104,770 ) — — $ 31.64 2018 2018 - 2020 60,040 — — — 60,040 $ 64.60 2019 2019 - 2021 81,242 — — — 81,242 $ 56.49 2020 2020 - 2022 — 88,538 — — 88,538 $ 59.81 Total 246,052 88,538 ( 104,770 ) — 229,820 At December 31, 2020, management estimates that the recipients will receive approximately 200 %, 191 %, and 200 % of the 2020, 2019, and 2018 target number of PSUs, respectively, at the end of the applicable three-year performance cycle based on projected performance compared to the target performance metrics. The 2017 - 2019 performance period grants vested and issued on March 15, 2020 at 199 % of the target number. We recognized $ 9.2 million, $ 4.8 million, and $ 4.0 million of total stock-based compensation expense related to PSUs for the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020, we had unrecognized compensation cost of $ 13.8 million, based on the probable amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of 1.6 years. Employee Stock Purchase Plan The LGI Homes, Inc. Employee Stock Purchase Plan (the “ESPP”) provides for employees to make quarterly elections for payroll withholdings to purchase shares of our common stock at a 15 % discount from the closing price of our common stock on the purchase date, which is the last business day of each calendar quarter. During the years ended December 31, 2020, 2019 and 2018, we issued 60,918 , 47,731 , and 49,744 shares of our common stock to the ESPP participants. We received net proceeds of approximately $ 4.3 million, $ 2.9 million and $ 2.7 million related to the ESPP for 2020, 2019, and 2018, respectively. We recognized $ 0.8 million, $ 0.5 million, and $ 0.4 million in stock compensation expense related to the ESPP for 2020, 2019, and 2018, respectively. The ESPP contributions are not refundable (other than in the case of termination of employment) and, therefore, the shares purchasable with the amounts withheld are included in weighted-average shares outstanding for both basic and diluted earnings per share. The maximum aggregate number of shares of our common stock which may be issued pursuant to the ESPP is 500,000 shares, and as of December 31, 2020, 288,322 shares of our common stock remain available for issuance under the ESPP. 11. FAIR VALUE DISCLOSURES ASC Topic 820, Fair Value Measurements (“ASC 820”) , defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that differs from the transaction price or market price of the asset or liability. ASC 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows: Level 1 - Fair value is based on quoted prices in active markets for identical assets or liabilities. Level 2 - Fair value is determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities, or quoted prices in markets that are not active. Level 3 - Fair value is determined using one or more significant inputs that are unobservable in active markets at the measurement date, such as a pricing model, discounted cash flow, or similar technique. We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets. The fair value of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. As of December 31, 2020, the Credit Agreement’s carrying value approximates market value since it has a floating interest rate, which increases or decreases with market interest rates and our leverage ratio. 76 Table of Contents In order to determine the fair value of the Senior Notes, the future contractual cash flows are discounted at our estimate of current market rates of interest, which were determined based upon the average interest rates of similar senior notes within the homebuilding industry (Level 2 measurement). The following table below shows the level and measurement of liabilities at December 31, 2020 and 2019 (in thousands): December 31, 2020 December 31, 2019 Fair Value Hierarchy Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Senior Notes Level 2 $ 296,681 $ 340,388 $ 296,028 $ 337,853 12. RELATED PARTY TRANSACTIONS Land Purchases from Affiliates As of December 31, 2020, we have a land purchase contract to purchase a total of 110 finished lots in Pasco County, Florida from an affiliate of one of our directors for a total base purchase price of approximately $ 4.0 million. The lots will be purchased in takedowns, subject to a maximum price escalation of 6 % per annum, and may provide for additional payments to the seller at the time of sale to the homebuyer. We have a $ 0.2 million non-refundable deposit at December 31, 2020 related to this land purchase contract. In August 2019, we purchased our first takedown of 58 lots under the Pasco County contract for a base purchase price of approximately $ 2.1 million. For the year ended December 31, 2020, we purchased in three separate transactions a total of 55 finished lots in Montgomery County and Travis County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately $ 4.7 million. 