Century Communities, Inc. (CCS) FY 2022 MD&A

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our Company, business, operations and present business environment and is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. We use certain non-GAAP financial measures that we believe are important for purposes of comparison to prior periods. This information is also used by our management to measure the profitability of our ongoing operations and analyze our business performance and trends. Some of the numbers included herein have been rounded for the convenience of presentation.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Overview

We are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 18 states.  In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land.  We build and sell homes under our Century Communities and Century Complete brands.

Our Century Communities brand offers a wide range of buyer profiles including: entry-level, first and second time move-up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Our Century Complete brand targets entry-level homebuyers, primarily sells homes through retail studios and the internet, and generally provides no option or upgrade opportunities. Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Century Complete.   Our indirect wholly-owned subsidiaries, Inspire Home Loans Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, primarily to our homebuyers have been identified as our Financial Services segment. Additionally, our wholly owned subsidiary, Century Living, LLC, is engaged in the development, construction and management of multi-family rental properties, primarily in Colorado, with the intent to dispose of properties shortly after achieving stabilized rental operations. During 2022, our Century Living operations commenced construction on three multi-family projects in Colorado. Century Living, LLC is included in our Corporate segment.

While we offer homes that appeal to a broad range of entry-level, move-up, and lifestyle homebuyers, our offerings are heavily weighted towards providing affordable housing options in each of our homebuyer segments. Additionally, we prefer building move-in-ready homes over built-to-order homes, which we believe allows for a faster construction process, advantageous pricing with subcontractors, and shortened time period from home sale to home delivery, thus allowing us to more appropriately price the homes and deploy our capital. Of the 10,594 homes delivered during 2022, approximately 77% of our deliveries were made to entry-level homebuyers that were below Federal Housing Administration-insured mortgage limits and approximately 96% of homes delivered were built as move-in ready homes. On December 1, 2022, the Federal Housing Administration announced new increased loan limits for calendar year 2023, which may provide increased access to Federal Housing Administration-insured mortgages for our homebuyers.

During the year ended December 31, 2022, the Federal Reserve’s continual raising of the federal funds interest rate to mitigate inflation considerably impacted the U.S. housing market. Beginning in the second quarter of 2022 and continuing throughout the remainder of 2022, we experienced a decline in sales pace across our markets, resulting in a decrease of 35.5% in our net new home contracts for 2022 as compared to 2021. In addition, during 2022, we experienced an increase in cancellation rates to a combined 24%, with a 21% cancellation rate for Century Communities and a 27% cancellation rate for Century Complete, primarily driven by the increases in mortgage rates. This decrease in our sales pace was consistent with trends seen in the overall housing market during 2022, as increased mortgage interest rates, rising inflation, and macro-economic uncertainty caused demand for home sales to decrease from the historically strong market conditions experienced since the second quarter of 2020. Further, this uncertainty has led a majority of our recent homebuyers to seek homes with near-term completion schedules, allowing them to lock interest rates closer to a home closing.

In response to the significant interest rate increases experienced during the latter half of 2022 and to maintain sales momentum, we have increased incentive offerings across our communities, including discounts on options and upgrades and financing incentives, which resulted in downward pressure to our homebuilding gross margin beginning in the fourth quarter of 2022. We expect we will continue

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to experience downward pressure to our homebuilding margins during the first half of 2023, primarily impacted by elevated construction costs and incentives. We have also taken steps to reduce our fixed costs in light of decreased demand for our homes compared to prior periods, including a reduction in staff during the fourth quarter of 2022.

We anticipate the homebuilding markets in each of our operating segments will continue to be tied to both the macro-economic environment and the local economy. We believe future demand for our homes is uncertain as future economic and market conditions are uncertain, in particular with respect to inflation; the impact of recent and anticipated future increases to the federal funds interest rate by the Federal Reserve; interest rates; availability and cost of mortgage loans to homebuyers; financial markets, credit and mortgage markets; the extent to which and how long government monetary directives, actions, and economic relief efforts will impact the U.S. economy, consumer confidence; wage growth; household formations; levels of new and existing homes for sale; prevailing home and rental prices; availability and cost of land, labor and construction materials; demographic trends; housing demand; and other factors, including those described elsewhere in this Form 10-K. Specifically, the recent rise in interest rates increases the costs of owning a home and adversely affects the purchasing power of our customers. Increased interest rates also could decrease homebuyer confidence and hinder not only demand for our homes, but also our ability to realize our backlog. A decrease in demand for our homes or an increase in cancellations due to increased interest rates or otherwise would adversely affect our operating results in future periods, including our net sales, home deliveries, gross margin, origination volume of and revenues from our Financial Services segment, and net income. As a result, our past performance may not be indicative of our future results.

Despite future macro-economic uncertainty, especially in relation to the recent higher interest rate environment, we believe we are well-positioned to benefit from the ongoing shortage of both new and resale homes available for purchase in our key markets and the favorable demographics that support the need for new housing. We believe our operations are well-positioned to withstand volatility in future market conditions as a result of our product offerings which both span the home buying segment and focus on affordable price points, and our current and future inventories of attractive land positions. We have continued to focus on maintaining an appropriate balance of home and land inventories in relation to anticipated future demand, as well as prudent leverage, and, as a result, we believe we are well positioned to continue to execute on our strategy in order to optimize stockholder returns.

Homebuilding Operations Strategy

Our strategy with respect to our homebuilding operations is focused on increasing the returns on our inventory while generating strong profitability. In general, we are focused on the following:

Maintaining a strong balance sheet and prudent use of leverage;

Offering homes that appeal to a broad range of entry-level, move-up, and lifestyle homebuyers, while heavily weighting our offerings towards providing affordable housing options in each of our homebuyer segments;

Preferring building move-in-ready homes over built-to-order homes, which we believe allows for a faster construction process, advantageous pricing with subcontractors, and shortened time period from home sale to home delivery, thus allowing our customers greater certainty regarding their financing costs;

Maintaining a strong pipeline of future land holdings, including favoring lot option contracts to manage our risk to land holdings;

Increasing our market share within our existing markets through organic growth and/or acquisitions of other homebuilders already operating in the market;

Engaging in opportunistic strategies for construction of multi-family rental units; and

Controlling costs, including costs of home sales revenue and selling, general and administrative expenses, and generating further efficiencies, including through the increased reliance on digital marketing and direct outreach to potential customers through our website and digital tools, such as the introduction of the ability to buy a home via our website, to achieve increased profitability.

