What changed in this filing

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Item 1A. Risk Factors

2023-02-21 compared with 2022-02-15 · 162 added, 139 removed, 457 unchanged (40% of the section changed)

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They describe various risks and uncertainties we are or may become subject to, many of which are difficult to predict or beyond our control.

Although the risks summarized below are organized by heading, and each risk is summarized separately, many of the risks are interrelated.

These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

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• Operational Risks Related to Our Business:

◦ our ability to acquire finished lots and land parcels suitable for residential homebuilding at reasonable prices;

◦ labor and raw material shortages and price fluctuations that could delay or increase the cost of home construction;

◦ our ability to acquire finished lots and land parcels suitable for residential homebuilding at reasonable prices;

◦ the impact of the COVID-19 pandemic;

• Industry and Economic Risks:

◦ the tightening of mortgage lending standards and mortgage financing requirements, and rising mortgage interest rates;

◦ federal income tax credits currently available to builders of certain energy efficient homes may not be extended by future legislation;

◦ the housing market may not continue to grow at the same rate, or may decline;

◦ rising mortgage interest rates, and the tightening of mortgage lending standards and mortgage financing requirements;

◦ the housing market may continue its recent decline or decline further;

◦ the homebuilding industry is highly competitive;

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In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing community or market.

Developing land and constructing homes takes a significant amount of time and requires a substantial cash investment.

Developing land and constructing homes takes a considerable amount of time and requires a substantial cash investment.

Land development is a key part of our operations and we develop land in most of our markets.

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Our business model is based on building homes before a sales contract is executed and a customer deposit is received.

Because interest and other expenses are capitalized only during construction, we recognize interest and maintenance expense on unsold completed homes in inventory.

Because interest and other expenses are capitalized only during the development of land and home construction, we incur interest subject to capitalization criteria and recognize maintenance expenses on unsold completed homes in inventory.

As of December 31, 2022, we had 1,985 completed homes in inventory and 1,323 homes in progress in inventory.

In the event there is a downturn in home sales in our markets, our inventory of completed homes could increase, leading to additional financing costs and lower margins, which could have a material adverse effect on our financial results and operations.

In the event there is a continued downturn in home sales in our markets, our inventory of completed homes could increase, leading to additional financing costs and lower margins, which could have a material adverse effect on our financial results and operations.

In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all.

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The residential construction industry experiences labor and raw material shortages from time to time, including shortages in qualified subcontractors and tradespeople and supplies of insulation, drywall, cement, steel and lumber.

These labor and raw material shortages can be more severe during periods of strong demand for housing, during periods following natural disasters that have a significant impact on existing residential and commercial structures or as a result of broader economic disruptions, such as the COVID-19 pandemic.

The current strong demand for homes and the effects of the COVID-19 pandemic have caused multiple disruptions in our supply chain and have resulted in shortages in certain building materials and tightness in the labor market.

It is uncertain whether these shortages will continue as is, improve or worsen.

In addition, pricing for labor and raw materials can be affected by the factors discussed above and various other national, regional, local, economic and political factors, including changes in immigration laws, trends in labor migration and tariffs.

Specifically, during the second and third quarters of 2021, we saw a significant increase in the cost of our lumber related to undersupply as a result of increased demand and shutdowns of lumber mills due to the COVID-19 pandemic.

We may see additional lumber cost pressures in future quarters.

For example, the federal government has previously imposed new or increased tariffs or duties on an array of imported materials and goods that are used in connection with the construction and delivery of our homes, including lumber, raising our costs for these items (or products made with them).

Such government-imposed tariffs and trade regulations on imported building supplies, and retaliatory measures by other countries, may in the future have significant impacts on the cost to construct our homes and on our customers’ budgets, including by causing disruptions or shortages in our supply chain.

We have also experienced labor shortages, price fluctuations and increased labor costs, including as a result of inflation or wage increases, particularly over the past year due to historic inflation rates in the United States.

It is uncertain whether these conditions will continue as is, improve or worsen.

Additionally, in 2021, we saw a significant increase in the cost of our lumber related to undersupply as a result of increased demand and shutdowns of lumber mills due to the COVID-19 pandemic.

