What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-11-01 · 143 added, 243 removed, 315 unchanged (55% of the section changed)

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Business Overview

Our management team has been in the residential land development business since the mid-1990s.

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

We are engaged in the design, construction and sale of new homes in the following markets:

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Nashville, TN

Our management team has been in the residential land development business since the mid-1990s.

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

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.

We continued to adapt our business to respond to current market conditions and the uncertainty caused by the Federal Reserve’s ongoing actions to slow inflation.

We remained focused on targeted advertising spending to connect with more potential homebuyers and continued offering mortgage buy-down programs and other sales incentives to offset some of the affordability pressures resulting from higher mortgage rates.

During the three months ended March 31, 2023, we saw a measurable increase in the demand for our homes when compared to the three months ended December 31, 2022.

We believe this was due to several factors including our success at driving leads to our information centers through targeted marketing, our ability to move completed inventory through a combination of incentives and lower prices, our ongoing pivot to offering smaller, more affordable homes and the incremental decline of interest rates during the first quarter.

As a result of increased community count, the increased demand from qualified buyers, and our decision to meet that demand by selling homes earlier in the construction process, we experienced a higher number of net orders during the first quarter.

In response to these positive trends, we selectively increased construction starts in certain markets to align with the increased sales pace.

Although we are encouraged by these recent trends, we are closely monitoring demand trends at each active community and remain focused on balancing levels of vertical and completed inventory with current sales activity.

During the three months ended March 31, 2023, we had 1,366 home closings, compared to 1,599 home closings during the three months ended March 31, 2022.

The decline in home closings for the three months ended March 31, 2023 was primarily due to the slowdown in demand experienced during the second half of 2022.

We continued to experience supply chain disruptions that extended development cycles and delayed the opening of new communities.

We believe these supply shortages will continue to impact our operations for the remainder of the year.

At March 31, 2023, we had 99 active communities, including ten Terrata Homes communities.

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

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, mortgage rates, inflation, financial market stability, consumer confidence, housing demand, availability of financing for homebuyers, 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.

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 to continue to impact demand for the foreseeable future.

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

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Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 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:

Risk Factors in Part II of this Quarterly Report on Form 10-Q for the three months ended March 31, 2023.

Recent Developments

On April 28, 2023, we entered into the Third Amendment (as defined herein), which amends the 2022 Credit Agreement (as defined herein).

The Credit Agreement (as defined herein) provides for a $1.13 billion revolving credit facility, which can be increased at the request of the Company by up to $170.0 million, subject to the terms and conditions of 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.

Key financial results as of and for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, were as follows:

• Home sales revenues decreased 10.7% to $487.4 million from $546.1 million.

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• Average sales price per home closed increased 4.5% to $356,777 from $341,495.

• Gross margin as a percentage of home sales revenues increased to 28.5% from 26.9%.

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

• Gross margin as a percentage of home sales revenues decreased to 20.3% from 29.0%.

• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues decreased to 22.1% from 30.3%.

• Net income before income taxes decreased 67.5% to $32.3 million from $99.6 million.

• Net income decreased 65.7% to $27.0 million from $78.7 million.

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

• EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 8.1% from 19.1%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 7.2% from 18.8%.

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

Key financial results as of and for the nine months ended September 30, 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.

• Homes closed decreased 34.7% to 5,173 homes from 7,916 homes.

• Average sales price per home closed increased 23.6% to $351,091 from $284,117.

• Gross margin as a percentage of home sales revenues increased to 30.0% from 27.0%.

• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 31.2% from 28.4%.

• Net income before income taxes decreased 7.0% to $371.3 million from $399.4 million.

• Net income decreased 8.1% to $292.5 million from $318.3 million.

• EBITDA (non-GAAP) as a percentage of home sales revenues increased to 21.3% from 19.1%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 20.4% from 19.6%.

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.

We owned and controlled 69,724 lots at March 31, 2023 and 71,904 lots at December 31, 2022.

Results of Operations

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

The following table sets forth our results of operations for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

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

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Operating income 26,051 95,720

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

Other income, net (6,297) (3,830)

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EBITDA margin % (2)(4)

20.8 % 18.1 % 21.3 % 19.1 %

Adjusted EBITDA (4)

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Adjusted EBITDA margin % (2)(4)

18.4 % 19.7 % 20.4 % 19.6 %

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

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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.

