What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-03 compared with 2021-11-02 · 141 added, 271 removed, 304 unchanged (58% of the section changed)

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Since commencing home building operations in 2003, we have constructed and closed over 50,000 homes.

During the nine months ended September 30, 2021, we had 7,916 home closings, compared to 5,931 home closings during the nine months ended September 30, 2020.

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

Our 103 active communities at September 30, 2021 included three Terrata Homes communities.

During the three months ended September 30, 2021, we recorded $101.6 million in wholesale revenues as a result of 433 home closings, representing 17.3% of the total homes closed during the three months ended September 30, 2021.

During the three months ended September 30, 2020, we recorded $19.0 million in wholesale revenues as a result of 92 home closings, representing 4.4% of the total homes closed during the three months ended September 30, 2020.

During the nine months ended September 30, 2021, we recorded $258.6 million in wholesale revenues as a result of 1,146 home closings, representing 14.5% of the total homes closed during the nine months ended September 30, 2021.

During the nine months ended September 30, 2020, we recorded $101.4 million in wholesale revenues as a result of 490 home closings, representing 8.3% of the total homes closed during the nine months ended September 30, 2020.

During the three months ended March 31, 2022, we had 1,599 home closings, compared to 2,561 home closings during the three months ended March 31, 2021.

At March 31, 2022, we had 88 active communities, including seven Terrata Homes communities.

At March 31, 2021, we had 110 active communities, including two Terrata Homes communities.

During the three months ended March 31, 2022, we recorded $51.8 million in wholesale revenues as a result of 213 home closings, representing 13.3% of the total homes closed during the three months ended March 31, 2022.

During the three months ended March 31, 2021, we recorded $62.4 million in wholesale revenues as a result of 283 home closings, representing 11.1% of the total homes closed during the three months ended March 31, 2021.

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.

COVID-19 and COVID-19 Variants

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.

The spread of COVID-19 and COVID-19 variants (hereinafter collectively referred to as “COVID-19”) has caused significant volatility in U.S.

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

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.

We 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 outbreak and spread of COVID-19 and variants thereof (hereinafter collectively referred to as “COVID-19”) and resulting containment efforts by governmental, regulatory and health agencies caused significant disruptions in the global economy, including tightened supply chains, raw material price volatility and significant cost inflation.

During the three months ended March 31, 2022, we continued to experience significant supply chain disruptions that extended construction and development cycles and delayed home closings and the opening of new communities.

While we continue to carefully manage our supply chain to limit impacts to our business and customers, we believe these COVID-19 related global shortages will continue to impact our operations as long as the dynamics surrounding the pandemic persist.

We also believe that the desire for our single-family homes remains strong.

During the three months ended March 31, 2022, we closed 1,599 homes compared to 2,561 homes closed in the same period last year.

The first quarter of 2021 was one of the strongest in our history during which we set new Company records with respect to a number of financial metrics.

The decline in home closings was attributable to longer lead times relating to labor, materials and municipality activities that increased our construction and development cycle times and negatively impacted the timing of closings.

We expect continued cost inflation, building material shortages and longer municipality lead times will persist until demand for new homes normalizes and global supply chain constraints ease.

For additional discussion regarding our operations and COVID-19, see Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II our Annual Report on Form 10-K for the fiscal year ended

December 31, 2020.

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 emergence of more infectious strains of the virus, the impact of government actions designed to prevent the spread of COVID-19 or the decrease in such actions and resulting increased business and social activities, the availability and timely distribution of, and willingness to accept, effective treatments and vaccines, vaccine hesitancy, 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.

Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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

Risk Factors in Part I our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Additionally, during the three months ended September 30, 2021, significant supply chain disruptions extended construction cycles across our markets.

While we have carefully managed our supply chain to limit impacts to our business and customers, we believe these global shortages are directly related to COVID-19 and will continue to impact our operations as long as the pandemic persists.

Although we expect COVID-19 to continue to influence 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.

Key financial results as of and for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, were as follows:

• Home sales revenues increased 40.7% to $751.6 million from $534.2 million.

• Homes closed increased 19.5% to 2,499 homes from 2,091 homes.

• Average sales price per home closed increased 17.7% to $300,764 from $255,477.

• Gross margin as a percentage of home sales revenues increased to 26.9% from 25.3%.

• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 28.2% from 27.3%.

• Net income before income taxes increased 63.2% to $127.0 million from $77.8 million.

• Net income increased 13.0% to $100.6 million from $89.0 million.

• EBITDA (non-GAAP) as a percentage of home sales revenues increased to 18.1% from 16.3%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.7% from 16.5%.

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 nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020, were as follows:

• Home sales revenues increased 52.9% to $2.2 billion from $1.5 billion.

• Homes closed increased 33.5% to 7,916 homes from 5,931 homes.

Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Recent Developments

On April 29, 2022, amounts available to the Company under the Credit Agreement (as defined herein) were increased by $250.0 million to $1.1 billion, in accordance with the terms and conditions of the Second Amendment (as defined herein).

Key financial results as of and for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, were as follows:

• Home sales revenues decreased 22.7% to $546.1 million from $706.0 million.

• Homes closed decreased 37.6% to 1,599 homes from 2,561 homes.

• Average sales price per home closed increased 23.9% to $341,495 from $275,655.

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• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 30.3% from 28.5%.

• Net income before income taxes increased 98.4% to $399.4 million from $201.3 million.

• Net income increased 69.8% to $318.3 million from $187.5 million.

• Net income before income taxes decreased 19.2% to $99.6 million from $123.3 million.

• Net income decreased 21.0% to $78.7 million from $99.7 million.

• EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.1% from 19.0%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.6% from 15.6%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 18.8% from 19.0%.

We owned and controlled 87,512 lots at September 30, 2021 as compared to 75,910 lots at June 30, 2021 and 61,504 lots at December 31, 2020.