Our operating strategy has resulted in significant growth in revenue and income before income taxes over the last five years. We anticipate the homebuilding markets in each of our operating segments will continue to be tied to both the macro-economic environment and the local economy, and we expect our operating strategy will continue to adapt to market changes, though we cannot provide any assurance that our strategies will continue to be successful.

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Results of Operations – Years Ended December 31, 2022 and 2021

During the year ended December 31, 2022, we generated $676.9 million in income before income tax expense, representing a 5.6% increase as compared to the prior year, and net income of $525.1 million, or $15.92 per diluted share, representing increases of 5.3% and 10.0%, respectively, as compared to the prior year, and resulting in a 26.8% return on equity. During the year ended December 31, 2022, we paid quarterly cash dividends to our stockholders of $0.20 per share, and aggregate cash dividends of $0.80 per share, and we also returned capital to our stockholders via share repurchases of 2.3 million shares for $120.6 million or a weighted average price of $52.32 per share.

Our financial results for the year ended December 31, 2022 are largely reflective of the favorable housing supply and demand environment in our markets prior to the second quarter of 2022 when the homes were contracted, which allowed us to pass on higher costs through higher selling prices and thereby positively affected our homebuilding gross margins for the year ended December 31, 2022. While we continued to experience labor and raw material shortages and municipal and utility delays in many of our markets during 2022, the severity of the shortages and delays began to moderate throughout the year, resulting in improvements to our construction cycle times since the first quarter of 2022.

‎During the year ended December 31, 2022, we generated homebuilding revenues of $4.4 billion, representing an increase of 7.8% over the prior year. During the year ended December 31, 2022, we delivered 10,594 homes with an average sales price of $414.7 thousand, representing a 2.0% decrease in the number of homes delivered as compared to the prior year, and a 11.1% increase in the average sales price as compared to the prior year. As of December 31, 2022, we had a backlog of 1,810 homes, a 61.1% decrease as compared to December 31, 2021, representing approximately $671.4 million in sales value, a 64.1% decrease as compared to December 31, 2021.

During the year ended December 31, 2022, we generated financial services revenue of $95.4 million, representing a decrease of 22.9% as compared to the prior year, driven by a reduced number of mortgages originated, as well as reduced margins on loans sold to third parties. These decreases were partially offset by increased revenue related to loan origination discount points, and gains from the settlement of forward commitments used to economically hedge our interest rate risk.

We ended 2022 with no amounts outstanding under our revolving line of credit, $296.7 million of cash and cash equivalents, $56.6 million of cash held in escrow, and a net homebuilding debt to net capital ratio of 23.5%. Additionally, we have continued to strategically manage our lot pipeline, while selectively reducing our land acquisition and development activities by terminating certain contracts in our markets that no longer met our investment criteria, in lights of market conditions, resulting in 53,119 lots owned and controlled at December 31, 2022, a 33.5% decrease as compared to December 31, 2021.

During the year ended December 31, 2022, our Century Living operations commenced construction on three multi-family projects in Colorado, comprising over 900 units, which we anticipate will be available for leasing beginning in the second half of 2023 and into 2024.

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The following table summarizes our results of operations for the years ended December 31, 2022 and 2021.

(1)This is a non-GAAP financial measure and should not be used as a substitute for the Company’s operating results prepared in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information within our “Homebuilding Gross Margin” and “Non-GAAP Financial Measures” sections in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

(2)Homebuilding gross margin percentage is inclusive of $10.1 million in impairment charges for the year ended December 31, 2022, and nominal impairment charges for the year ended December 31, 2021, included within inventory impairment on our consolidated statements of operations. See Note 13 – Fair Value Disclosures in the Notes to the Consolidated Financial Statements for further detail.

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Results of Operations by Segment

(dollars in thousands)

West

During the year ended December 31, 2022, our West segment generated income before income tax expense of $218.5 million, a 2.5% increase over the prior year, which increase was primarily driven by an increase in home sales revenue of $66.1 million. The revenue increase during the year ended December 31, 2022 was primarily driven by a 7.3% increase in the average sales price per home. The average sales price increase was driven by the mix of deliveries within individual communities and home price appreciation over the prior year.

Mountain

During the year ended December 31, 2022, our Mountain segment generated income before income tax expense of $192.5 million, a 9.3% decrease over the prior year. Home sales revenue increased during the year ended December 31, 2022 by $23.5 million, primarily generated by an 18.1% increase in the average sales price per home, and partially offset by a 13.6% decrease in the number of homes delivered. The decrease in the number of homes delivered was primarily driven by a 36.7% decrease in monthly absorption rate, and the average sales price increase was driven by the mix of deliveries within individual communities and home price appreciation over the prior year.

Texas

During the year ended December 31, 2022, our Texas segment generated income before income tax expense of $64.2 million, a 6.4% decrease over the respective prior year period, which decrease was primarily driven by a decrease in home sales revenue of $23.8 million. The revenue decrease during the year ended December 31, 2022 was primarily driven by a 17.6% decrease in the number of homes delivered, and partially offset by a 15.3% increase in the average sales price per home. The decrease in the number of homes delivered was primarily driven by a 57.1% decrease in monthly absorption rate, and the average sales price increase was driven by the mix of deliveries within individual communities and home price appreciation over the prior year.

Southeast

During the year ended December 31, 2022, our Southeast segment generated income before income tax expense of $139.0 million, a 50.4% increase over the prior year, which increase was primarily driven by an increase in home sales revenue of $60.8 million and an increase of 527 basis points in the percentage of income before income tax expense to home sales revenues. The revenue increase was primarily driven by a 9.2% increase in the average sales price per home, which was driven by the mix of deliveries within individual communities and home price appreciation over the prior year. The increase in the percentage of income before income tax expense to home sales revenue was primarily a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margins on home sales.

Century Complete

During the year ended December 31, 2022, our Century Complete segment generated income before income tax expense of $124.2 million, a 13.7% increase over the prior year, which increase was primarily driven by an increase in home sales revenue of $234.2 million. The revenue increase was primarily driven by an 11.1% increase in the number of homes delivered, as well as a 17.3% increase in the average sales price per home. The increase in the number of homes delivered was driven by the favorable housing supply and

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demand environment in our Century Complete markets prior to the second quarter of 2022 when the homes were contracted, and the average sales price increase was driven by the mix of deliveries within individual communities and home price appreciation over the prior year.