We may see additional lumber cost pressures in the future.

Further, our success in recently-entered markets or those we may choose to enter in the future depends substantially on our ability to source labor and local materials on terms that are favorable to us.

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We engage subcontractors to perform the construction of our homes and, in many cases, to select and obtain the raw materials used in constructing our homes.

Accordingly, the timing and quality of our construction depend on the availability

and skill of our subcontractors.

Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors.

While we anticipate being able to obtain sufficient materials and reliable subcontractors and believe that our relationships with subcontractors are good, we do not have long-term contractual commitments with any subcontractors, and we can provide no assurance that skilled subcontractors will be available at reasonable rates and in our markets.

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We may also suffer reputational damage from the actions of subcontractors, which are beyond our control.

If we are unable to develop our communities successfully or within expected time-frames, our results of operations could be adversely affected.

Before a community generates any revenue, time and material expenditures are required to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities and sales facilities.

It can take several years from the time we acquire control of an undeveloped property to the time we make our first home sale on the site.

Delays in the development of communities, including delays associated with subcontractors performing the development activities or entitlements, labor and raw material shortages or supply chain disruptions, expose us to the risk of changes in market conditions for homes.

A decline in our ability to develop and market one of our new undeveloped communities successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.

In addition, higher than expected absorption rates in existing communities may result in lower than expected inventory levels until the development for replacement communities is completed.

We are subject to warranty and liability claims arising in the ordinary course of business that can be significant.

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We cannot provide assurance that coverage will not be further restricted, increasing our risks and financial exposure to claims, and/or become costlier.

If we are unable to develop our communities successfully or within expected time-frames, our results of operations could be adversely affected.

It can take several years from the time we acquire control of an undeveloped property to the time we make our first home sale on the site.

In addition, higher than expected absorption rates in existing communities may result in lower than expected inventory levels until the development for replacement communities is completed.

We could be adversely affected by efforts to impose joint employer liability on us for labor law violations committed by our subcontractors.

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However, various governmental agencies have taken actions to hold parties like us responsible for violations of wage and hour laws and other labor laws by subcontractors.

Governmental rulings that hold us responsible for labor practices by our subcontractors could create substantial

exposures for us under our subcontractor relationships, which could have a material adverse impact on our business, prospects, liquidity, financial condition and results of operations.

Governmental rulings that hold us responsible for labor practices by our subcontractors could create substantial exposures for us under our subcontractor relationships, which could have a material adverse impact on our business, prospects, liquidity, financial condition and results of operations.

We may be unable to obtain suitable bonding for the development of our housing projects.

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Any joint venture investments that we make could be adversely affected by our lack of sole decision making authority, our reliance on the financial condition of our joint venture partners and disputes between us and our joint venture partners.

During 2021, we established LGI Mortgage Solutions, a joint venture with one of our long-time, third-party preferred lenders.

We have established LGI Mortgage Solutions and LGI Insurance Solutions, two separate joint ventures with a long-time, third-party preferred lender and third-party insurance agency.

We may co-invest in the future with third parties through other partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development.

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In addition, we may in certain circumstances be liable for the actions of our joint venture partners.

In addition, our LGI Mortgage Solutions joint venture involves additional risks associated with the mortgage banking business.

The mortgage banking business is competitive, and competitors include mortgage lenders, such as national, regional and local mortgage banks and other financial institutions.

Some of these competitors are subject to fewer governmental regulations and have greater access to capital than our joint venture does, and some of them may operate with different criteria than our joint venture does.

These competitors may offer a broader or more attractive array of financing and other products and services to potential customers than our joint venture does.

For these reasons, our joint venture may not be able to compete effectively in the mortgage banking business.

Further, the mortgage banking business is subject to numerous federal, state and local laws and regulations, which, among other things:

prohibit discrimination and establish underwriting guidelines;

provide for audits and inspections;

require appraisals and/or credit reports on prospective borrowers and disclosure of certain information concerning credit and settlement costs;

establish maximum loan amounts;

prohibit predatory lending practices;

and regulate the referral of business to affiliated entities.