We owned and controlled 93,270 lots at March 31, 2022 and 91,845 lots at December 31, 2021.

Results of Operations

The following table sets forth our results of operations for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

The following table sets forth our results of operations for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

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

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Operating income 95,720 122,443

Loss on extinguishment of debt 13,314 — 13,976 —

Other income, net (3,830) (833)

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(4) EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance.

We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and

amortization and (iv) capitalized interest charged to the cost of sales.

We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales.

We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting.

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.

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.

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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 September 30, 2021 Compared to Three Months Ended September 30, 2020

Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the three months ended September 30, 2021 and 2020 were as follows (revenues in thousands):

Three Months Ended September 30, 2021 As of September 30, 2021

Revenues Home Closings ASP Average Community Count Average

Absorption Rate Community Count at End of Period

Central $ 287,878 1,072 $ 268,543 34.7 10.3 33

Southeast 146,166 551 265,274 24.0 7.7 26

Northwest 148,515 325 456,969 12.3 8.8 12

West 90,592 248 365,290 12.7 6.5 13

Florida 78,457 303 258,934 19.0 5.3 19

Total $ 751,608 2,499 $ 300,764 102.7 8.1 103

Three Months Ended September 30, 2020 As of September 30, 2020

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the three months ended March 31, 2022 and 2021 were as follows (revenues in thousands):

Three Months Ended March 31, 2022 As of March 31, 2022

Revenues Home Closings ASP Average Community Count Average

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Total $ 546,050 1,599 $ 341,495 89.0 6.0 88

Home sales revenues for the three months ended September 30, 2021 were $751.6 million, an increase of $217.4 million, or 40.7%, from $534.2 million for the three months ended September 30, 2020.

The increase in home sales revenues is primarily due to a 19.5% increase in homes closed and an increase in the average sales price per home closed during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

The average sales price per home closed during the three months ended September 30, 2021 was $300,764, an increase of $45,287, or 17.7%, from the average sales price per home closed of $255,477 for the three months ended September 30, 2020.

This increase in the average sales price per home closed is primarily due to increased closings at higher price points in certain markets and a favorable pricing environment, partially offset by additional wholesale home closings.

The overall increase in home closings was largely due to a strong demand environment leading to higher average monthly absorption rates within certain markets in all reportable segments during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

Our community count at September 30, 2021 decreased to 103 from 110 at September 30, 2020.

The decrease in community count is due to close out of or transition between certain active communities for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

Home sales revenues in our Central reportable segment increased by $101.0 million, or 54.0%, during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, primarily due to an 32.0% increase in the number of homes closed, increased average community count at a higher absorption rate and an increase in the average sales price per home closed.

Home sales revenues in our Southeast reportable segment increased by $16.0 million, or 12.3%, primarily due to higher average sales price per home closed, as well as continued expansion into certain Mid-Atlantic geographic markets, partially offset by the close out of active communities.

Home sales revenues in our Northwest reportable segment increased by $57.4 million, or 63.0%, primarily due to increased demand and an increase in the number of homes closed, increased average community count at a higher absorption rate and an increase in the average sales price per home closed for the three months ended September 30, 2021.

Home sales revenues in our West reportable segment increased by $27.7 million, or 43.9%, during the three months ended September 30, 2021 as compared to the three months ended September 30,

2020, primarily due to a 27.7% increase in average sales price per home closed, and the close out of or transition between, and to a lesser extent available inventory in, certain active communities for the three months ended September 30, 2021.

Home sales revenues in our Florida reportable segment increased by $15.4 million, or 24.4%, largely due to an increase in the number of homes closed resulting from an increase in the average sales price per home closed, increased average community count and a higher absorption rate for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

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

Cost of sales increased for the three months ended September 30, 2021 to $549.3 million, an increase of $150.3 million, or 37.7%, from $399.0 million for the three months ended September 30, 2020, primarily due to the increase in homes closed and increased construction costs.

Gross margin for the three months ended September 30, 2021 was $202.3 million, an increase of $67.1 million, or 49.6%, from $135.2 million for the three months ended September 30, 2020.

Gross margin as a percentage of home sales revenues was 26.9% for the three months ended September 30, 2021 and 25.3% for the three months ended September 30, 2020.

This increase in gross margin as a percentage of home sales revenues was primarily due to raising prices higher than increases in input costs for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

Selling Expenses.

Selling expenses for the three months ended September 30, 2021 were $39.9 million, an increase of $4.4 million, or 12.4%, from $35.5 million for the three months ended September 30, 2020.

Sales commissions increased to $28.0 million for the three months ended September 30, 2021 from $20.7 million for the three months ended September 30, 2020, primarily due to a 40.7% increase in home sales revenues during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

Selling expenses as a percentage of home sales revenues were 5.3% and 6.6% for the three months ended September 30, 2021 and 2020, respectively.

The decrease in selling expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

General and Administrative.

General and administrative expenses for the three months ended September 30, 2021 were $24.5 million, an increase of $2.2 million, or 9.7%, from $22.3 million for the three months ended September 30, 2020.

The increase in the amount of general and administrative expenses is primarily due to timing of personnel and related costs during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

General and administrative expenses as a percentage of home sales revenues were 3.3% and 4.2% for the three months ended September 30, 2021 and 2020, 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 September 30, 2021 as compared to the three months ended September 30, 2020.

Loss on Extinguishment of Debt.

Loss on extinguishment of debt for the three months ended September 30, 2021 was $13.3 million, due to the redemption premium associated with our 6.875% Senior Notes due 2026 (the “2026 Senior Notes”), as well as debt issuance costs and discount previously capitalized that were associated with our 2026 Senior Notes.

There was no loss on extinguishment of debt for the three months ended September 30, 2020.

Other Income.

Other income, net of other expenses was $2.4 million for the three months ended September 30, 2021, an increase of $2.0 million from $0.4 million for the three months ended September 30, 2020.