Financial Services

Our Financial Services segment originates mortgages for primarily our homebuyers, and as such, performance typically correlates to the number of homes delivered. Our Financial Services segment generated income before income tax of $41.2 million for the year ended December 31, 2022, a 19.6% decrease over the prior year. This decrease was primarily the result of a $28.3 million decrease in financial services revenue during the year ended December 31, 2022 compared to the prior year, driven by (1) a 31.4% decrease in the number of mortgages originated during the year ended December 31, 2022, due in part to a decrease in originations related to refinancing, and (2) reduced margins on loans sold to third parties period over period. These decreases were partially offset by increased revenue related to loan origination discount points and gains from the settlement of forward commitments used to economically hedge our interest rate risk. During the year ended December 31, 2022, the capture rate of Century homebuyers decreased to 69% primarily driven by the impact of increased competition.

The following table presents selected operational data for our Financial Services segment in relation to our loan origination activities (dollars in thousands):



Corporate

During the year ended December 31, 2022, our Corporate segment generated a loss of $102.7 million, as compared to a loss of $105.9 million during 2021.  The decrease in loss is primarily attributed to a $14.5 million loss on debt extinguishment during the year ended December 31, 2021 related to the redemption of our 5.75% senior notes due 2025, partially offset by higher corporate costs to support our homebuilding operations during the year ended December 31, 2022.

Homebuilding Gross Margin

Homebuilding gross margin represents home sales revenues less cost of home sales revenues and inventory impairment. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, increased to 24.5% for the year ended December 31, 2022, as compared to 24.2% for the year ended December 31, 2021.  This increase was driven by (1) our ability to increase sales price in excess of an increase in our labor and direct costs period over period, (2) benefits from our increased scale driving building efficiencies and streamlined production processes, and (3) the realization of less interest in cost of home sales revenue over the prior year, and was partially offset by impairment charges of $10.1 million during the year ended December 31, 2022.

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In the following table, we calculate our homebuilding gross margin, as adjusted to exclude inventory impairment and interest in cost of home sales revenues.

(dollars in thousands)

(1)This non-GAAP financial measure should not be used as a substitute for the Company’s operating results in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information under “—Non-GAAP Financial Measures.” An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP.

For the year ended December 31, 2022, our adjusted homebuilding gross margin percentage excluding inventory impairment, and interest in cost of home sales revenues, was 26.0% as compared to 25.9% for 2021. We believe the above information is meaningful as it isolates the impact that inventory impairment, indebtedness and acquisitions (if applicable) have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.

Selling, General and Administrative Expense

(dollars in thousands)

Our selling, general and administrative expense increased $41.1 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily attributable to an increase of $25.5 million in salaries and wages expense due to increased headcount, increased base pay due to market conditions, and increased incentive based compensation accruals, as well as an increase in expenses in numerous areas to support our homebuilding operations. As a percentage of home sales revenue, our selling, general and administrative expense increased 10 basis points during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Income Tax Expense

Our income tax expense for the year ended December 31, 2022 was $151.8 million, or 22.4% of income before income tax expense, as compared to $142.6 million, or 22.2% of income before income tax expense, for the year ended December 31, 2021.

Our effective tax rate of 22.4% for the year ended December 31, 2022 is comprised of our statutory federal and blended state rate of 24.9%, partially offset by certain permanent differences between taxable income and GAAP income before tax expense. These differences include certain compensation paid to executive officers, which is not deductible for federal income tax purposes and increased our effective tax rate by 0.9%, and the estimated federal energy home credits for the current year home deliveries, which benefited our effective tax rate by 2.7%.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law. The IRA extended the energy efficient home credit which provides a tax credit for each home delivered that meets the energy saving and certification requirements for homes delivered from January 1, 2022 (retroactively) through December 31, 2022, as well as modifies and increases the tax credit starting in 2023 through 2032. Our effective rates for the years ended December 31, 2022 and 2021 were impacted by benefits of $18.3 million and $16.5 million, respectively, as a result of the energy efficient home credit. While we have historically qualified approximately 80%

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of our homes for energy efficient home credits, we cannot provide any assurance that we will be able to continue to qualify the same number of our homes in future periods.

Segment Assets

(dollars in thousands)

Total assets increased by $276.9 million, or 7.9%, to $3.8 billion at December 31, 2022, as compared to $3.5 billion at December 31, 2021, primarily as a result of an increase in investment in homebuilding inventory, partially offset by a decrease in Financial Services assets primarily related to a decrease in mortgage loans held for sale period over period and a decrease in cash and cash equivalents. The increase in our Corporate assets was driven by an increase in our cash and cash equivalents and increases related to Century Living.

Lots owned and controlled

Of our total lots owned and controlled as of December 31, 2022, 60.5% were owned and 39.5% were controlled, as compared to 41.1% owned and 58.9% controlled as of December 31, 2021. The decrease in the number of controlled lots was driven by the termination of certain contracts in our markets that no longer met our investment criteria, in light of market conditions.

Other Homebuilding Operating Data

Net new home contracts

Net new home contracts (new home contracts net of cancellations) for the year ended December 31, 2022 decreased by 4,264 homes, or 35.5%, to 7,753 as compared to 12,017 for the year ended December 31, 2021.  Beginning in the second quarter of 2022 and continuing throughout the remainder of 2022, we experienced a decline in home sales pace across our markets as compared to prior periods. The decrease in net new home contracts was primarily driven by the impact on demand for new homes from increasing interest rates, rising inflation, and macro-economic uncertainty, and to some extent, an increase in cancellations primarily due to interest rate increases.

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Monthly absorption rate

Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancellations) for the years ended December 31, 2022 and 2021 by segment is included in the table below:

During the year ended December 31, 2022, our absorption rate decreased by 38.0% to 3.1 per month, as compared to 2021. Beginning in the second quarter of 2022 and continuing throughout the remainder of 2022, we experienced a decline in sales pace across our markets compared to prior periods, as well as an increase in cancellation rates to a combined 24%, with a 21% cancellation rate for Century Communities and a 27% cancellation rate for Century Complete, primarily driven by the increases in mortgage rates. The decrease in sales pace was consistent with trends seen in the overall housing market during the latter half of 2022, as increased mortgage interest rates, rising inflation, and macro-economic uncertainty caused demand to decrease from the historically strong market conditions experienced since the second quarter of 2020.

