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Item 7. Management’s Discussion and Analysis

2024-02-20 compared with 2023-02-21 · 103 added, 192 removed, 379 unchanged (44% of the section changed)

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Our historical consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K contain additional information that should be referred to when reviewing this material.

This section covers fiscal years 2023 and 2022 and discusses the results of operations for fiscal year 2023 compared to fiscal year 2022.

The discussion of fiscal year 2021 and the results of operations for fiscal year 2022 compared to fiscal year 2021 is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on February 21, 2023, and is incorporated by reference into this Annual Report on Form 10-K.

For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc.

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Key financial results as of and for the year ended December 31, 2023, as compared to the year ended December 31, 2022, were as follows:

• Home sales revenues decreased 24.4% to $2.3 billion from $3.1 billion.

• Homes closed decreased 36.6% to 6,621 homes from 10,442 homes.

• Home sales revenues increased 2.3% to $2.4 billion from $2.3 billion.

• Homes closed increased 1.6% to 6,729 homes from 6,621 homes.

• Average sales price per home closed increased 0.7% to $350,510 from $348,052.

• Gross margin as a percentage of home sales revenues increased to 28.1% from 26.8%.

• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 29.2% from 28.2%.

• Gross margin as a percentage of home sales revenues decreased to 23.0% from 28.1%.

• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues decreased to 24.7% from 29.2%.

• Net income before income taxes decreased 37.4% to $261.8 million from $418.1 million.

• Net income decreased 39.0% to $199.2 million from $326.6 million.

• EBITDA (non-GAAP) as a percentage of home sales revenues remained at 19.1%.

• EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 12.6% from 19.1%.

• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 11.7% from 18.2%.

• Active communities at the end of 2022 decreased to 99 from 101.

• Active communities at the end of 2023 increased to 117 from 99.

• Total owned and controlled lots decreased 1.1% to 71,081 lots at December 31, 2023 from 71,904 lots at December 31, 2022.

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 .”

Current Homebuilding and Inflationary Environment

For the first half of 2022, we saw robust demand for our homes and continued to benefit from pricing power that allowed us to pass through rising input costs related to supply chain constraints.

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.

Longer lead times relating to materials, municipality and labor activities increased our construction and development cycle times and slowed the timing of home closings.

Our average home completion time was approximately 90 to 165 days in 2022 as compared to 90 to 130 days in 2021.

To address the demand headwinds and drive sales, we increased advertising spending to connect with more potential homebuyers, we began offering mortgage buy-down programs and other sales incentives to offset some of the affordability pressures and we increased our allocation of inventory available for sale to our wholesale channel.

In addition, we evaluated our land position and significantly reduced our owned and controlled lots.

The decline in home closings for the year ended December 31, 2022 was primarily due to our strong prior year comparable numbers, combined with lower average community count and slower absorptions resulting from the impact of higher mortgage rates experienced during the second half of the year.

We expect that many of these challenges will persist in 2023 and could potentially worsen.

However, 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.

We believe we are well positioned to meet the demands of this uncertain period based on our 100% spec-focused business model, targeted at the entry level buyers.

Continuing Impact of COVID-19

We continue to see pressure on global supply chains due to disruptions created by the effects of COVID-19 and variants thereof (collectively, “COVID-19”), that extended construction and development cycles and delayed home closings and the opening of new communities.

We continue to focus on meeting our customers' needs as we supply homes critical to maintaining essential infrastructure within the markets we serve.

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.

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

Risk Factors in Part I of this Annual Report on Form 10-K.

Results of Operations

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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 years ended December 31, 2022 and 2021 were as follows (revenues in thousands):

Year Ended December 31, 2022 At December 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 years ended December 31, 2023 and 2022, and our community count as of December 31, 2023 and 2022, were as follows (revenues in thousands):

Year Ended December 31, 2023 As of December 31, 2023

Reportable Segment Revenues Home Closings ASP Average Community Count Average

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Total $ 2,358,580 6,729 $ 350,510 103.9 5.4 117

Year Ended December 31, 2021 At December 31, 2021

Year Ended December 31, 2022 As of December 31, 2022

Reportable Segment Revenues Home Closings ASP Average Community Count Average

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Home Sales Revenues .

Home sales revenues for the year ended December 31, 2022 were $2.3 billion, a decrease of $0.7 billion, or 24.4%, from $3.1 billion for the year ended December 31, 2021.

