What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-01 compared with 2022-08-02 · 179 added, 176 removed, 379 unchanged (48% of the section changed)

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

Housing market conditions were generally favorable during the six months ended June 30, 2022, supported by a strong demand environment, limited inventory of new and existing homes for sale, strong household formations, low unemployment and historically attractive mortgage interest rates.

However, during the second quarter of 2022, we experienced a rapid increase in mortgage interest rates resulting from the Federal Reserve’s actions to stem continued price inflation.

As a result, demand for our homes decreased during the second quarter of 2022 as many potential homebuyers paused or reconsidered their purchase decisions.

As these events occurred at the end of the second quarter of 2022, their potential impact is not fully reflected in our reported results as the majority of the contracts on the homes we closed included rate locks and were written prior to the rapid acceleration in mortgage interest rates.

New orders weakened during the second quarter of 2022 in many of our markets and we experienced a higher than normal cancellation rate during the second quarter of 2022.

We expect that mortgage interest rates will remain elevated until inflation subsides.

Our strategy to combat these headwinds and drive continued sales is to increase our targeted advertising spend to connect with more potential homebuyers.

We started executing on this strategy towards the end of the second quarter of 2022 and have seen favorable results in both the number of leads generated and new orders written.

This gives us confidence that, despite the challenges of the market, there remains a strong pool of qualified buyers for our homes.

We continue to sell homes later in the construction cycle to maximize profitability and provide a better customer experience.

Additionally, during the second quarter of 2022, we slowed our pace of new home starts to match current levels of absorptions in all of our communities.

During the three months ended June 30, 2022, we had 2,027 home closings, compared to 2,856 home closings during the three months ended June 30, 2021.

During the six months ended June 30, 2022, we had 3,626 home closings, compared to 5,417 home closings during the six months ended June 30, 2021.

The decline in home closings for both the three months and six months ended June 30, 2022 was attributable to the prior year’s strong comparable numbers and compounded by longer lead times relating to labor, materials and municipality activities that increased our construction and development cycle times and negatively impacted the timing of home 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.

At June 30, 2022, we had 92 active communities, including seven Terrata Homes communities.

At June 30, 2021, we had 106 active communities, including two Terrata Homes communities.

In June 2022, we experienced our first home closings in the state of Maryland and are now operating in 35 markets across 20 states.

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, mortgage 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.

During the three months ended June 30, 2022, we continued to experience significant supply chain disruptions, stemming from COVID-19 and variants thereof (collectively, “COVID-19”), 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 global shortages will continue to impact our operations as long as the dynamics surrounding the COVID-19 pandemic persist.

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

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

During the three months ended September 30, 2022, we continued to adapt our business to respond to the slowdown in demand caused by the Federal Reserve’s ongoing actions to stem inflation.

Mortgage rates during the three months ended September 30, 2022 were double what they were during the three months ended September 30, 2021, further impacting sentiment and affordability for potential buyers.

As a result, many buyers have paused their home purchasing decisions.

We expect that mortgage rates will remain elevated until inflation subsides.

Additionally, challenges from ongoing supply chain disruptions and higher construction and development costs continued during the three months ended September 30, 2022.

We continue to combat the demand headwinds and drive continued sales through increased advertising spending to connect with more potential homebuyers.

During the three months ended September 30, 2022, we began offering mortgage buy-down programs and other sales incentives to offset some of the affordability pressures resulting from higher mortgage rates.

Additionally, we increased our allocation of inventory available for sale to our wholesale channel.

At the same time, we are carefully evaluating our land position and we significantly reduced our owned and controlled lots during the three months ended September 30, 2022.

Finally, given the current market conditions and our focus on future community count growth, during the three months ended September 30, 2022, we chose to allocate available capital to near-term land development, rather than repurchase shares of our common stock.

During the three months ended September 30, 2022, we had 1,547 home closings, compared to 2,499 home closings during the three months ended September 30, 2021.

During the nine months ended September 30, 2022, we had 5,173 home closings, compared to 7,916 home closings during the nine months ended September 30, 2021.

The decline in home closings for both the three and nine months ended September 30, 2022 was primarily due to our strong prior year comparable numbers, exacerbated by the momentum of higher mortgage rates experienced this year and lower average community count and absorption rates.

Throughout 2022, our results were negatively impacted by longer lead times relating to materials, municipality and labor activities that increased our construction and development cycle times and slowed the timing of home closings.

We expect continued cost inflation, building material shortages and longer municipality lead times to persist until global supply chain constraints ease.

At September 30, 2022, we had 93 active communities, including eleven Terrata Homes communities.

At September 30, 2021, we had 103 active communities, including three Terrata Homes communities.

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, mortgage rates, financial market stability, 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.

During the three months ended

September 30, 2022, we continued to experience significant supply chain disruptions, stemming from COVID-19 and variants thereof (collectively, “COVID-19”), that extended construction and development cycles and delayed home closings and the opening of new communities.

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

Despite the current demand environment headwinds, we believe the long-term outlook for new homes remains strong, driven by solid fundamentals, including a historically low inventory of new and existing homes for sale, an aging housing stock, rising rents, strong household formations and low unemployment.

However, the housing market is currently in a state of transition and we expect affordability constraints and buyer reticence to continue to impact demand for the foreseeable future.

