LGI Homes, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. and its subsidiaries. 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 70,000 homes. We are engaged in the design, construction and sale of new homes in the following markets: West Northwest Central Midwest Florida Southeast Mid-Atlantic Phoenix, AZ Seattle, WA Houston, TX Minneapolis, MN Tampa, FL Atlanta, GA Washington, D.C. Tucson, AZ Portland, OR Dallas Ft. Worth, TX Orlando, FL Charlotte, NC Norfolk, VA Albuquerque, NM Denver, CO San Antonio, TX Fort Myers, FL Raleigh, NC Richmond, VA Las Vegas, NV Austin, TX Jacksonville, FL Wilmington, NC Baltimore, MD Northern CA Oklahoma City, OK Fort Pierce, FL Winston-Salem, NC Southern CA Daytona Beach, FL Columbia, SC Salt Lake City, UT Sarasota, FL Greenville, SC Birmingham, AL Nashville, TN The housing market remains healthy, with overall demand supported by strong fundamentals, including household formation and migration trends, the ongoing impact of years of underproduction, and a lock-in effect limiting the supply of existing homes available for sale. On top of these dynamics are a resilient employment market and our customers’ positive outlook on the stability of their jobs. On the other side of the demand equation is constrained affordability, which remains the main challenge for our customers. During the nine months ended September 30, 2024, we had 4,495 home closings, compared to 4,971 home closings during the nine months ended September 30, 2023. We sell homes under the LGI Homes and Terrata Homes brands. Our 138 active communities at September 30, 2024 included 18 Terrata Homes communities. At September 30, 2023, we had 106 active communities, including 11 Terrata Homes communities. Recent Developments On October 9, 2024, we entered into the Fifth Amendment, which amended the 2023 Credit Agreement. The Fifth Amendment, among other things, (a) amended the negative covenant in the Credit Agreement relating to housing inventory and (b) extended the maturity of the commitments of certain lenders under the Credit Agreement to April 28, 2028. For additional information on the Credit Agreement (including defined terms used in this paragraph), see Note 4 , “Notes Payable” to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q . For additional discussion regarding our business and operations, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. For additional discussion regarding risks associated with our business and operations, see Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Key Results Key financial results as of and for the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, were as follows: • Home sales revenues increased 5.6% to $651.9 million from $617.5 million. • Homes closed increased 0.3% to 1,757 homes from 1,751 homes. • Average sales price per home closed increased 5.2% to $371,004 from $352,678. • Gross margin as a percentage of home sales revenues decreased to 25.1% from 25.7%. 20 Table of Contents • Adjusted gross margin (non-GAAP) as a percentage of home sales revenues was 27.2% in both comparable periods. • Net income before income taxes increased 2.7% to $91.9 million from $89.4 million. • Net income increased 3.8% to $69.6 million from $67.0 million. • EBITDA (non-GAAP) as a percentage of home sales revenues increased to 16.2% from 16.0%. For reconciliations of the non-GAAP financial measures of adjusted gross margin and 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, 2024, as compared to the nine months ended September 30, 2023, were as follows: • Home sales revenues decreased 6.0% to $1.6 billion from $1.8 billion. • Homes closed decreased 9.6% to 4,495 homes from 4,971 homes. • Average sales price per home closed increased 4.0% to $366,007 from $352,075. • Gross margin as a percentage of home sales revenues increased to 24.7% from 22.8%. • Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 26.7% from 24.5%. • Net income before income taxes decreased 0.7% to $191.8 million from $193.2 million. • Net income decreased 1.3% to $145.2 million from $147.1 million. • EBITDA (non-GAAP) as a percentage of home sales revenues increased to 13.6% from 12.5%. For reconciliations of the non-GAAP financial measures of adjusted gross margin and EBITDA to the most directly comparable GAAP financial measures, please see “ —Non-GAAP Measures .” We owned and controlled 68,564 lots at September 30, 2024 as compared to 69,904 lots at June 30, 2024 and 71,081 lots at December 31, 2023. 21 Table of Contents Results of Operations The following table sets forth our results of operations for the three and nine months ended September 30, 2024 and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (dollars in thousands, except per share data and average home sales price) Statement of Income Data: Home sales revenues $ 651,854 $ 617,539 $ 1,645,202 $ 1,750,166 Expenses: Cost of sales 488,362 458,734 1,239,425 1,350,608 Selling expenses 55,196 49,781 149,196 141,811 General and administrative 27,991 26,748 90,022 84,334 Operating income 80,305 82,276 166,559 173,413 Other income, net (11,547) (7,173) (25,270) (19,793) Net income before income taxes 91,852 89,449 191,829 193,206 Income tax provision 22,277 22,407 46,628 46,068 Net income $ 69,575 $ 67,042 $ 145,201 $ 147,138 Basic earnings per share $ 2.96 $ 2.85 $ 6.17 $ 6.24 Diluted earnings per share $ 2.95 $ 2.84 $ 6.15 $ 6.21 Other Financial and Operating Data: Average community count 133.3 103.7 126.1 101.1 Community count at end of period 138 106 138 106 Home closings 1,757 1,751 4,495 4,971 Average sales price per home closed $ 371,004 $ 352,678 $ 366,007 $ 352,075 Gross margin (1) $ 163,492 $ 158,805 $ 405,777 $ 399,558 Gross margin % (2) 25.1 % 25.7 % 24.7 % 22.8 % Adjusted gross margin (3) $ 177,603 $ 168,152 $ 439,098 $ 429,544 Adjusted gross margin % (2)(3) 27.2 % 27.2 % 26.7 % 24.5 % EBITDA (4) $ 105,636 $ 98,822 $ 224,296 $ 219,461 EBITDA margin % (2)(4) 16.2 % 16.0 % 13.6 % 12.5 % (1) Gross margin is home sales revenues less cost of sales. (2) Calculated as a percentage of home sales revenues. (3) Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. Please see “ —Non-GAAP Measures ” for a reconciliation of adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable. (4) EBITDA is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. Our management believes that the presentation of 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 provides an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be 22 Table of Contents unusual or non-recurring. Accordingly, our management believes that this measure is useful for comparing general operating performance from period to period. Other companies may define this measure differently and, as a result, our measure of EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of this measure is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA is limited as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. Please see “ —Non-GAAP Measures ” for reconciliations of EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable. Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 Homes Sales. 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 September 30, 2024 and 2023, and our community count by reportable segment as of September 30, 2024 and 2023, were as follows (revenues in thousands): Three Months Ended September 30, 2024 As of September 30, 2024 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Community Count at End of Period Central $ 164,439 509 $ 323,063 45.7 3.7 47 Southeast 155,205 466 333,058 27.3 5.7 29 Northwest 83,061 150 553,740 14.3 3.5 15 West 150,646 361 417,302 23.0 5.2 24 Florida 98,503 271 363,480 23.0 3.9 23 Total $ 651,854 1,757 $ 371,004 133.3 4.4 138 Three Months Ended September 30, 2023 As of September 30, 2023 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Community Count at End of Period Central $ 183,615 561 $ 327,299 34.7 5.4 34 Southeast 149,593 452 330,958 23.7 6.4 24 Northwest 67,666 131 516,534 11.0 4.0 11 West 94,950 249 381,325 14.3 5.8 15 Florida 121,715 358 339,986 20.0 6.0 22 Total $ 617,539 1,751 $ 352,678 103.7 5.6 106 Home sales revenues for the three months ended September 30, 2024 were $651.9 million, an increase of $34.3 million, or 5.6%, from $617.5 million for the three months ended September 30, 2023. The increase in home sales revenues was primarily due to an increase in the average sales price per home closed and a slight increase in homes closed during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The average sales price per home closed during the three months ended September 30, 2024 was $371,004, an increase of $18,326, or 5.2%, from the average sales price per home closed of $352,678 for the three months ended September 30, 2023. The increase in the average sales price per home closed was primarily due to geographic mix, largely in our Northwest and West segments, and a favorable pricing environment. The overall increase in home closings was a result of a higher average community count during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The overall increase in average community count relates to timing associated with new community openings, offset by the close out of some communities and transition between certain active communities during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The overall decrease in absorption rate generally relates to the impact of ongoing affordability constraints, new community openings, and the overall increase in community count. 23 Table of Contents Included within our home sales revenues for the three months ended September 30, 2024 was $49.5 million in wholesale revenues resulting from 160 home closings, representing 9.1% of the 1,757 total homes closed during the three months ended September 30, 2024. Included within our home sales revenues for the three months ended September 30, 2023 was $43.3 million in wholesale revenues resulting from 139 home closings, representing 7.9% of the 1,751 total homes closed during the three months ended September 30, 2023. • Home sales revenues in our Central reportable segment decreased by $19.2 million, or 10.4%, during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, due to a 9.3% decrease in the number of homes closed and a 1.3% 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 $5.6 million, or 3.8%, during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, due to a 3.1% increase in the number of homes closed and a 0.6% 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, partially offset by a lower absorption rate. • Home sales revenues in our Northwest reportable segment increased by $15.4 million, or 22.8%, during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, due to a 14.5% increase in the number of homes closed and a 7.2% 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, partially offset by a lower absorption rate. • Home sales revenues in our West reportable segment increased by $55.7 million, or 58.7%, during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, due to a 45.0% increase in the number of homes closed and a 9.4% 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, partially offset by a lower absorption rate. • Home sales revenues in our Florida reportable segment decreased by $23.2 million, or 19.1%, during the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, primarily due to a 24.3% decrease in the number of homes closed, partially offset by a 6.9% increase in the average sales price per home closed. The decrease in home closings was the result of a lower absorption rate, partially offset by a higher average community count. Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the three months ended September 30, 2024 to $488.4 million, an increase of $29.6 million, or 6.5%, from $458.7 million for the three months ended September 30, 2023, primarily due to an increase in lot costs and higher capitalized interest. Gross margin for the three months ended September 30, 2024 was $163.5 million, an increase of $4.7 million, or 3.0%, from $158.8 million for the three months ended September 30, 2023. Gross margin as a percentage of home sales revenues was 25.1% for the three months ended September 30, 2024 and 25.7% for the three months ended September 30, 2023. This decrease in gross margin as a percentage of home sales revenues was primarily due to the impact of increased sales incentives offered and a combination of an increase in lot costs and higher capitalized interest during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Selling Expenses. Selling expenses for the three months ended September 30, 2024 were $55.2 million, an increase of $5.4 million, or 10.9%, from $49.8 million for the three months ended September 30, 2023. The increase in selling expenses was primarily due to an increase in advertising expense and an increase in personnel costs as a result of an increase in communities for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Sales commissions decreased to $27.6 million for the three months ended September 30, 2024 from $27.9 million for the three months ended September 30, 2023, primarily due to a decrease in outside commissions, partially offset by an increase in our in-house commissions due to an overall increase in revenues during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Selling expenses as a percentage of home sales revenues were 8.5% and 8.1% for the three months ended September 30, 2024 and 2023, respectively. The increase in selling expenses as a percentage of home sales revenues was primarily due to higher advertising and other personnel expenses incurred during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. General and Administrative. General and administrative expenses for the three months ended September 30, 2024 were $28.0 million, an increase of $1.2 million, or 4.6%, from $26.7 million for the three months ended September 30, 2023. The increase in general and administrative expenses was primarily a result of increased indirect overhead expenses and professional fees, partially offset by a decrease in payroll related costs during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. General and administrative expenses as a percentage of home sales revenues were 4.3% during each of the three months ended September 30, 2024 and 2023. 24 Table of Contents Other Income, Net. Other income, net of other expenses was $11.5 million for the three months ended September 30, 2024, an increase of $4.4 million from $7.2 million for the three months ended September 30, 2023. The increase in other income, net of other expenses, primarily reflects gains realized from the sale of residential lots and the increase in income associated with our investment in unconsolidated entities during the three months ended September 30, 2024. Operating Income and Net Income before Income Taxes. Operating income for the three months ended September 30, 2024 was $80.3 million, a decrease of $2.0 million, or 2.4%, from $82.3 million for the three months ended September 30, 2023. The decrease in operating income was primarily attributed to lower gross margin and higher advertising and other costs associated with the increase in average community count. Net income before income taxes for the three months ended September 30, 2024 was $91.9 million, an increase of $2.4 million, or 2.7%, from $89.4 million for the three months ended September 30, 2023. The increase in net income before income taxes was primarily attributed to gains realized from the sale of residential lots during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Our reportable segments contributed to net income before income taxes during the three months ended September 30, 2024 as follows: Central - $21.8 million, or 23.8%; Southeast - $27.6 million, or 30.0%; Northwest - $12.3 million, or 13.4%; West - $21.0 million, or 22.8%; and Florida - $9.7 million, or 10.6%. Income Taxes . Income tax provision for the three months ended September 30, 2024 was $22.3 million, a decrease of $0.1 million, or 0.6%, from income tax provision of $22.4 million for the three months ended September 30, 2023. The decrease in our effective tax rate to 24.3% for the three months ended September 30, 2024 from 25.1% for the three months ended September 30, 2023 was primarily a result of a decrease in the rate for the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended. Net Income . Net income for the three months ended September 30, 2024 was $69.6 million, an increase of $2.5 million, or 3.8%, from $67.0 million for the three months ended September 30, 2023. The increase in net income was primarily attributed to a higher average sales price per home closed and gains realized from the sale of residential lots during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. 25 Table of Contents Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 Homes Sales. 