The increase in other income primarily reflects the gain realized from the sale of lots not directly associated with our core homebuilding operations.

Operating Income and Net Income before Income Taxes.

Operating income for the three months ended September 30, 2021 was $137.9 million, an increase of $60.5 million, or 78.1%, from $77.4 million for the three months ended September 30, 2020.

Net income before income taxes for the three months ended September 30, 2021 was $127.0 million, an increase of $49.2 million, or 63.2%, from $77.8 million for the three months ended September 30, 2020.

All reportable segments contributed to net income before income taxes during the three months ended September 30, 2021 as follows:

Central - $55.8 million or 43.9%;

Southeast - $27.1 million or 21.4%;

Northwest - $34.1 million or 26.9%;

West - $13.3 million or 10.5%;

and Florida - $11.9 million or 9.4%.

The increases in operating income and net income before income taxes are primarily attributed to higher gross margins, operating leverage realized from the increase in home sales revenues and higher average sales price per home closed during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

Income Taxes .

Income tax provision for the three months ended September 30, 2021 was $26.4 million, an increase of $37.6 million, or 336.3%, from income tax benefit of $11.2 million for the three months ended September 30, 2020.

The increase in the amount of income tax provision is primarily due to the retroactive federal energy efficient homes tax credits recognized during the three months ended September 30, 2020 and the 63.2% increase in net income before taxes, partially offset by tax benefits relating to the federal energy efficient homes tax credits we recognized during the three months ended September 30, 2021.

Net income for the three months ended September 30, 2021 was $100.6 million, an increase of $11.5 million, or 13.0%, from $89.0 million for the three months ended September 30, 2020.

The increase in net income is primarily attributed to higher gross margins, operating leverage realized from the increase in home sales revenues and higher average sales price per

home closed recognized during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Our home sales revenues, home closings, average sales price per home closed (ASP), average community count and average monthly absorption rate by reportable segment for the nine months ended September 30, 2021 and 2020 were as follows (revenues in thousands):

Nine Months Ended September 30, 2021

Revenues Home Closings ASP Average Community Count Average

Absorption Rate

Central $ 924,591 3,547 $ 260,668 36.7 10.7

Southeast 442,431 1,731 255,593 25.8 7.5

Northwest 372,903 876 425,688 11.1 8.8

West 252,553 729 346,438 11.3 7.1

Florida 256,595 1,033 248,398 19.8 5.8

Total $ 2,249,073 7,916 $ 284,117 104.7 8.4

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021 As of March 31, 2021

Revenues Home Closings ASP Average Community Count Average Monthly

Absorption Rate

Absorption Rate Community Count at End of Period

Central $ 288,750 1,127 $ 256,211 37.3 10.1 38

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Total $ 705,953 2,561 $ 275,655 106.3 8.0 110

Home sales revenues for the nine months ended September 30, 2021 were $2.2 billion, an increase of $778.5 million, or 52.9%, from $1.5 billion for the nine months ended September 30, 2020.

The increase in home sales revenues is primarily due to a 33.5% increase in homes closed and an increase in the average sales price per home closed during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

The average sales price per home closed during the nine months ended September 30, 2021 was $284,117, an increase of $36,177, or 14.6%, from the average sales price per home closed of $247,940 for the nine months ended September 30, 2020.

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

The overall increase in home closings was primarily driven by strong demand in all reportable segments during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Home sales revenues in our Central reportable segment increased by $404.0 million, or 77.6%, during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to a 54.2% increase in the number of homes closed at a higher average sales price per home closed and increased average community count at a higher absorption rate in this reportable segment.

Home sales revenues in our Southeast reportable segment increased by $95.3 million, or 27.4%, during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased closings in certain markets in North Carolina and South Carolina, partially offset by lower community count during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Home sales revenues in our Northwest reportable segment increased by $123.4 million, or 49.5%, during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to a 33.7% increase in the number of homes closed in this reportable segment, as a result of increased demand during the nine months ended September 30, 2021.

Home sales revenues in our West reportable segment increased by $70.5 million, or 38.8%, during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased demand in certain markets in this reportable segment, partially offset by lower average community count.

Home sales revenues in our Florida reportable segment increased by $85.3 million, or 49.8%, largely due to

an increase of 11.9% in the average sales price per home closed as a result of strong demand and complemented by increased average community count at an improved absorption rate during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Home sales revenues for the three months ended March 31, 2022 were $546.1 million, a decrease of $159.9 million, or 22.7%, from $706.0 million for the three months ended March 31, 2021.

The decrease in home sales revenues is primarily due to a 37.6% decrease in homes closed partially offset by an increase in the average sales price per home closed during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

The average sales price per home closed during the three months ended March 31, 2022 was $341,495, an increase of $65,840, or 23.9%, from the average sales price per home closed of $275,655 for the three months ended March 31, 2021.

The increase in the average sales price per home closed is primarily due to our ability to pass through cost increases associated with construction in favorable pricing environments.

Additionally, we experienced higher price points in all reportable segments.

The overall decrease in home closings is a result of lower average community count and overall lower absorption pace during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

The overall decrease in absorption relates to increased cycle times that are pandemic related production disruptions.

These disruptions have caused varying degrees for supply chain constraints in the markets we serve and have shifted the timing of when we put homes under contract with our customers.

Home sales revenues in our Central reportable segment decreased by $26.5 million, or 9.2%, during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to a 25.1% decrease in the number of homes closed driven by a decrease in the average community count at a slightly lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Southeast reportable segment decreased by $64.1 million, or 46.9%, during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to a 56.6% decrease in the number of homes closed driven by a decrease in the average community count at a slightly lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Northwest reportable segment decreased by $15.3 million, or 13.0%, during the three months ended March 31, 2022 as compared to the three months ended March 31,

2021, primarily due to a 32.1% decrease in the number of homes closed driven by a slight decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by a sharp increase in the average sales price per home closed.