For additional discussion regarding our business and operations, see Item 7.

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 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Key financial results as of and for the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, were as follows:

For additional discussion regarding risks associated with our business and operations, see Item 1A.

Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in Item 1A.

Risk Factors in Part II of this Quarterly Report on Form 10-Q for the three months ended September 30, 2022.

Key financial results as of and for the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, were as follows:

• Home sales revenues decreased 27.2% to $547.1 million from $751.6 million.

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• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 29.5% from 28.2%.

• Net income before income taxes increased 9.3% to $163.0 million from $149.1 million.

• Net income increased 4.4% to $123.4 million from $118.1 million.

• Net income before income taxes decreased 14.4% to $108.7 million from $127.0 million.

• Net income decreased 10.1% to $90.4 million from $100.6 million.

• EBITDA (non-GAAP) as a percentage of home sales revenues increased to 20.8% from 18.1%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 23.1% from 20.0%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 18.4% from 19.7%.

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

Key financial results as of and for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, were as follows:

Key financial results as of and for the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, were as follows:

• Home sales revenues decreased 19.2% to $1.8 billion from $2.2 billion.

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We owned and controlled 89,984 lots at June 30, 2022 as compared to 93,270 lots at March 31, 2022 and 91,845 lots at December 31, 2021.

We owned and controlled 76,453 lots at September 30, 2022 as compared to 89,984 lots at June 30, 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 six months ended June 30, 2022 and 2021:

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

The following table sets forth our results of operations for the three and nine months ended September 30, 2022 and 2021:

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

2022 2021 2022 2021

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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.

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

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

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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 June 30, 2022 Compared to Three Months Ended June 30, 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 June 30, 2022 and 2021 were as follows (revenues in thousands):

Three Months Ended June 30, 2022 As of June 30, 2022

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 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 September 30, 2022 and 2021 were as follows (revenues in thousands):

Three Months Ended September 30, 2022 As of September 30, 2022

Revenues Home Closings ASP Average Community Count Average

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Total $ 547,074 1,547 $ 353,635 93.0 5.5 93

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

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

Revenues Home Closings ASP Average Community Count Average

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

Home sales revenues for the three months ended June 30, 2022 were $723.1 million, a decrease of $68.4 million, or 8.6%, from $791.5 million for the three months ended June 30, 2021.

The decrease in home sales revenues is primarily due to a 29.0% decrease in homes closed, partially offset by an increase in the average sales price per home closed during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

The average sales price per home closed during the three months ended June 30, 2022 was $356,719, an increase of $79,579, or 28.7%, from the average sales price per home closed of $277,140 for the three months ended June 30, 2021.

Home sales revenues for the three months ended September 30, 2022 were $547.1 million, a decrease of $204.5 million, or 27.2%, from $751.6 million for the three months ended September 30, 2021.

The decrease in home sales revenues is primarily due to a 38.1% decrease in homes closed, partially offset by an increase in the average sales price per home closed during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

The average sales price per home closed during the three months ended September 30, 2022 was $353,635, an increase of $52,871, or 17.6%, from the average sales price per home closed of $300,764 for the three months ended September 30, 2021.

The increase in the average sales price per home closed in all reportable segments is primarily due to favorable pricing environments that allowed us to pass through cost increases associated with the construction of our homes.

The overall decrease in home closings is a result of lower average community count and overall lower absorption pace during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Our community count at June 30, 2022 decreased to 92 from 106 at June 30, 2021.

The decrease in community count is due to the close out of or transition between certain active communities for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

The overall decrease in absorption primarily relates to the normalization of demand, increased mortgage interest rates and increased cycle times stemming from pandemic related production disruptions.

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

Within our home sales revenues for the three months ended June 30, 2022, we included $36.9 million in wholesale revenues as a result of 146 home closings, representing 7.2% of the 2,027 total homes closed during the three months ended June 30, 2022.

Within our home sales revenues for the three months ended June 30, 2021, we included $94.7 million in wholesale revenues as a result of 430 home closings, representing 15.1% of the 2,856 total homes closed during the three months ended June 30, 2021.

The decrease in home closings through our wholesale channel was primarily related to writing fewer wholesale contracts due to supply chain volatility that limited our ability to estimate input costs and the timing of home closings as well as a prioritization of retail sales.

Home sales revenues in our Central reportable segment decreased by $31.3 million, or 9.0%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 30.6% 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 Southeast reportable segment decreased by $42.1 million, or 26.4%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 42.9% 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 Northwest reportable segment decreased by $35.4 million, or 33.3%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 47.8% 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 West reportable segment increased by $43.1 million, or 53.4%, during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, primarily due to a 29.7% increase in the number of homes closed, an increase in the average sales price per home closed and an increase in the average community count at a higher absorption rate in this reportable segment.

Home sales revenues in our Florida reportable segment decreased by $2.7 million, or 2.8%, during the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, primarily due to a 23.7% 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.

The overall decrease in home closings is a result of lower average community count and overall lower absorption pace during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Our community count at September 30, 2022 decreased to 93 from 103 at September 30, 2021.

The decrease in community count is due to the close out of or transition between certain active communities for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

The overall decrease in absorption primarily relates to the lower demand environment as a result of higher mortgage rates and increased cycle times resulting from pandemic related production disruptions.