The decrease in home sales revenues is primarily due to a 36.6% decrease in homes closed in fewer communities, partially offset by an increase in the average sales price per home closed during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Home sales revenues for the year ended December 31, 2023 were $2.4 billion, an increase of $54.1 million, or 2.3%, from $2.3 billion for the year ended December 31, 2022.

The increase in home sales revenues was primarily due to a 1.6% increase in homes closed and a slight increase in the average sales price per home closed during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

We closed 6,729 homes during 2023, as compared to 6,621 homes closed during 2022.

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

Our average community count at December 31, 2022 decreased to 91.9 from 104.4 at December 31, 2021.

The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities and longer development cycle times during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

The overall increase in home closings was a result of higher average community count, offset by an overall lower absorption pace during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Our average community count at December 31, 2023 increased to 103.9 from 91.9 at December 31, 2022.

The average sales price per home closed during the year ended December 31, 2023 was $350,510, an increase of $2,458, or 0.7%, from the average sales price per home closed of $348,052 for the year ended December 31, 2022.

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 absorption relates to the slowdown of demand primarily resulting from increased mortgage rates and longer 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 year ended December 31, 2022 was $340.6 million in wholesale revenues related to 1,233 home closings through our wholesale channel, representing 18.6% of the 6,621 total homes closed during the year ended December 31, 2022.

Included within our home sales revenues during the year ended December 31, 2021 was $349.3 million in wholesale revenues related to 1,515 home closings through our wholesale channel, representing 14.5% of the 10,442 total homes closed during the year ended December 31, 2021.

The increase in home closings as a percentage of revenues through our wholesale channel was related to the slowdown in retail sales experienced during the second half of 2022 and our

decision to allocate more inventory available for sale to our wholesale partners during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

• Home sales revenues in our Central reportable segment decreased by $240.9 million, or 19.2%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 33.7% 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 $139.4 million, or 23.4%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 38.4% 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 $257.1 million, or 50.4%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 56.9% 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 $50.3 million, or 14.3%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 24.5% 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 $58.0 million, or 17.0%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 34.9% 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 for the majority of 2022.

The increase in the average sales price per home closed was primarily due to our ability to increase prices in certain markets and the impact of fewer home closings in our wholesale channel.

The overall decrease in absorption rate relates to the continued normalization of demand primarily resulting from higher mortgage rates.

Included within our home sales revenues for the year ended December 31, 2023 was $202.3 million in wholesale revenues resulting from 679 home closings, representing 10.1% of the 6,729 total homes closed during the year ended December 31, 2023.

Included within our home sales revenues for the year ended December 31, 2022 was $340.6 million in wholesale revenues resulting from 1,233 home closings, representing 18.6% of the 6,621 total homes closed during the year ended December 31, 2022.

• Home sales revenues in our Central reportable segment decreased by $281.2 million, or 27.8%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a 27.6% decrease in the number of homes closed and a slight decrease in the average sales price per home closed.

The decrease in home closings was the result of a lower absorption rate, partially offset by an increase in the average community count.

• Home sales revenues in our Southeast reportable segment increased by $101.5 million, or 22.3%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a 22.2% increase in the number of homes closed and a slight increase in the average sales price per home closed.

The increase in home closings was the result of an increase in the average community count and a higher absorption rate.

• Home sales revenues in our Northwest reportable segment decreased by $2.2 million, or 0.9%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a 2.6% decrease in the average sales price per home closed, partially offset by a 1.8% increase in the number of homes closed.

The increase in home closings was the result of a 20.0% increase in the average community count, offset by a lower absorption rate.

• Home sales revenues in our West reportable segment increased by $80.1 million, or 26.6%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a 32.1% increase in the number of homes closed, partially offset by a 4.1% decrease in the average sales price per home closed.

The increase in home closings was the result of a 21.7% increase in the average community count and a higher absorption rate.

• Home sales revenues in our Florida reportable segment increased by $155.9 million, or 55.1%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a 45.9% increase in the number of homes closed and a 6.3% increase in the average sales price per home closed.

The increase in home closings was the result of a higher absorption rate and an increase in the average community count.

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

Cost of sales decreased for the year ended December 31, 2022 to $1.7 billion, a decrease of $0.6 billion, or 25.7%, from $2.2 billion for the year ended December 31, 2021.

This decrease is primarily due to a 36.6% decrease in homes closed, offset by increased construction costs during 2022 as compared to 2021.