Home sales revenues in our West reportable segment decreased by $25.6 million, or 31.5%, during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, primarily due to a 43.0% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Florida reportable segment decreased by $28.5 million, or 35.0%, during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, primarily due to a 49.0% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate in this reportable segment, partially offset by the increase of 27.3% in the average sales price per home closed.

Differing absorption rates in our reportable segments was generally related to available homes to sell.

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

Cost of sales increased for the nine months ended September 30, 2021 to $1.6 billion, an increase of $532.0 million, or 47.9%, from $1.1 billion for the nine months ended September 30, 2020.

This overall increase is primarily due to a 33.5% increase in homes closed, higher construction costs and product mix.

As a percentage of home sales revenues, cost of sales decreased as a result of the increase in home sales revenues, lower capitalized interest and lower overhead, partially offset by higher lot costs during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Gross margin for the nine months ended September 30, 2021 was $606.3 million, an increase of $246.5 million, or 68.5%, from $359.8 million for the nine months ended September 30, 2020.

Gross margin as a percentage of home sales revenues was 27.0% for the nine months ended September 30, 2021 and 24.5% for the nine months ended September 30, 2020.

This increase in gross margin as a percentage of home sales revenues was primarily due to raising prices higher than increases in input costs for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Cost of sales decreased for the three months ended March 31, 2022 to $387.6 million, a decrease of $128.4 million, or 24.9%, from $516.0 million for the three months ended March 31, 2021.

This overall decrease is primarily due to a 37.6% decrease in homes closed.

The increase in gross margin as a percentage of home sales revenues during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 was primarily due to raising prices higher than increases in input costs, in addition to lower capitalized interest and lower overhead and lot costs.

Gross margin for the three months ended March 31, 2022 was $158.4 million, a decrease of $31.5 million, or 16.6%, from $189.9 million for the three months ended March 31, 2021.

Gross margin as a percentage of home sales revenues was 29.0% for the three months ended March 31, 2022 and 26.9% for the three months ended March 31, 2021.

This increase in gross margin as a percentage of home sales revenues was primarily due to raising prices higher than increases in input costs for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Selling Expenses.

Selling expenses for the nine months ended September 30, 2021 were $127.5 million, an increase of $29.3 million, or 29.8%, from $98.2 million for the nine months ended September 30, 2020.

Sales commissions increased to $84.7 million for the nine months ended September 30, 2021 from $55.2 million for the nine months ended September 30, 2020, partially due to a 52.9% increase in home sales revenues during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Selling expenses as a percentage of home sales revenues were 5.7% and 6.7% for the nine months ended September 30, 2021 and 2020, respectively.

The decrease in selling expenses as a percentage of home sales revenues was driven primarily by operating leverage obtained from the increase in home sales revenues and to a lesser extent lower advertising expenses during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Selling expenses for the three months ended March 31, 2022 were $34.4 million, a decrease of $8.4 million, or 19.6%, from $42.8 million for the three months ended March 31, 2021.

Sales commissions decreased to $20.1 million for the three months ended March 31, 2022 from $26.3 million for the three months ended March 31, 2021, partially due to a 22.7% decrease in home sales revenues during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Selling expenses as a percentage of home sales revenues were 6.3% and 6.1% for the three months ended March 31, 2022 and 2021, respectively.

The increase in selling expenses as a percentage of home sales revenues was driven primarily by the decrease in home sales revenues during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

General and Administrative.

General and administrative expenses for the nine months ended September 30, 2021 were $72.5 million, an increase of $10.1 million, or 16.1%, from $62.4 million for the nine months ended September 30, 2020.

The increase in the amount of general and administrative expenses is primarily due to timing of compensation during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

General and administrative expenses as a percentage of home sales revenues were 3.2% and 4.2% for the nine months ended September 30, 2021 and 2020, 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 nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Loss on Extinguishment of Debt.

Loss on extinguishment of debt for the nine months ended September 30, 2021 was $14.0 million, primarily due to the redemption premium associated with our 2026 Senior Notes, as well as debt issuance costs and discount previously capitalized that were associated with our 2026 Senior Notes and debt issuance costs previously capitalized that were associated with our 2020 Credit Agreement.

There was no loss on extinguishment of debt for the nine months ended September 30, 2020.

General and administrative expenses for the three months ended March 31, 2022 were $28.3 million, an increase of $3.6 million, or 14.4%, from $24.7 million for the three months ended March 31, 2021.

The increase in the amount of general and administrative expenses is primarily due higher overhead and increased headcount in certain departments during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

General and administrative expenses as a percentage of home sales revenues were 5.2% and 3.5% for the three months ended March 31, 2022 and 2021, respectively.

Other Income.

Other income, net of other expenses was $7.0 million for the nine months ended September 30, 2021, an increase of $4.8 million from $2.1 million for the nine months ended September 30, 2020.

The increase in other income primarily reflects the gain realized from the sale of lots and land not directly associated with our core homebuilding operations.

Other income, net of other expenses was $3.8 million for the three months ended March 31, 2022, an increase of $3.0 million from $0.8 million for the three months ended March 31, 2021.

The increase in other income primarily reflects the gain realized from sale of land not directly associated with our core homebuilding operations and to a lesser extent other miscellaneous income.

Operating Income and Net Income before Income Taxes.

Operating income for the nine months ended September 30, 2021 was $406.4 million, an increase of $207.2 million, or 104.1%, from $199.2 million for the nine months ended September 30, 2020.

Net income before income taxes for the nine months ended September 30, 2021 was $399.4 million, an increase of $198.1 million, or 98.4%, from $201.3 million for the nine months ended September 30, 2020.

All reportable segments contributed to net income before income taxes during the nine months ended September 30, 2021 as follows:

Operating income for the three months ended March 31, 2022 was $95.7 million, a decrease of $26.7 million, or 21.8%, from $122.4 million for the three months ended March 31, 2021.