Included within our home sales revenues for the three months ended September 30, 2022 is $127.9 million in wholesale revenues as a result of 443 home closings, representing 28.6% of the 1,547 total homes closed during the three months ended September 30, 2022.

Included within our home sales revenues for the three months ended September 30, 2021 is $101.6 million in wholesale revenues as a result of 433 home closings, representing 17.3% of the 2,499 total homes closed during the three months ended September 30, 2021.

The increase in home closings as a percentage of revenues through our wholesale channel was primarily related to allocating more inventory available for sale to the wholesale channel during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, when we limited the writing of wholesale contracts due to higher retail demand and supply chain uncertainty.

Home sales revenues in our Central reportable segment decreased by $59.4 million, or 20.6%, during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to a 36.5% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Southeast reportable segment decreased by $7.7 million, or 5.3%, during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to a 24.0% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Northwest reportable segment decreased by $101.7 million, or 68.5%, during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to a 70.8% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our West reportable segment decreased by $25.5 million, or 28.2%, during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily due to a 37.5% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Florida reportable segment decreased by $10.1 million, or 12.9%, during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, primarily due to a 35.0% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

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

Cost of sales decreased for the three months ended June 30, 2022 to $491.7 million, a decrease of $85.7 million, or 14.8%, from $577.4 million for the three months ended June 30, 2021, primarily due to a 29.0% decrease in homes closed, offset by increased construction costs.

Gross margin for the three months ended June 30, 2022 was $231.4 million, an increase of $17.3 million, or 8.1%, from $214.1 million for the three months ended June 30, 2021.

Gross margin as a percentage of home sales revenues was 32.0% for the three months ended June 30, 2022 and 27.0% for the three months ended June 30, 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 during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Cost of sales decreased for the three months ended September 30, 2022 to $391.3 million, a decrease of $158.0 million, or 28.8%, from $549.3 million for the three months ended September 30, 2021, primarily due to a 38.1% decrease in homes closed, offset by higher average construction costs per home closed.

Gross margin for the three months ended September 30, 2022 was $155.8 million, a decrease of $46.5 million, or 23.0%, from $202.3 million for the three months ended September 30, 2021.

Gross margin as a percentage of home sales revenues was 28.5% for the three months ended September 30, 2022 and 26.9% for the three months ended September 30, 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 during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Selling Expenses.

Selling expenses for the three months ended June 30, 2022 were $43.3 million, a decrease of $1.5 million, or 3.4%, from $44.8 million for the three months ended June 30, 2021.

Sales commissions decreased to $29.6 million for the three months ended June 30, 2022 from $30.4 million for the three months ended June 30, 2021, primarily due to an 8.6% decrease in home sales revenues during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Selling expenses as a percentage of home sales revenues were 6.0% and 5.7% for the three months ended June 30, 2022 and 2021, respectively.

The slight increase in selling expenses as a percentage of home sales revenues was driven primarily by third-party sales commissions during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Selling expenses for the three months ended September 30, 2022 were $33.9 million, a decrease of $5.9 million, or 14.9%, from $39.9 million for the three months ended September 30, 2021.

Sales commissions decreased to $17.9 million for the three months ended September 30, 2022 from $28.0 million for the three months ended September 30, 2021, primarily due to a 27.2% decrease in home sales revenues during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Selling expenses as a percentage of home sales revenues were 6.2% and 5.3% for the three months ended September 30, 2022 and 2021, respectively.

The increase in selling expenses as a percentage of home sales revenues was primarily due to higher advertising and other expenses incurred during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

General and Administrative.

General and administrative expenses for the three months ended June 30, 2022 were $29.1 million, an increase of $5.8 million, or 25.0%, from $23.3 million for the three months ended June 30, 2021.

The increase in the amount of general and administrative expenses is primarily due to the timing of increased personnel and associated costs, as well as professional fees incurred during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

General and administrative expenses as a percentage of home sales revenues were 4.0% and 2.9% for the three months ended June 30, 2022 and 2021, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues is primarily due to timing of increased personnel and associated costs incurred during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

General and administrative expenses for the three months ended September 30, 2022 were $27.3 million, an increase of $2.8 million, or 11.5%, from $24.5 million for the three months ended September 30, 2021.

The increase in the amount of general and administrative expenses is primarily due to costs related to the termination of land purchase agreements incurred during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

General and administrative expenses as a percentage of home sales revenues were 5.0% and 3.3% for the three months ended September 30, 2022 and 2021, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues is primarily due to the 27.2% decrease in homes sales revenue, increased personnel costs and terminated land purchase agreements, partially offset by reductions in other personnel associated costs, including performance based compensation, incurred during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Loss on Extinguishment of Debt.

There was no loss on extinguishment of debt for the three months ended June 30, 2022.

Loss on extinguishment of debt for the three months ended June 30, 2021 was $0.7 million, due to the debt issuance costs previously capitalized that were associated with the 2021 Credit Agreement for the three months ended June 30, 2021.

There was no loss on extinguishment of debt for the three months ended September 30, 2022.

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 for the three months ended September 30, 2021.

Other Income.

