Green Brick Partners, Inc. (GRBK)

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

For business overview and developments during the year ended December 31, 2024, refer to Part I, Item 1 of this Annual Report on Form 10-K.

Overview and Outlook

Our key financial and operating metrics are home deliveries, home closings revenue, average sales price of homes delivered, net new home orders, which refers to the number of sales contracts executed reduced by the number of sales contracts canceled during the relevant period, and homebuilding gross margin. Our results for each key financial and operating metric, as compared to the year ended December 31, 2023, are provided below:

The strong performance on most of our key metrics year over year is attributable to our superior infill and infill-adjacent locations in high-growth markets, our land strategy to self-develop raw land into finished lots that are held on our balance sheet, our reduced cycle times, and the strong demand for new homes in our markets. Our average active selling communities increased 18.8%, while the average sales price of homes delivered decreased 3.4% due to a combination of product mix and a high mortgage rate environment. We maintained a strong homebuilding gross margin of 33.8%.

2024 Developments

Among the 12 largest metropolitan areas in the country, the Dallas and Atlanta areas ranked second and tenth, respectively, in annual rate of job growth from November 2023 to November 2024 (Source: US Bureau of Labor Statistics, November 2024). We believe we operate in two of the most desirable housing markets in the nation and that increasing demand and supply levels in our target markets create favorable conditions for our future growth.

Results of Operations

Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023

Residential Units Revenue and New Homes Delivered

The table below represents residential units revenue and new homes delivered for the years ended December 31, 2024 and December 31, 2023 (dollars in thousands):

The $300.9 million increase in residential units revenue was driven by the 21.1% increase in the number of homes delivered partially offset by a 3.4% decrease in average sales price of new homes delivered. The increase in new homes delivered is attributable to our increase in community count, the limited competition in our infill and infill-adjacent community sites, our reduced cycle times, and the continued low supply of existing and new home inventory in our markets. The decrease in the average sales price of homes delivered is primarily attributable to an increase in the percentage of home deliveries by

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Trophy Signature Homes over the last year and higher incentives driven by the high mortgage rate environment. Trophy had an average sales price below the Company average due to a mix of product type and selling more inventory in perimeter locations.

New Home Orders and Backlog

The table below represents new home orders and backlog related to our builder operations segments, excluding mechanic’s liens contracts (dollars in thousands):

Net new home orders increased by 9.7% over the prior year and our average active selling communities increased by 18.8% due to the continued opening of new communities that outpaced the sellout of existing communities. As a result, our absorption rate per average active selling community decreased 8.1% year over year, which we believe is due to elevated mortgage rates, high interest rate volatility, and the lock-in effect of homeowners with existing lower rate mortgages. The increase in net new home orders is attributable to the increase in our active selling communities, the limited competition in our infill and infill-adjacent community sites, and the strength in demand in our primary higher growth markets.

Backlog refers to homes under sales contracts that have not yet closed at the end of the respective period, and absorption rate refers to the rate at which net new home orders are contracted per average active selling community during the respective period. Sales contracts may be canceled prior to closing for a number of reasons, including the inability of the homebuyer to obtain suitable mortgage financing. Accordingly, backlog may not be indicative of our future revenue.

Backlog revenue decreased by 10.7% due to a 13.2% decrease in backlog units partially offset by a 3.0% increase in the average sales price of backlog units. As a result, our spec units under construction as a percentage of total units under construction increased from 69.8% as of December 31, 2023 to 75.6% as of December 31, 2024.

Our cancellation rate, which refers to sales contracts canceled divided by sales contracts executed during the relevant period, was 7.3% for the year ended December 31, 2024, compared to 6.6% for the year ended December 31, 2023. Our cancellation rate remained in a historically low range under 10.0% since December 31, 2022.

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Residential Units Gross Margin

The table below represents the components of residential units gross margin (dollars in thousands):

Residential units revenue increased by $300.9 million or 17.0% during the year ended December 31, 2024, mainly due to an increase in home deliveries of 21.1% partially offset by a 3.4% reduction in average sales price of homes delivered as discussed above. Cost of residential units as a percent of residential units revenue for the year ended December 31, 2024 decreased to 66.2% compared to 69.1% in the previous year due to a combination of product mix and a focus on delivering more affordable product to combat high interest rates.

Residential units gross margin for the year ended December 31, 2024 increased to 33.8%, compared to 30.9% for the year ended December 31, 2023. The increase in residential units gross margin is primarily due to limited competition in our infill and infill-adjacent community sites, our self-development strategy, our high growth primary markets of DFW and Atlanta, our infill locations, and our expertise in site selection.

Land and Lots Revenue

The table below represents lots closed and land and lots revenue (dollars in thousands):

From time to time we will opportunistically sell finished lots to other homebuilders when we determine that we have excess capacity in specific neighborhoods or submarkets. Lots revenue increased by 98.3% during the year ended December 31, 2024, driven by a 153.4% increase in the number of lots closed partially offset by a 21.7% decrease in the average lot price. Land revenue represents sales of two tracts of commercial land during the year ended December 31, 2024.

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Selling, General and Administrative Expenses

The table below represents the components of selling, general and administrative expense (dollars in thousands):

Selling, general and administrative expense as a percentage of revenue was 10.8% for the year ended December 31, 2024, which is substantially in line with 10.9% for the year ended December 31, 2023.

Builder Operations

Selling, general and administrative expenses as a percentage of revenue for builder operations remained flat year over year. Builder operations expenditures include salaries, sales commissions, and community costs such as advertising and marketing expenses, rent, professional fees, and non-capitalized property taxes.

Corporate, Other and Unallocated

Selling, general and administrative expense for the corporate, other and unallocated non-operating segment for the year ended December 31, 2024 was $8.1 million, compared to income of $0.3 million for the year ended December 31, 2023. The increase was driven by incentive compensation and charitable donations during the year ended December 31, 2024. Corporate, other and unallocated expenses generally include capitalized overhead adjustments that are not allocated to builder operations segments.

Equity in Income of Unconsolidated Entities

Equity in income of unconsolidated entities decreased to $5.1 million, or 69.6%, for the year ended December 31, 2024, compared to $16.7 million for the year ended December 31, 2023. This decrease is mainly due to the sale of our ownership interest in Challenger during the three months ended March 31, 2024, wherein, we recognized only one month of net earnings from this investment during 2024 compared to twelve months in the prior year. See Note 5 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of Green Brick’s share in net earnings by unconsolidated entity.

