What changed in this filing

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Item 1A. Risk Factors

2022-02-16 compared with 2021-02-12 · 64 added, 40 removed, 210 unchanged (33% of the section changed)

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These risks can also indirectly impact us to the extent our customers need to sell their existing homes to purchase a new home from us if the potential buyer of their home is unable to obtain mortgage financing.

Although long-term interest rates currently are near historically low levels, it is difficult to predict future increases or decreases in market interest rates.

Although long-term interest rates currently remain at historic lows, it is predicted that market interest rates will increase in 2022 and beyond.

A homebuyers' ability to obtain a mortgage loan is largely subject to prevailing interest rates, lenders’ credit standards and appraisals, and the availability of government-supported programs, such as those from the FHA, the VA, Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").

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A prolonged tightening of the financial markets could also negatively impact our business.

Our future operations may be adversely impacted by high inflation.

Our future operations may be adversely impacted by high inflation or deflation.

We, like other homebuilders, may be adversely affected during periods of high inflation, mainly from higher land, construction, labor and materials costs.

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Inflation could increase our cost of financing, materials and labor and could cause our financial results and profitability to decline.

Traditionally, we have attempted to pass cost increases on to our customers through higher sales prices.

Although inflation has not historically had a material adverse effect on our business, sustained increases in material costs could have a material adverse effect on our business if we are unable to correspondingly increase home sale prices.

Traditionally, we have attempted to pass cost increases on to our customers through higher sales prices and inflation has not historically had a material adverse effect on our business.

Although, in the event that we are unable to do so in a rising cost environment, our profitability could decline.

Alternatively, a significant period of deflation could cause a decrease in overall spending and borrowing levels.

This could lead to deterioration in economic conditions, including an increase in the rate of unemployment.

Deflation could also cause the value of our inventories to decline or reduce the value of existing homes below the related mortgage loan balance, which could potentially increase the supply of existing homes.

These, or other factors that increase the risk of significant deflation, could have a negative impact on our business or financial results.

Supply shortages and other risks related to the demand for building materials could materially disrupt our operations and increase costs.

Our ability to timely construct our homes may be significantly impacted by circumstance beyond our control, such as work stoppages, shortages of qualified trades people, lack of availability of utility infrastructure and services, our need to rely on local subcontractors, and shortages or delays in availability of building materials.

Constraints of raw materials and finished goods or in the distribution channels of our construction inputs can delay delivery of our homes to customers and can increase our building costs or lead to sales orders cancellations.

For example, in 2021, supply chain constraints for various construction materials related to sustained demand amid the backdrop of a global pandemic have caused our construction cycle times to lengthen.

We believe these conditions may continue in 2022 and potentially beyond.

These delays impact the timing of our expected home closings and may also result in cost increases that we may not be able to pass to our current or future customers.

Sustained increases in construction costs may, over time, erode our margins, and impact our total order and closing volumes.

Our ability to acquire and develop raw or partially finished lots may be negatively impacted if we are unable to secure performance bonds.

In connection with land development work on our raw or partially developed land, we are oftentimes required to provide performance bonds, letters of credit or other assurances for the benefit of the respective municipalities or governmental authorities.

In connection with land development work on our raw or partially developed land, we are often required to provide performance bonds, letters of credit or other assurances for the benefit of the respective municipalities or governmental authorities.

These instruments provide assurance to the beneficiaries that the development will be completed, or that in case we do not perform, that funds from these instruments are available for the municipality or governmental agency to arrange for completion of such work.

Although such instruments are currently accessible, in the future additional performance bonds or letters of credit may be difficult to obtain, or may become difficult to obtain on terms that are acceptable to us.

Although such instruments are currently accessible, in the future additional performance bonds or

letters of credit may be difficult to obtain, or may become difficult to obtain on terms that are acceptable to us.

If we are unable to secure such instruments, progress on affected projects may be delayed or halted or we may be required to expend additional cash, which may adversely affect our financial position and ability to grow our operations.

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For example, during 2018 and 2019, we experienced increases in the prices of some building materials as a result of such tariffs.

Such cost increases limit our ability to control costs, potentially reducing margins on the homes we build if we are not able to

successfully offset the increased costs through higher sales prices.

Such cost increases limit our ability to control costs, potentially reducing margins on the homes we build if we are not able to successfully offset the increased costs through higher sales prices.

Additionally, tariffs pose a risk to our supply chain availability if we are forced to use alternative materials or products.

A reduction in our sales absorption levels may force us to incur and absorb additional community-level costs.

We incur certain overhead costs associated with our communities, such as marketing expenses, real estate taxes and HOA assessments and costs associated with the upkeep and maintenance of our model and sales complexes.

If our sales absorptions pace decreases and the time required to close out our communities is extended, we would likely incur additional overhead costs, which would negatively impact our financial results.