Other income, net of other expenses was $4.0 million for the three months ended June 30, 2022, an increase of $0.2 million from $3.8 million for the three months ended June 30, 2021.

Other income, net of other expenses, primarily reflects income associated with our investment in unconsolidated entities and gains realized from the sale of land and lots not directly associated with our core homebuilding operations.

Other income, net of other expenses was $14.1 million for the three months ended September 30, 2022, an increase of $11.8 million from $2.4 million for the three months ended September 30, 2021.

Other income, net of other expenses, primarily reflects the sale in July 2022 of the three-year interest rate cap of LIBOR prior to its expiration that resulted in $7.1 million in other income, income associated with our investment in unconsolidated entities and gains realized from the sale of land and lots not directly associated with our core homebuilding operations.

Operating Income and Net Income before Income Taxes.

Operating income for the three months ended June 30, 2022 was $159.0 million, an increase of $13.0 million, or 8.9%, from $146.0 million for the three months ended June 30, 2021.

Net income before income taxes for the three months ended June 30, 2022 was $163.0 million, an increase of $13.9 million, or 9.3%, from $149.1 million for the three months ended June 30, 2021.

All reportable segments contributed to net income before income taxes during the three months ended June 30, 2022 as follows:

Operating income for the three months ended September 30, 2022 was $94.6 million, a decrease of $43.4 million, or 31.4%, from $137.9 million for the three months ended September 30, 2021.

Net income before income taxes for the three months ended September 30, 2022 was $108.7 million, a decrease of $18.3 million, or 14.4%, from $127.0 million for the three months ended September 30, 2021.

All reportable segments contributed to net income before income taxes during the three months ended September 30, 2022 as follows:

Central - $46.4 million or 42.7%;

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and Florida - $9.8 million or 9.0%.

The increases in operating income and net income before income taxes are primarily attributed to higher gross margins and higher

average sales price per home closed during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

The overall decreases in operating income and net income before income taxes are primarily attributed to lower home closings across all reportable segments and lower average community count at a lower absorption pace, partially offset by higher gross margins and higher average sales price per home closed during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Income Taxes .

Income tax provision for the three months ended June 30, 2022 was $39.6 million, an increase of $8.6 million, or 27.9%, from income tax provision of $31.0 million for the three months ended June 30, 2021.

The increase in our effective tax rate to 24.3% from 20.8% for the three months ended June 30, 2021 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.

Net income for the three months ended June 30, 2022 was $123.4 million, an increase of $5.2 million, or 4.4%, from $118.1 million for the three months ended June 30, 2021.

The increase in net income is primarily attributed to higher gross margins and higher average sales price per home closed recognized during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

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 six months ended June 30, 2022 and 2021 were as follows (revenues in thousands):

Six Months Ended June 30, 2022

Income tax provision for the three months ended September 30, 2022 was $18.3 million, a decrease of $8.1 million, or 30.8%, from income tax provision of $26.4 million for the three months ended September 30, 2021.

The decrease in our effective tax rate to 16.8% from 20.8% for the three months ended September 30, 2021 results from the retroactive extension of the 45L tax credit and the deductions in excess of compensation cost for share-based payments, offset by an increase in the rate for the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended, and for state income taxes, net of the federal benefit.

Net income for the three months ended September 30, 2022 was $90.4 million, a decrease of $10.2 million, or 10.1%, from $100.6 million for the three months ended September 30, 2021.

The decrease in net income is primarily attributed to higher gross margins and higher average sales price per home closed recognized during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

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, 2022 and 2021 were as follows (revenues in thousands):

Nine Months Ended September 30, 2022

Revenues Home Closings ASP Average Community Count Average

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Total $ 1,816,193 5,173 $ 351,091 91.1 6.3

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Revenues Home Closings ASP Average Community Count Average Monthly

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

Home sales revenues for the six months ended June 30, 2022 were $1.3 billion, a decrease of $0.2 billion, or 15.2%, from $1.5 billion for the six months ended June 30, 2021.

The decrease in home sales revenues is primarily due to a 33.1% decrease in homes closed, partially offset by an increase in the average sales price per home closed during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

The average sales price per home closed during the six months ended June 30, 2022 was $350,005, an increase of $73,567, or 26.6%, from the average sales price per home closed of $276,438 for the six months ended June 30, 2021.

Home sales revenues for the nine months ended September 30, 2022 were $1.8 billion, a decrease of $0.4 billion, or 19.2%, from $2.2 billion for the nine months ended September 30, 2021.

The decrease in home sales revenues is primarily due to a 34.7% decrease in homes closed, partially offset by an increase in the average sales price per home closed during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

The average sales price per home closed during the nine months ended September 30, 2022 was $351,091, an increase of $66,974, or 23.6%, from the average sales price per home closed of $284,117 for the nine months ended September 30, 2021.

The overall decrease in home closings is a result of lower average community count and overall lower absorption pace during the six months ended June 30, 2022 as compared to the six months ended June 30, 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 six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

The overall decrease in absorption relates to the normalization of demand, increased mortgage interest rates and increased cycle times stemming from pandemic-related production disruptions.

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

Within our home sales revenues for the six months ended June 30, 2022, we recorded $88.8 million in wholesale revenues as a result of 359 home closings, representing 9.9% of the 3,626 total homes closed during the six months ended June 30, 2022.