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

Our 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 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

Absorption Rate Community Count at End of Period

Central $ 228,448 681 $ 335,460 33.0 6.9 34

Southeast 138,478 419 330,496 23.3 6.0 24

Northwest 46,774 95 492,358 7.0 4.5 7

West 65,064 155 419,768 11.0 4.7 11

Florida 68,310 197 346,751 18.7 3.5 17

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

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

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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 three months ended March 31, 2023 and 2022, and our community count as of March 31, 2023 and 2022, were as follows (revenues in thousands):

Three Months Ended March 31, 2023 As of March 31, 2023

Revenues Home Closings ASP Average Community Count Average

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Total $ 487,357 1,366 $ 356,777 97.7 4.7 99

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 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 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 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 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 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 $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 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%;

Southeast - $31.6 million or 29.1%;

Northwest - $6.4 million or 5.9%;

West - $8.3 million or 7.7%;

and Florida - $9.8 million or 9.0%.

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 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

Absorption Rate

Central $ 807,400 2,460 $ 328,211 31.3 8.7

Southeast 328,510 1,018 322,701 21.0 5.4

Northwest 220,440 429 513,846 8.6 5.5

West 244,603 598 409,035 11.2 5.9

Florida 215,240 668 322,216 19.0 3.9

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

Nine Months Ended September 30, 2021

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

Revenues Home Closings ASP Average Community Count Average Monthly

Absorption Rate

Absorption Rate Community Count at End of Period

Central $ 262,298 844 $ 310,780 30.0 9.4 29

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

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 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.

Home sales revenues for the three months ended March 31, 2023 were $487.4 million, a decrease of $58.7 million, or 10.7%, from $546.1 million for the three months ended March 31, 2022.

The decrease in home sales revenues is primarily due to a 14.6% decrease in homes closed, partially offset by an increase in the average sales price per home closed during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

The overall decrease in home closings is a result of an overall lower absorption pace, partially offset by a higher average community count, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

The overall decrease in absorption pace relates to the normalization of demand resulting from increased mortgage rates and longer cycle times stemming from varying degrees of supply chain constraints in the markets we serve.

The average sales price per home closed during the three months ended March 31, 2023 was $356,777, an increase of $15,282, or 4.5%, from the average sales price per home closed of $341,495 for the three months ended March 31, 2022.

The increase in the average sales price per home closed is primarily due to geographic mix, the impact of lower home closings from our wholesale channel and favorable pricing environments that allowed us to pass through cost increases associated with the construction of our homes in some of our markets.

Included within our home sales revenues for the three months ended March 31, 2023 was $31.2 million in wholesale revenues as a result of 103 home closings, representing 7.5% of the 1,366 total homes closed during the three months ended March 31, 2023.

Included within our home sales revenues for the three months ended March 31, 2022 was $51.8 million in wholesale revenues as a result of 213 home closings, representing 13.3% of the 1,599 total homes closed during the three months ended March 31, 2022.

The decrease in home closings as a percentage of revenues through our wholesale channel was primarily related to lower demand from our wholesale channel partners along with our decision to allocate less inventory available for sale through the wholesale channel during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

• Home sales revenues in our Central reportable segment decreased by $111.9 million, or 42.7%, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to a 46.3%

decrease in the number of homes closed at a lower absorption rate, partially offset by an increase in average community count and an increase in the average sales price per home closed.

• Home sales revenues in our Southeast reportable segment increased by $31.9 million, or 44.0%, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to a 32.8% increase in the number of homes closed driven by an increase in the average sales price per home closed and an increase in the average community count and higher absorption rate.

• Home sales revenues in our Northwest reportable segment decreased by $28.1 million, or 27.3%, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to a 20.9% decrease in the number of homes closed, as well as a decrease in the average sales price per home closed, a decrease in the average community count and a lower absorption rate.

• Home sales revenues in our West reportable segment increased by $23.3 million, or 41.9%, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to a 47.2% increase in the number of homes closed, as well as an increase in the average community count and a higher absorption rate, partially offset by a decrease in the average sales price per home closed.

• Home sales revenues in our Florida reportable segment increased by $26.1 million, or 49.3%, during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, primarily due to a 31.6% increase in the number of homes closed, as well as a higher absorption rate and an increase in the average sales price per home closed, partially offset by a decrease in the average community count.