A reduction in our orders absorption levels may force us to incur and absorb additional community-level costs.

If our orders absorptions pace decreases and the time required to close out our communities is extended, we would likely incur additional overhead costs, which would negatively impact our financial results.

Additionally, we typically incur various land development improvement costs for a community prior to the commencement of home construction.

Such costs include infrastructure, utilities, taxes and other related expenses.

Such costs include infrastructure, utilities, property taxes and other related expenses.

A reduction in home absorption rates increases the associated holding costs and extends our time and ability to recover such costs.

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We compete for sales in each of our markets with national, regional and local developers and homebuilders, resale of existing homes, condominiums and available rental housing.

Some of our competitors have significantly greater financial resources and some may have lower costs than we do.

Some of our competitors have greater financial resources and some may have lower costs than we do.

Competition among homebuilders of all sizes is based on a number of interrelated factors, including location, reputation, product type, amenities, design, innovation, quality and price.

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Home warranty and construction defect claims are common in the homebuilding industry and can be costly.

We sometimes encounter construction defect issues that may be alleged to be widespread within a single community or geographic area and we are currently managing such an issue, regarding alleged widespread stucco application issues in Florida.

In order to account for future potential warranty and construction defect obligations, we establish a warranty reserve in connection with every home closing.

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For example, we may be responsible for applicable self-insured retentions, and certain claims may not be covered by insurance or may exceed applicable coverage limits, which could be material to our financial results.

In addition, the costs of insuring against construction defect and product liability claims are high, and the amount of coverage offered by insurance companies is currently limited.

There can be no assurance that this coverage will not be further restricted and become more costly.

If the limits or coverages of our current and former insurance programs and/or those of our subcontractors prove inadequate, or we and/or our subcontractors are unable to obtain adequate, or reasonably priced, insurance against these types of claims in the future, or the amounts currently provided for future warranty or insurance claims are inadequate, we may experience losses that could negatively impact our financial results.

A major safety incident relating to our operations could be costly in terms of potential liabilities and reputational damage.

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• conditions of the real estate market in areas where we operate and of the general economy;

• governmental imposed restrictions and consumer reactions related to the COVID-19 pandemic;

• governmental imposed restrictions and consumer reactions related to an epidemic or pandemic (such as stay-at-home orders and similar restrictions in 2020 related to the COVID-19 pandemic);

• the cyclical nature of the homebuilding industry;

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At December 31, 2021, we had approximately $1.2 billion of indebtedness and $618.3 million of cash and cash equivalents.

If we require working capital greater than that provided by our operations and current liquidity position, including the $ 682.6 million available to be drawn under our credit facility, we may be required to seek additional capital in the form of equity or debt financing from a variety of potential sources, including bank financing, public bonds or off-balance sheet resources.

If we require working capital greater than that provided by our operations and current liquidity position, including the $717.6 million available to be drawn under our credit facility, we may be required to seek additional capital in the form of equity or debt financing from a variety of potential sources, including bank financing, public bonds or off-balance sheet

There can be no assurance we would be able to obtain such additional capital on terms acceptable to us, if at all.

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• we could be required to use a substantial portion of our cash flow from operations to pay interest and principal on our indebtedness, which would reduce the funds available to us for other purposes such as land and lot acquisition, development and construction activities;

• although we have a low level of indebtedness and a high volume of cash and cash equivalents, some of our competitors may have additional access to capital, which may put us at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in our industry, including increased competition;

• although we have a relatively low level of indebtedness and a relatively high balance of cash and cash equivalents, some of our competitors may have additional access to capital, which may put us at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in our industry, including increased competition;

• we may be more vulnerable to economic downturns and adverse developments in our business than some of our competitors.

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In addition, the terms of existing or future debt agreements may restrict or limit us from pursuing any of these alternatives.

Our ability to obtain third-party financing may be negatively affected by any downgrade of our credit rating from a rating agency.

Our ability to obtain third-party financing may be negatively affected by any downgrade of our credit rating from one or more rating agencies.

We consider the availability of third-party financing to be a key component of our long-term strategy to grow our business either through acquisitions or through internal expansion.

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Any downgrades from these ratings may impact our ability to obtain future additional financing, or to obtain such financing on terms that are favorable to us and therefore, may adversely impact our future operations.

Our business may be negatively impacted by natural disasters or extreme weather events.

Our homebuilding operations include operations in Texas, California, North Carolina, South Carolina, Tennessee, Georgia and Florida which occasionally experience extreme weather conditions such as tornadoes, hurricanes, earthquakes, wildfires, flooding, drought, landslides, prolonged periods of precipitation, sinkholes and other natural disasters.

We may not be able to insure against some of these risks.

For example, during 2017 and 2018, several of our markets were impacted by hurricanes, and a devastating tornado impacted the Nashville market in the first quarter of 2020.