13. RETIREMENT BENEFITS Our employees are eligible to participate in a 401(k) savings plan. Employees are eligible to participate after completing 90 days of service and having attained the age of 21 . Salary deferrals are allowed in amounts up to 100 % of an eligible employee’s salary, not to exceed the maximum allowed by law. A discretionary match may be made by us of up to 100 % of the first 4 % of an eligible employee’s deferral, not to exceed the maximum allowed by law. For each of the years ended December 31, 2020, 2019 and 2018, our matching contributions were $ 4.0 million, $ 2.9 million and $ 2.6 million, respectively. 14. COMMITMENTS AND CONTINGENCIES Contingencies In the ordinary course of doing business, we are subject to claims or proceedings from time to time relating to the purchase, development and sale of real estate and homes and other aspects of our homebuilding operations. Management believes that these claims include usual obligations incurred by real estate developers and residential home builders in the normal course of business. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows. We have provided unsecured environmental indemnities to certain lenders and other counterparties. In each case, we have performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, we may have recourse against other previous owners. In the ordinary course of doing business, we are subject to regulatory proceedings from time to time related to environmental and other matters. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows. Land Deposits We have land purchase contracts, generally through cash deposits, for the right to purchase land or lots at a future point in time with predetermined terms. We do not have title to the property, and obligations with respect to the land purchase contracts are generally limited to the forfeiture of the related nonrefundable cash deposits. 77 Table of Contents The following is a summary of our land purchase deposits included in pre-acquisition costs and deposits (in thousands, except for lot count): December 31, 2020 2019 Land deposits and option payments $ 34,097 $ 35,111 Commitments under the land purchase contracts if the purchases are consummated $ 663,006 $ 539,122 Lots under land purchase contracts 26,236 16,205 As of December 31, 2020 and 2019, approximately $ 24.0 million and $ 26.3 million, respectively, of the land deposits are related to purchase contracts to deliver finished lots that are refundable under certain circumstances, such as feasibility or specific performance, and secured by mortgages or letters of credit or guaranteed by the seller or its affiliates. Lease Obligations We recognize lease obligations and associated ROU assets for our existing non-cancelable leases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have non-cancelable operating leases primarily associated with our corporate and regional office facilities. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets, as included in other assets on the consolidated balance sheets, were $ 4.9 million and $ 5.3 million as of December 31, 2020 and 2019, respectively. Lease obligations, as included in accrued expenses and other liabilities on the consolidated balance sheets, were $ 5.3 million and $ 5.6 million as of December 31, 2020 and 2019, respectively. Operating lease cost, as included in general and administrative expense in our consolidated statements of operations, totaled $ 1.6 million, $ 1.3 million and $ 1.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. Cash paid for amounts included in the measurement of lease liabilities for operating leases during the years ended December 31, 2020 and 2019 was $ 1.4 million and $ 1.3 million, respectively. As of December 31, 2020, the weighted-average discount rate was 5.32 % and our weighted-average remaining life was 5.1 years. We do not have any significant lease contracts that have not yet commenced at December 31, 2020. The table below shows the future minimum payments under non-cancelable operating leases at December 31, 2020 (in thousands): Year Ending December 31, Operating leases 2021 $ 1,223 2022 1,067 2023 946 2024 774 2025 510 Thereafter 1,770 Total 6,290 Lease amount representing interest ( 1,003 ) Present value of lease liabilities $ 5,287 Bonding and Letters of Credit We have outstanding letters of credit and performance and surety bonds totaling $ 143.8 million (including $ 10.5 million of letters of credit issued under the Credit Agreement) and $ 108.7 million (including $ 11.6 million of letters of credit issued under the Credit Agreement) at December 31, 2020 and 2019, respectively, related to our obligations for site improvements at various projects. Management does not believe that draws upon the letters of credit, surety bonds, or financial guarantees if any, will have a material effect on our consolidated financial position, results of operations, or cash flows. Investment in Unconsolidated Entity In July 2019, we entered into a real estate investment fund as a limited partner with a maximum $ 30.0 million commitment. The term of the commitment is eight years and includes renewals of up to two additional years. As of December 31, 2020 and 2019, we have a total investment of $ 3.9 million and $ 1.1 million, respectively, within other assets on the balance sheet. Contributions into the unconsolidated entity are used by the entity to invest in certain real estate transactions. 