Net income before income taxes for the three months ended March 31, 2022 was $99.6 million, a decrease of $23.7 million, or 19.2%, from $123.3 million for the three months ended March 31, 2021.

The following reportable segments contributed to net income before income taxes during the three months ended March 31, 2022 as follows:

Central - $57.7 million or 58.0%;

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Northwest - $27.6 million or 27.7%;

West - $38.6 million or 9.7%;

and Florida - $5.4 million or 5.4%.

The increases in operating income and net income before income taxes are primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Our West reportable segment had a $(0.2) million, or (0.2)%, net loss primarily attributable to an ongoing local tax audit impacting our Arizona markets.

The decreases in operating income and net income before income taxes are primarily attributed to the decrease in home sales revenues, partially offset by higher average sales price per home closed during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Income Taxes .

Income tax provision for the nine months ended September 30, 2021 was $81.0 million, an increase of $67.2 million, or 485.9%, from income tax provision of $13.8 million for the nine months ended September 30, 2020.

The increase in the amount of income tax provision is primarily due to the retroactive tax benefits relating to the federal energy efficient homes tax credits we recognized during the nine months ended September 30, 2020 and the 98.4% increase in net income before taxes, which resulted in an increase in our effective tax rate for the nine months ended September 30, 2021 to 20.3% from 6.9% for the nine months ended September 30, 2020.

Net income for the nine months ended September 30, 2021 was $318.3 million, an increase of $130.9 million, or 69.8%, from $187.5 million for the nine months ended September 30, 2020.

The increase in net income is primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed, partially offset by tax benefits relating to the federal energy efficient homes tax credits we recognized during the nine months ended September 30, 2020.

Income tax provision for the three months ended March 31, 2022 was $20.9 million, a decrease of $2.8 million, or 11.7%, from income tax provision of $23.6 million for the three months ended March 31, 2021.

The decrease in the amount of income tax provision is primarily due to the 19.2% decrease in net income before taxes, offset by the tax benefits relating to the federal energy efficient homes tax credits that expired in 2021.

The increase in our effective tax rate to 21.0% from 19.2% results from an increase in the rate due to the expiration of the tax benefits relating to the federal energy efficient homes tax credits and an increase in the rate for the compensation limitation under Section 162(m) of the Internal Revenue

Code, as amended, offset by a decrease in the rate for deductions in excess of compensation cost for share-based payments for the three months ended March 31, 2022.

Net income for the three months ended March 31, 2022 was $78.7 million, a decrease of $21.0 million, or 21.0%, from $99.7 million for the three months ended March 31, 2021.

The decrease in net income is primarily attributed to overall lower homes closed, offset by higher average sales price per home closed at higher gross margins on a per home basis, during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Non-GAAP Measures

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 net income and adjusted earnings per share.

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 September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Home sales revenues $ 546,050 $ 705,953

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Purchase accounting adjustments (1)

952 1,396 3,210 3,271

Adjusted gross margin $ 165,202 $ 201,433

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Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies.

Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business.

EBITDA and adjusted EBITDA should be considered in addition

to, and not as a substitute for, net income in accordance with GAAP as a measure of performance.

Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs,

such as interest and taxes, necessary to operate our business.

EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance.

Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items.

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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 September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Net income $ 78,686 $ 99,658

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Purchase accounting adjustments (1)

952 1,396 3,210 3,271

Loss on extinguishment of debt 13,314 — 13,976 —

Other income, net (3,830) (833)

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(2) Calculated as a percentage of home sales revenues.

Adjusted Net Income and Adjusted Earnings per Share

Adjusted net income and adjusted earnings per share are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance.

We define adjusted net income as net income less the retroactive federal energy efficient homes tax credits.

We define adjusted earnings per share as adjusted net income divided by weighted average shares outstanding.

Our management believes that the presentation of adjusted net income and adjusted earnings per share provides useful information to investors because such measures isolate the impact that material retroactive tax

adjustments have on net income and earnings per share.

However, because adjusted net income and adjusted earnings per share information excludes the retroactive federal energy efficient homes tax credits, which have real economic effects and could impact our results, the utility of adjusted net income and adjusted earnings per share as measures of our operating performance may be limited.

In addition, other companies may not calculate adjusted net income and adjusted earnings per share in the same manner that we do.

Accordingly, adjusted net income and adjusted earnings per share information should be considered only as a supplement to net income and earnings per share information as measures of our performance.

The following table reconciles adjusted net income and adjusted earnings per share to net income and earnings per share, respectively, which are the GAAP measures that our management believes to be most directly comparable (dollars in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Numerator (in thousands):

Net income (Numerator for basic and diluted earnings per share) $ 100,550 $ 89,004 $ 318,342 $ 187,467

Retroactive federal energy efficient homes tax credits — 27,141 — 26,595

Adjusted net income (Numerator for adjusted basic and diluted earnings per share) $ 100,550 $ 61,863 $ 318,342 $ 160,872

Basic weighted average shares outstanding 24,508,134 25,089,424 24,766,260 25,162,162

Effect of dilutive securities:

Stock-based compensation units 316,186 167,629 263,901 166,393

Diluted weighted average shares outstanding 24,824,320 25,257,053 25,030,161 25,328,555

Basic earnings per share $ 4.10 $ 3.55 $ 12.85 $ 7.45

Diluted earnings per share $ 4.05 $ 3.52 $ 12.72 $ 7.40

Adjusted basic earnings per share $ 4.10 $ 2.47 $ 12.85 $ 6.39

Adjusted diluted earnings per share $ 4.05 $ 2.45 $ 12.72 $ 6.35

We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase contract.

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Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is signed.

If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract.

determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract.

If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the preliminary criteria to obtain mortgage financing.

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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 home

closings have been, and may continue to 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.