Cost of sales increased for the year ended December 31, 2023 to $1.8 billion, an increase of $158.5 million, or 9.6%, from $1.7 billion for the year ended December 31, 2022.

This overall increase was primarily due to higher construction costs and capitalized interest and a 1.6% increase in homes closed.

Gross margin for the year ended December 31, 2023 was $542.2 million, a decrease of $104.4 million, or 16.1%, from $646.6 million for the year ended December 31, 2022.

Gross margin as a percentage of home sales revenues was 23.0% for the year ended December 31, 2023 and 28.1% for the year ended December 31, 2022.

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

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

Selling Expenses.

Selling expenses for the year ended December 31, 2022 were $144.9 million, a decrease of $25.1 million, or 14.8%, from $170.0 million for the year ended December 31, 2021.

Sales commissions decreased to $82.7 million for the year ended December 31, 2022 from $115.4 million for the year ended December 31, 2021 due to a 24.4% decrease in home sales revenues during 2022 as compared to 2021.

Selling expenses for the year ended December 31, 2023 were $191.6 million, an increase of $46.7 million, or 32.2%, from $144.9 million for the year ended December 31, 2022.

Sales commissions increased to $102.8 million for the year ended December 31, 2023 from $82.7 million for the year ended December 31, 2022 due to a 2.3% increase in home sales revenues and an increase in outside commissions during 2023 as compared to 2022.

Selling expenses as a percentage of home sales revenues were 8.1% and 6.3% for the years ended December 31, 2023 and 2022, respectively.

The increase in selling expenses as a percentage of home sales revenues was driven primarily by higher advertising spend, partially offset by lower sales commission expensed during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

The increase in selling expenses as a percentage of home sales revenues was primarily due to higher advertising expenses, fewer wholesale home closings and higher other expenses incurred during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

General and Administrative.

General and administrative expenses for the year ended December 31, 2023 were $117.4 million, an increase of $5.8 million, or 5.2%, from $111.6 million for the year ended December 31, 2022.

The increase in the amount of general and administrative expenses is primarily due to increased overhead expenses.

The increase in the amount of general and administrative expenses was primarily due to higher personnel related costs and increased indirect overhead expenses, partially offset by a decrease in payroll related costs and lower terminated land purchase expenses for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

General and administrative expenses as a percentage of home sales revenues were 5.0% and 4.8% for the years ended December 31, 2023 and 2022, respectively.

The increase in general and administrative expenses as a percentage of home sales revenues reflects our increased personnel and associated overhead costs, as well as professional fees and terminated land purchase agreements, partially offset by a decrease in management bonus and stock compensation incurred during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Loss on extinguishment of debt.

There was no loss on extinguishment of debt for the year ended December 31, 2022.

Loss on extinguishment of debt was $14.0 million for the year ended December 31, 2021 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.

We redeemed all of our 2026 Senior Notes in July 2021.

The increase in general and administrative expenses as a percentage of home sales revenues reflects our increased personnel and associated overhead costs, partially offset by a decrease in payroll related costs during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Other Income.

Other income, net of other expenses was $28.5 million for the year ended December 31, 2023, an increase of $0.5 million from $28.0 million for the year ended December 31, 2022.

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 investments in unconsolidated entities and gains realized from the sale of land and lots not directly associated with our core homebuilding operations.

The increase in other income, net of other expenses, primarily reflects an increase in income associated with our investment in unconsolidated entities and rental properties for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Operating Income and Net Income before Income Taxes.

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Net income before income taxes for the year ended December 31, 2023 was $261.8 million, a decrease of $156.4 million, or 37.4%, from $418.1 million for the year ended December 31, 2022.

Our reportable segments contributed the following amounts and percentages of net income before income taxes during 2022:

The following reportable segments contributed to net income before income taxes during the year ended December 31, 2023 as follows:

Central - $87.2 million, or 33.3%;

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and Florida - $48.9 million, or 18.7%.

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

The overall decreases in operating income and net income before income taxes were primarily due to a lower absorption rate, a lower gross margin, and higher advertising and other selling expenses incurred, partially offset by a higher average community count during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Income Taxes .

Income tax provision for the year ended December 31, 2023 was $62.5 million, a decrease of $29.0 million, or 31.7%, from income tax provision of $91.5 million for the year ended December 31, 2022.