Other Income, Net

Other income, net, increased to $29.8 million for the year ended December 31, 2024, compared to $19.4 million for the year ended December 31, 2023. The change was primarily due to a $10.7 million gain in the sale of our investment in Challenger.

Income Tax Expense

Income tax expense increased to $94.7 million for the year ended December 31, 2024 from $84.6 million for the year ended December 31, 2023. The increase was substantially due to higher taxable income partially offset by investment tax credits purchased at a discount and an income tax benefit for equity compensation deductions. See Note 13 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a discussion on the Company’s income tax expense for the year ended December 31, 2024.

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

For discussion and analysis of our results of operations for the year ended December 31, 2023 as well as for comparison to our results of operations for the year ended December 31, 2022, refer to Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023.

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Lots Owned and Controlled

The following table presents the lots we owned or controlled, including lot option contracts, as of December 31, 2024 and December 31, 2023. Owned lots are those for which we hold title, while controlled lots are lots past feasibility studies and approved by land committee for which we do not hold title, but have the contractual right to acquire title.

(1) Land held for future development consist of raw land parcels where development activities have been postponed due to market conditions or other factors.

(2) Total lots excludes lots with homes under construction.

The following table presents additional information on the lots we owned as of December 31, 2024 and December 31, 2023.

(1) Total lots owned includes finished lot purchases, which were less than 1.4% of total lots self-developed as of December 31, 2024.

Liquidity and Capital Resources Overview

As of December 31, 2024 and December 31, 2023, we had $141.5 million and $179.8 million of unrestricted cash and cash equivalents, respectively. Our historical cash management strategy includes redeploying net cash from the sale of home inventory to acquire and develop land and lots that represent opportunities to generate desired margins and returns, and using cash to make additional investments in business acquisitions, joint ventures, or other strategic activities.

Our principal uses of capital for the year ended December 31, 2024 were home construction, land purchases, land development, operating expenses, and payment of routine liabilities. Historically, we have used funds generated by operations and available borrowings to meet our short-term working capital requirements. We remain focused on generating positive margins in our homebuilding operations and acquiring desirable land positions in order to maintain a strong balance sheet and remain poised for continued growth.

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Cash flows for each of our communities depend on the community’s stage in the development cycle. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, roads, utilities, general landscaping and other amenities, and home construction. These costs are a component of our inventory and are not recognized in our statement of income until a home closes. In the later stages of community life cycle, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with home construction and land development previously occurred.

Effective February 1, 2024, we sold our ownership interest in GB Challenger, LLC (“Challenger”) to the entity that already held the controlling interest in Challenger for approximately $64.0 million in cash. We used the proceeds from the transaction for investment in and expansion of opportunities with those builders in which we hold a controlling or one-hundred percent (100%) ownership interest, particularly including the growth and expansion of our Trophy brand in the DFW, Austin and Houston markets and launching our wholly owned mortgage company.

Our debt to total capitalization ratio, which is calculated as the sum of borrowings on lines of credit, the senior unsecured notes, and notes payable, net of debt issuance costs (“total debt”), divided by the total capitalization, which equals the sum of Green Brick Partners, Inc. stockholders’ equity and total debt, was approximately 17.2% as of December 31, 2024.

Additionally, as of December 31, 2024, our net debt to total capitalization ratio, which is a non-GAAP financial measure, remained low at 10.7%. It is our intent to prudently employ leverage to continue to invest in our land acquisition, development and homebuilding activities. We target a debt to total capitalization ratio of approximately 20%, which we expect will provide us with significant additional growth capital.

Reconciliation of a Non-GAAP Financial Measure

In this Annual Report on Form 10-K, we utilize a financial measure of net debt to total capitalization ratio that is a non-GAAP financial measure as defined by the SEC. Net debt to total capitalization is calculated as total debt less cash and cash equivalents, divided by the sum of total Green Brick Partners, Inc. stockholders’ equity and total debt less cash and cash equivalents. We present this measure because we believe it is useful to management and investors in evaluating the Company’s financing structure. We also believe this measure facilitates the comparison of our financing structure with other companies in our industry. Because this measure is not calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation, as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

The closest GAAP financial measure to the net debt to total capitalization ratio is the debt to total capitalization ratio. The following table represents a reconciliation of the net debt to total capitalization ratio as of December 31, 2024 (dollars in thousands):

Key Sources of Liquidity

Our key sources of liquidity were funds generated by operations and provided by borrowings during the year ended December 31, 2024.

Cash Flows

The following summarizes our primary sources and uses of cash for the year ended December 31, 2024 as compared to the year ended December 31, 2023:

•Operating activities. Net cash provided by operating activities for the year ended December 31, 2024 was $25.9 million, compared to $213.3 million during the year ended December 31, 2023. The net cash inflows for the year ended December 31, 2024 were primarily generated from business operations of $417.2 million offset by an increase in inventory of $403.3 million.

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•Investing activities. Net cash provided by investing activities for the year ended December 31, 2024 was $27.8 million compared to net cash used of $13.3 million during the year ended December 31, 2023. The cash inflows for the year ended December 31, 2024 were primarily from proceeds of $64.0 million from the sale of our interest in Challenger in February 2024, partially offset by $31.8 million used in other investments in unconsolidated entities.

•Financing activities. Net cash used in financing activities for the year ended December 31, 2024 was $93.5 million, compared to a $93.8 million during the year ended December 31, 2023. The cash outflows for the year ended December 31, 2024 were primarily related to share repurchases of $48.4 million, net borrowings on our lines of credit of $25.0 million, and repayments of our senior unsecured notes of $37.5 million.

For discussion and analysis our cash flows for the year ended December 31, 2023 as well as for comparison to our cash flows for the year ended December 31, 2022, refer to Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023.

Debt Instruments

Borrowings on lines of credit outstanding, net of debt issuance costs, as of December 31, 2024 and December 31, 2023 consisted of the following (in thousands):

Secured Revolving Credit Facility – As of December 31, 2024 and 2023, we had no outstanding amounts under our Secured Revolving Credit Facility. Borrowings under the Secured Revolving Credit Facility bear interest at a floating rate per annum equal to the rate announced by Bank of America, N.A. as its “Prime Rate” less 0.25%, subject to a minimum rate. As amended, this credit agreement matures on May 1, 2025 and carries a minimum interest rate of 3.15%.

Unsecured Revolving Credit Facility – As of December 31, 2024, we had $25 million outstanding under our Unsecured Revolving Credit facility compared no amounts outstanding as of December 31, 2023. On December 13, 2024, the Company entered into the Twelfth Amendment (the “Twelfth Amendment”) to this credit agreement which adopted a leverage-based pricing grid for a reduction in both interest rate and non-use fee and other administrative changes. The Twelfth Amendment removed one lender with a $25 million prior commitment and added $30 million in new commitments, thereby increasing total commitments to $330 million. The maturity of all commitments under the facility were extended to December 14, 2027.