Our net orders decreased in the first quarter of 2022 primarily due to the availability of finished lots brought on by sustained demand and the rapid pace of fluctuating rising costs for certain supplies and labor experienced in 2021.

During the first half of 2021, due to limited supply, we elected to not enter into sales contracts until construction on the home had begun and our costs for the home were readily determined.

In the first quarter of 2022, to mitigate continuing cost volatility, we have further modified our traditional timing of when to enter into our sales contracts until later in the construction cycle to align with the dynamic pricing environment.

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 Nine Months Ended September 30,

Backlog Data Three Months Ended March 31,

Net orders (1)

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Ending backlog is valued at the contract amount.

(4) As of September 30, 2021, we had 563 units related to bulk sales agreements associated with our wholesale business.

(5) As of September 30, 2020, we had 821 units related to bulk sales agreements associated with our wholesale business.

(4) As of March 31, 2022, we had 374 units related to bulk sales agreements associated with our wholesale business.

(5) As of March 31, 2021, we had 1,344 units related to bulk sales agreements associated with our wholesale business.

Land Acquisition Policies and Development

We had 103 and 116 active communities as of September 30, 2021 and December 31, 2020, respectively.

We had 88 and 101 active communities as of March 31, 2022 and December 31, 2021, respectively.

The overall decrease in community count is seen as transitory, primarily due to the close out of active communities and to a lesser extent available finished lots in certain active markets.

Generally, it takes us two to three years to turn raw or undeveloped land into an active community.

Our lot inventory increased to 87,512 owned or controlled lots as of September 30, 2021 from 61,504 owned or controlled lots as of December 31, 2020 due to an overall increased lot count within all reportable segments.

The table below shows (i) home closings by reportable segment for the nine months ended September 30, 2021 and (ii) our owned or controlled lots by reportable segment as of September 30, 2021.

Nine Months Ended September 30, 2021 As of September 30, 2021

Our lot inventory increased to 93,270 owned or controlled lots as of March 31, 2022 from 91,845 owned or controlled lots as of December 31, 2021.

The table below shows (i) home closings by reportable segment for the three months ended March 31, 2022 and (ii) our owned or controlled lots by reportable segment as of March 31, 2022.

Three Months Ended March 31, 2022 As of March 31, 2022

Reportable Segment Home Closings Owned (1)

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Total 1,599 59,079 34,191 93,270

(1) Of the 44,174 owned lots as of September 30, 2021, 32,250 were raw/under development lots and 11,924 were finished lots.

(1) Of the 59,079 owned lots as of March 31, 2022, 47,222 were raw/under development lots and 11,857 were finished lots.

Homes in Inventory

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

As of September 30, 2021, we had a total of 568 completed homes, including information centers, and 4,014 homes in progress.

As of March 31, 2022, we had a total of 676 completed homes, including information centers, and 3,762 homes in progress.

Raw Materials and Labor

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Typically, the price changes that most significantly influence our operations are price increases in labor, commodities and lumber.

We could see additional cost pressures associated with lumber in future quarters.

For the three months ended March 31, 2022, we have experienced delays in varying degrees in our materials and components.

We could see additional cost pressures associated with lumber and other materials in future quarters.

Generally, we have been able to increase the sales prices of our homes to absorb these increased costs.

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Liquidity and Capital Resources

As of September 30, 2021, we had $46.7 million of cash and cash equivalents.

As of March 31, 2022, we had $53.3 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.

Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness and the payment of various liabilities.

In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition and repurchase share of our common stock.

Early stages of development or expansion require significant cash outlays for land acquisitions, land development, plats, vertical development, construction of information centers, general landscaping and other amenities.

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In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement purposes, as the costs associated with home and land construction were previously incurred.

Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness and the payment of various liabilities.

In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition.

We generally rely on our ability to finance our operations by generating operating cash flows, borrowing under the Credit Agreement (as defined below) or the issuance and sale of shares of our common stock.

Short-term Liquidity and Capital Resources

We generally rely on our ability to finance our operations by generating operating cash flows and borrowing under the Credit Agreement (as defined below) to adequately fund our short-term working capital obligations and to purchase land and other assets, develop lots and homes and repurchase shares of our common stock.

As needed, we will consider accessing the debt and equity capital markets as part of our ongoing financing strategy.

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However, with the uncertainty surrounding COVID-19, our ability to engage in the transactions described above may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as moderated investor or lender interest or capacity and our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.

Long-term Liquidity and Capital Resources

We believe that our long-term principal uses of liquidity and capital resources will be inventory related purchases concerning land, lot development, repurchase shares of our common stock, other capital expenditures, and principal and interest payments on our debt obligations maturing in 2025 and 2029.

We believe that we will be able to fund our long-term liquidity needs with cash generated from operations and cash expected to be available to borrow under the Credit Agreement or through accessing debt or equity capital, as needed, although no assurance can be provided that such additional debt or equity capital will be available when needed or on terms that we find attractive.

To the extent these sources of capital are insufficient to meet our needs, we may also conduct additional public or private offerings of our securities, refinance our indebtedness, or dispose of certain assets to fund our operating activities and capital needs.

Revolving Credit Facility

On April 28, 2021, we entered into that certain Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”), which amends and

restates that certain Fourth Amended and Restated Credit Agreement, dated as of May 6, 2019 (as amended, the “2020 Credit Agreement”).

The Credit Agreement (a) increases the commitments to $850.0 million, (b) allows the Company to increase the commitments by up to $100.0 million, subject to terms and conditions, (c) extends the maturity to April 28, 2025 for all lenders, (d) increases the sublimit for letters of credit to $50.0 million, (e) adds unrestricted cash in excess of $10.0 million as a component of the borrowing base and removes certain exclusions from the borrowing base, (f) reduces the applicable margin for LIBOR loans to a range of 1.45% to 2.10%, based on our leverage ratio, (g) reduces the LIBOR floor to 0.50%, (h) increases the minimum tangible net worth requirement to $850.0 million plus 75% of the net proceeds of equity issuances after December 31, 2020 and 50% of consolidated earnings for each quarter ending after March 31, 2021 and (i) provides for a “hardwired” transition from LIBOR loan pricing that is intended to be economically neutral to the Company;

otherwise, the Credit Agreement is on substantially the same terms as the 2020 Credit Agreement.