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, 2024 and 2023 were as follows (revenues in thousands): Nine Months Ended September 30, 2024 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Central $ 441,609 1,363 $ 323,998 43.8 3.5 Southeast 407,068 1,231 330,681 26.2 5.2 Northwest 187,253 344 544,340 13.6 2.8 West 351,880 848 414,953 20.7 4.6 Florida 257,392 709 363,035 21.8 3.6 Total $ 1,645,202 4,495 $ 366,007 126.1 4.0 Nine Months Ended September 30, 2023 Revenues Home Closings ASP Average Community Count Average Monthly Absorption Rate Central $ 564,580 1,724 $ 327,483 35.3 5.4 Southeast 397,618 1,216 326,988 24.1 5.6 Northwest 212,885 433 491,651 10.1 4.8 West 256,575 672 381,808 13.3 5.6 Florida 318,508 926 343,961 18.3 5.6 Total $ 1,750,166 4,971 $ 352,075 101.1 5.5 Home sales revenues for the nine months ended September 30, 2024 were $1.6 billion, a decrease of $105.0 million, or 6.0%, from $1.8 billion for the nine months ended September 30, 2023. The decrease in home sales revenues was primarily due to a 9.6% decrease in homes closed, offset by an increase in the average sales price per home closed during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The overall decrease in home closings was a result of a lower absorption rate, partially offset by a higher average community count, during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The overall increase in average community count relates to timing associated with new community openings, offset by the close out of some communities and transition between certain active communities during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. The average sales price per home closed during the nine months ended September 30, 2024 was $366,007, an increase of $13,932, or 4.0%, from the average sales price per home closed of $352,075 for the nine months ended September 30, 2023. The increase in the average sales price per home closed was primarily due to geographic mix and a favorable pricing environment. The overall decrease in absorption rate generally relates to the impact of ongoing affordability constraints, new community openings, and the overall increase in community count. Included within our home sales revenues for the nine months ended September 30, 2024 was $113.7 million in wholesale revenues resulting from 379 home closings, representing 8.4% of the 4,495 total homes closed during the nine months ended September 30, 2024. Included within our home sales revenues for the nine months ended September 30, 2023 was $116.3 million in wholesale revenues resulting from 381 home closings, representing 7.7% of the 4,971 total homes closed during the nine months ended September 30, 2023. The increase in home closings as a percentage of revenues through our wholesale channel was primarily related to fewer retail home closings during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. 26 Table of Contents • Home sales revenues in our Central reportable segment decreased by $123.0 million, or 21.8%, during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily due to a 20.9% decrease in the number of homes closed as well as a slight decrease in the average sales price per home closed. The decrease in home closings was primarily 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 $9.5 million, or 2.4%, during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily due to a 1.2% increase in the number of homes closed and a 1.1% 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, partially offset by a lower absorption rate. • Home sales revenues in our Northwest reportable segment decreased by $25.6 million, or 12.0%, during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily due to a 20.6% decrease in the number of homes closed, offset by a 10.7% increase 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 West reportable segment increased by $95.3 million, or 37.1%, during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily due to a 26.2% increase in the number of homes closed and an 8.7% 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, partially offset by a lower absorption rate. • Home sales revenues in our Florida reportable segment decreased by $61.1 million, or 19.2%, during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, primarily due to a 23.4% decrease in the number of homes closed, partially offset by a 5.5% increase 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. Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales for the nine months ended September 30, 2024 was $1.2 billion, a decrease of $111.2 million, or 8.2%, from $1.4 billion for the nine months ended September 30, 2023. This decrease was primarily due to an increase in lot costs and higher capitalized interest. Gross margin for the nine months ended September 30, 2024 was $405.8 million, an increase of $6.2 million, or 1.6%, from $399.6 million for the nine months ended September 30, 2023. Gross margin as a percentage of home sales revenues was 24.7% for the nine months ended September 30, 2024 and 22.8% for the nine months ended September 30, 2023. The increase in gross margin as a percentage of home sales revenues during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was primarily due to a higher average sales price per home closed, partially offset by a combination of higher lot costs and higher capitalized interest as a percentage of revenue as well as the impact of sales incentives offered during the nine months ended September 30, 2024. Selling Expenses. Selling expenses for the nine months ended September 30, 2024 were $149.2 million, an increase of $7.4 million, or 5.2%, from $141.8 million for the nine months ended September 30, 2023. The increase in selling expenses was primarily due to an increase in advertising expense and an increase in personnel costs as a result of an increase in communities for the nine months ended September 30, 2024 as compared to the three months ended September 30, 2023. Sales commissions decreased to $72.2 million during the nine