Selling communities at period end

Our selling communities increased by 6 communities to 208 communities at December 31, 2022, as compared to 202 communities at December 31, 2021. This increase was a result of new community openings during 2022.

Backlog

(dollars in thousands)

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Backlog reflects the number of homes, net of cancellations, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home. At December 31, 2022, we had 1,810 homes in backlog with a total value of $671.4 million, which represents decreases of 61.1% and 64.1%, respectively, as compared to 4,651 homes in backlog with a total value of $1.9 billion at December 31, 2021.  The decrease in backlog dollar value is primarily attributable to the decrease in backlog units, and in part due to a 7.7% decrease in the average sales price of homes in backlog.

Liquidity and Capital Resources

Overview

Our liquidity, consisting of our cash and cash equivalents and cash held in escrow and revolving credit facility availability, was $1.2 billion as of December 31, 2022, compared to $1.2 billion as of December 31, 2021.

Our principal uses of capital for the year ended December 31, 2022 were our land purchases, land development, home construction, share repurchases, and the payment of routine liabilities. We increased our investment in homebuilding inventory during 2022, including an increase of $25.6 million in homes under construction and $340.0 million in land and land development.

Cash flows for each of our communities depend on the stage in the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and not recognized in our consolidated statements of operations until a home closes, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we continue to acquire and develop lots in our markets when they meet our current investment criteria. During the year ended December 31, 2022, we reduced our land acquisition and development activities by terminating certain contracts in our markets that no longer met our investment criteria, in light of current market conditions, resulting in a charge of $11.6 million recorded as other expense included in our consolidated statements of operations.

Short-term Liquidity and Capital Resources

We use funds generated by operations, available borrowings under our revolving credit facility, and proceeds from issuances of debt or equity, including our current at-the-market facility, to fund our short term working capital obligations and fund our purchases of land, as well as land development, home construction activities, and other cash needs.

Our Financial Services operations use funds generated from operations, and availability under our mortgage repurchase facilities to finance its operations including originations of mortgage loans to our homebuyers.

Our Century Living operations use excess cash from our operations as well as project specific secured financing under construction loan agreements to fund development of multi-family projects.

We believe that we will be able to fund our current 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 our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available or on acceptable terms based on the macro-economy, and market conditions at the time. In a higher interest rate environment, we may incur additional interest expense on borrowings that bear floating interest rates, such as our revolving line of credit. We believe we are well positioned from a cash and liquidity standpoint to operate in an uncertain environment, and to pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise.

Long-term Liquidity and Capital Resources

Beyond the next twelve months, we believe that our principal uses of capital will be land and inventory purchases and other expenditures, as well as principal and interest payments on our long-term debt obligations. 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 from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available, or on favorable terms, especially in light of rising interest rates. In a higher interest rate environment, we may incur additional interest expense on borrowings that bear floating interest rates, such as our revolving line of credit. 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,

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refinance debt, or dispose of certain assets to fund our operating activities and capital needs.

Material Cash Requirements

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations impact our short-term and long-term liquidity and capital resource needs. Our contractual obligations as of December 31, 2022 were as follows (in thousands):

(1)Principal payments in accordance with our revolving line of credit, mortgage repurchase facilities and long-term debt agreements, and interest payments for outstanding long-term debt obligations. Interest on variable rate debt was calculated using the interest rate as of December 31, 2022. See Note 10 – Debt in the Notes to the Consolidated Financial Statements for further detail.

(2)Operating lease obligations do not include payments to property owners covering real estate taxes and common area maintenance.

In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. Purchase and option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties until we have determined whether to exercise our option, which may serve to reduce our financial risks associated with long-term land holdings. These purchase contracts typically require a cash deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and others as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Option contracts generally require payment by us of a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. Our obligations with respect to purchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits.

As of December 31, 2022, we had outstanding purchase contracts and option contracts for 21,007 lots totaling approximately $867.9 million and we had $48.4 million of deposits for land contracts, of which $25.8 were non-refundable cash deposits pertaining to land contracts. For contracts for which cash deposits were non-refundable, and subject to the terms of the outstanding contracts continuing to meet our investment criteria, we currently anticipate performing on the majority of our purchase and option contracts during the next twenty-four months. Our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change and dependent on future market conditions. Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.

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Outstanding Debt Obligations and Debt Service Requirements

One of our principal liquidity needs is the payment of principal and interest on outstanding indebtedness. Our outstanding indebtedness is described in detail in Note 10 – Debt in the Notes to the Consolidated Financial Statements. We are required to meet certain covenants, and as of December 31, 2022, we were in compliance with all such covenants and requirements under the agreements governing our revolving line of credit and mortgage repurchase facilities. See Note 10 – Debt in the Notes to the Consolidated Financial Statements for further detail.

Our outstanding debt obligations included the following as of December 31, 2022 and 2021 (in thousands):

(1)The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes.

(2)As of December 31, 2022, other financing obligations included $20.7 million related to insurance premium notes and certain secured borrowings, as well as $7.4 million outstanding under the construction loan agreements, as described below. As of December 31, 2021, other financing obligations included $9.2 million related to insurance premium notes and certain secured borrowings.

We may from time to time seek to refinance or increase our outstanding debt or retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may or may not be material during any particular reporting period.

Letters of Credit and Performance Bonds

In the normal course of business, we post letters of credit and performance and other bonds primarily related to our land development performance obligations with local municipalities. As of December 31, 2022 and 2021, we had $574.8 million and $492.5 million, respectively, in letters of credit and performance and other bonds issued and outstanding. Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and performance and other bonds are not generally released until all development and construction activities are completed. We anticipate that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business.

Construction Loan Agreements

On August 9, 2022 and March 17, 2022, certain wholly owned subsidiaries of Century Living, LLC entered into construction loan agreements with PNC Bank, National Association and U.S. Bank National Association, a national banking association, d/b/a Housing Capital Company (which we collectively refer to as “the Lenders”), respectively. The construction loan agreements (which we refer to as the “Construction Loan Agreements”), collectively provide that we may borrow up to and aggregate of $128.0 million from the Lenders for purposes of construction of multi-family projects in Colorado, with advances made by the Lenders upon the satisfaction of certain conditions. Borrowings under the Construction Loan Agreements bear interest at floating interest rates per annum equal to the Secured Overnight Financing Rate (which we refer to as “SOFR”) and the Bloomberg Short-term Bank Yield Index, plus an applicable margin. The outstanding principal balances and all accrued and unpaid interest is due on varying maturity dates through August 9, 2026, with the option to extend the maturity dates for a period of 12 months if certain conditions are satisfied. The Construction Loan Agreements contain customary affirmative and negative covenants (including covenants related to construction completion, and limitations on the use of loan proceeds, transfers of land, equipment, and improvements), as well as customary events of default.