On April 29, 2022, we entered into that certain Lender Addition and Acknowledgement Agreement and Second Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Second Amendment”), which amended that certain Fifth Amended and Restated Credit Agreement, dated as of April 28, 2021, with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “2021 Credit Agreement” and, as so amended and as otherwise amended prior to the date of the Second Amendment, the “Credit Agreement”).

The Credit Agreement contains revolving commitments of $1.1 billion, subject to a borrowing base primarily consisting of a percentage of commercial land, land held for development, lots under development and finished lots held by the Company and its subsidiaries that guarantee the obligations under the Credit Agreement.

The Credit Agreement matures on April 28, 2025.

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 of at least $0.5 million.

The 2021 Credit Agreement is guaranteed by, among others, each of our subsidiaries that have gross assets of at least $0.5 million.

The borrowings and letters of credit outstanding under the Credit Agreement, together with the outstanding principal balance of our 4.000% Senior Notes due 2029 (the “2029 Senior Notes”), may not exceed the borrowing base under the Credit Agreement.

As of September 30, 2021, the borrowing base under the Credit Agreement was $1.1 billion, of which borrowings, including the 2029 Senior Notes, of $679.0 million were outstanding, $8.3 million of letters of credit were outstanding and $459.6 million was available to borrow under the Credit Agreement.

Interest is paid monthly on borrowings at LIBOR plus 1.45%.

The Credit Agreement applicable margin for LIBOR loans ranges from 1.45% to 2.10% based on our leverage ratio.

At September 30, 2021, LIBOR was 0.08%;

however, the Credit Agreement has a 0.50% LIBOR floor.

The Credit Agreement requires us to maintain (i) a tangible net worth of not less than $850.0 million plus 75% of the net proceeds of all equity issuances after December 31, 2020 plus 50.0% of the amount of our positive net income in each fiscal quarter ending after March 31, 2021, (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 September 30, 2021, we were in compliance with all of the covenants contained in the Credit Agreement.

Senior Notes Offerings

On June 28, 2021, we issued $300.0 million aggregate principal amount of the 2029 Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A (“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 (“Regulation S”) under the Securities Act.

Interest on the 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2022, and the 2029 Senior Notes mature on July 15, 2029.

As of March 31, 2022, the borrowing base under the 2021 Credit Agreement was $1.1 billion, of which borrowings, including the 2029 Senior Notes, of $1.0 billion were outstanding, $25.0 million of letters of credit were outstanding and $108.3 million was available to borrow under the 2021 Credit Agreement.

For a further description of the Credit Agreement, please refer to Note 4, “Notes Payable” to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Senior Notes Offering

On June 28, 2021, we issued $300.0 million aggregate principal amount of the 2029 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 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each year.

The 2029 Senior Notes mature on July 15, 2029.

Terms of the 2029 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Third Supplemental Indenture thereto, dated as of June 28, 2021, 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.

On July 6, 2018, we issued $300.0 million aggregate principal amount of the 2026 Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A and to certain non-U.S.

persons in transactions outside the United States pursuant to Regulation S.

On July 15, 2021, we redeemed all of the outstanding 2026 Senior Notes, which resulted in the principal payment of $300.0 million and a redemption premium of $10.3 million.

Additionally, we expensed $3.0 million of deferred financing costs and discounts that were being previously amortized in association with the 2026 Senior Notes.

We financed the redemption of the 2026 Senior Notes with a portion of the net proceeds from the offering of the 2029 Senior Notes, together with cash on hand.

Letters of Credit, Surety Bonds and Financial Guarantees

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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 $199.7 million as of September 30, 2021.

Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $268.8 million as of March 31, 2022.

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.

believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of September 30, 2021 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 March 31, 2022 will be drawn upon.

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.

In October 2020, the Board approved an increase in our stock repurchase program by an additional $300.0 million.

During the three months ended September 30, 2021, we repurchased 358,817 shares of our common stock for $56.1 million to be held as treasury stock.

During the nine months ended September 30, 2021, we repurchased 910,038 shares of our common stock for $137.7 million to be held as treasury stock.

In February 2022, our Board of Directors (the “Board”) approved a $200.0 million increase to our previously authorized stock repurchase program, pursuant to which we may purchase up to $550.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws.

During the three months ended March 31, 2022, we repurchased 475,055 shares of our common stock for $57.7 million to be held as treasury stock.

A total of 2,521,611 shares of our common stock has been repurchased since our stock repurchase program commenced.

As of September 30, 2021, we may purchase up to $162.7 million of shares of our common stock under our stock repurchase program.

As of March 31, 2022, we may purchase up to $249.0 million of shares of our common stock under our stock repurchase program.

The timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase program will be determined by our management at its discretion based on a variety of factors, including the market price of our common stock, corporate considerations, general market and economic conditions and legal requirements.

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Operating Activities

Net cash provided by operating activities was $101.1 million for the nine months ended September 30, 2021.

Net cash used in operating activities was $137.8 million for the three months ended March 31, 2022.

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 nine months ended September 30, 2021 was primarily driven by net income of $318.3 million, and included cash outflow from the $286.6 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 and increases of $66.8 million and $20.6 million in the net change in accounts receivable and accounts payable, respectively.

Net cash provided by operating activities was $113.0 million for the nine months ended September 30, 2020.