Senior Unsecured Notes - As of December 31, 2024, we had four series of senior unsecured notes outstanding which were each issued pursuant to a note purchase agreement. The aggregate amount of senior unsecured notes outstanding was $299.1 million as of December 31, 2024, compared to $336.2 million as of December 31, 2023, respectively, net of issuance costs.

•In August 2019, we issued $75.0 million of senior unsecured notes (the “2026 Notes”) of which $62.5 million was outstanding as of December 31, 2024. Interest accrues at an annual rate of 4.0% and is payable quarterly. Principal on the 2026 Notes of $12.5 million is due on August 8, 2025 and the remaining principal amount of $50.0 million is due on August 8, 2026.

•In August 2020, we issued $37.5 million of senior unsecured notes (the “2027 Notes”). Interest accrues at an annual rate of 3.35% and is payable quarterly. Principal on the 2027 Notes is due on August 26, 2027.

•In February 2021, we issued $125.0 million of senior unsecured notes (the “2028 Notes”) of which $100.0 million was outstanding as of December 31, 2024. Interest accrues at an annual rate of 3.25% and is payable quarterly. Principal on the 2028 Notes is due in increments of $25.0 million annually on February 25 in each of 2025, 2026, 2027, and 2028.

•In December 2021, we issued $100.0 million of senior unsecured notes (the “2029 Notes”). Interest accrues at an annual rate of 3.25% and is payable quarterly. A required principal prepayment of $30.0 million is due on December 28, 2028. The remaining unpaid principal balance is due on December 28, 2029.

Optional prepayment is allowed with payment of a “make-whole” premium that fluctuates depending on market interest rates. Interest is payable quarterly in arrears.

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Our debt instruments require us to maintain specific financial covenants, each of which we were in compliance with as of December 31, 2024. Specifically, under the most restrictive covenants, we are required to maintain the following:

•a minimum interest coverage (consolidated EBITDA to interest incurred) of no less than 2.0 to 1.0. As of December 31, 2024, our interest coverage on a last 12 months’ basis was 34.76 to 1.0;

•a Consolidated Tangible Net Worth of no less than approximately $1,010.7 million. As of December 31, 2024, our Consolidated Tangible Net Worth was $1,621.9 million; and

•a maximum debt to total capitalization rolling average ratio of no more than 40.0%. As of December 31, 2024, we had a rolling average ratio of 18.0%.

As of December 31, 2024, we believe that our cash on hand, capacity available under our lines of credit, and cash flows from operations for the next twelve months will be sufficient to service our outstanding debt during the next twelve months and fund our operations. For more detailed information on our lines of credit, refer to Note 8 to the Consolidated Financial Statements located in Part II, Item 8 of this Annual Report on Form 10-K.

Preferred Equity

As of December 31, 2024 and December 31, 2023 we had 2,000,000 Depositary Shares issued and outstanding, each representing 1/1000 of a share of our 5.75% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”). We pay cumulative cash dividends on the Series A Preferred Stock, when and as declared by the Board, at the rate of 5.75% of the $25,000 liquidation preference per share. Dividends are payable quarterly in arrears. During each of the years ended December 31, 2024 and 2023, we paid dividends of $2.9 million on the Series A Preferred Stock. During the year ended December 31, 2022, we paid dividends of $2.8 million. On February 17, 2025, the Board declared a quarterly cash dividend of $0.359 per depositary share on the Series A Preferred Stock. The dividend is payable on March 15, 2025 to stockholders of record as of March 1, 2025.

Registration Statements

In September 2023, we filed with the SEC an automatic shelf registration statement on Form S-3 which enables us to issue shares of common stock, preferred stock or debt securities either separately or represented by warrants, or depositary shares as well as units that include any of these securities. Under the rules governing shelf registration statements, we will file a prospectus supplement and advise the SEC of the amount and type of securities each time we issue securities under this registration statement. The Company has not issued any securities under this registration statement through the date of this filing.

Off-Balance Sheet Arrangements

Land and Lot Option Contracts

In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of our homes in the future. We are subject to customary obligations associated with such contracts. These purchase contracts typically require an earnest money deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements.

To a much lesser extent due to limited availability in our market of true lot developers, we also utilize option contracts with lot sellers as a method of acquiring lots in staged takedowns, which are the schedules that dictate when lots must be purchased to help manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Lot option contracts generally require us to pay a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices that typically include escalations in lot prices over time.

Our utilization of lot option contracts is dependent on, among other things, the availability of lot developers willing to enter into these arrangements, the availability of capital 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.

We generally have the right, at our discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting the earnest money deposit with no further financial responsibility to the seller.

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As of December 31, 2024, we had earnest money deposits of $9.7 million at risk associated with contracts to purchase 2,975 lots past feasibility studies with an aggregate purchase price of approximately $160.3 million.

Letters of Credit and Performance Bonds

Refer to Note 18 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for details of letters of credit and performance bonds outstanding.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the reporting period. Management bases estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from estimates under different assumptions or conditions. Management believes that the following accounting area is most critical to the portrayal of our financial condition and results of operations and requires the most subjective or complex judgments.

Impairment of Inventory

We value inventory at cost unless the carrying value is determined to be not recoverable in which case the affected inventory is written down to fair value. In accordance with Accounting Standards Codification 360, Property, Plant, and Equipment (“ASC 360”), we evaluate our inventory for indicators of impairment by individual community and development during each reporting period.

For our builder operations segments, during each reporting period, contribution margins on closed homes and homes under construction, and forecasted margins for future starts are reviewed at a community level by management. In the event that this review suggests higher potential for losses at a specific community, the Company monitors such communities by adding them to our “watchlist” communities, and, when an impairment indicator is present, further analysis is performed.

For our land development segment, we perform a quarterly review for indicators of impairment for each project which involves comparing anticipated lot sale revenues to projected costs (i.e. lot gross margins). For lots designated for our builders, we review land for indicators of impairment on a consolidated level, looking at overall projected home contribution margins. In determining the allocation of costs to a particular land parcel, we rely on project budgets which are based on a variety of assumptions, including assumptions about development schedules and future costs to be incurred. It is common that actual results differ from budgeted amounts for various reasons, including delays, changes in costs that have not been committed, unforeseen issues encountered during project development that fall outside the scope of existing contracts, or items that ultimately cost more or less than the budgeted amount. We apply procedures to maintain best estimates in our budgets, including assessing and revising project budgets on a periodic basis, obtaining commitments from subcontractors and vendors for future costs to be incurred and utilizing the most recent information available to estimate costs.