months ended September 30, 2024 from $77.1 million for the nine months ended September 30, 2023, primarily due to a decrease in outside commissions and our in-house commissions. Selling expenses as a percentage of home sales revenues were 9.1% and 8.1% for the nine months ended September 30, 2024 and 2023, respectively. The increase in selling expenses as a percentage of home sales revenues was primarily due to higher advertising and other personnel expenses during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. General and Administrative. General and administrative expenses for the nine months ended September 30, 2024 were $90.0 million, an increase of $5.7 million, or 6.7%, from $84.3 million for the nine months ended September 30, 2023. The increase in general and administrative expenses was primarily a result of increased indirect overhead expenses and professional fees, partially offset by a decrease in payroll related costs during the nine months ended September 30, 2024. General and administrative expenses as a percentage of home sales revenues were 5.5% and 4.8% for the nine months ended September 30, 2024 and 2023, respectively. The increase in general and administrative expenses as a percentage of home sales revenues was primarily due to leverage from community count growth during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. Other Income, Net. Other income, net of other expenses was $25.3 million for the nine months ended September 30, 2024, an increase of $5.5 million from $19.8 million for the nine months ended September 30, 2023. The increase in other income, net 27 Table of Contents of other expenses, primarily reflects gains realized from the sale of residential lots and the increase in income associated with our investment in unconsolidated entities. Operating Income and Net Income before Income Taxes. Operating income for the nine months ended September 30, 2024 was $166.6 million, a decrease of $6.9 million, or 4.0%, from $173.4 million for the nine months ended September 30, 2023. The overall decreases in operating income and net income before income taxes were primarily due to overall lower home closings at a lower absorption rate and higher advertising and other costs associated with the increase in average community count during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. Net income before income taxes for the nine months ended September 30, 2024 was $191.8 million, a decrease of $1.4 million, or 0.7%, from $193.2 million for the nine months ended September 30, 2023. Our reportable segments contributed to net income before income taxes during the nine months ended September 30, 2024 as follows: Central - $47.0 million, or 24.5%; Southeast - $67.6 million, or 35.2%; Northwest - $19.6 million, or 10.2%; West - $40.9 million, or 21.3%; and Florida - $19.6 million, or 10.2%. Income Taxes . Income tax provision for the nine months ended September 30, 2024 was $46.6 million, an increase of $0.6 million, or 1.2%, from income tax provision of $46.1 million for the nine months ended September 30, 2023. The increase in our effective tax rate to 24.3% for the nine months ended September 30, 2024 from 23.8% for the nine months ended September 30, 2023 was primarily a result of an increase in the compensation cost in excess of deductions for share-based payments, partially offset by the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended. Net Income . Net income for the nine months ended September 30, 2024 was $145.2 million, a decrease of $1.9 million, or 1.3%, from $147.1 million for the nine months ended September 30, 2023. The decrease in net income was primarily attributed to overall lower homes closed and lower home sales revenues, partially offset by a higher gross margin during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. Non-GAAP Measures In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin and EBITDA. Adjusted Gross Margin Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. 28 Table of Contents 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, 2024 2023 2024 2023 Home sales revenues $ 651,854 $ 617,539 $ 1,645,202 $ 1,750,166 Cost of sales 488,362 458,734 1,239,425 1,350,608 Gross margin 163,492 158,805 405,777 399,558 Capitalized interest charged to cost of sales 12,954 8,580 30,187 24,475 Purchase accounting adjustments (1) 1,157 767 3,134 5,511 Adjusted gross margin $ 177,603 $ 168,152 $ 439,098 $ 429,544 Gross margin % (2) 25.1 % 25.7 % 24.7 % 22.8 % Adjusted gross margin % (2) 27.2 % 27.2 % 26.7 % 24.5 % (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. (2) Calculated as a percentage of home sales revenues. EBITDA EBITDA is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. Our management believes that the presentation of 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 provides an indicator of general economic performance that is 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 this measure is useful for comparing general operating performance from period to period. Other companies may define this measure differently and, as a result, our measure of EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA as a financial measure to assess the performance of our business, the use of this measure is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA is limited as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: (i) it does not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments, including for purchase of land; (ii) it does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt; (iii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and EBITDA does not reflect any cash requirements for such replacements or improvements; (iv) it does not adjust for all