The regulatory environment for mortgage lending is complex and ever changing and has led to an increase in the number of audits, examinations and investigations in the industry.

The 2008 housing downturn resulted in numerous changes in the regulatory framework of the financial services industry.

More recently, in response to COVID-19, federal agencies, state governments and private lenders are proactively providing relief to borrowers in the housing market by, subject to requirements, suspending home foreclosures and granting payment forbearance, among other

These relief measures are temporary, but these changes and others could become incorporated into the current regulatory framework.

Any changes or new enactments could result in more stringent compliance standards, which could adversely affect our financial condition and results of operations and the market perception of our business.

Additionally, if we are unable to originate mortgages for any reason going forward, our customers may experience significant mortgage loan funding issues, which could have a material impact on our homebuilding business and our consolidated financial statements.

Our business could be materially and adversely disrupted by an epidemic, pandemic (such as COVID-19) or similar public health threat.

An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, along with any associated economic and social instability or distress, have a material adverse impact on our business, financial condition, results of operations, cash flows, strategies or prospects.

For instance, the outbreak of COVID-19 and its development into a global pandemic in March 2020 resulted in federal, state and local governments imposing varying degrees of restrictions on business and social activities to contain COVID-19, including business shutdowns and closures, travel restrictions, quarantines, shelter-in-place orders and “stay-at-home” orders in certain of our markets.

While many of the restrictions and measures initially implemented during 2020 have since been softened or lifted in varying degrees in the United States, and the manufacture and distribution of COVID-19 vaccines during 2021 helped to initiate a recovery from the pandemic, recent increases in COVID-19 cases, the uncertainty regarding new variants of COVID-19 and the success of any vaccines in respect thereof may in the future cause a significant reduction in economic activity or prompt the re-imposition of certain restrictions and measures.

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 variants of COVID-19, 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.

Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home;

cause civil unrest;

negatively impact mortgage availability or the federal government’s mortgage loan-related programs or policies;

delay mortgage originations;

tighten mortgage lending standards;

or precipitate a prolonged economic downturn or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our products;

negatively impact general consumer interest in purchasing a home compared to choosing other housing alternatives;

impair our ability to sell and build homes in a typical manner or at all, generate revenues and cash flows or access the Credit Agreement (as defined herein) or the capital or lending markets (or significantly increase the costs of doing so), as may be necessary to sustain our business;

further disrupt our supply chain or increase the costs or decrease the supply of building materials or the financial viability or availability of subcontractors, including as a result of infections or medically necessary or recommended self-quarantining, or governmental mandates to direct production activities to support public health efforts;

and result in our recognizing charges in future periods, which may be material, for inventory impairments or land option contract abandonments, or both, related to our current inventory assets.

The inherent uncertainty surrounding COVID-19, due in part to changing governmental directives (including as a result of the change in the U.S.

presidential administration), public health challenges and progress and market reactions thereto, also makes it more challenging for our management to estimate the future performance of our business and develop strategies to generate growth or achieve our objectives for the remainder of 2022.

Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, decreases in our net orders, homes closed, average sales prices per home closed, revenues and profitability, and such impacts could be material to our business, financial condition, results of operations, cash flows, strategies or prospects in future quarters.

In addition, should the surge in COVID-19 cases or the public health effort related thereto intensify to such an extent that we cannot operate in most or all of our markets, we could generate few or no orders and deliver few, if any, homes during the applicable period, which could be prolonged.

Along with a potential increase in cancellations of home purchase contracts, if prolonged government restrictions on our business and our customers return in response to increases in COVID-19 cases, or if there is an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business;

meet the terms of our covenants and other requirements under the Credit Agreement, the 2029 Senior Notes (as defined herein) and the related indenture, and/or mortgages and land contracts due to land sellers and other loans;

or service our outstanding indebtedness.

Such a circumstance could, among other things, exhaust our available liquidity and ability to access liquidity sources or trigger an acceleration to pay a significant portion or all of our then-outstanding debt obligations, which we may be unable to do.