Each reporting period, management reviews each real estate asset with an indicator of impairment to determine whether the estimated remaining undiscounted future cash flows are more or less than the asset’s carrying value. The estimated cash flows are determined by projecting the remaining revenue from closings based on the contractual lot takedowns remaining, future projected lot takedowns, or historical and projected home sales or delivery absorptions for homebuilding operations and then comparing such projections to the remaining projected expenditures for development or home construction. Remaining projected expenditures are based on the most current pricing/bids received from subcontractors for current phases or homes under development. For future phases of land development, management uses its judgment to project potential cost increases. In determining the estimated cash flows for land held for sale, management considers recent comparisons to market comparable transactions, bona fide letters of intent from outside parties, executed sales contracts, broker quotes, and similar information. When projecting revenue, management does not assume improvement in market conditions.

If the estimated undiscounted cash flows are more than the asset’s carrying value, no impairment adjustment is required. However, if the estimated undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and will be written down to fair value. These impairment evaluations require us to make estimates and assumptions regarding future conditions, including the timing and amounts of development costs and sales prices of real estate assets, to determine if expected future cash flows will be sufficient to recover the asset’s carrying value.

Fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets. These discounted cash flows are impacted by expected risk based on estimated land development activities, construction

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and delivery timelines, market risk of price erosion, uncertainty of development or construction cost increases, and other risks specific to the asset or market conditions where the asset is located when the assessment is made. These factors are specific to each community and may vary among communities. When deemed appropriate, we use recent comparisons to market comparable transactions, bona fide letters of intent from outside parties, executed sales contracts, broker quotes, or similar information as inputs to estimate the fair value of certain real estate assets.

When estimating cash flows of a community, management makes various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended 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 overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, the level of time-sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model home maintenance costs and advertising costs). Due to uncertainties in the estimation process, the volatility in demand for new housing and the long life cycle of many communities, actual results could differ significantly from such estimates.

Refer to Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further description of our significant accounting policies.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for recent accounting pronouncements.

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

For business overview and developments during the year ended December 31, 2023, refer to Part I, Item 1 of this Annual Report on Form 10-K.

Overview and Outlook

Our key financial and operating metrics are home deliveries, home closings revenue, average sales price of homes delivered, and net new home orders, which refers to the number of sales contracts executed reduced by the number of sales contracts canceled during the relevant period. Our results for each key financial and operating metric, as compared to the year ended December 31, 2022, are provided below:

The strong performance on most of our key metrics year over year is attributable to our superior infill and infill-adjacent locations in high-growth markets, our reduced cycle times, the continued low supply of existing and new home inventory in our markets, and increased revenue by our Texas builders. The decrease in the average sales price of homes delivered is attributable to an increase in the percentage of home deliveries by Trophy Signature Homes, Centre Living Homes, and CB JENI Homes over last year. These homebuilders had an average sales price below the Company average.

2023 Developments

Among the 12 largest metropolitan areas in the country, the Dallas and Atlanta areas ranked first and seventh, respectively, in annual rate of job growth from November 2022 to November 2023 (Source: US Bureau of Labor Statistics, November 2023). We believe we operate in two of the most desirable housing markets in the nation and that increasing demand and supply levels in our target markets create favorable conditions for our future growth.

Results of Operations

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

Residential Units Revenue and New Homes Delivered

The table below represents residential units revenue and new homes delivered for the years ended December 31, 2023 and December 31, 2022 (dollars in thousands):

The $65.3 million increase in residential units revenue was driven by the 7.1% increase in the number of homes delivered partially offset by a 2.7% decrease in average sales price of new homes delivered. The increase in new homes delivered is attributable to the limited competition in our infill and infill-adjacent community sites, our reduced cycle times, and the continued low supply of existing and new home inventory in our markets. The decrease in the average sales price of homes delivered is attributable to an increase in the percentage of home deliveries by Trophy Signature Homes, Centre Living Homes, and CB JENI Homes over last year. These homebuilders had an average sales price below the Company average due to a mix of product type and selling more inventory in perimeter locations.

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New Home Orders and Backlog

The table below represents new home orders and backlog related to our builder operations segments, excluding mechanic’s liens contracts (dollars in thousands):

Net new home orders increased by 70.1% over the prior year, and our absorption rate per average active selling community increased 52.3% year over year. The increase in net new home orders is attributable to the increase in our active selling communities, the limited competition in our infill and infill-adjacent community sites, improved homebuyer sentiment, and the continued low supply of existing and new home inventory in our markets.

Backlog refers to homes under sales contracts that have not yet closed at the end of the relevant period, and absorption rate refers to the rate at which net new home orders are contracted per average active selling community during the relevant period. There are instances in which sales contracts are canceled after execution, such as when the homebuyer cancels because of the inability to obtain suitable mortgage financing within a contractually specified time period. Accordingly, backlog may not be indicative of our future revenue.

Backlog increased by 50.4% with a 43.4% increase in backlog units and a 4.9% increase in the average sales price of backlog units. As a result, our spec units under construction as a percentage of total units under construction declined from 73.4% as of December 31, 2022 to 69.8% as of December 31, 2023.

Our cancellation rate, which refers to sales contracts canceled divided by sales contracts executed during the relevant period, was 6.6% for the year ended December 31, 2023, compared to 13.8% for the year ended December 31, 2022.

Residential Units Gross Margin

The table below represents the components of residential units gross margin (dollars in thousands):

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Residential units revenue increased by $65.3 million or 3.8% during the year ended December 31, 2023 due to the increase in home deliveries partially offset by a reduction in average sales price. Cost of residential units for the year ended December 31, 2023 increased by $26.2 million, or 2.2%, compared to the year ended December 31, 2022 due to the increase in units delivered.

The residential units gross margin percentage for the year ended December 31, 2023 increased to 30.9%, compared to 29.8% for the year ended December 31, 2022. The increase in residential units gross margin is primarily due to strong sales, lower construction costs, and limited competition in our infill and infill-adjacent community sites.

Land and Lots Revenue

The table below represents lots closed and land and lots revenue (dollars in thousands):

From time to time, we will opportunistically sell finished lots to other homebuilders when we determine that we have excess capacity in specific neighborhoods or submarkets. Lots revenue decreased by 61.1% during the year ended December 31, 2023, driven by a 74.7% decrease in the number of lots closed partially offset by a 53.4% increase in the average lot price. Land revenue represents sales of tracts of land during the year ended December 31, 2022 and 2023.