non-cash income or expense items that are reflected in our statements of cash flows; (v) it does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and (vi) other companies in our industry may calculate it differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, our EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. We compensate for these limitations by using our EBITDA along with other comparative tools, together with GAAP measures, to assist in the evaluation of operating performance. These GAAP measures include operating income, net income and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments and other non-recurring charges, which are not reflected in our EBITDA. EBITDA is not intended as an alternative to net income as an indicator of our operating 29 Table of Contents performance, as an alternative to any other measure of performance in conformity with GAAP or as an alternative to cash flows as a measure of liquidity. You should therefore not place undue reliance on our EBITDA calculated using these measures. The following table reconciles EBITDA to net income, 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, 2024 2023 2024 2023 Net income $ 69,575 $ 67,042 $ 145,201 $ 147,138 Income tax provision (benefit) 22,277 22,407 46,628 46,068 Depreciation and amortization 830 793 2,280 1,780 Capitalized interest charged to cost of sales 12,954 8,580 30,187 24,475 EBITDA $ 105,636 $ 98,822 $ 224,296 $ 219,461 EBITDA margin % (1) 16.2 % 16.0 % 13.6 % 12.5 % (1) Calculated as a percentage of home sales revenues. Backlog We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase contract. The amount of the required deposit is minimal (typically $1,000 to $10,000). We permit our retail homebuyers to cancel the purchase contract and obtain a refund of their deposit in the event mortgage financing cannot be obtained within a certain period of time, as specified in their purchase contract. Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is signed. If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract. If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the preliminary criteria to obtain mortgage financing. 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 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. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes closed during the current period. 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. In addition, we may experience cancellations of purchase contracts at any time prior to closing. It is important to note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. 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 months ended September 30, 2024 compared to the nine months ended September 30, 2023. The number of homes in our backlog at September 30, 2024 decreased 21.0% compared to September 30, 2023. The decreases generally relate to the impact of ongoing affordability constraints and our decision to limit the use of incentives to the level required to achieve predetermined closing targets during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. 30 Table of Contents 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, 2024 (4) 2023 (5) Net orders (1) 4,993 5,646 Cancellation rate (2) 21.6 % 22.8 % Ending backlog – homes (3) 1,088 1,377 Ending backlog – value (3) $ 417,798 $ 509,932 (1) Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period. (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 with varying terms. Ending backlog is valued at the contract amount. (4) As of September 30, 2024, we had 212 units related to bulk sales agreements associated with our wholesale business. (5) As of September 30, 2023, we had 273 units related to bulk sales agreements associated with our wholesale business. Land Acquisition Policies and Development We had 138 and 117 active communities as of September 30, 2024 and December 31, 2023, respectively. 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 have utilized, on a limited and strategic basis, land banking financing arrangements. Our lot inventory decreased to 68,564 owned or controlled lots as of September 30, 2024 from 71,081 owned or controlled lots as of December 31, 2023, primarily related to our discipline in the evaluation 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 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 nine months ended September 30, 2024 and (ii) our owned or controlled lots by reportable segment as of September 30, 2024. Nine Months Ended September 30, 2024 As of September 30, 2024 Reportable Segment Home Closings Owned (1) Controlled Total Central 1,363 20,283 1,842 22,125 Southeast 1,231 14,072 4,239 18,311 Northwest 344 5,478 2,286 7,764 West 848 9,023 3,754 12,777 Florida 709 5,173 2,414 7,587 Total 4,495 54,029 14,535 68,564 (1) Of the 54,029 owned lots as of September 30, 2024, 38,734 were raw/under development lots and 15,295 were finished lots. 31 Table of Contents Homes in Inventory 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, 2024, we had a total of 2,491 completed homes, including information centers, and 1,977 homes in progress. Raw Materials and Labor When constructing homes, we use various materials and components. We generally contract for our materials and labor at a fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. 