For instance, the COVID-19 pandemic resulted in federal, state and local governments imposing varying degrees of restrictions on business and social activities to contain COVID-19, including business shutdowns and closures, travel restrictions, quarantines, shelter-in-place orders and “stay-at-home” orders in certain of our markets.

While many of the restrictions and measures initially implemented during 2020 have since been lifted in the United States, and the manufacture and distribution of COVID-19 vaccines during 2021 helped to initiate a recovery from the pandemic, recent increases in COVID-19 cases, the uncertainty regarding new variants of COVID-19 and the success of any vaccines in respect thereof may in the future cause a significant reduction in economic activity or prompt the re-imposition of certain restrictions and measures.

To the extent that the COVID-19 pandemic adversely impacts our business, results of operations, liquidity or financial condition, it may also have the effect of increasing many of the other risks described in this “Risk Factors” section.

There is no guarantee that a future outbreak of this or any other widespread epidemics or pandemics will not occur, or that the U.S.

economy will fully recover therefrom, either of which could materially and adversely affect our business.

Industry and Economic Risks

Inflation could adversely affect our business and financial results.

Currently, the United States is experiencing inflationary conditions.

Inflation could adversely affect our business and financial results by increasing the costs of land, raw materials and labor needed to operate our business.

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Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.

Tightening of mortgage lending standards and mortgage financing requirements, untimely or incomplete mortgage loan originations for our homebuyers and rising mortgage interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

Rising mortgage interest rates, tightening of mortgage lending standards and mortgage financing requirements, untimely or incomplete mortgage loan originations for our homebuyers and rising mortgage interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

Almost all of our customers finance their home purchases through lenders that provide mortgage financing.

Mortgage interest rates have generally trended downward for the last several decades and reached historic lows in the summer of 2020, which has made the homes we sell more affordable.

However, we cannot predict whether mortgage interest rates will continue to fall, remain low or rise.

If mortgage interest rates increase, the ability of prospective homebuyers to finance home purchases may be adversely affected, and, as a result, our operating results may be significantly negatively impacted.

Our homebuilding activities are dependent upon the availability of mortgage financing to homebuyers, which is expected to be impacted by continued regulatory changes and fluctuations in the risk appetites of lenders.

Mortgage interest rates have increased significantly during 2022, which has made the homes we sell less affordable.

The current and continued macroeconomic conditions impacting the homebuilding industry are rapid inflation and rising interest rates.

The significant burden of inflation and the rise of mortgage interest rates for our customers during 2022 are viewed by us as the primary driver behind the sudden decrease in demand for new homes beginning in March 2022.

However, we cannot predict whether mortgage interest rates will continue to rise, remain high or fall.

If mortgage interest rates continue to increase, the ability of prospective homebuyers to finance home purchases may be adversely affected, and, as a result, our operating results may be significantly negatively impacted.

Additionally, rapid increases in interest rates may negatively impact the affordability of a home purchase for existing buyers in backlog who still need to lock in a mortgage interest rate for their loan.

This volatility could lead to an increase in cancellations of home purchase contracts.

Our homebuilding activities depend upon the availability of mortgage financing to homebuyers, which is expected to be impacted by ongoing regulatory changes and fluctuations in the risk appetites of lenders.

The financial documentation, down payment amounts and income-to-debt ratio requirements are subject to change and could become more restrictive.

purchase or insure mortgage loans and mortgage loan-backed securities, and its insurance of mortgage loans through or in connection with the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and the U.S.

The federal government has a significant role in supporting mortgage lending through its conservatorship of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), both of which purchase or insure mortgage loans and mortgage loan-backed securities, and its insurance of mortgage loans through or in connection with the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and the U.S.

Department of Agriculture (“USDA”).

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A limited availability of suitable mortgage financing may adversely affect the volume and sales price of our home sales.

Increases in cancellations of purchase contracts could have an adverse effect on our business.

Our backlog reflects standard purchase contracts with our homebuyers for homes that still need to be delivered.

We require a deposit from our homebuyers for all homes reflected in our backlog, and generally, we have the right to retain the deposit if the homebuyer does not complete the purchase.