The increase in our effective tax rate to 21.9% from 20.8% results from an increase in the compensation limitation under Section 162(m) of the Code, and the retroactive extension of the 45L tax credit, offset by deductions in excess of compensation cost for share-based payments for the year ended December 31, 2021.

The increase in our effective tax rate to 23.9% from 21.9% was primarily due to an increase in the rate for state income taxes, net of the federal benefit, the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended, and the retroactive extension of the federal energy efficient homes tax credits for the year ended December 31, 2022, offset by a decrease in the rate for the deductions in excess of compensation cost for share-based payments.

Net income for the year ended December 31, 2023 was $199.2 million, a decrease of $127.3 million, or 39.0%, from $326.6 million for the year ended December 31, 2022.

The decrease in net income is primarily attributed to overall lower number of homes closed across all reportable segments, partially offset by higher average sales price per home closed at higher gross margins on a per home basis, during the year ended December 31, 2022.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the years ended December 31, 2021 and 2020 were as follows (revenues in thousands):

Year Ended December 31, 2021 At December 31, 2021

Reportable Segment Revenues Home Closings ASP Average Community Count Average

Absorption Rate Community Count at End of Period

Central $ 1,252,782 4,665 $ 268,549 36.5 10.7 35

Southeast 594,742 2,279 260,966 25.6 7.4 25

Northwest 510,497 1,166 437,819 11.1 8.8 11

West 351,219 995 352,984 11.4 7.3 11

Florida 340,909 1,337 254,981 19.8 5.6 19

Total $ 3,050,149 10,442 $ 292,104 104.4 8.3 101

Year Ended December 31, 2020

At December 31, 2020

Reportable Segment Revenues Home Closings ASP Average Community Count Average

Absorption Rate Community Count at End of Period

Central $ 850,375 3,654 $ 232,724 34.6 8.8 38

Southeast 559,226 2,382 234,772 33.5 5.9 31

Northwest 389,523 1,000 389,523 11.9 7.0 13

West 286,130 1,043 274,334 13.9 6.2 13

Florida 282,675 1,260 224,345 18.0 5.8 21

Total $ 2,367,929 9,339 $ 253,553 111.9 7.0 116

Home Sales Revenues .

Home sales revenues for the year ended December 31, 2021 were $3.1 billion, an increase of $682.2 million, or 28.8%, from $2.4 billion for the year ended December 31, 2020.

The increase in home sales revenues is primarily due to an 11.8% increase in homes closed and an increase in the average sales price per home closed during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

We closed 10,442 homes during 2021, as compared to 9,339 homes closed during 2020.

The average sales price per home closed during the year ended December 31, 2021 was $292,104, an increase of $38,551, or 15.2%, from the average sales price per home closed of $253,553 for the year ended December 31, 2020.

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

The overall increase in home closings was primarily driven by strong demand in all reportable segments during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

We increased our home sales revenues in our reportable segments other than our Central reportable segment by $279.8 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020, representing a 1.6% increase in the number of homes closed in these reportable segments and increased average sales price per home closed on a consolidated basis during 2021 as compared to 2020.

• Home sales revenues in our Central reportable segment increased by $402.4 million, or 47.3%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to an increase in the number of homes closed at a higher average sales price per home closed and increased average community count at a higher absorption rate in this reportable segment.

• Home sales revenues in our Southeast reportable segment increased by $35.5 million, or 6.4%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased closings in certain markets in North Carolina and South Carolina, partially offset by lower community count at December 31, 2021 as compared to December 31, 2020.

• Home sales revenues in our Northwest reportable segment increased by $121.0 million, or 31.1%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to a 16.6% increase in the number of homes closed in this reportable segment, as a result of increased demand.

• Home sales revenues in our West reportable segment increased by $65.1 million, or 22.7%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased demand in certain markets in this reportable segment, partially offset by lower average community count.

• Home sales revenues in our Florida reportable segment increased by $58.2 million, or 20.6%, largely due to an increase of 13.7% in the average sales price per home closed as a result of strong demand and complemented by increased average community count during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

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

Cost of sales increased for the year ended December 31, 2021 to $2.2 billion, an increase of $467.3 million, or 26.5%, from $1.8 billion for the year ended December 31, 2020.

This increase is primarily due to an 11.8% increase in homes closed, higher construction costs and product mix during 2021 as compared to 2020.