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, a practice that often reduces costs and ensures 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. Our construction work is substantially completed by third-party subcontractors, most of whom are non-unionized. We continue to monitor the supply markets to achieve the best prices available. Typically, the price changes that most significantly influence our operations are price increases in labor, commodities and lumber. In future quarters, we could see various cost pressures associated with inflation similar to the cost pressures experienced in the last few years. Generally, we have successfully increased the sales prices of our homes to absorb these increased costs or have successfully made cost-effective changes as we endeavor to keep our homes affordable. Seasonality 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. We generally close more homes in our second, third and fourth quarters. Thus, our revenues may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels. Our revenues and capital requirements are generally similar across our second, third and fourth quarters. As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular quarter, especially the first quarter, are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to continue in the long term. Liquidity and Capital Resources Overview As of September 30, 2024, we had $60.9 million of cash and cash equivalents. Cash flows for each of our active communities depend on the status of the development cycle and can differ substantially from reported earnings. Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness and the payment of various liabilities. In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition and repurchase shares of our common stock. Early stages of development or expansion require significant cash outlays for land acquisitions, land development, plats, vertical development, construction of information centers, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of home sales revenues. In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement purposes, as the costs associated with home and land construction were previously incurred. 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 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. We rely on our ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects. Furthermore, we utilize, on a limited and strategic basis, land banking financing arrangements to access short-term liquidity. As of the date of this Quarterly Report on Form 10-Q, we believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from the Credit Agreement or through accessing debt or equity capital, as needed. However, our ability to engage in the transactions described above may be constrained by volatile or tight economic, capital, credit and financial market 32 Table of Contents 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 between 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. Revolving Credit Facility On October 9, 2024, we entered into a Fifth Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Fifth Amendment”), which amended the 2023 Credit Agreement (as so amended by the Fifth 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 $1.085 billion, or 90.0%, of the $1.205 billion of commitments thereunder and on April 28, 2025 with respect to 10.0% 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, 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 September 30, 2024, the borrowing base under the 2023 Credit Agreement was $2.0 billion, of which the maximum available to borrow is $1.9 billion. As of September 30, 2024, borrowings under the 2023 Credit Agreement and the outstanding principal amount of the 2029 Senior Notes and the 2028 Senior Notes totaled approximately $1.6 billion, $26.1 million of letters of credit were outstanding and $314.5 million was available to borrow under the 2023 Credit Agreement. Borrowings under the Credit Agreement bear interest, payable monthly in arrears, at the Company’s option, at either (1) the Adjusted Term SOFR (defined as a term SOFR that is based on a fixed 1, 3 or 6 month interest period, as selected by the Company, plus a 10, 15 or 25 basis point adjustment, respectively), which rate is subject to a 50 basis point floor, plus an applicable margin ranging from 145 basis points to 210 basis points (the “Applicable Margin”) based on the Company’s leverage ratio as determined in accordance with a pricing grid, or (2) the Base Rate (defined as a term SOFR that is based on a daily variable 1 month interest period plus a 10 basis point adjustment), subject to a 50 basis point floor, plus the Applicable Margin. At September 30, 2024, the Applicable Margin was 1.85%, and SOFR was 4.85%, subject to the 0.50% SOFR floor as included in the 2023 Credit Agreement. The Credit Agreement contains various financial covenants, including a minimum tangible net worth, a leverage ratio, a minimum liquidity amount and an EBITDA to interest expense ratio. The Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At September 30, 2024, we were in compliance with all of the covenants contained in the 2023 Credit Agreement. Senior Notes Offering 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. 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 33 Table of Contents 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. 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 and to certain non-U.S. 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. The 2029 Senior Notes mature on July 15, 2029. The terms of the 2029 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Third Supplemental Indenture thereto, dated as of June 28, 2021, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee. Letters of Credit, Surety Bonds and Financial Guarantees We are often required to provide letters of credit and surety bonds to secure our performance under construction contracts, development agreements and other arrangements. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. 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 $376.3 million as of September 30, 2024. 