In some cases, however, a homebuyer may cancel the purchase contract and receive a complete or partial refund of the deposit for reasons such as state and local law requirements, the homebuyer’s inability to obtain mortgage financing, the homebuyer’s failure to sell their current home, or our inability to complete and deliver the house within the defined time.

Homebuyers may also choose to cancel their purchase contract and forfeit their deposit.

As of December 31, 2022, we had 702 homes with an ending backlog value of $252.0 million.

With the weakening of the housing market, we have experienced an increase in cancellation rates.

If economic conditions decline further, if mortgage financing becomes less available, or if our homes become less attractive due to market price declines or due to other conditions at or in the vicinity of our communities, we could experience an additional increase in homebuyers canceling their purchase contracts with us, which could have an adverse effect on our business and results of operations.

Any limitation on, or reduction or elimination of, tax benefits associated with homeownership would have an adverse effect upon the demand for homes, which could be material to our business.

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Any such future changes could also have a material adverse impact on our business, prospects, liquidity, financial condition and results of operations.

Federal income tax credits currently available to builders of certain energy efficient new homes may not be extended by future legislation.

On December 21, 2020, the U.S.

Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which former President Trump signed into law on December 27, 2020.

This Act extended the availability of Code Section 45L credit for energy efficient new homes (“federal energy efficient homes tax credits”), which provides a tax credit of $2,000 per qualifying home to eligible homebuilders, and made such tax credits available for homes delivered through December 31, 2021.

Legislation to extend such tax credits beyond December 31, 2021 has not been adopted, and it is uncertain whether an extension or similar tax credit will be adopted in the future.

Federal energy efficient homes tax credits recognized during the year ended December 31, 2021 totaled $16.2 million.

If legislation to extend such tax credits for periods after December 31, 2021 is not adopted, our effective income tax rates in future periods may increase, potentially materially.

The housing market may not continue to grow at the same rate, or may decline, and any decline in our markets or for the homebuilding industry generally may materially and adversely affect our business and financial condition.

We cannot predict whether and to what extent the housing markets in the geographic areas in which we operate will continue to grow, particularly if interest rates for mortgage loans, land costs, and construction costs rise.

Other factors that might impact growth in the homebuilding industry include uncertainty in domestic and international financial, credit and consumer lending markets amid slow economic growth or recessionary conditions in various regions or industries around the world, including as a result of the COVID-19 pandemic, tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, higher home prices, more conservative appraisals, changing consumer preferences, higher loan-to-value ratios and extensive buyer income and asset documentation requirements, changes to mortgage regulations, slower rates of population growth or population decline in our markets, or Federal Reserve policy changes.

Given these factors, we can provide no assurance that the present housing market will continue to be strong, whether overall or in our markets.

If there is limited economic growth, declines in employment and consumer income, changes in consumer behavior, including as a result of the COVID-19 pandemic, and/or tightening of mortgage lending standards, practices and regulation in the geographic areas in which we operate, or if interest rates for mortgage loans or home prices rise, there could likely be a corresponding adverse effect on our business, prospects, liquidity, financial condition and results of operations, including, but not limited to, the number of homes we sell, our average sales price per home closed and the amount of revenues or profits we generate, and such effect may be material.

The housing market may continue its recent decline or decline further, and any such continuation or decline in our markets or for the homebuilding industry generally may materially and adversely affect our business and financial condition.

We cannot predict whether and to what extent the housing markets in the geographic areas in which we operate will grow, particularly if interest rates for mortgage loans, land costs, and construction costs continue to rise.

housing market remained strong throughout the COVID-19 pandemic, but began softening during the second quarter of 2022 and continued to decline through the remainder of 2022 primarily due to inflationary pricing, rapidly rising interest rates for mortgage loans, and construction costs.

Other factors that might impact the homebuilding industry include uncertainty in domestic and international financial, credit and consumer lending markets amid slow economic growth or recessionary conditions in various regions or industries around the world, including as a result of the COVID-19 pandemic, the conflict between Russia and Ukraine, tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, higher home prices, more conservative appraisals, changing consumer preferences, higher loan-to-value ratios and extensive buyer income and asset documentation requirements, changes to mortgage regulations, slower rates of population growth or population decline in our markets, or Federal Reserve policy changes.