These occurrences could damage or destroy some of our homes under construction or our building lots and community improvements, which may result in uninsured or underinsured losses.

We could also suffer significant construction delays or substantial fluctuations in the pricing or availability of building materials due to such disasters.

The physical impacts of climate change such as natural disasters or extreme weather events could increase our costs and adversely affect our operations.

The climates of many of the states in which we have homebuilding operations, including California, Texas, Florida and other coastal areas present increased risks of, and have recently experienced, adverse weather and natural disasters which may be caused by, or exacerbated by, climate change.

We may not be able to insure against some of these risks, and damage or destruction to our homes under construction or our building lots and community improvements caused by adverse weather or natural disasters could result in uninsured or underinsured losses.

We could also suffer significant construction delays or substantial fluctuations in the pricing or availability of building materials and labor due to such disasters.

Any of these events could cause a delay in scheduled closings and a decrease in our revenue, cash flows and earnings.

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If there is a shift away from, or decrease in, the demand for first-time and first move-up buyers or our entry-level home offerings, it could have negative consequences on our operations, financial position and cash flows.

Reduced levels of sales may cause us to re-evaluate the viability of existing option contracts, resulting in a potential termination of these contracts which may lead to impairment charges.

Reduced levels of sales may cause us to re-evaluate the viability of existing land option contracts, resulting in a potential termination of these contracts which may lead to impairment charges.

In the prior homebuilding cycle, a significant portion of our lots were controlled under option contracts.

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We have operations in Texas, Arizona, California, Colorado, Florida, North Carolina, South Carolina, Georgia and Tennessee.

Although we have, in recent years, expanded our operations to new markets, our geographic diversification is still limited and could adversely impact us if the homebuilding business in our current markets should decline, since we may not have a balancing opportunity in other geographic regions.

Although we have, in recent years, expanded our operations to new markets, our geographic diversification is still more limited than some of our competitors and could adversely impact us if the homebuilding business in our current markets should decline, since we may not have a balancing opportunity in other geographic regions.

Our ability to build energy-efficient technologies at a profitable price point may be replicated by other builders in the future, which could reduce our competitive advantage.

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Our communities offer a high level of energy-saving features included in the base price of our homes, and most of our single family detached home plans can accommodate the incorporation of optional solar features to further optimize energy savings.

If other builders are able to replicate our energy efficient technologies and offer them at a similar or lower price point or are required to do so by changing regulatory standards, it could diminish our competitive advantage in the marketplace.

However, as the demand for energy-efficient homes continues to grow along with government imposed building requirements and societal responses to reduce potential climate change impacts, and other builders become more inclined or required by changing regulatory standards to offer more energy efficient technologies and offer them at a similar or lower price point, it could diminish our competitive advantage in the marketplace.

Shortages in the availability of subcontract labor may delay construction schedules and increase our costs.

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The cost of labor may also be adversely affected by shortages of qualified trades people, changes in laws and regulations relating to union activity and changes in immigration laws and trends in labor migration.

Throughout various homebuilding cycles, we have experienced shortages of skilled labor in certain markets, which led to increased labor costs.

Throughout various homebuilding cycles, we have experienced shortages of skilled labor in certain markets, which led to increased labor costs and delayed construction schedules.

For example, we experienced delays in our construction cycle time in 2021 due to a limited pool of subcontract labor caused by the combined impact of elevated demand for homes and government restrictions on certain activities in some geographies in response to the global pandemic.

Although we continually strive to be a partner of choice with our trades, we cannot be assured that in the future there will be a sufficient supply of, or satisfactory performance by, these unaffiliated third-party subcontractors and consultants, which could have a material adverse effect on our business.

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Additionally, we maintain cyber-security insurance and require our employees to complete an annual information security training and compliance program;

however, our ability to conduct our business may be impaired if these information technology resources are compromised, degraded, damaged or fail, whether due to a virus or other harmful circumstance, intentional penetration or disruption of our information technology resources by a third party, natural disaster, hardware or software corruption or failure or error (including a failure of security controls incorporated into or applied to such hardware or software), telecommunications system failure, service provider error or failure, intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost connectivity to our networked resources.

hardware or software), telecommunications system failure, service provider error or failure, intentional or unintentional personnel actions (including the failure to follow our security protocols), or lost connectivity to our networked resources.

For example, during the first quarter of 2020, some of our systems were affected by a malware attack that encrypted certain information on some of our systems and resulted in limitations to certain employee access for a short duration to certain of our systems and services, although all core operating activities continued during our remediation process.

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Under previous tax law, certain expenses of owning a home, including mortgage loan interest costs and real estate taxes, generally were deductible expenses for the purpose of calculating an individual's federal, and in some cases state, tax liability.