Net cash used in operating activities during the three months ended March 31, 2022 was primarily driven by cash outflow from the $251.6 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 and partially offset by net income of $78.7 million, as well as the $9.4 million and $10.5 million increase in the net change in accounts receivable and accrued expenses and other liabilities, respectively.

Net cash provided by operating activities was $160.7 million for the three months ended March 31, 2021.

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 nine months ended September 30, 2020 was primarily driven by net income of $187.5 million, and included cash outflow from the $48.8 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 in addition to changes in non-inventory balances of $25.7 million.

Net cash provided by operating activities during the three months ended March 31, 2021 was primarily driven by net income of $99.7 million, and included cash outflow from the $41.7 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 and a $56.7 million and $27.9 million increase in the net change in accounts receivable and accounts payable.

Investing Activities

Net cash used in investing activities was $69.8 million for the nine months ended September 30, 2021, primarily due to the payment for business acquisitions, additional investment in unconsolidated entities and purchase of property and equipment.

Net cash used in investing activities was $2.3 million for the nine months ended September 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 $1.4 million for the three months ended March 31, 2022, primarily due to the purchase of property and equipment and additional investment in unconsolidated entities.

Net cash provided by investing activities was $0.4 million for the three months ended March 31, 2021, primarily due to the return of capital with our investment in an unconsolidated entity, offset by the purchase of property and equipment, as well as an additional investment in an unconsolidated entity.

Financing Activities

Net cash used in financing activities was $20.5 million for the nine months ended September 30, 2021, primarily driven by $944.0 million of payments on the 2026 Senior Notes, the 2020 Credit Agreement and the Credit Agreement and by the $137.7 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by $1.1 billion related to the proceeds received for the 2029 Senior Notes, and borrowings under the 2020 Credit Agreement and the Credit Agreement.

Net cash used in financing activities was $102.7 million for the nine months ended September 30, 2020, primarily driven by $275.0 million of payments on the 2020 Credit Agreement and by the $31.3 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $203.1 million under the 2020 Credit Agreement.

Off-Balance Sheet Arrangements

In the ordinary course of business, we enter into land purchase contracts in order to procure land and lots for the construction of our homes.

We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots.

These contracts typically require cash deposits and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, which may include obtaining applicable property and development entitlements or the completion of development activities and the delivery of finished lots.

We also utilize contracts with land sellers as a method of acquiring lots and land in staged takedowns, which helps us manage the financial and

market risk associated with land holdings and minimize the use of funds from our corporate financing sources.

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.

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

As of September 30, 2021, we had $46.3 million of cash deposits pertaining to land purchase contracts for 43,338 lots with an aggregate purchase price of $1.0 billion.

Approximately $25.1 million of the cash deposits as of September 30, 2021 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.

Land purchase contracts may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain markets.

Net cash provided by financing activities was $142.0 million for the three months ended March 31, 2022, primarily driven by $197.6 million of borrowings under the 2021 Credit Agreement, offset by the $57.7 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock.

Net cash used in financing activities was $148.9 million for the three months ended March 31, 2021, primarily driven by $230.0 million of payments on the Fourth Amended and Restated Credit Agreement, dated as of May 6, 2019 (as amended, the “2020 Credit Agreement”) and by the $25.8 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $104.8 million under the 2020 Credit Agreement.

Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs.

In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers.

During the nine months ended September 30, 2021, we have experienced a significant increase in land, labor, materials and construction costs, which we currently expect to continue for the fourth quarter of 2021 and into 2022.

During the three months ended March 31, 2022, we have experienced a significant increase in land, labor, materials and construction costs, which we currently expect to continue for the foreseeable future.

Generally, we have been able to increase the sales prices of our homes to absorb such increased costs.

Contractual Obligations

As of September 30, 2021, 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, 2020.

Critical Accounting Policies

See “Industry and Economic Risks—Inflation could adversely affect our business and financial results” in Item 1A.

Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Material Cash Requirements

As of March 31, 2022, there have been no material changes to our known contractual and other obligations appearing in the “Material Cash Requirements” 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, 2021.

Critical Accounting Policies and 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 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.

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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 nine months ended September 30, 2021 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, 2020.

We believe that there have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2022 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, 2021.

Cautionary Statement about Forward-Looking Statements

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The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:

• the impact of the COVID-19 pandemic and its effect on us, our business, customers, subcontractors and suppliers, and the markets in which we operate, U.S.

• adverse economic changes either nationally or in the markets in which we operate, including, among other things, potential impacts from political uncertainty, civil unrest, increases in unemployment, volatility of mortgage interest rates, supply chain disruptions (including due to the conflict in Ukraine and the wide-ranging sanctions the United States and other countries have imposed or may further impose on Russian business sectors, financial organizations, individuals and raw materials) and inflation and decreases in housing prices;

• the impact of the COVID-19 pandemic and its effect on us, our business, customers, subcontractors and suppliers (including associated supply chain disruptions), and the markets in which we operate, U.S.

and world financial markets, mortgage availability, potential regulatory actions, changes in customer and stakeholder behaviors and impacts on and modifications to our operations, business and financial condition relating to COVID-19;

• a slowdown in the homebuilding industry or changes in population growth rates in our markets;

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• the cost and availability of insurance and surety bonds;

• changes in (including as a result of the change in the U.S.

presidential administration), liabilities under, or the failure or inability to comply with, governmental laws and regulations, including environmental laws and regulations;

• changes in, liabilities under, or the failure or inability to comply with, governmental laws and regulations, including environmental laws and regulations;

• the timing of receipt of regulatory approvals and the opening of projects;

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• our continued ability to qualify for additional federal energy efficient homes tax credits and the extension of the availability of such tax credits beyond December 31, 2021;

• information system failures, cyber incidents or breaches in security;

• negative publicity or poor relations with the residents of our projects;

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• availability of qualified personnel and third-party contractors and subcontractors;

• information system failures, cyber incidents or breaches in security;

• our ability to retain our key personnel;

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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