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

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 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.

Cost of sales increased for the three months ended March 31, 2023 to $388.5 million, an increase of $0.9 million, or 0.2%, from $387.6 million for the three months ended March 31, 2022.

This overall increase is primarily due to higher construction costs and capitalized interest, partially offset by a 14.6% decrease in homes closed.

Gross margin for the three months ended March 31, 2023 was $98.8 million, a decrease of $59.6 million, or 37.6%, from $158.4 million for the three months ended March 31, 2022.

Gross margin as a percentage of home sales revenues was 20.3% for the three months ended March 31, 2023 and 29.0% for the three months ended March 31, 2022.

The decrease in gross margin as a percentage of home sales revenues during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily due to a combination of higher construction costs, capitalized interest and the impact of sales incentives offered during the three months ended March 31, 2023.

Selling Expenses.

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.

Selling expenses for the three months ended March 31, 2023 were $42.8 million, an increase of $8.4 million, or 24.4%, from $34.4 million for the three months ended March 31, 2022.

Sales commissions decreased to $20.3 million for the three months ended March 31, 2023 from $21.0 million for the three months ended March 31, 2022.

Selling expenses as a percentage of home sales revenues were 8.8% and 6.3% for the three months ended March 31, 2023 and 2022, respectively.

The increase in selling expenses as a percentage of home sales revenues was driven primarily by higher advertising spending and personnel costs, and in-house commissions due to lower home closings from our wholesale channel during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

General and Administrative.

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 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.

General and administrative expenses for the three months ended March 31, 2023 were $30.0 million, an increase of $1.7 million, or 5.9%, from $28.3 million for the three months ended March 31, 2022.

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 three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

General and administrative expenses as a percentage of home sales revenues were 6.1% and 5.2% for the three months ended March 31, 2023 and 2022, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues is primarily due to lower home sales revenues during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Other Income.

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.

Other income, net of other expenses was $6.3 million for the three months ended March 31, 2023, an increase of $2.5 million from $3.8 million for the three months ended March 31, 2022.

The increase in other income 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.

Operating Income and Net Income before Income Taxes.

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:

Operating income for the three months ended March 31, 2023 was $26.1 million, a decrease of $69.7 million, or 72.8%, from $95.7 million for the three months ended March 31, 2022.

Net income before income taxes for the three months ended March 31, 2023 was $32.3 million, a decrease of $67.2 million, or 67.5%, from $99.6 million for the three months ended March 31, 2022.

The following reportable segments contributed to net income before income taxes during the three months ended March 31, 2023 as follows:

Central - $9.1 million or 28.0%;

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and Florida - $7.5 million or 23.1%.

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.

The decreases in operating income and net income before income taxes are primarily attributed to lower gross margin, increased advertising spending and additional costs resulting from the increase of personnel associated with the

increase in community count, partially offset by higher average sales price per home closed during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Income Taxes .

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.

Income tax provision for the three months ended March 31, 2023 was $5.4 million, a decrease of $15.5 million, or 74.2%, from income tax provision of $20.9 million for the three months ended March 31, 2022.

The decrease in our effective tax rate to 16.7% from 21.0% was primarily due to deductions in excess of compensation cost for share-based payments and the extension of federal energy efficient homes tax credits, 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 March 31, 2023 was $27.0 million, a decrease of $51.7 million, or 65.7%, from $78.7 million for the three months ended March 31, 2022.

The decrease in net income is primarily attributed to overall lower homes closed at lower gross margins and higher selling expenses during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

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 September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Home sales revenues $ 487,357 $ 546,050

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Purchase accounting adjustments (1)

1,162 952 5,470 3,210

Adjusted gross margin $ 107,609 $ 165,202

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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.

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.

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

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

2022 2021 2022 2021

Three Months Ended March 31,

Net income $ 26,962 $ 78,686

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Purchase accounting adjustments (1)

1,162 952 5,470 3,210

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

Other income, net (6,297) (3,830)

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EBITDA margin % (2)

20.8 % 18.1 % 21.3 % 19.1 %

Adjusted EBITDA margin % (2)

18.4 % 19.7 % 20.4 % 19.6 %

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

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

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

Homes in backlog are generally closed within one to two months, although home closings have been, and may continue to be delayed.

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

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

Our net orders decreased 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.

Our net orders increased for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to an increase in community count.