Selling, General and Administrative Expenses

The table below represents the components of selling, general and administrative expense (dollars in thousands):

Selling, general and administrative expense as a percentage of revenue increased by 1.6% for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to an increase in brokerage commissions.

Builder Operations

Selling, general and administrative expenses as a percentage of revenue for builder operations increased from 9.5% to 10.9% due to an increase in brokerage commissions. Builder operations expenditures include salaries, sales commissions, and community costs such as advertising and marketing expenses, rent, professional fees, and non-capitalized property taxes.

Corporate, Other and Unallocated

Selling, general and administrative expense for the corporate, other and unallocated non-operating segment for the year ended December 31, 2023 was income of $0.3 million, compared to income of $3.5 million for the year ended December 31, 2022. The change was driven primarily by an increase in capitalized overhead adjustments that are not allocated to our builder operations and land development segments.

Equity in Income of Unconsolidated Entities

Equity in income of unconsolidated entities decreased to $16.7 million, or 34.7%, for the year ended December 31, 2023, compared to $25.6 million for the year ended December 31, 2022, primarily due to a decrease in earnings from GB Challenger. See Note 5 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of Green Brick’s share in net earnings by unconsolidated entity.

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Other Income, Net

Other income, net, increased to $19.4 million for the year ended December 31, 2023, compared to $11.8 million for the year ended December 31, 2022. The change was primarily due to an increase in interest income.

Income Tax Expense

Income tax expense increased to $84.6 million for the year ended December 31, 2023 from $82.5 million for the year ended December 31, 2022. The increase was primarily due to a reduction in Section 45L tax credits and increased state tax expense. See Note 13 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a discussion on the Company’s income tax expense for the year ended December 31, 2023.

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

For discussion and analysis of our results of operations for the year ended December 31, 2022 as well as for comparison to our results of operations for the year ended December 31, 2021, refer to Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022.

Lots Owned and Controlled

The following table presents the lots we owned or controlled, including lot option contracts, as of December 31, 2023 and December 31, 2022. Owned lots are those for which we hold title, while controlled lots are lots past feasibility studies for which we do not hold title, but have the contractual right to acquire title.

(1) Land held for future development consist of raw land parcels where development activities have been postponed due to market conditions or other factors.

(2) Total lots excludes lots with homes under construction.

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The following table presents additional information on the lots we owned as of December 31, 2023 and December 31, 2022.

(1) Total lots owned includes finished lot purchases, which were less than 3.2% of total lots self-developed as of December 31, 2023.

Liquidity and Capital Resources Overview

As of December 31, 2023 and December 31, 2022, we had $179.8 million and $76.6 million of unrestricted cash, respectively. Our historical cash management strategy includes redeploying net cash from the sale of home inventory to acquire and develop land and lots that represent opportunities to generate desired margins and returns, and using cash to make additional investments in business acquisitions, joint ventures, or other strategic activities.

Our principal uses of capital for the year ended December 31, 2023 were home construction, land purchases, land development, repayments of lines of credit, operating expenses, payment of routine liabilities and stock repurchases. Historically, we have used funds generated by operations and available borrowings to meet our short-term working capital requirements. We remain focused on generating positive margins in our homebuilding operations and acquiring desirable land positions in order to maintain a strong balance sheet and remain poised for continued growth.

Cash flows for each of our communities depend on the community’s stage in the development cycle. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, roads, utilities, general landscaping and other amenities, and home construction. These costs are a component of our inventory and are not recognized in our statement of income until a home closes. In the later stages of community life cycle, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with home construction and land development previously occurred.

Our debt to total capitalization ratio, which is calculated as the sum of borrowings on lines of credit, the senior unsecured notes, and notes payable, net of debt issuance costs (“total debt”), divided by the total capitalization, which equals the sum of Green Brick Partners, Inc. stockholders’ equity and total debt, was approximately 21.1% as of December 31, 2023.

Additionally, as of December 31, 2023, our net debt to total capitalization ratio, which is a non-GAAP financial measure, remained low at 11.4%. It is our intent to prudently employ leverage to continue to invest in our land acquisition, development and homebuilding activities. We target a debt to total capitalization ratio of approximately 30%, which we expect will provide us with significant additional growth capital.

Reconciliation of a Non-GAAP Financial Measure

In this Annual Report on Form 10-K, we utilize a financial measure of net debt to total capitalization ratio that is a non-GAAP financial measure as defined by the Securities and Exchange Commission (“SEC”). Net debt to total capitalization is calculated as total debt less cash and cash equivalents, divided by the sum of total Green Brick Partners, Inc. stockholders’ equity and total debt less cash and cash equivalents. We present this measure because we believe it is useful to management and investors in evaluating the Company’s financing structure. We also believe this measure facilitates the comparison of our financing structure with other companies in our industry. Because this measure is not calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation, as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

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The closest GAAP financial measure to the net debt to total capitalization ratio is the debt to total capitalization ratio. The following table represents a reconciliation of the net debt to total capitalization ratio as of December 31, 2023 (dollars in thousands):

Key Sources of Liquidity

Our key sources of liquidity were funds generated by operations and provided by borrowings during the year ended December 31, 2023.

Cash Flows

The following summarizes our primary sources and uses of cash for the year ended December 31, 2023 as compared to the year ended December 31, 2022:

•Operating activities. Net cash provided by operating activities for the year ended December 31, 2023 was $213.3 million, compared to $90.7 million during the year ended December 31, 2022. The net cash inflows for the year ended December 31, 2023 were primarily generated from business operations of $306.7 million, partially offset by an increase in inventory of $109.2 million.

•Investing activities. Net cash used in investing activities for the year ended December 31, 2023 increased to $13.3 million compared to $6.5 million for the year ended December 31, 2022. The increase in cash outflows was primarily due to the purchase of property and equipment, net of disposals of $7.8 million during the year ended December 31, 2023.

•Financing activities. Net cash used in financing activities for the year ended December 31, 2023 was $93.8 million, compared to a $84.5 million during the year ended December 31, 2022. The cash outflows for the year ended December 31, 2023 were primarily for share repurchases of $45.8 million, net repayments on our lines of credit of $20.0 million and distributions to noncontrolling interests of $19.1 million.

For discussion and analysis our cash flows for the year ended December 31, 2022 as well as for comparison to our cash flows for the year ended December 31, 2021, refer to Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022.