Within our home sales revenues for the six months ended June 30, 2021, we recorded $157.1 million in wholesale revenues as a result of 713 home closings, representing 13.2% of the 5,417 total homes closed during the six months ended June 30, 2021.

Home sales revenues in our Central reportable segment decreased by $57.8 million, or 9.1%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a 28.1% decrease in the number of homes closed driven by a decrease in 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 Southeast reportable segment decreased by $106.2 million, or 35.9%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a 49.2% 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 Northwest reportable segment decreased by $50.7 million, or 22.6%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a 39.4% 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 a sharp increase in the average sales price per home closed.

Home sales revenues in our West reportable segment increased by $17.6 million, or 10.9%, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to a 20.4% increase in the average sales price per home closed, partially offset by a decrease in the number of homes closed and an increase in the average community count at a lower absorption rate in this reportable segment.

Home sales revenues in our Florida reportable segment decreased by $31.2 million, or 17.5%, during the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, primarily due to a 35.5% 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.

The overall decrease in home closings is a result of lower average community count and overall lower absorption pace during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 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 nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

The overall decrease in absorption relates to the normalization of demand, increased mortgage rates and increased cycle times stemming from pandemic-related production disruptions.

These disruptions have caused varying degrees of supply chain constraints in the markets we serve.

Included within our home sales revenues for the nine months ended September 30, 2022 is $216.6 million in wholesale revenues as a result of 802 home closings, representing 15.5% of the 5,173 total homes closed during the nine months ended September 30, 2022.

Included within our home sales revenues for the nine months ended September 30, 2021 is $258.6 million in wholesale revenues as a result of 1,146 home closings, representing 14.5% of the 7,916 total homes closed during the nine months ended September 30, 2021.

The increase in home closings as a percentage of revenues through our wholesale channel was primarily related to allocating more inventory available for sale to the wholesale channel during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Home sales revenues in our Central reportable segment decreased by $117.2 million, or 12.7%, during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to a 30.6% decrease in the number of homes closed driven by a decrease in average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Southeast reportable segment decreased by $113.9 million, or 25.7%, during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to a 41.2% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Northwest reportable segment decreased by $152.5 million, or 40.9%, during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to a 51.0% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our West reportable segment decreased by $8.0 million, or 3.1%, during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily due to an 18.0% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

Home sales revenues in our Florida reportable segment decreased by $41.4 million, or 16.1%, during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, primarily due to a 35.3% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

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

Cost of sales decreased for the six months ended June 30, 2022 to $0.9 billion, a decrease of $0.2 billion, or 19.6%, from $1.1 billion for the six months ended June 30, 2021.

Cost of sales decreased for the nine months ended September 30, 2022 to $1.3 billion, a decrease of $0.4 billion, or 22.7%, from $1.6 billion for the nine months ended September 30, 2021.

This overall decrease is primarily due to a 34.7% decrease in homes closed, offset by increased construction costs.

Gross margin for the six months ended June 30, 2022 was $389.8 million, a decrease of $14.3 million, or 3.5%, from $404.0 million for the six months ended June 30, 2021.

Gross margin as a percentage of home sales revenues was 30.7% for the six months ended June 30, 2022 and 27.0% for the six months ended June 30, 2021.

The increase in gross margin as a percentage of home sales revenues during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 was primarily due to raising prices higher than increases in input costs.

Gross margin for the nine months ended September 30, 2022 was $545.6 million, a decrease of $60.8 million, or 10.0%, from $606.3 million for the nine months ended September 30, 2021.

Gross margin as a percentage of home sales revenues was 30.0% for the nine months ended September 30, 2022 and 27.0% for the nine months ended September 30, 2021.

The increase in gross margin as a percentage of home sales revenues during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was primarily due to raising prices higher than increases in input costs.

Selling Expenses.

Selling expenses for the six months ended June 30, 2022 were $77.7 million, a decrease of $9.9 million, or 11.3%, from $87.6 million for the six months ended June 30, 2021.

Sales commissions decreased to $50.6 million for the six months ended June 30, 2022 from $56.7 million for the six months ended June 30, 2021, partially due to a 15.2% decrease in home sales revenues during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Selling expenses as a percentage of home sales revenues were 6.1% and 5.8% for the six months ended June 30, 2022 and 2021, respectively.

The slight increase in selling expenses as a percentage of home sales revenues was driven primarily by third-party sales commissions during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Selling expenses for the nine months ended September 30, 2022 were $111.6 million, a decrease of $15.8 million, or 12.4%, from $127.5 million for the nine months ended September 30, 2021.

Sales commissions decreased to $68.5 million for the nine months ended September 30, 2022 from $84.7 million for the nine months ended September 30, 2021, partially due to a 19.2% decrease in home sales revenues during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Selling expenses as a percentage of home sales revenues were 6.1% and 5.7% for the nine months ended September 30, 2022 and 2021, respectively.

The slight increase in selling expenses as a percentage of home sales revenues was driven primarily by higher advertising and other expenses incurred during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

General and Administrative.

General and administrative expenses for the six months ended June 30, 2022 were $57.4 million, an increase of $9.4 million, or 19.5%, from $48.0 million for the six months ended June 30, 2021.