Gross margin for the year ended December 31, 2021 was $818.0 million, an increase of $214.9 million, or 35.6%, from $603.1 million for the year ended December 31, 2020.

Gross margin as a percentage of home sales revenues was 26.8% for the year ended December 31, 2021 and 25.5% for the year ended December 31, 2020.

This increase in gross margin as a percentage of home sales revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to raising prices higher than increases in input costs.

Selling Expenses.

Selling expenses for the year ended December 31, 2021 were $170.0 million, an increase of $21.6 million, or 14.6%, from $148.4 million for the year ended December 31, 2020.

Sales commissions increased to $115.4 million for the year ended December 31, 2021 from $89.2 million for the year ended December 31, 2020 partially due to a 28.8% increase in home sales revenues during 2021 as compared to 2020.

Selling expenses as a percentage of home sales revenues were 5.6% and 6.3% for the years ended December 31, 2021 and 2020, respectively.

The decrease in selling expenses as a percentage of home sales revenues was driven primarily by operating leverage obtained from the increase in home sales revenues and to a lesser extent lower advertising expenses during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

General and Administrative.

General and administrative expenses for the year ended December 31, 2021 were $100.3 million, an increase of $10.3 million, or 11.5%, from $90.0 million for the year ended December 31, 2020.

The increase in the amount of general and administrative expenses is primarily due to increased overhead.

General and administrative expenses as a percentage of home sales revenues were 3.3% and 3.8% for the years ended December 31, 2021 and 2020, respectively.

The decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Loss on extinguishment of debt.

Loss on extinguishment of debt was $14.0 million for the year ended December 31, 2021 primarily due to the redemption premium associated with the optional redemption of 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 and debt issuance costs previously capitalized that were associated with our credit agreement then in effect.

There was no loss on extinguishment of debt for the year ended December 31, 2020.

Other Income.

Other income, net of other expenses was $9.1 million for the year ended December 31, 2021, an increase of $5.9 million from $3.1 million for the year ended December 31, 2020.

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

Operating Inco me and Net Income before Income Taxes.

Operating income for the year ended December 31, 2021 was $547.7 million, an increase of $183.0 million, or 50.2%, from $364.7 million for the year ended December 31, 2020.

Net income before income taxes for the year ended December 31, 2021 was $542.8 million, an increase of $174.9 million, or 47.6%, from $367.8 million for the year ended December 31, 2020.

Our reportable segments contributed the following amounts and percentages of net income before income taxes during 2021:

Central - $242.6 million or 44.7%;

Southeast - $105.6 million or 19.5%;

Northwest - $115.0 million or 21.2%;

West - $50.8 million or 9.4%;

and Florida - $49.9 million or 9.2%.

The increases in operating income and net income before income taxes are primarily attributed to operating leverage realized from

the increase in home sales revenues and higher average sales price per home closed during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Income Taxes .

Income tax provision for the year ended December 31, 2021 was $113.1 million, an increase of $69.2 million, or 157.4%, from income tax provision of $44.0 million for the year ended December 31, 2020.

The increase in the amount of income tax provision is primarily due to the retroactive tax benefits relating to the federal energy efficient homes tax credits we recognized during 2020 and the 47.6% increase in net income before taxes, which resulted in an increase in our effective tax rate for the year ended December 31, 2021 to 20.8% from 11.9% for the year ended December 31, 2020.

Net income for the year ended December 31, 2021 was $429.6 million, an increase of $105.8 million, or 32.6%, from $323.9 million for the year ended December 31, 2020.

The increase in net income is primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed, partially offset by tax benefits relating to the federal energy efficient homes tax credits we recognized for the year ended December 31, 2020.

The decrease in net income was primarily attributed to a lower gross margin and higher selling expenses as a percentage of revenues during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Non-GAAP Measures

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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 included in cost of sales.

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.

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

EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates,

levels of depreciation or amortization and items considered to be unusual or non-recurring.

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

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Only purchase contracts that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing are included in new (gross) orders.

Our backlog consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve months .

Our “backlog” consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed and wholesale contracts with varying terms.

Since our business model is generally based on building move-in ready homes before a purchase contract is signed, the majority of our homes in backlog are currently under construction or complete.

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

Our net orders decreased in 2022 primarily due to the sharp rise in mortgage rates as homebuyer demand softened, combined with historically low levels of finished lots resulting from years of sustained demand and the rapid pace of fluctuating rising costs for certain supplies and labor, previously experienced in 2021.