Debt Instruments

Borrowings on lines of credit outstanding, net of debt issuance costs, as of December 31, 2023 and December 31, 2022 consisted of the following (in thousands):

Secured Revolving Credit Facility – As of December 31, 2023 and 2022, we had no outstanding amounts under our Secured Revolving Credit Facility. Borrowings under the Secured Revolving Credit Facility bear interest at a floating rate per annum equal to the rate announced by Bank of America, N.A. as its “Prime Rate” less 0.25%, subject to a minimum rate. On February 9, 2022, the Company entered into the Eighth Amendment to this credit agreement to extend its maturity date to May 1, 2025 and to reduce the minimum interest rate from 4.00% to 3.15%. All other material terms of the credit agreement, as amended, remained unchanged.

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Unsecured Revolving Credit Facility – As of December 31, 2023, we had no amounts outstanding under our Unsecured Revolving Credit facility compared to $20 million as of December 31, 2022. On December 8, 2023, the Company entered into the Eleventh Amendment to this credit agreement which revised certain financial covenants in order to appropriately reflect the Company’s size and growth. The Eleventh Amendment also extends the maturity of $300.0 million of the commitments under the credit facility through December 14, 2026, with the remaining $25.0 million commitment expiring December 14, 2025.

Senior Unsecured Notes - As of December 31, 2023, we had four series of senior unsecured notes outstanding which were each issued pursuant to a note purchase agreement. The aggregate amount of senior unsecured notes outstanding was $336.2 million as of December 31, 2023, compared to $335.8 million as of December 31, 2022, respectively, net of issuance costs.

•In August 2019, we issued $75.0 million of senior unsecured notes (the “2026 Notes”). Interest accrues at an annual rate of 4.0% and is payable quarterly. Principal on the 2026 Notes is required to be paid in increments of $12.5 million on each of August 8, 2024 and August 8, 2025 with a final principal payment of $50.0 million on August 8, 2026.

•In August 2020, we issued $37.5 million of senior unsecured notes (the “2027 Notes”). Interest accrues at an annual rate of 3.35% and is payable quarterly. Principal on the 2027 Notes is due on August 26, 2027.

•In February 2021, we issued $125.0 million of senior unsecured notes (the “2028 Notes”). Interest accrues at an annual rate of 3.25% and is payable quarterly. Principal on the 2028 Notes is due in increments of $25.0 million annually on February 25 in each of 2024, 2025, 2026, 2027, and 2028.

•In December 2021, we issued $100.0 million of senior unsecured notes (the “2029 Notes”). Interest accrues at an annual rate of 3.25% and is payable quarterly. A required principal prepayment of $30.0 million is due on December 28, 2028. The remaining unpaid principal balance is due on December 28, 2029.

Optional prepayment is allowed with payment of a “make-whole” premium that fluctuates depending on market interest rates. Interest is payable quarterly in arrears.

Our debt instruments require us to maintain specific financial covenants, each of which we were in compliance with as of December 31, 2023. Specifically, under the most restrictive covenants, we are required to maintain the following:

•a minimum interest coverage (consolidated EBITDA to interest incurred) of no less than 2.0 to 1.0. As of December 31, 2023, our interest coverage on a last 12 months’ basis was 26.4 to 1.0;

•a Consolidated Tangible Net Worth of no less than approximately $820.8 million. As of December 31, 2023, our Consolidated Tangible Net Worth was $1,298.9 million; and

•a maximum debt to total capitalization rolling average ratio of no more than 40.0%. As of December 31, 2023, we had a rolling average ratio of 21.9%.

As of December 31, 2023, we believe that our cash on hand, capacity available under our lines of credit and cash flows from operations for the next twelve months will be sufficient to service our outstanding debt during the next twelve months and fund our operations. For more detailed information on our lines of credit, refer to Note 8 to the Consolidated Financial Statements located in Part II, Item 8 of this Annual Report on Form 10-K.

Preferred Equity

As of December 31, 2023 and December 31, 2022 we had 2,000,000 Depositary Shares issued and outstanding, each representing 1/1000 of a share of our 5.75% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”). We pay cumulative cash dividends on the Series A Preferred Stock, when and as declared by the Board, at the rate of 5.75% of the $25,000 liquidation preference per share. Dividends are payable quarterly in arrears. During the year ended December 31, 2023 and December 31, 2022, we paid dividends of $2.9 million and $2.8 million, respectively, on the Series A Preferred Stock. As the series A Preferred Stock was issued in December 2021, no dividend payments were made during the year ended December 31, 2021. On February 15, 2024, the Board declared a quarterly cash dividend of $0.359 per depositary share on the Series A Preferred Stock. The dividend is payable on March 15, 2024 to stockholders of record as of March 1, 2024.

Registration Statements

In September 2023, we filed with the SEC an automatic shelf registration statement on Form S-3 which enables us to issue shares of common stock, preferred stock or debt securities either separately or represented by warrants, or depositary shares as well as units that include any of these securities. Under the rules governing shelf registration statements, we will file a prospectus supplement and advise the SEC of the amount and type of securities each time we issue securities under this

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registration statement. The Company has not issued any securities under this registration statement through the date of this filing.

Off-Balance Sheet Arrangements

Land and Lot Option Contracts

In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of our homes in the future. We are subject to customary obligations associated with such contracts. These purchase contracts typically require an earnest money 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 lot sellers as a method of acquiring lots in staged takedowns, which are the schedules that dictate when lots must be purchased to help manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Lot option contracts generally require us to pay a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices that typically include escalations in lot prices over time.

Our utilization of lot option contracts is dependent on, among other things, the availability of land sellers willing to enter into these arrangements, the availability of capital 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.

We generally have the right, at our discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting the earnest money deposit with no further financial responsibility to the seller.

As of December 31, 2023, we had earnest money deposits of $13.4 million at risk associated with contracts to purchase 3,757 lots past feasibility studies with an aggregate purchase price of approximately $177.0 million.

Letters of Credit and Performance Bonds

Refer to Note 18 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for details of letters of credit and performance bonds outstanding.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the reporting period. Management bases estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from estimates under different assumptions or conditions. Management believes that the following accounting area is most critical to the portrayal of our financial condition and results of operations and requires the most subjective or complex judgments.

Impairment of Inventory

We value inventory at cost unless the carrying value is determined to be not recoverable in which case the affected inventory is written down to fair value. In accordance with Accounting Standards Codification 360, Property, Plant, and Equipment (“ASC 360”), we evaluate our inventory for indicators of impairment by individual community and development during each reporting period.