The number of homes in our backlog at March 31, 2023 decreased 36.0% compared to March 31, 2022.

The decrease in ending backlog relates to demand for home sales earlier in the first half of 2022 as compared to the first quarter of 2023 as a result of the increase in mortgage rates for our homebuyers.

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 Nine Months Ended September 30,

Backlog Data Three Months Ended March 31,

Net orders (1)

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Ending backlog is valued at the contract amount.

(4) As of September 30, 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.

(4) As of March 31, 2023, we had 130 units related to bulk sales agreements associated with our wholesale business.

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

Land Acquisition Policies and Development

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.

We had 99 active communities as of both March 31, 2023 and December 31, 2022.

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

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.

Our lot inventory decreased to 69,724 owned or controlled lots as of March 31, 2023 from 71,904 owned or controlled lots as of December 31, 2022, primarily related to our discipline in the evaluation of and selective approval of new land deals.

We have 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

Based on our right to control the ultimate economic outcome of these finished lots, these assets will continue to be held as real estate not owned within our inventory and a corresponding obligation was established within our accrued liabilities, as discussed in Note 3 , “Accrued Expenses and Other Liabilities” to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, to recognize this relationship.

While we are not legally obligated to repurchase 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 that we have sold to the land banker and we do not guarantee any of the land banker’s liabilities.

The table below shows (i) home closings by reportable segment for the three months ended March 31, 2023 and (ii) our owned or controlled lots by reportable segment as of March 31, 2023.

Three Months Ended March 31, 2023 As of March 31, 2023

Reportable Segment Home Closings Owned (1)

Controlled (2)

Controlled Total

Central 453 21,471 3,413 24,884

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Total 1,366 57,636 12,088 69,724

(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.

(1) Of the 57,636 owned lots as of March 31, 2023, 46,633 were raw/under development lots and 11,003 were finished lots.

Homes in Inventory

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

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

We base future home starts on home closings.

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

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

As of March 31, 2023, we had a total of 1,628 completed homes, including information centers, and 2,026 homes in progress.

Raw Materials and Labor

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Typically, the raw materials and most of the components used in our business are readily available in the United States.

We purchase some components and materials centrally to achieve volume discounts, reducing costs and helping to ensure timely deliveries.

We typically do not store significant inventories of construction materials, except for work in progress materials for homes under construction.

In addition, the majority of our raw materials are supplied to us by our subcontractors, and are included in the price of our contract with such subcontractors.

Most of the raw materials necessary for our subcontractors are standard items carried by major suppliers.

Substantially all of our construction work is done by third-party subcontractors, most of whom are non-unionized.

Our construction work is performed by third-party subcontractors, most of whom are non-unionized.

We continue to monitor the supply markets to achieve the best prices possible.

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

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.

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

For the three months ended March 31, 2023, we have experienced delays and cost increases, to varying degrees, in our building materials and other construction costs.

In all of our reportable segments, we have historically experienced similar variability in our results of operations and in capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry.

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Liquidity and Capital Resources

As of September 30, 2022, we had $52.7 million of cash and cash equivalents.

As of March 31, 2023, we had $43.0 million of cash and cash equivalents.

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

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Short-term Liquidity and Capital Resources

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

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

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

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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.

However, our ability to engage in the transactions described above may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as moderated investor or lender interest or capacity and our liquidity, leverage and net worth, and we can

provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.

Long-term Liquidity and Capital Resources

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

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

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

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Revolving Credit Facility

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

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

The Credit Agreement matures on April 28, 2025.

On April 28, 2023, we entered into a Third Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Third Amendment”), which amends the 2022 Credit Agreement (as so amended by the Third Amendment, the “Credit Agreement”).

The Credit Agreement provides for a $1.13 billion revolving credit facility, which can be increased at the request of the Company by up to $170.0 million, subject to the terms and conditions of the Credit Agreement.

Lenders with $775.0 million, or 68.6%, of the $1.13 billion of commitments under the Credit Agreement, agreed to extend the maturity of their commitments to April 28, 2027, with the remaining lenders retaining their existing maturity of April 28, 2025.

The Credit Agreement also permits our subsidiaries that solely own and operate single family rental homes to incur secured indebtedness not to exceed 6% of our tangible net worth, and allows such subsidiaries to not guarantee the obligations under the Credit Agreement.