As of December 31, 2022, $7.4 million was outstanding under the Construction Loan Agreements, with borrowings bearing a weighted average interest rate of 5.634% during the year ended December 31, 2022, and we were in compliance with all covenants thereunder.

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Revolving Line of Credit

On May 21, 2021, we entered into a Second Amended and Restated Credit Agreement (which we refer to as the “Second A&R Credit Agreement”) with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders party thereto. The Second A&R Credit Agreement provides us with a senior unsecured revolving line of credit (which we refer to as the “Credit Facility”) of up to $800.0 million, and unless terminated earlier, will mature on April 30, 2026. The Credit Facility includes a $250.0 million sublimit for standby letters of credit. Under the terms of the Second A&R Credit Agreement, we are entitled to request an increase in the size of the Credit Facility by an amount not exceeding $200 million. Our obligations under the Second A&R Credit Agreement are guaranteed by certain of our subsidiaries. The Second A&R Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. Borrowings under the Second A&R Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.05% and 2.65% per annum, and if made available in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.05% and 1.65% per annum. On December 21, 2022, we entered into a First Modification Agreement with Texas Capital Bank (formerly known as Texas Capital Bank, National Association), as Administrative Agent, amending the Second A&R Credit Agreement pursuant to which, effective January 3, 2023, all existing borrowings using an interest rate based on a LIBOR reference rate had the interest rate replaced with one based on an adjusted term SOFR reference rate, which equals the greater of (i) 0.50% or (ii) the one-month quotation of the secured overnight financing rate administered by the Federal Reserve Bank of New York, plus 0.10%.

As of December 31, 2022, no amounts were outstanding under the Credit Facility and we were in compliance with all covenants.

Mortgage Repurchase Facilities – Financial Services

Inspire is party to mortgage warehouse facilities, with Comerica Bank, J.P. Morgan and Wells Fargo (which we refer to as the “Repurchase Facilities”), which provide Inspire with uncommitted repurchase facilities of up to an aggregate of $300.0 million as of December 31, 2022, secured by the mortgage loans financed thereunder. The Repurchase Facilities have varying short term maturity dates through December 21, 2023 and bear a weighted average interest rate of 3.523% during the year ended December 31, 2022.

Amounts outstanding under the Repurchase Facilities are not guaranteed by us or any of our subsidiaries, and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of December 31, 2022 and 2021, we had $197.6 million and $331.9 million outstanding under these Repurchase Facilities, respectively, and were in compliance with all covenants thereunder.

During the years ended December 31, 2022 and 2021, we incurred interest expense on our Repurchase Facilities of $2.0 million and $2.1 million, respectively, which are included in financial services costs on our consolidated statements of operations.

At-the-Market Offerings

We are party to a Distribution Agreement with J.P. Morgan Securities LLC, BofA Securities, Inc., Wells Fargo Securities, LLC and Fifth Third Securities, Inc. (which we refer to as the “Distribution Agreement”), as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings, in accordance with the terms and conditions set forth in the Distribution Agreement. The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement. We did not sell or issue any shares of our common stock during the years ended December 31, 2022 and 2021, respectively, and as of December 31, 2022, all $100.0 million remained available for sale.

Stock Repurchase Program

Our Board of Directors authorized a stock repurchase program in 2018, under which we may repurchase up to 4.5 million shares of our outstanding common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws. The actual manner, timing, amount and value of repurchases under the stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including the market price of our common stock, trading volume, other capital management objectives and opportunities, applicable legal requirements, applicable tax effects including the 1% excise tax recently instituted under the Inflation Reduction Act of 2022, and general market and economic conditions.

We intend to finance any stock repurchases through available cash and our revolving credit facility. Repurchases also may be made

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under a trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, which would permit shares to be repurchased when we otherwise may be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The stock repurchase program has no expiration date and may be extended, suspended or discontinued by our Board of Directors at any time without notice at our discretion. All shares of common stock repurchased under the program will be cancelled and returned to the status of authorized but unissued shares of common stock.

During the year ended December 31, 2022 an aggregate of 2.3 million shares, were repurchased for a total purchase price of approximately $120.6 million at a weighted average price of $52.32 per share. During the years ended December 31, 2021, we did not repurchase any shares of common stock. The maximum number of shares available to be purchased under the stock repurchase program as of December 31, 2022 was 1,508,169 shares.

Dividends

The following table sets forth cash dividends declared by our Board of Directors to holders of record of our common stock during the years ended December 31, 2022 and 2021 (in thousands, except per share information):

The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our Board of Directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.

Cash Flows—Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

For the years ended December 31, 2022 and 2021, the comparison of cash flows is as follows:

Our primary sources of cash flows from operations are from the sale of single-family attached and detached homes and mortgages. Our primary uses of cash flows from operations are the acquisition of land and expenditures associated with the construction of our single-family attached and detached homes and the origination of mortgages held for sale. Net cash provided by operating activities was $315.3 million during the year ended December 31, 2022 as compared to net cash used by operating activities of $201.2 million during 2021. The increase in cash provided by operations is primarily a result of a $26.6 million increase in net income and a reduction in land acquisition spend during the year ended December 31, 2022 as compared to the year ended December 31, 2021. Additionally, our cash flows from operations was positively impacted during the year ended December 31, 2022 by a reduction in our mortgage loans held for sale of $140.0 million, as compared to an increase in mortgage loans held for sale of $72.4 million during the year ended December 31, 2021.

Net cash used in investing activities increased to $54.3 million during the year ended December 31, 2022, compared to $6.5 million used during 2021. The increase was primarily related to $30.3 million in expenditures related to the development, construction, and management of multi-family rental properties by our wholly owned subsidiary, Century Living, and a $8.8 million increase in purchases of property and equipment for the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Net cash used by financing activities was $274.8 million during the year ended December 31, 2022, compared to net cash provided by financing activities of $131.8 million during the year ended December 31, 2021. The increase in cash used in

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financing activities was primarily attributable (1) a $120.6 million increase in repurchases of our common stock during 2022, (2) a $207.0 million increase in net payments on the Repurchase Facilities during 2022, (3) $88.2 million in net proceeds from the issuance of senior notes due 2029 during 2021, partially offset by the simultaneous extinguishment of our former senior notes due 2025 and (4) a $10.8 million increase in dividend payments during the year ended December 31, 2022 compared to the year ended December 31, 2021.