The increase in the amount of general and administrative expenses is primarily due to the timing of increased personnel and associated costs, as well as professional fees incurred during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

General and administrative expenses as a percentage of home sales revenues were 4.5% and 3.2% for the six months ended June 30, 2022 and 2021, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues is primarily due to timing of increased personnel and associated costs incurred during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

General and administrative expenses for the nine months ended September 30, 2022 were $84.7 million, an increase of $12.2 million, or 16.8%, from $72.5 million for the nine months ended September 30, 2021.

The increase in the amount of general and administrative expenses is primarily due to increased personnel and associated costs, as well as professional fees and terminated land purchase agreements incurred during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

General and administrative expenses as a percentage of home sales revenues were 4.7% and 3.2% for the nine months ended September 30, 2022 and 2021, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues is primarily due to increased personnel and associated costs, as well as professional fees and terminated land purchase agreements incurred during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Loss on Extinguishment of Debt.

There was no loss on extinguishment of debt for the six months ended June 30, 2022.

Loss on extinguishment of debt for the six months ended June 30, 2021 was $0.7 million, due to the debt issuance costs previously capitalized that were associated with the 2021 Credit Agreement for the six months ended June 30, 2021.

There was no loss on extinguishment of debt for the nine months ended September 30, 2022.

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 credit agreement then in effect for the nine months ended September 30, 2021.

Other Income.

Other income, net of other expenses was $7.8 million for the six months ended June 30, 2022, an increase of $3.2 million from $4.6 million for the six months ended June 30, 2021.

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

Other income, net of other expenses was $22.0 million for the nine months ended September 30, 2022, an increase of $15.0 million from $7.0 million for the nine months ended September 30, 2021.

The increase in other income primarily reflects the sale in July 2022 of the three-year interest rate cap of LIBOR prior to its expiration that resulted in $7.1 million in other income, income associated with our investment in unconsolidated entities and gains realized from the sale of land and lots not directly associated with our core homebuilding operations.

Operating Income and Net Income before Income Taxes.

Operating income for the six months ended June 30, 2022 was $254.7 million, a decrease of $13.7 million, or 5.1%, from $268.5 million for the six months ended June 30, 2021.

Net income before income taxes for the six months ended June 30, 2022 was $262.6 million, a decrease of $9.8 million, or 3.6%, from $272.4 million for the six months ended June 30, 2021.

The following reportable segments contributed to net income before income taxes during the six months ended June 30, 2022 as follows:

Operating income for the nine months ended September 30, 2022 was $349.3 million, a decrease of $57.1 million, or 14.0%, from $406.4 million for the nine months ended September 30,

Net income before income taxes for the nine months ended September 30, 2022 was $371.3 million, a decrease of $28.1 million, or 7.0%, from $399.4 million for the nine months ended September 30, 2021.

The following reportable segments contributed to net income before income taxes during the nine months ended September 30, 2022 as follows:

Central - $189.0 million or 50.9%;

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and Florida - $30.9 million or 8.3%.

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 at higher gross margins on a per home basis, during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

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 at higher gross margins on a per home basis, during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Income Taxes .

Income tax provision for the six months ended June 30, 2022 was $60.5 million, an increase of $5.9 million, or 10.8%, from income tax provision of $54.6 million for the six months ended June 30, 2021.

The increase in the amount of income tax provision is primarily due to the tax benefits relating to the federal energy efficient homes tax credits that expired in 2021.

The increase in our effective tax rate to 23.1% from 20.0% 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 six months ended June 30, 2022.

Net income for the six months ended June 30, 2022 was $202.1 million, a decrease of $15.7 million, or 7.2%, from $217.8 million for the six months ended June 30, 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 six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Income tax provision for the nine months ended September 30, 2022 was $78.8 million, a decrease of $2.2 million, or 2.8%, from income tax provision of $81.0 million for the nine months ended September 30, 2021.

The decrease in the amount of income tax provision is primarily due to the tax benefits relating to the federal energy efficient homes tax credits that previously expired in 2021 and were subsequently extended for 2022.

The increase in our effective tax rate to 21.2% from 20.3% results from an increase in the rate due to an increase in the rate for the state income taxes, net of the federal benefit, and the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended, offset by the retroactive extension of the 45L tax credit and the deductions in excess of compensation cost for share-based payments for the nine months ended September 30, 2022.

Net income for the nine months ended September 30, 2022 was $292.5 million, a decrease of $25.9 million, or 8.1%, from $318.3 million for the nine months ended September 30, 2021.

The decrease in net income is primarily attributed to overall lower homes closed across all reportable segments, offset by higher average sales price per home closed at higher gross margins on a per home basis, during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Non-GAAP Measures

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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 June 30, Six Months Ended June 30,

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

2022 2021 2022 2021

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

EBITDA and adjusted EBITDA

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

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

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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 June 30, Six Months Ended June 30,

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

2022 2021 2022 2021

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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.

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 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.

Our net orders decreased in the first half of 2022 primarily due to the availability of finished lots, construction headwinds, and rising mortgage interest rates for our homebuyers.

Additionally, our net orders decreased as a result of the timing of when we enter our sales contracts with our homebuyers.

During the first half of 2022, the availability of finished lots were constrained.