The Credit Agreement otherwise has substantially similar terms and provisions to the 2022 Credit Agreement.

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

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

The Credit Agreement is guaranteed by, among others, each of our subsidiaries that have gross assets of at least $0.5 million, other than subsidiaries whose sole purpose is to own and operate single-family rental homes.

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

As of September 30, 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.

As of March 31, 2023, the borrowing base under the 2022 Credit Agreement was, and under the Credit Agreement would have been, $1.4 billion, of which borrowings, including the 2029 Senior Notes, of which $1.1 billion were outstanding,$26.4 million of letters of credit were outstanding and $315.8 million was available to borrow under the 2022 Credit Agreement and would have been available to borrow under the Credit Agreement.

For a further description of the 2022 Credit Agreement and the Credit Agreement, please refer to Note 4 , “Notes Payable” to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Senior Notes Offering

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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 $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 September 30, 2022 will be drawn upon.

Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $361.1 million as of March 31, 2023.

Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and

surety bonds are not generally released until all development and construction activities are completed.

We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of March 31, 2023 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 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.

During the three months ended March 31, 2023, we did not repurchase any shares of our common stock.

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

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

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

As of March 31, 2023, 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 $359.6 million for the nine months ended September 30, 2022.

Net cash provided by operating activities was $77.6 million for the three months ended March 31, 2023.

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 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.

Net cash provided by operating activities during the three months ended March 31, 2023 was primarily driven by cash inflow from the $15.9 million increase in the net change in real estate inventory, which was primarily related to the number of home closings outpacing the homes under construction and land acquisitions and development level of activity, net income of $27.0 million, as well as the $22.3 million increase in other assets and $14.7 million increase in the net change in accounts payable.

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

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

Net cash provided by operating activities during the nine months ended September 30, 2021 was primarily driven by net income of $318.3 million, and included cash outflow from the $286.6 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity and increases of $66.8 million and $20.6 million in the net change in accounts receivable and accounts payable, respectively.

Net cash used in operating activities during the three months ended March 31, 2022 was primarily driven by cash outflow from the $251.6 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity and partially offset by net income of $78.7 million, as well as the $9.4 million and $10.5 million increase in the net change in accounts receivable and accrued expenses and other liabilities, respectively.

Investing Activities

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.

Net cash used in investing activities was $4.9 million for the three months ended March 31, 2023, primarily due to the additional investment in unconsolidated entities.

Net cash used in investing activities was $1.4 million for the three months ended March 31, 2022, 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 $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.

Net cash used in financing activities was $61.8 million for the three months ended March 31, 2023, primarily driven by $105.0 million of repayments on the 2022 Credit Agreement and the $17.9 million of payments related to a financing arrangement with a third-party land banker, offset by proceeds of $32.9 million under the 2022 Credit Agreement and proceeds of $26.9 million related to a financing arrangement with a third-party land banker.

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

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

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

During the nine months ended September 30, 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 three months ended March 31, 2023, we continued to experience pressure on costs due to high levels of inflation, which we expect will continue throughout 2023.

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

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

See “Industry and Economic Risks—Inflation could adversely affect our business and

financial results” in Item 1A.

Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Material Cash Requirements

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.

As of March 31, 2023, 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, 2022.

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 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.

We believe that there have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2023 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, 2022.

Cautionary Statement about Forward-Looking Statements

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• 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.

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

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

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• our ability to identify potential acquisition targets, close such acquisitions and realize the benefits of such acquisitions;

• increases in taxes or government fees;

• decline in the market value of our land portfolio;

• our ability to successfully integrate any acquisitions with our existing operations;

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• decisions of the Credit Agreement lender group;

• decline in the market value of our land portfolio;

• the cost and availability of insurance and surety bonds;

• shortages of or increased prices for labor, land, or raw materials used in land development and housing construction, including due to changes in trade policies;

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• uninsured losses in excess of insurance limits;

• the cost and availability of insurance and surety bonds;

• our leverage and future debt service obligations;

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

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• the degree and nature of our competition;

• 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 2032;

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

• 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;

• our ability to retain our key personnel;

• the impact of the COVID-19 pandemic and its effect on us, our business, customers, subcontractors and suppliers (including associated supply chain disruptions);

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

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

• our ability to retain our key personnel;

• our leverage and future debt service obligations;

• the impact on our business of any future government shutdown;

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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