As of December 31, 2022, our cash and cash and equivalents and restricted cash was $308.5 million.

Supplemental Guarantor Information



Our 6.750% senior notes due 2027 (which we collectively refer to as our “2027 Notes”) and our 3.875% senior notes due 2029 (which we collectively refer to as our “2029 Notes” and together with the 2027 Notes, the “Senior Notes”) are our unsecured senior obligations and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our direct and indirect wholly-owned operating subsidiaries (which we refer to collectively as “Guarantors”). In addition, our former 5.875% senior notes due 2025 (which we collectively refer to as our “2025 Notes”), which were extinguished during the year ended December 31, 2021, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors. Our subsidiaries associated with our Financial Services operations (referred to as “Non-Guarantors”) do not guarantee the Senior Notes. The guarantees are senior unsecured obligations of the Guarantors that rank equal with all existing and future senior debt of the Guarantors and senior to all subordinated debt of the Guarantors. The guarantees are effectively subordinated to any secured debt of the Guarantors. As of December 31, 2022, Century Communities, Inc. had outstanding $1.0 billion in total principal amount of Senior Notes.

Each of the indentures governing our Senior Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the respective indentures), which sale, transfer, exchange or other disposition does not constitute an “Asset Sale” (as defined in the respective indentures) or is made in compliance with applicable provisions of the applicable indenture; (2) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the assets of such Guarantor, which sale, transfer, exchange or other disposition does not constitute an Asset Sale or is made in compliance with applicable provisions of the applicable indenture; provided, that after such sale, transfer, exchange or other disposition, such Guarantor is an “Immaterial Subsidiary” (as defined in the respective indentures); (3) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the applicable indenture; provided that if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the applicable Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the applicable Indenture; (4) upon the designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the respective Indentures), in accordance with the applicable indenture; (5) if the Company exercises its legal defeasance option or covenant defeasance option under the applicable indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the applicable indenture, upon such exercise or discharge; or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the applicable indenture. The indenture governing our former 2025 Notes contained a similar provision.

If a guarantor were to become a debtor in a case under the US Bankruptcy Code, a court may decline to enforce its guarantee of the Senior Notes. This may occur when, among other factors, it is found that the guarantor originally received less than fair consideration for the guarantee and the guarantor would be rendered insolvent by enforcement of the guarantee. On the basis of historical financial information, operating history and other factors, we believe that each of the guarantors, after giving effect to the issuance of its guarantee of the Senior Notes when the guarantee was issued, was not insolvent and did not and has not incurred debts beyond its ability to pay such debts as they mature. The Company cannot predict, however, what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.

Only the 2027 Notes and the related guarantees are, and the former 2025 Notes and the related guarantees were, registered securities under the Securities Act of 1933, as amended (the “Securities Act”). The offer and sale of the 2029 Notes and the related guarantees were not and will not be registered under the Securities Act or the securities laws of any other jurisdiction and instead were issued in reliance upon an exemption from such registration. Unless they are subsequently registered under the Securities Act, neither the 2029 Notes nor the related guarantees may be offered and sold only in transactions that are exempt from the registration requirements under the Securities Act and the applicable securities laws of any other jurisdiction.

As the guarantees for the 2027 Notes and the guarantees for the former 2025 Notes were made in connection with the issuance of the

2027 Notes and former 2025 Notes and exchange offers effected under the Securities Act in February 2015, October 2015 and April 2017, the Guarantors’ condensed supplemental financial information is presented in this report as if the guarantees existed during the

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periods presented pursuant to applicable SEC rules and guidance. If any Guarantors are released from the guarantees in future periods, the changes are reflected prospectively. We have determined that separate, full financial statements of the Guarantors would not be material to investors, and accordingly, supplemental financial information is presented below.

The following summarized financial information is presented for Century Communities, Inc. and the Guarantor Subsidiaries on a combined basis after eliminating intercompany transactions and balances among Century Communities, Inc. and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from Non-Guarantor Subsidiaries.

Critical Accounting Policies

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and the estimates included in our financial statements might be impacted if we used different assumptions or conditions. Our management believes that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require among the most difficult, subjective or complex judgments:

Home Sales Revenues and Profit Recognition

Under Accounting Standards Codification (which we refer to as “ASC”) 606 Revenue from Contracts with Customers, revenues from home sales and the related profit are recorded when our performance obligations are satisfied, which generally occurs when the respective homes are closed and title has passed to our homebuyers.  We generally satisfy our performance obligations in less than one

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year from the contract date.  Proceeds from home closings that are held for our benefit in escrow, are presented as cash held in escrow on our consolidated balance sheets.  Cash held for our benefit in escrow is typically held by the escrow agent for a few days. When it is determined that the earnings process is not complete and we have remaining performance obligations that are material in the context of the contract, the related revenue and costs are deferred for recognition in future periods until those performance obligations have been satisfied. Prior to satisfying our performance obligations, we typically receive deposits from customers related to sold but undelivered homes and we collect these deposits at the time a homebuyer’s contract is accepted. These deposits are classified as earnest money deposits and are included in accrued expenses and other liabilities on our consolidated balance sheets. Earnest money deposits totaled $17.9 million and $56.8 million at December 31, 2022 and December 31, 2021, respectively.

Inventories and Cost of Sales

We capitalize pre-acquisition, land, development, and other allocated costs, including interest, during periods of entitlement, development and home construction.

Land, development, and other common costs are allocated to inventory using the relative-sales-value method; however, as lots within a project typically have comparable market values, we generally allocate land, development, and common costs equally to each lot within the project. Home construction costs are recorded using the specific-identification method. Cost of sales for homes closed includes the allocation of construction costs of each home and all applicable land acquisition, land development, and related common costs, both incurred and estimated to be incurred. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining homes in the community.

When a home is closed, the Company generally has not paid all incurred costs necessary to complete the home, and a liability and a charge to cost of home sales revenues are recorded for the amount that is estimated will ultimately be paid related to completed homes.

Impairment of Inventories

We review all of our communities for indicators of impairment quarterly and record an impairment loss when conditions exist where the carrying amount of inventory is not recoverable and exceeds its fair value. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases to gross margins, costs significantly in excess of budget, and actual or projected cash flow losses.