Our net orders increased for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to an increase in average community count.

Our wholesale orders decreased 61.8% to 60 units at December 31, 2023 from 157 units at December 31, 2022.

The number of homes in our backlog at December 31, 2023 decreased 16.0% compared to December 31, 2022.

The decrease in ending backlog is primarily a result of the continued increase in mortgage rates for our homebuyers during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

As of the dates set forth below, our net orders, cancellation rate, and ending backlog homes and value were as follows (dollars in thousands):

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(2) Cancellation rate for a period is the total number of purchase contracts cancelled during the period divided by the total new (gross) orders for the purchase of homes during the period.

(3) Ending backlog consists of retail homes at the end of the period that are under a purchase contract that has been signed by homebuyers who have met our preliminary financing criteria but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve months.

Ending backlog is valued at the contract amount.

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As of the date of this Annual Report on Form 10-K, 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, 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.

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

To the extent these sources of capital are insufficient to meet our

needs, we may also conduct additional public or private offerings of our securities, refinance our indebtedness, or dispose of certain assets to fund our operating activities and capital needs.

Additionally, we plan to further utilize,

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

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

Material Cash Requirements

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700,000 — — 400,000 300,000

Interest and fees (c)

Land banking financing arrangements (c)

104,459 61,337 43,122 — —

Land banking financing arrangements (d)

Interest and fees (d)

435,226 91,362 181,077 162,787 —

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Total $ 1,815,105 $ 154,234 $ 342,469 $ 1,018,389 $ 300,013

(a) Represents borrowings under the Credit Agreement, which matures on April 28, 2025.

Interest calculated using the effective rate as of December 31, 2022.

(a) Represents borrowings under the Credit Agreement, which matures on April 28, 2025 with respect to 20.3% of the commitments thereunder and April 28, 2028 with respect to 79.7% of the commitments thereunder.

See Note 6 , “ Notes Payable ” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our long-term debt.

(b) Represents $300.0 million aggregate principal amount of our 4.000% 2029 Senior Notes.

The 2029 Senior Notes mature on July 15, 2029.

(b) Represents $300.0 million aggregate principal amount of our 4.000% 2029 Senior Notes and $400.0 million aggregate principal amount of our 8.750% 2028 Senior Notes.

The 2029 Senior Notes mature on July 15, 2029, and the 2028 Senior Notes mature on December 15, 2028.

See Note 6 “ Notes Payable ” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our long-term debt.

(c) All of the outstanding borrowings under the Credit Agreement are at variable rates based on SOFR, or subject to an interest rate floor.

(c) The land banking financing arrangements are subject to certain performance obligations, financial and other penalties if the lots covered by such arrangements are not purchased.

See Note 5 , “Accrued Expenses and Other Liabilities” for additional information regarding our land banking financing arrangements.

(d) All of the outstanding borrowings under the Credit Agreement are at variable rates based on SOFR, or subject to an interest rate floor.

The interest rate for our variable rate indebtedness as of December 31, 2023 was SOFR plus 1.85%.

Interest calculated using the effective rate as of December 31, 2023.

Fees under the Credit Agreement are approximately $0.3 million per year.

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

Interest related to the land banking financing arrangements is not included in the table.

(d) The land banking financing arrangements may incur interest at time of purchase and are subject to certain performance obligations, financial and other penalties if the lots are not purchased and are excluded from the table.

Interest on the 2028 Senior Notes accrues at a rate of 8.750% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2024.

The land banking financing arrangements incur interest at the time of purchase.

Interest of $1.6 million related to the land banking financing arrangements is included in the table.

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

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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 December 5, 2023, we entered into a Fourth Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Fourth Amendment”), which amended the 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 (as amended to date, including the Fourth Amendment, the “Credit Agreement”).

The Credit Agreement provides for a $1.205 billion revolving credit facility, which can be increased at the request of the Company by up to $95.0 million, subject to the terms and conditions of the Credit Agreement.

The Credit Agreement matures on April 28, 2028 with respect to $960.0 million, or 79.7%, of the $1.205 billion of commitments thereunder and on April 28, 2025 with respect to 20.3% of the commitments thereunder.

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

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

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

As of December 31, 2022, the borrowing base under the Credit Agreement was $1.4 billion, of which borrowings, including the 2029 Senior Notes, of $1.1 billion were outstanding, $33.4 million of letters of credit were outstanding and $236.6 million was available to borrow under the Credit Agreement.