However, the Tax cuts and Jobs Act (the "Tax Act") signed into law on December 22, 2017 limited these deductions for some individuals.

However, the Tax Cuts and Jobs Act (the "Tax Act") signed into law in December 2017 limited these deductions for some individuals.

The Tax Act caps individual state and local tax deductions at $10,000 for the aggregate of state and local real property and income taxes or state and local sales taxes.

Additionally, the Tax Act reduces the cap on mortgage interest deduction to $750,000 of debt for debt incurred after December 15, 2017 while retaining the $1 million debt cap for debt incurred prior to December 15, 2017.

Additionally, the Tax Act reduces the cap on mortgage interest deduction to $750,000 of debt for debt incurred after December 15, 2017.

The limits on deductibility of mortgage interest and property taxes may increase the after-tax cost of owning a home for some individuals.

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We must also obtain licenses, permits and approvals from government agencies to engage in certain activities, the granting or receipt of which are beyond our control and could cause delays in our homebuilding projects.

We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment.

Environmental laws or permit restrictions may result in project delays, may cause substantial compliance and other costs and may prohibit or severely restrict development in certain environmentally sensitive regions or geographic areas.

With growing concern from government agencies and the general public over the effects of climate change on the environment, we may be subject to additional regulatory responses to reduce greenhouse gas emissions and combat climate change that may increase our costs particularly as they relate to land development and home construction activities.

Most recently, for example, in California, we were subject to the California Energy Commission’s Building Energy Efficiency Standards under Title 24.

As part of the updated building codes, all homes constructed in California with permits obtained in 2020 and beyond are required to have solar panels, which we offer as standard feature for homes built in the state.

Such compliance has not had a material impact on our operations;

however, it could increase our operating and compliance costs in the future or require additional technology and capital investment.

These and other similar environmental laws or permit restrictions may also result in production delays and may prohibit or severely restrict development in certain environmentally sensitive or geographic areas.

Environmental regulations can also have an adverse impact on the availability and price of certain raw materials, such as lumber.

While we believe we are complying in all material respects with existing climate-related government standards and regulations applicable to our business, we also cannot predict our future exposure given the rapidly changing nature of environmental matters.

There is a variety of new legislation being enacted, or considered for enactment at the federal, state, local and international levels relating to energy and climate change.

This legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards.

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

As climate change concerns continue to grow, legislation and regulations of this nature are expected to continue and become more costly to comply with.

Similarly, energy-and climate-related initiatives affect a wide variety of companies throughout the United States and the world and because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, they could have an indirect adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are burdened with expensive cap and trade and similar energy and climate-related regulations.

The increasing attention to ESG matters and our responses to these matters could have an adverse effect on our business.

We published our inaugural ESG report in 2021.

We voluntarily followed certain reporting frameworks in our ESG report that we believe are of value to our investors and other stakeholders.

We intend to continue to research, evaluate, and implement applicable disclosures and initiatives related to ESG matters, however, if we are unable to adequately address such ESG matters or fail to comply with future mandatory reporting requirements, it could negatively impact our reputation and our business results.

Our financial services operations are subject to extensive regulations that could cause us to incur significant liabilities or restrict our business activities.

Our wholly-owned title company, Carefree Title, provides title insurance and closing settlement services for our homebuyers.

The title and settlement services provided by Carefree Title are subject to various regulations, including regulation by state banking and insurance regulations.

Potential changes to federal and state laws and regulations could have the effect of limiting our activities or how our mortgage joint venture conducts its operations and this could have an adverse effect on our results of operations.

Our mortgage joint venture is engaged in mortgage broker activities and provides services to our homebuyers.

The mortgage industry remains under intense scrutiny and continues to face increasing regulation at the federal, state and local level.

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In addition, if we are determined to have violated federal or state regulations, we face the loss of our licenses or other required approvals or we could be subject to fines, penalties, civil actions or we could be required to suspend our activities, each of which could have an adverse effect on our reputation, results and operations.

There is a variety of new legislation being enacted, or considered for enactment at the federal, state, local and international levels relating to energy and climate change.

This legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards.

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

As climate change concerns continue to grow, legislation and regulations of this nature are expected to continue and become more costly to comply with.

General Risk Factors

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For example, the COVID-19 pandemic and the measures undertaken by governmental authorities to address it, initially disrupted or prevented us from operating parts our business in the ordinary course.

With the exception of a brief pause in March and April, the COVID-19 pandemic and its effects on the economy have not adversely affected our results of operations to date.

With the exception of a brief pause in March and April of 2020, the COVID-19 pandemic and its effects on the economy have not adversely affected our results of operations to date.

However, future disruptions and governmental actions combined with any associated economic and/or social instability or distress, may have an adverse impact on our results of operations, financial condition and cash flows.

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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 1A. Risk Factors