When an indicator of impairment is identified, we prepare and analyze cash flows at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets, which we have determined as the community level. If the undiscounted cash flows are less than the community’s carrying value, we generally estimate the fair value using the estimated future discounted cash flows of the respective inventories. A community with a fair value less than its carrying value is impaired and is written down to fair value. Such losses, if any, are reported within homebuilding gross margin. The discount rate used in determining each asset’s fair value reflects inherent risks associated with the related estimated cash flows, as well as current risk-free rates available in the market and estimated market risk premiums. When estimating future discounted cash flows, we have utilized a discount rate of approximately 12% in our valuations during the years ended December 31, 2022 and 2021, respectively. The discount rate utilized was most directly impacted by the stage of construction, which was at or near completion for the community, and the estimated completion of selling efforts in the community, which were generally less than 18 months from the impairment date.

When estimating undiscounted cash flows, we make various assumptions, including the following: the expected home sales revenue to be generated, including consideration of the number of homes available, pricing and incentives offered by us or other builders in comparable communities; the costs incurred to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction, and selling and marketing costs; any alternative product offerings that may be offered that could have an impact on sales, sales prices and/or building costs; and alternative uses for the property. The key assumptions relating to estimating cash flows are impacted by local market and economic conditions, and are inherently uncertain. Although our quarterly assessments reflect management’s best estimates, due to uncertainties in the estimation process, actual results could differ from such estimates.

For the years ended December 31, 2022 and 2021, the following table shows the number of communities for which we identified an indicator of impairment and therefore tested for whether an impairment existed, compared to the total number of communities that existed during such period.

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During the year ended December 31, 2022, we determined that inventory with a carrying value before impairment of $59.8 million within 22 communities across our Century Complete, Southeast, and Texas segments was not recoverable. Inventory impairment charges in 2022, which were all related to communities in which we are actively selling homes, were driven by our decision to increase incentives in certain communities directed at improving our sales absorptions primarily on move-in ready homes. Accordingly, we recognized impairment charges of an aggregate $10.1 million in order to record the communities at fair value. We recorded nominal impairment charges for one community during the year ended December 31, 2021. The impairment charges are included in inventory impairment in our consolidated statements of operations.

Warranties

Estimated future direct warranty costs are accrued and charged to cost of home sales revenues in the period when the related home sales revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the consolidated balance sheets, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through a model that incorporates historical payment trends and adjust the amounts recorded if necessary. The model is subject to management’s judgment, and our primary assumption in estimating the amounts we accrue for warranty costs is that historical claims experience is a strong indicator of future claims experience. Factors that contribute to our warranty reserve include the number of homes delivered, historical and anticipated rates of warranty claims, and cost per claim. Actual future warranty costs could differ from our currently estimated amounts. Based on favorable warranty payment trends relative to our estimates at the time of home closing, we reduced our warranty reserve by $2.1 million, $5.4 million and $2.4 million during the years ended December 31, 2022, 2021 and 2020, respectively.

Self-Insurance

We maintain general liability insurance coverage, including coverage for certain construction defects. These insurance policies protect us against a portion of the risk of loss from claims, subject to certain self-insured per occurrence and aggregate retentions, deductibles, and available policy limits. Prior to the year ended December 31, 2021, we generally maintained construction defect policies with lower self-insurance limits. In circumstances where we have elected to retain a higher portion of the overall risk for construction defect claims in return for a lower initial premium, we reserve for the estimated costs that we will incur that are above our coverage limits or that are not covered by our insurance policies. The reserve is recorded on an undiscounted basis at the time revenue is recognized for each home closing. Our self-insurance liability is presented on a gross basis without consideration of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any. Estimates of insurance recoveries and amounts we have paid on behalf of and expect to recover from other parties, if any, are recorded as receivables when such recoveries are considered probable.

As of December 31, 2022, our self-insurance reserve for incurred but not reported construction defect claims was $17.0 million, compared to $5.1 million as of December 31, 2021. The self-insurance reserve estimate requires significant management judgment and assumptions, and is based on a third-party actuarial analysis that relies primarily upon industry data and partially on our historical claims to estimate overall costs. These estimates are subject to uncertainty due to a variety of factors, the most significant being the long period of time between the delivery of a home to a homebuyer and when a construction defect claim may be made, and the ultimate resolution of any such construction defect claim. Though state regulations vary, construction defect claims are reported and resolved over a long period of time, which can extend for 10 years or more. As a result, the majority of the estimated self-insurance liability based on the actuarial analysis relates to claims incurred but not yet reported. Assumptions used in developing estimates can fluctuate as a result of unforeseen developments in claims relative to markets in which we operate, inflation rates, regulatory or legal changes, and other factors. While we believe our estimates are reasonable and provide for a certain degree of coverage to account for these variables, actual claims and costs could differ significantly from recorded reserves. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. Historically, adjustments to our estimates have not been material, as we increased our self-insurance reserve by $0.9 million during the year ended December 31, 2022 and recorded no change to our reserve during the year ended December 31, 2021, respectively.

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Mortgage Loans Held for Sale and Financial Services Revenue Recognition

Mortgage loans held for sale and mortgage servicing rights are carried at fair value, with gains and losses from the changes in fair value reflected in financial services revenue on the consolidated statements of operations. Management believes carrying mortgage loans held for sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them. Net gains and losses from the sale of mortgage loans held for sale, which are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale are also included in financial services revenue on the consolidated statements of operations.

Derivative instruments used to economically hedge our market and interest rate risk are carried at fair value. Derivative instruments typically include mortgage loans in process for which interest rates were committed to the borrowers (referred to as “interest rate lock commitments”), and forward commitments on mortgage-backed securities. Changes in fair value of these derivatives as well as any gains or losses upon settlement are reflected in financial services revenue on the consolidated statements of operations.

Financial services revenue also includes loan origination fees, which represent revenue earned from originating mortgage loans that is recognized at the time the mortgage loans are funded and generally represent a fee based on a percentage of the original loan amount, and fees related to discount points paid by borrowers to reduce mortgage interest rates.