If there is limited economic growth, declines in employment and consumer income, changes in consumer behavior, including as a result of the COVID-19 pandemic, the conflict between Russia and Ukraine, and/or tightening of mortgage lending standards, practices and regulation in the geographic areas in which we operate, or if interest rates for mortgage loans or home prices continue to rise, there could likely be a corresponding adverse effect on our business, prospects, liquidity, financial condition and results of operations, including, but not limited to, the number of homes we sell, our average sales price per home closed , cancellations of home purchase contracts and the amount of revenues or profits we generate, and such effect may be material.

The homebuilding industry is highly competitive and, if our competitors are more successful or offer better value to our customers, our business could decline.

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Our communities on the West coast are especially susceptible to restrictive government regulations and environmental laws.

To the extent the oil and gas industry, which can be very volatile, is negatively impacted by declining commodity prices, climate

change, legislation or other factors, a result could be a reduction in employment or other negative economic consequences, which in turn could adversely impact our home sales and activities in certain of our markets.

To the extent the oil and gas industry, which can be very volatile, is negatively impacted by declining commodity prices, climate change, legislation or other factors, a result could be a reduction in employment or other negative economic consequences, which in turn could adversely impact our home sales and activities in certain of our markets.

Moreover, certain insurance companies doing business in states in which we operate could restrict, curtail or suspend the issuance of homeowners’ insurance policies on single-family homes.

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Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

If the market value of our land inventory decreases, our results of operations could be adversely affected by impairments and write-downs.

The market value of our land and housing inventories depends on market conditions.

We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets.

There is an inherent risk that the value of the land owned by us may decline after purchase.

The valuation of property is inherently subjective and based on the individual characteristics of each property.

We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably.

In addition, our deposits for lots controlled under purchase, option or similar contracts may be put at risk.

Factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations are subject to uncertainty.

Moreover, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality.

If housing demand fails to meet our expectations when we acquired our inventory, our profitability may be adversely affected and we may not be able to recover our costs when we build and sell houses.

We regularly review the value of our land holdings and continue to review our holdings on a periodic basis.

Material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial condition.

Interest rate changes may adversely affect us.

We currently hedge a portion of our interest rate exposure through the use of an interest rate cap contract.

We may obtain additional forms of interest rate protection in the form of swap agreements, interest rate cap contracts or similar agreements to hedge against the possible negative effects of interest rate fluctuations.

However, we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder.

In addition, we may be subject to risks of default by hedging counterparties.

Increases in interest rates can make it more difficult and/or expensive for us to obtain the funds we need to operate our business.

Increases in interest rates generally could increase the interest rates we must pay on borrowings under the Credit Agreement and on any subsequent issuances of debt securities.

Adverse economic conditions could also cause the terms on which we borrow to be unfavorable.

We could be required to liquidate one or more of our assets at times which may not permit us to receive an attractive return on our assets in order to meet our debt service obligations.

Difficulties with appraisal valuations in relation to the proposed sales price of our homes could force us to reduce the price of our homes for sale.

Each of our home sales may require an appraisal of the home value before closing.

These appraisals are professional judgments of the market value of the property and are based on a variety of market factors.

If our internal valuations of the market and pricing do not line up with the appraisal valuations and appraisals are not at or near the agreed upon sales price, we may be forced to reduce the sales price of the home to complete the sale.

These appraisal issues could have a material adverse effect on our business and results of operations.

Any future government shutdowns or slowdowns may materially adversely affect our business or financial results.

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Natural disasters, severe weather and adverse geological conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect us.

Our homebuilding operations are located in many areas that are subject to natural disasters, severe weather or adverse geological conditions.

These include, but are not limited to, hurricanes, tornadoes, droughts, floods, brushfires, wildfires, prolonged periods of precipitation, landslides, soil subsidence, earthquakes and other natural disasters.

The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability.

Our homebuilding operations are located in areas that are subject to natural disasters, severe weather or adverse geological conditions.