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”) and our 8.750% Senior Notes due 2028 (the “2028 Senior Notes”), may not exceed the borrowing base under the Credit Agreement.

The borrowing base primarily consists 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.

As of December 31, 2023, the borrowing base under the Credit Agreement was $1.7 billion, of which the maximum available to borrow was $1.205 billion.

As of December 31, 2023, borrowings under the Credit Agreement and the outstanding principal amount of the 2029 Senior Notes and the 2028 Senior Notes totaled $1.3 billion, $28.1 million of letters of credit were outstanding and $354.8 million was available to borrow under the Credit Agreement.

For a further description of the Credit Agreement, please refer to Note 6 , “Notes Payable” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Senior Notes Offering

On June 28, 2021, we issued $300.0 million aggregate principal amount of the 2029 Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S.

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

On November 21, 2023, we issued $400.0 million aggregate principal amount of the 2028 Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A (“Rule 144A”) under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S.

persons in transactions outside the United States pursuant to Regulation S (“Regulation S”) under the Securities Act.

Interest on the 2028 Senior Notes accrues at a rate of 8.750% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2024.

The 2028 Senior Notes mature on December 15, 2028.

The terms of the 2028 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Fourth Supplemental Indenture thereto, dated as of November 21, 2023, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Regions Bank, as trustee.

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

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

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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 December 31, 2022 will be drawn upon.

We do not believe that it

is probable that any outstanding letters of credit, surety bonds or financial guarantees as of December 31, 2023 will be drawn upon.

Stock Repurchase Program

In November 2018, we announced that our Board of Directors (the “Board”) authorized a stock repurchase program, pursuant to which we may purchase up to $50.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws.

In October 2020 and February 2022, the Board approved an increase in our stock repurchase program by an additional $300.0 million and $200.0 million, respectively.

For the years ended December 31, 2022, 2021 and 2020, we repurchased 892,916 shares of our common stock for $95.1 million to be held as treasury stock, 1,288,563 shares of our common stock for $193.8 million to be held as treasury stock and 718,993 shares of our common stock for $48.1 million to be held as treasury stock, respectively.

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 year ended December 31, 2023, we did not repurchase any shares of our common stock.

During the years ended December 31, 2022 and 2021, we repurchased 892,916 shares of our common stock for $95.1 million to be held as treasury stock and 1,288,563 shares of our common stock for $193.8 million to be held as treasury stock, respectively.

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

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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 year ended December 31, 2023 was primarily driven by cash outflow from the $255.5 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, partially offset by net income of $199.2 million, as well as the $16.2 million increase and $18.3 million decrease in the net change in accounts receivable, and accrued expenses and other liabilities, respectively.

Net cash used in operating activities was $370.5 million during the year ended December 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 used in operating activities during the year ended December 31, 2022 was primarily driven by cash outflow from the $823.9 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, partially offset by net income of $326.6 million, as well as the $32.8 million decrease and $58.1 million increase in the net change in accounts receivable, and accrued expenses and other liabilities, respectively.

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Net cash provided by operating activities during the year ended December 31, 2021 was primarily driven by net income of $429.6 million, and included cash outflows from the $463.6 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 a $58.0 million decrease in the net change in accounts receivable.

Net cash provided by operating activities was $202.2 million during the year ended December 31, 2020.

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 year ended December 31, 2020 was primarily driven by net income of $323.9 million, offset by cash outflows from the $70.2 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity and a $59.5 million increase in the net change in accounts receivable.

Investing Activities

Net cash used in investing activities was $13.6 million during the year ended December 31, 2023, primarily due to additional investments in unconsolidated entities, net of return of capital from unconsolidated entities.

Net cash used in investing activities was $6.0 million during the year ended December 31, 2022, primarily due to additional investments in unconsolidated entities.

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and its affiliated entities, including R Home LLC and Paxmar Land Development, and the real estate assets of Buffington Homebuilding Group, Ltd.

Net cash used in investing activities was $5.6 million during the year ended December 31, 2020, which reflects the purchase of property and equipment and investment in unconsolidated entity.

Financing Activities

Net cash provided by financing activities was $357.9 million during the year ended December 31, 2022, primarily driven by $618.9 million of borrowings under the 2021 Credit Agreement and the Credit Agreement and $149.5 million of proceeds related to financing arrangements with a third-party land banker.