Stock-Based Compensation

We account for stock-based awards in accordance with ASC 718, Compensation—Stock Compensation, which requires us to estimate the grant date fair value of stock-based compensation awards and to recognize the fair value as compensation costs over the requisite service period, which is generally three years, for all awards that vest. The fair value of our restricted stock units and awards in the form of unrestricted shares of common stock is equal to the closing price of our common stock on the New York Stock Exchange on the date of grant. Stock-based compensation expense associated with outstanding performance share units is measured using the grant date fair value and is based on the estimated achievement of the established performance criteria at the end of each reporting period until the performance period ends, recognized on a straight-line basis over the performance period. Stock-based compensation expense is only recognized for performance share units that we expect to vest, which we estimate based upon an assessment of the probability that the performance criteria will be achieved. Management judgment is required in estimating the level of performance that will be achieved and the number of shares that will be earned, and considers, among other factors, our historical operating results and our expectation of future profitability. The performance share units granted during the fiscal years ended December 31, 2022, 2021, and 2020 have three-year performance-based metrics measured over performance periods ending on December 31 for each three-year period. Stock-based compensation expense associated with outstanding performance share units is updated for actual forfeitures.

Income Taxes

We account for income taxes in accordance with ASC 740, Income Taxes, which requires recognition of deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of its assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. Management judgement is required to evaluate whether it is more likely than not that deferred tax assets will be realized, and this evaluation considers, among other factors, our historical operating results, our expectation of future profitability, the duration of the applicable statutory carryforward periods, and conditions in the housing market and the broader economy. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. In addition, management judgment is required in evaluating uncertain tax positions. We evaluate our uncertain tax positions quarterly based on various factors, including changes in facts or circumstances, tax laws or the status of audits by tax authorities.  When it is more likely than not that a tax position will be sustained upon examination by a tax authority that has full knowledge of all relevant information, we measure the amount of tax benefit from the position and record the largest amount of tax benefit that is more likely than not of being realized after settlement with a tax authority. Our policy is to recognize interest to be paid on an underpayment of income taxes in interest expense and any related statutory penalties in the provision for income taxes on our consolidated statements of operations.

Goodwill

We evaluate goodwill for possible impairment in accordance with ASC 350, Intangibles–Goodwill and Other, on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use a two step process to assess whether or not goodwill can be realized. The first step is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. The qualitative assessment requires management judgment to consider factors which may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial

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performance of the reporting units and other entity and reporting unit specific events. If the qualitative assessment indicates a stable or improved fair value, no further testing is required.

If a qualitative assessment indicates that a significant decline to fair value of a reporting unit is more likely than not, we will proceed to the second step where we calculate the fair value of a reporting unit based on discounted future cash flows. Significant assumptions are required in assessing the fair value of the reporting unit, including the estimate of future discounted cash flows of the reporting unit and impacts of current market conditions. If this step indicates that the carrying value of a reporting unit is in excess of its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

Business Combinations

We account for business combinations in accordance with ASC Topic 805, Business Combinations, if the acquired assets assumed and liabilities incurred constitute a business. We consider acquired companies to constitute a business if the acquired net assets and processes have the ability to create outputs in the form of revenue. For acquired companies constituting a business, we recognize the identifiable assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid over the fair value of the identifiable net assets as goodwill.

The fair value of acquired inventories largely depends on the stage of production of the acquired land and work in process inventory. For acquired land inventory, we typically utilize, with the assistance of a third party appraiser, a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimates include future per lot development costs, construction and overhead costs, mix of products sold in each community, as well as average sales price. For work in process inventories, we estimate the fair value based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts.

Non-GAAP Financial Measures

In this Form 10-K, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net homebuilding debt to net capital, and adjusted net income and adjusted earnings per diluted share. These non-GAAP financial measures are presented to provide investors additional information to facilitate the comparison of our past and present operations. We believe these non-GAAP financial measures provide useful information to investors because they are used to evaluate our performance on a comparable year-over-year basis. These non-GAAP financial measures are not in accordance with, or an alternative for, GAAP measures and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of our non-GAAP financial measures may differ from the definitions of other companies using the same or similar names limiting, to some extent, the usefulness of such measures for comparison purposes. Non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our financial results as determined in accordance with GAAP. These measures should only be used to evaluate our financial results in conjunction with the corresponding GAAP measures. Accordingly, we qualify our use of non-GAAP financial information in a statement when non-GAAP financial information is presented.

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EBITDA and Adjusted EBITDA

The following table presents EBITDA and Adjusted EBITDA for the years ended December 31, 2022 and 2021. Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance. We define Adjusted EBITDA as consolidated net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense, (iv) depreciation and amortization expense, (v) loss on debt extinguishment, and (vi) inventory impairment. We believe Adjusted 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 non-recurring. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Adjusted EBITDA should be considered in addition to, and not as a substitute for, consolidated net income in accordance with GAAP as a measure of performance. Our presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our Adjusted EBITDA is limited as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

(dollars in thousands)

NM – Not Meaningful

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Net Homebuilding Debt to Net Capital



The following table presents our ratio of net homebuilding debt to net capital, which is a non-GAAP financial measure.  We calculate this by dividing net homebuilding debt (homebuilding debt less cash and cash equivalents, and cash held in escrow) by net capital (net homebuilding debt plus total stockholders’ equity). Homebuilding debt is our total debt minus our outstanding borrowings under our Construction Loan Agreements and our Repurchase Facilities. The most directly comparable GAAP measure is the ratio of debt to total capital. We believe the ratio of net homebuilding debt to net capital is a relevant and useful financial measure to investors in understanding the leverage employed in our operations and as an indicator of our ability to obtain external financing.

(dollars in thousands)



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Adjusted Net Income and Adjusted Diluted Earnings per Share



Adjusted Net Income and Adjusted Diluted Earnings per Share (which we refer to as “Adjusted EPS”) are non-GAAP financial measures that we believe are useful to management, investors and other users of our financial information in evaluating our operating results and understanding our operating trends without the effect of certain non-recurring items. We believe excluding certain non-recurring items provides more comparable assessment of our financial results from period to period. We define Adjusted Net Income as consolidated net income before (i) income tax expense, (ii) inventory impairment (iii) restructuring costs, and (iv) loss on debt extinguishment, less adjusted income tax expense, calculated using the Company’s estimated annual effective tax rate after discrete items for the applicable period. Adjusted Diluted EPS is calculated by dividing Adjusted Net Income by weighted average common shares – diluted.

(in thousands, except share and per share information)

(1)The tax rates used in calculating adjusted net income for the years ended December 31, 2022 and 2021 were 22.4% and 22.2%, respectively, which reflect of the Company’s GAAP tax rates for the applicable periods.