78 Table of Contents 15. SEGMENT INFORMATION We operate one principal homebuilding business that is organized and reports by division. We have seven operating segments (our Central, Midwest, Southeast, Mid-Atlantic, Northwest, West and Florida divisions) that we aggregate into five reportable segments at December 31, 2020: our Central, Southeast, Northwest, West and Florida divisions. These segments reflect the way the Company evaluates its business performance and manages its operations. The Central division is our largest division and comprised approximately 35.9 %, 39.4 % and 41.5 % of total home sales revenues for the years ended December 31, 2020, 2019 and 2018, respectively. In accordance with ASC Topic 280, Segment Reporting , operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in deciding how to allocate resources and in assessing performance. The CODMs primarily evaluate performance based on the number of homes closed, gross margin and average sales price per home closed. The seven operating segments qualify as our five reportable segments. In determining the most appropriate reportable segments, we consider operating segments’ economic and other characteristics, including home floor plans, average selling prices, gross margin percentage, geographical proximity, production construction processes, suppliers, subcontractors, regulatory environments, customer type and underlying demand and supply. Each operating segment follows the same accounting policies and is managed by our management team. We have no inter-segment sales, as all sales are to external customers. Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented. Financial information relating to our reportable segments was as follows (in thousands): For the Year Ended December 31, 2020 2019 2018 Revenues: Central $ 850,375 $ 724,981 $ 623,751 Southeast 559,226 347,817 271,073 Northwest 389,523 304,294 277,567 West 286,130 271,186 151,059 Florida 282,675 189,876 180,950 Total home sales revenues $ 2,367,929 $ 1,838,154 $ 1,504,400 Net income (loss) before income taxes: Central $ 154,772 $ 117,350 $ 104,625 Southeast 79,394 30,316 29,078 Northwest 71,256 46,863 40,906 West 35,847 28,504 13,595 Florida 32,550 16,012 21,341 Corporate (1) ( 5,970 ) ( 7,213 ) ( 10,447 ) Total net income (loss) before income taxes $ 367,849 $ 231,832 $ 199,098 (1) The Corporate balance consists primarily of general and administration unallocated costs for various shared service functions, as well as our warranty reserve and loss on extinguishment of debt. Actual warranty expenses are reflected within the reportable segments. 79 Table of Contents December 31, Assets: 2020 2019 Central $ 708,087 $ 637,083 Southeast 401,725 410,944 Northwest 252,098 221,132 West 228,186 193,545 Florida 157,169 149,877 Corporate (1) 78,822 53,534 Total assets $ 1,826,087 $ 1,666,115 (1) As of December 31, 2020, the Corporate balance consists primarily of cash, prepaid insurance, ROU assets, prepaid expenses and income tax receivables related to the federal energy efficient homes tax credit. As of December 31, 2019, the Corporate balance consists primarily of cash, prepaid insurance, ROU assets and prepaid expenses. 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly results are as follows (in thousands, except per share data): First Quarter Second Quarter Third Quarter Fourth Quarter 2020 2020 2020 2020 Total home sales revenues $ 454,727 $ 481,602 $ 534,202 $ 897,398 Gross margin 106,564 117,973 135,231 243,329 Income before income taxes 54,889 68,597 77,815 166,548 Net income 42,839 55,624 89,004 136,428 Basic earnings per share 1.69 2.22 3.55 5.45 Diluted earnings per share 1.67 2.21 3.52 5.34 First Quarter Second Quarter Third Quarter Fourth Quarter 2019 2019 2019 2019 Total home sales revenues $ 287,594 $ 461,830 $ 483,081 $ 605,649 Gross margin 66,304 111,311 116,650 142,214 Income before income taxes 21,694 60,535 64,732 84,871 Net income 18,334 46,055 49,349 64,870 Basic earnings per share 0.81 2.01 2.15 2.69 Diluted earnings per share 0.73 1.82 1.93 2.52 Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year. 80 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.