This constraint was brought on by the sustained demand and the rapid pace of rising costs for certain supplies and labor experienced in 2021.

Throughout 2022, these cost constraints have started the process of normalization with the corresponding demand for home ownership.

The number of homes in our backlog at June 30, 2022 decreased 73.6% compared to June 30, 2021.

This decrease reflects the prior year’s strong comparable numbers, changes made to timing of sales contracts and available inventory in certain markets as compared to the first half of 2021.

The increase in cancellation rates generally corresponds with the increase in mortgage interest rates for our homebuyers in the second quarter of 2022.

We believe that, over time, our inventory levels and sales pace will return to our pre-pandemic levels as demand normalizes.

Our net orders decreased for the nine month period ended September 30, 2022 compared to the same period last year primarily due to the strength of the prior year comp, our decision to write contracts later in the construction process, the availability of finished lots, longer construction cycle times and, to a lesser extent, rising mortgage rates for our homebuyers that impacted levels of demand for our homes starting in the third quarter of 2022.

The number of homes in our backlog at September 30, 2022 decreased 59.4% compared to September 30, 2021.

The increase in cancellation rates generally corresponds with the rapid increase in mortgage rates for our homebuyers in the second and third quarters of 2022.

We believe that, over time, our inventory levels and sales pace will return to our pre-pandemic levels as demand normalizes and mortgage rates decrease from current levels.

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 Six Months Ended June 30,

Backlog Data Nine Months Ended September 30,

Net orders (1)

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Ending backlog is valued at the contract amount.

(4) As of June 30, 2022 , we had 412 units related to bulk sales agreements associated with our wholesale business.

(5) As of June 30, 2021 , we had 940 units related to bulk sales agreements associated with our wholesale business.

(4) As of September 30, 2022 , we had 591 units related to bulk sales agreements associated with our wholesale business.

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

Land Acquisition Policies and Development

We had 92 and 101 active communities as of June 30, 2022 and December 31, 2021, respectively.

We had 93 and 101 active communities as of September 30, 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 decreased to 89,984 owned or controlled lots as of June 30, 2022 from 91,845 owned or controlled lots as of December 31, 2021, primarily related to controlled lots that were delayed or terminated during the second quarter of 2022 to manage our overall inventory.

The table below shows (i) home closings by reportable segment for the six months ended June 30, 2022 and (ii) our owned or controlled lots by reportable segment as of June 30, 2022.

Six Months Ended June 30, 2022 As of June 30, 2022

To mitigate our exposure to real estate inventory risks, we utilize, on a limited and strategic basis, land banking financing arrangements.

Our lot inventory decreased to 76,453 owned or controlled lots as of September 30, 2022 from 91,845 owned or controlled lots as of December 31, 2021, primarily related to controlled lots that were terminated during the second and third quarters of 2022 to manage our overall inventory.

Additionally, throughout 2022 we have experienced intermittent delays that have lowered the lot counts and have been compounded by nationwide inflationary headwinds.

During the three months ended September 30, 2022, we have entered into several land banking financing arrangements with a third-party land banker to repurchase land that we sold to the land banker as a method of acquiring finished lots in staged takedowns, while limiting risk and minimizing the use of funds from our available cash or other financing sources.

In consideration for this repurchase option, we paid a non-refundable commitment fee.

Based on our right to control the ultimate economic outcome of these finished lots, these assets will continue to be held within our inventory and a corresponding obligation was established within our accrued liabilities to recognize this relationship.

While we are not legally obligated to purchase the balance of the lots, we will be subject to certain performance obligations, financial and other penalties if the lots are not purchased.

We do not have any ownership interest or title to the assets and do not guarantee their liabilities.

The table below shows (i) home closings by reportable segment for the nine months ended September 30, 2022 and (ii) our owned or controlled lots by reportable segment as of September 30, 2022.

Nine Months Ended September 30, 2022 As of September 30, 2022

Reportable Segment Home Closings Owned (1)

Controlled Total

Controlled (2)

Central 2,460 23,326 4,512 27,838

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Total 5,173 60,627 15,826 76,453

(1) Of the 61,893 owned lots as of June 30, 2022, 49,595 were raw/under development lots and 12,298 were finished lots.

(1) Of the 60,627 owned lots as of September 30, 2022, 48,516 were raw/under development lots and 12,111 were finished lots.

(2) Of the 15,826 controlled lots as of September 30, 2022, 716 were associated with land banking financing arrangements.

Homes in Inventory

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

As of June 30, 2022, we had a total of 722 completed homes, including information centers, and 4,095 homes in progress.

As of September 30, 2022, we had a total of 1,541 completed homes, including information centers, and 2,569 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.

For the six months ended June 30, 2022, we have experienced delays and cost increases, to varying degrees, in our building materials and other construction costs.

For the nine months ended September 30, 2022, we have experienced delays and cost increases, to varying degrees, in our building materials and other construction costs.

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

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Liquidity and Capital Resources

As of June 30, 2022, we had $42.0 million of cash and cash equivalents.

As of September 30, 2022, we had $52.7 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.

In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition and repurchase shares 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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As needed, we will consider accessing the debt and equity capital markets as part of our ongoing financing strategy.

We also rely on our ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects.

We rely on our ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects.