These include, but are not limited to, hurricanes, tornadoes, droughts, floods, storm surge, coastal erosion, sea level rise, brushfires, wildfires, prolonged periods of precipitation, landslides, soil subsidence, earthquakes and other natural disasters.

The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing, increase mortgage default risk, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability.

In addition to directly damaging our land or projects, many of these natural events could damage roads and highways providing access to our assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market homes or sell land in those areas and possibly increasing the costs of homebuilding completion.

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We are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety.

The particular environmental requirements that apply to any given site vary according to multiple factors, including the site’s location, whether the site contains wetlands or other features that may create burdensome permitting requirements, its environmental conditions, the present and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and environmental conditions at adjoining or nearby properties.

present and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and environmental conditions at adjoining or nearby properties.

We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites.

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This legislation could relate to, for example, matters such as greenhouse gas emissions control and building and other codes that impose energy efficiency standards or require energy saving construction materials.

On June 1, 2022, the Biden Administration launched the National Initiative to Advance Building Codes, an initiative to modernize building codes, improve climate resilience, and reduce energy costs and the recent Inflation Reduction Act of 2022, through various grants and tax incentives, encourages municipalities to adopt stricter energy codes, both of which could increase the cost to construct homes and cause delays.

Certain state and local governments in areas such as California have passed, or are considering, legislation banning the use of natural gas-fired appliances in new homes, which could affect our costs to construct homes as well as consumer demand for the homes we construct.

New building or other code requirements that impose stricter energy efficiency standards or requirements for building materials could

significantly increase our cost to construct homes.

New building or other code requirements that impose stricter energy efficiency standards or requirements for building materials could significantly increase our cost to construct homes.

As climate change concerns continue to grow, legislation, regulations, mandates, standards and other requirements of this nature are expected to continue to be enacted and become costlier for us to comply with.

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Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our stock price and our access to and costs of capital.

Changes in tax law could adversely affect our business.

tax law is always subject to change (possibly with retroactive effect).

For example, in August 2022, the United States enacted the Inflation Reduction Act of 2022, which contains significant changes to U.S.

tax law including, but not limited to, a corporate minimum tax and 1% excise tax on stock repurchases.

Other potential changes to the U.S.

Internal Revenue Code, as amended (the “Code”), include changes to the U.S.

corporate income tax rate and provisions limiting or eliminating various deductions, credits or tax preferences.

Interpretations of the Code and regulations promulgated by the Internal Revenue Service are likewise subject to change.

As states elect to conform (or else have rolling conformity) to the Code, such interpretations and regulations (including those promulgated by state authorities) could likewise affect our state income and franchise tax obligations.

Any future changes in tax law, including changes to U.S.

federal, state, territorial or local tax law, could affect our tax position and adversely impact our business.

Because of the seasonal nature of our business, our quarterly operating results fluctuate.

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We generally close more homes in our second, third and fourth quarters.

Thus, our revenues may fluctuate on a quarterly basis, and we may have higher capital

requirements in our second, third and fourth quarters in order to maintain our inventory levels.

Thus, our revenues may fluctuate on a quarterly basis, and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels.

Accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames.

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availability and pricing of mortgage financing for homebuyers;

housing affordability;

consumer confidence generally and the confidence of potential homebuyers in particular;

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If the homebuilding industry experiences another significant or sustained downturn, it would materially adversely affect our business and results of operations in future years.

In the second half of 2022, the Federal Reserve’s aggressive actions to stem inflation caused mortgage interest rates to more than double between the end of 2021 and September 2022.

The resulting increased costs of borrowing negatively impacted customer sentiment and accelerated existing affordability constraints for potential homebuyers.

As a result, many homebuyers paused their home purchasing decisions.

Additionally, challenges from ongoing supply chain disruptions and higher construction and development costs persisted during 2022.

We anticipate this dynamic could continue in 2023, resulting in lower net orders and higher cancellation rates when compared to prior periods.

The potential difficulties described above can cause demand and prices for our homes to fall or cause us to take longer and incur more costs to develop the land and build our homes.

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The potential difficulties described above could also lead some homebuyers to cancel or refuse to honor their home purchase contracts altogether.