For our builder operations segments, during each reporting period, contribution margins on closed homes, average margins of homes under construction, and forecasted margins for future starts are reviewed at a community level by management. In the event that this review suggests higher potential for losses at a specific community, the Company monitors such communities by adding them to our “watchlist” communities, and, when an impairment indicator is present, further analysis is performed.

For our land development segment, we perform a quarterly review for indicators of impairment for each project which involves comparing anticipated lot sale revenues to projected costs (i.e. lot gross margins). For lots designated for our builders, we review land for indicators of impairment on a consolidated level, looking at overall projected home contribution margins. In determining the allocation of costs to a particular land parcel, we rely on project budgets which are based on a variety of assumptions, including assumptions about development schedules and future costs to be incurred. It is common that actual

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results differ from budgeted amounts for various reasons, including delays, changes in costs that have not been committed, unforeseen issues encountered during project development that fall outside the scope of existing contracts, or items that ultimately cost more or less than the budgeted amount. We apply procedures to maintain best estimates in our budgets, including assessing and revising project budgets on a periodic basis, obtaining commitments from subcontractors and vendors for future costs to be incurred and utilizing the most recent information available to estimate costs.

Each reporting period, management reviews each real estate asset with an indicator of impairment to determine whether the estimated remaining undiscounted future cash flows are more or less than the asset’s carrying value. The estimated cash flows are determined by projecting the remaining revenue from closings based on the contractual lot takedowns remaining, future projected lot takedowns, or historical and projected home sales or delivery absorptions for homebuilding operations and then comparing such projections to the remaining projected expenditures for development or home construction. Remaining projected expenditures are based on the most current pricing/bids received from subcontractors for current phases or homes under development. For future phases of land development, management uses its judgment to project potential cost increases. In determining the estimated cash flows for land held for sale, management considers recent comparisons to market comparable transactions, bona fide letters of intent from outside parties, executed sales contracts, broker quotes, and similar information. When projecting revenue, management does not assume improvement in market conditions.

If the estimated undiscounted cash flows are more than the asset’s carrying value, no impairment adjustment is required. However, if the estimated undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and will be written down to fair value. These impairment evaluations require us to make estimates and assumptions regarding future conditions, including the timing and amounts of development costs and sales prices of real estate assets, to determine if expected future cash flows will be sufficient to recover the asset’s carrying value.

Fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets. These discounted cash flows are impacted by expected risk based on estimated land development activities, construction and delivery timelines, market risk of price erosion, uncertainty of development or construction cost increases, and other risks specific to the asset or market conditions where the asset is located when the assessment is made. These factors are specific to each community and may vary among communities. When deemed appropriate, we use recent comparisons to market comparable transactions, bona fide letters of intent from outside parties, executed sales contracts, broker quotes, or similar information as inputs to estimate the fair value of certain real estate assets.

When estimating cash flows of a community, management makes various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended 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 overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, the level of time-sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model home maintenance costs and advertising costs). Due to uncertainties in the estimation process, the volatility in demand for new housing and the long life cycle of many communities, actual results could differ significantly from such estimates.

Refer to Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further description of our significant accounting policies.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for recent accounting pronouncements.

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

For business overview and developments during the year ended December 31, 2022, refer to Part I, Item 1 of this Annual Report on Form 10-K.

Overview and Outlook

Our key financial and operating metrics are home deliveries, home closings revenue, average sales price of homes delivered, and net new home orders, which refers to the number of sales contracts executed reduced by the number of sales contracts canceled during the relevant period. Our results for each key financial and operating metric, as compared to the year ended December 31, 2021, are provided below:

The expansion of our revenues year over year is primarily attributable to the strong performance of our Trophy division, growth in the average selling price of homes, the impact of macroeconomic factors, and an influx of millennial first-time home buyers during the first half of the year. The significant increase in new home construction in our markets has, in turn, led to increased demand for labor and the raw materials, products and appliances for new homes. Due to the increased demand, we have experienced increases in cost and decreased availability of skilled labor as well as increases, shortages, and significant extensions to our lead time for the delivery of key materials and inputs. Additionally, the recent rapid rise in interest rates as well as the inflationary impact on buying power has impacted the ability of some buyers to qualify for mortgages in spite of unsatisfied demand for homes and the continued undersupply of existing and new home inventory.

2022 Developments

From October 2021 to October 2022, homes in the DFW and Atlanta markets appreciated by 13.5% and 14.9%, respectively, compared to 8.6% average appreciation for 20 major U.S. metropolitan areas (Source: S&P Dow Jones Indices & CoreLogic, October 31, 2022). Among the 12 largest metropolitan areas in the country, the Dallas and Atlanta areas ranked third and sixth, respectively, in annual rate of job growth from November 2021 to November 2022 (Source: US Bureau of Labor Statistics, November 2022). We believe that we operate in two of the most desirable housing markets in the nation and that increasing demand and supply constraints in our target markets create favorable conditions for our future growth.

Results of Operations

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Residential Units Revenue and New Homes Delivered

The table below represents residential units revenue and new homes delivered for the years ended December 31, 2022 and December 31, 2021 (dollars in thousands):

The $394.3 million increase in residential units revenue was driven by the 26.3% increase in the average sales price of homes delivered for the year ended December 31, 2022 and the 2.9% increase in the number of homes delivered. The increase

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in the average sales price of homes delivered for the year ended December 31, 2022 was attributable to overall price increases driven by high demand and low supply of inventory.

New Home Orders and Backlog

The table below represents new home orders and backlog related to our builder operations segments, excluding mechanic’s liens contracts (dollars in thousands):

Net new home orders decreased by 30.8% over the prior year period and our absorption rate per average active selling community decreased 20.7% year over year. The lower levels of buyer traffic to many of our communities reduced the level of new home orders; we believe that the traffic decline starting in the second quarter was attributable to the recent rapid rise in interest rates as buyers reevaluated their buying capacity as well as the inflationary impact on consumer buying power and consumer confidence. Despite the lower sales pace, our decline in new order revenues was smaller than the decline in orders at 18.7% as our average sales price on new orders rose by 17.5%.

Backlog refers to homes under sales contracts that have not yet closed at the end of the relevant period, and absorption rate refers to the rate at which net new home orders are contracted per average active selling community during the relevant period. Upon a cancellation, the customer deposit may be returned to the prospective purchaser. Accordingly, backlog may not be indicative of our future revenue.