These were partially offset by $308.0 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 provided by financing activities during the year ended December 31, 2021 was $63.3 million, primarily driven by borrowings of $1.2 billion under the 2021 Credit Agreement and the 2029 Senior Notes, offset by $969.0 million of payments associated with the 2026 Senior Notes and our credit agreement then in effect and by the $193.8 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock.

Net cash used in financing activities during the year ended December 31, 2020 was $198.9 million, primarily driven by $530.0 million of payments under our credit agreement then in effect and by the $48.1 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $377.1 million under our credit agreement then in effect.

Net cash provided by financing activities was $87.6 million during the year ended December 31, 2023, primarily driven by $887.3 million of borrowings under our credit agreement then in effect and $50.4 million of proceeds related to financing arrangements with a third-party land banker.

These were partially offset by $746.0 million of repayments on our credit agreement then in effect, net of payments of $95.0 million related to a financing arrangement with a third-party land banker.

Net cash provided by financing activities was $357.9 million during the year ended December 31, 2022, primarily driven by $618.9 million of borrowings under our credit agreement then in effect and $149.5 million of proceeds related to financing arrangements with a third-party land banker.

These were partially offset by $308.0 million of repayments on our credit agreement then in effect 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 provided by financing activities during the year ended December 31, 2021 was $63.3 million, primarily driven by borrowings of $1.2 billion under our credit agreement then in effect and the 2029 Senior Notes, offset by $969.0 million of payments associated with the 2026 Senior Notes and our credit agreement then in effect and by the $193.8 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.

In June 2022 we began to experience a moderation of buyer demand resulting from the Federal Reserve’s ongoing actions to stem inflation, which ultimately resulted in higher mortgage rates for our homebuyers.

During the year ended December 31, 2022, we have experienced a significant increase in land, labor, materials and construction costs, which we currently expect to 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.

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and potential cost reimbursements from various municipalities.

Changes to estimated total remaining development costs subsequent to initial home closings in a community are allocated to the remaining unsold homes in the community on a prospective basis.

Changes to estimated total remaining development costs subsequent to initial home closings in a community are allocated to the remaining unsold homes

in the community on a prospective basis.

Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method and are capitalized as they are incurred.

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We pay particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales prices and/or margins are trending downward and are anticipated to continue to trend downward.

Due largely to the relatively short development and construction

periods for our communities and our growth, we have experienced limited circumstances during 2022, 2021 or 2020 that are indicators of impairment.

Due largely to the relatively short development and construction periods for our communities and our growth, we have experienced limited circumstances during 2023, 2022 or 2021 that are indicators of impairment.

Our future sales and margins may be impacted by our inability to realize continued growth, increased cost associated with holding and developing land, local economic factors, pressure on home sales prices, increased carrying costs, and insufficient access to labor and materials at reasonable costs.

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For raw land, land under development and completed lots that our management anticipates will be utilized for future homebuilding activities or to be sold as finished lots to individuals, the recoverability of assets is measured by comparing the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets based on home or lot sales, consistent with the evaluation of operating communities discussed above.

As of December 31, 2022, we had not identified any raw land, land under development or completed lots that management intends to market for sale in bulk to a third-party.

Pre-acquisition Costs and Controlled Lots Not Owned

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Warranty Reserves

We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements.

We have provided homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements.

Estimated future direct warranty costs are assessed monthly on a consistent basis as part of our policy and accrued and charged to cost of sales in connection with our home sales.

The primary assumption to record amounts accrued for our warranty liability is based upon a trailing 120 month period of historical warranty cost experience on a per house basis established based on (i) trends in historical warranty payment levels, (ii) the historical range of amounts paid per house, (iii) any warranty expenditures not considered to be normal and recurring, and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our expansion.

and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our expansion.

Our analysis also considers improvements in quality control and construction techniques expected to impact future warranty expenditures and the expertise of our personnel.

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We account for certain homebuilding asset purchases as business combinations using the acquisition method of accounting and allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date with excess recorded as goodwill.

The acquisition method of accounting

requires us to make significant estimates and assumptions regarding the fair value of the acquired assets.

The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair value of the acquired assets.

We determine the estimated fair values of the real estate inventory with the assistance of appraisals performed by independent third-party specialists and estimates by management.

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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-K

Item 7. Management’s Discussion and Analysis