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, 2024 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, 2024, we did not repurchase any shares of our common stock. During the nine months ended September 30, 2024, we repurchased 172,990 shares of our common stock for $18.0 million to be held as treasury stock. During the three and nine months ended September 30, 2023, we did not repurchase any shares of our common stock. A total of 3,112,462 shares of our common stock has been repurchased since our stock repurchase program commenced. As of September 30, 2024, we may purchase up to $193.5 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. Our stock repurchase program may be modified, discontinued or suspended at any time. Cash Flows Operating Activities Net cash used in operating activities was $200.7 million during the nine months ended September 30, 2024. 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, 2024 was primarily driven by cash outflow from the $390.9 million decrease 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 145.2 million. Net cash used in operating activities was $22.7 million during the nine months ended September 30, 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, 2023 was primarily driven by cash outflow from the $194.4 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 $147.1 million. 34 Table of Contents Investing Activities Net cash used in investing activities was $6.6 million during the nine months ended September 30, 2024, primarily due to additional investment in unconsolidated entities. Net cash used in investing activities was $7.6 million during the nine months ended September 30, 2023, primarily due to additional investment in unconsolidated entities. Financing Activities Net cash provided by financing activities was $219.3 million during the nine months ended September 30, 2024, primarily driven by $507.7 million of borrowings under our 2023 Credit Agreement, offset by $214.0 million of repayments on our 2023 Credit Agreement and payments of $60.3 million related to a financing arrangement with a third-party land banker. In addition, during the nine months ended September 30, 2024, we repurchased $18.0 million of shares of our common stock under our stock repurchase program to be held as treasury stock. Net cash provided by financing activities was $45.3 million during the nine months ended September 30, 2023, primarily driven by net borrowings of $75.9 million on our credit agreement then in effect, partially offset by net payments of $29.4 million related to a financing arrangement with a third-party land banker. Inflation 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. 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, 2023. Material Cash Requirements As of September 30, 2024, 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, 2023. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and judgments and makes adjustments as deemed necessary. 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, 2024 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, 2023. Cautionary Statement about Forward-Looking Statements From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may, and often do, vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements: 35 Table of Contents • 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 and the conflict in the Middle East), inflation, the possibility of recession and decreases in housing prices; • a slowdown in the homebuilding industry or changes in population growth rates in our markets; • volatility and uncertainty in the credit markets and broader financial markets; • disruption in the terms or availability of mortgage financing or increase in the number of foreclosures in our markets; • the cyclical and seasonal nature of our business; • our future operating results and financial condition; • our business operations; • changes in our business and investment strategy; • the success of our operations in recently opened new markets and our ability to expand into additional new markets; • our ability to successfully extend our business model to building homes with higher price points, developing larger communities and producing and selling multi-unit products, townhouses, wholesale products, and acreage home sites; • our ability to develop our projects successfully or within expected timeframes; • 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; • availability of land to acquire and our ability to acquire such land on favorable terms or at all; • availability, terms and deployment of capital and ability to meet our ongoing liquidity needs; • decisions of the Credit Agreement lender group; • 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; • delays in land development or home construction resulting from natural disasters, adverse weather conditions or other events outside our control; • uninsured losses in excess of insurance limits; • 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; • the timing of receipt of regulatory approvals and the opening of projects; • the degree and nature of our competition; • 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 an epidemic or 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; • existing and future litigation, arbitration or other claims; • availability of qualified personnel and third-party contractors and subcontractors; • the impact on our business of any future government shutdown; • other risks and uncertainties inherent in our business; • other factors we discuss under the section entitled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ”; and • the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 36 Table of Contents You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q.