Furthermore, we utilize, on a limited and strategic basis, land banking financing arrangements to access short-term liquidity.

As of the date of this Quarterly Report on Form 10-Q, we believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from the Credit Agreement or through accessing debt or equity capital, as needed.

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.

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

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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.

Additionally, we plan to further utilize, on a limited and strategic basis, land banking financing arrangements to maximize long-term liquidity for lot development projects where we have sufficient finished lot availability in certain markets.

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.

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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 June 30, 2022, the borrowing base under the Credit Agreement was $1.4 billion, of which borrowings, including the 2029 Senior Notes, of $1.2 billion were outstanding, $26.9 million of letters of credit were outstanding and $203.7 million was available to borrow under the Credit Agreement.

As of September 30, 2022, the borrowing base under the Credit Agreement was $1.4 billion, of which borrowings, including the 2029 Senior Notes, of $1.2 billion were outstanding, $29.8 million of letters of credit were outstanding and $127.3 million was available to borrow under the 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.

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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 $284.6 million as of June 30, 2022.

Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $338.7 million as of September 30, 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.

We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of June 30, 2022 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 September 30, 2022 will be drawn upon.

Stock Repurchase Program

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 six months ended June 30, 2022, we repurchased 892,916 shares of our common stock for $95.1 million to be held as treasury stock.

During the three months ended September 30, 2022, we did not repurchase any shares of our common stock.

During the nine months ended September 30, 2022, we repurchased 892,916 shares of our common stock for $95.1 million to be held as treasury stock.

A total of 2,939,472 shares of our common stock has been repurchased since our stock repurchase program commenced.

As of June 30, 2022, we may purchase up to $211.5 million of shares of our common stock under our stock repurchase program.

As of September 30, 2022, we may purchase up to $211.5 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 used in operating activities was $263.3 million for the six months ended June 30, 2022.

Net cash used in operating activities was $359.6 million for the nine months ended September 30, 2022.

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

Net cash used in operating activities during the six months ended June 30, 2022 was primarily driven by cash outflow from the $547.6 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 $202.1 million, as well as the $19.4 million, $26.0 million, and $22.2 million increase in the net change in other assets, accounts payable, and accrued expenses and other liabilities, respectively.

Net cash provided by operating activities was $139.9 million for the six months ended June 30, 2021.

Net cash used in operating activities during the nine months ended September 30, 2022 was primarily driven by cash outflow from the $791.7 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 partially offset by net income of $292.5 million, as well as the $41.1 million and $43.8 million increase in the net change in accounts payable, and accrued expenses and other liabilities, respectively.

Net cash provided by operating activities was $101.1 million for the nine months ended September 30, 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 six months ended June 30, 2021 was primarily driven by net income of $217.8 million, and included cash outflow from the $158.7 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 increases of $46.4 million and $43.9 million in the net change in accounts receivable and accounts payable, respectively.

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.

Investing Activities

Net cash used in investing activities was $2.5 million for the six months ended June 30, 2022, primarily due to the purchase of property and equipment and additional investment in unconsolidated entities.

Net cash used in investing activities was $29.8 million for the six months ended June 30, 2021, primarily due to the payment for a business acquisition, additional investment in unconsolidated entities, and purchase of property and equipment.

Net cash used in investing activities was $2.1 million for the nine months ended September 30, 2022, primarily due to the purchase of property and equipment and additional investment in unconsolidated entities.

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

Financing Activities

Net cash provided by financing activities was $257.2 million for the six months ended June 30, 2022, primarily driven by $371.2 million of borrowings under the 2021 Credit Agreement and the Credit Agreement, offset by the $95.1 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 $34.3 million for the six months ended June 30, 2021, primarily driven by $564.0 million of payments on our credit agreement then in effect and the 2021 Credit Agreement and by the $81.6 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by $617.7 million related to the proceeds received from the offering of the 2029 Senior Notes, and borrowings under our credit agreement then in effect and the 2021 Credit Agreement.

Net cash provided by financing activities was $363.8 million for the nine months ended September 30, 2022, primarily driven by $534.9 million of borrowings under the 2021 Credit Agreement and the Credit Agreement and $35.9 million of proceeds related to a financing arrangement with a third-party land banker.

These were partially offset by $110.0 million of repayments on the Credit Agreement and by $95.1 million in payments 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 $20.5 million for the nine months ended September 30, 2021, primarily driven by $944.0 million of payments on our credit agreement then in effect and the 2021 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 from the offering of the 2029 Senior Notes, and borrowings under our credit agreement then in effect and the 2021 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 six months ended June 30, 2022, we have experienced a significant increase in land, labor, materials and construction costs, which we currently expect to continue for the foreseeable future.

During the nine months ended September 30, 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.

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Material Cash Requirements

As of June 30, 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.

As of September 30, 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

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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 and estimates during the six months ended June 30, 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.

We believe that there have been no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 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:

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;

• 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 rates, supply chain disruptions (including due to the conflict between Russia and 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), inflation, the possibility of recession 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.

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• increases in taxes or government fees;

• 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;

• our continued ability to qualify for additional federal energy efficient homes tax credits and the extension of the availability of such tax credits beyond 2032;

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

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

• the risk factor set forth in Item 1A.

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

• the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

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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