Our cancellation rate, which refers to sales contracts canceled divided by sales contracts executed during the relevant period, was 13.8% for the year ended December 31, 2022, compared to 7.7% for the year ended December 31, 2021. Our cancellation rate increase was driven by rapidly rising interest rates as well as customer concerns with the macroeconomic environment. Sales contracts relating to homes in backlog may be canceled by the prospective purchaser for a number of reasons, such as the prospective purchaser’s inability to obtain suitable mortgage financing.

Backlog declined by 57.6% with a 63.7% drop in backlog units, offset by a 16.9% increase in the average sales price of backlog units. The drop in backlog units is a function of the lower levels of new home orders described above as well as an increase in our cancellation rate. With the volatility in interest rates, customers also are demonstrating a strong preference for inventory spec homes that are nearing completion. As a result, homes spend a shorter amount of time in backlog, thereby creating a smaller total backlog level. The increase in average sales price was attributable to overall price increases driven by high demand and low supply of inventory.

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Residential Units Gross Margin

The table below represents the components of residential units gross margin (dollars in thousands):

Cost of residential units for the year ended December 31, 2022 increased by $232.6 million, or 24.1%, compared to the year ended December 31, 2021, primarily driven by the increasing levels of input prices and more expensive homes delivered during the period.

Residential units gross margin for the year ended December 31, 2022 increased to 29.8%, compared to 26.4% for the year ended December 31, 2021, primarily due to overall price increases that outpaced the levels of cost increases.

Land and Lots Revenue

The table below represents lots closed and land and lots revenue (dollars in thousands):

The 23.2% decrease in lots revenue was driven by the 10.8% decrease in the number of lots closed from a higher proportion of lots developed for internal use. The average lot price decreased by 13.9% due to a higher number of entry level lots sold. Land revenue represents sales of tracts of land during the years ended December 31, 2022 and 2021; such sales are opportunistic but are not generally in the ordinary course of business.

Selling, General and Administrative Expenses

The table below represents the components of selling, general and administrative expense (dollars in thousands):

Total selling, general and administrative expense as a percentage of revenue modestly improved to 9.3% from 9.6% for the year ended December 31, 2022 compared to the year ended December 31, 2021.

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Builder Operations

The decrease in selling, general and administrative expense as a percentage of revenue for builder operations from 10.1% to 9.7% was primarily attributable to an increase in builder operations revenues without a corresponding increase in the level of overhead costs. Builder overhead expenditures include salaries, sales commissions, and community costs such as advertising and marketing expenses, rent, professional fees, and non-capitalized property taxes.

Land Development

Selling, general and administrative expense as a percentage of revenue for land development remained relatively flat for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Corporate, Other and Unallocated

Selling, general and administrative expense for the corporate, other and unallocated non-operating segment for the year ended December 31, 2022 was income of $3.5 million, compared to income of $2.1 million for the year ended December 31, 2021. The change is primarily due to an increase in capitalized overhead adjustments that are not allocated to builder operations and land development segments.

Equity in Income of Unconsolidated Entities

Equity in income of unconsolidated entities increased to $25.6 million, or 30.0%, for the year ended December 31, 2022, compared to $19.7 million for the year ended December 31, 2021, primarily due to an increase in earnings from GB Challenger. See Note 5 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of Green Brick’s share in net earnings by unconsolidated entity.

Other Income, Net

Other income, net, increased to $11.8 million for the year ended December 31, 2022, compared to $9.5 million for the year ended December 31, 2021. The change is primarily due to customer deposits forfeited during the year ended December 31, 2022.

Income Tax Expense

Income tax expense increased to $82.5 million for the year ended December 31, 2022 from $52.6 million for the year ended December 31, 2021. The increase was driven by a reduced benefit in the Energy Efficient Tax Homes Tax Credit, change in state tax rates in Florida and Colorado, and a higher taxable income during the year ended December 31, 2022.

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

For discussion and analysis of our results of operations for the year ended December 31, 2021 as well as for comparison to our results of operations for the year ended December 31, 2020, refer to Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021.

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Lots Owned and Controlled

The following table presents the lots we owned or controlled, including lot option contracts, as of December 31, 2022 and December 31, 2021. Owned lots are those for which we hold title, while controlled lots are lots past feasibility studies for which we do not hold title but have the contractual right to acquire title.

(1) Land held for future development consist of raw land parcels where development activities have been postponed due to market conditions or other factors.

(2) Total lots excludes lots with homes under construction.

The following table presents additional information on the lots we owned as of December 31, 2022 and December 31, 2021.

Liquidity and Capital Resources Overview

We had $76.6 million and $77.2 million of unrestricted cash as of December 31, 2022 and December 31, 2021, respectively. Our historical cash management strategy includes redeploying net cash from the sale of home inventory to acquire and develop land and lots that represent opportunities to generate desired margins and using cash to make additional investments in business acquisitions, joint ventures, or other strategic activities.

For the year ended December 31, 2022, our principal uses of capital were home construction, land purchases, land development, operating expenses, payment of routine liabilities and stock repurchases. We used funds generated by operations and available borrowings to meet our short-term working capital requirements. We remain focused on generating positive margins in our builder operations segments and acquiring desirable land positions in order to maintain a strong balance sheet and remain poised for continued growth.

Cash flows for each of our communities depend on the community’s 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, roads, utilities, general landscaping and other amenities. These costs are a

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component of our inventory and are not recognized in our statement of income until a home closes. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with home construction and land development have previously occurred.

Our debt to total capitalization ratio, which is calculated as the sum of borrowings on lines of credit, the senior unsecured notes and notes payable, net of debt issuance costs, divided by the total capitalization, which equals the sum of Green Brick Partners, Inc. stockholders’ equity and total debt, was approximately 25.7% as of December 31, 2022. Additionally, as of December 31, 2022, our net debt to total capitalization ratio, which is a non-GAAP financial measure, remained low at 21.5%. It is our intent to prudently employ leverage to continue to invest in our land acquisition, development and homebuilding businesses. We target a debt to total capitalization ratio of approximately 30% to 35%, which we expect will provide us with significant additional growth capital.

Reconciliation of a Non-GAAP Financial Measure

In this Annual Report on Form 10-K, we utilize a financial measure of net debt to total capitalization ratio that is a non-GAAP financial measure as defined by the SEC. Net debt to total capitalization is calculated as the total debt less cash and cash equivalents, divided by the sum of total Green Brick Partners, Inc. stockholders’ equity and total debt less cash and cash equivalents. We present this measure because we believe it is useful to management and investors in evaluating our financing structure. We also believe this measure facilitates the comparison of our financing structure with other companies in our industry. Because this measure is not calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

The closest GAAP financial measure to the net debt to total capitalization ratio is the debt to total capitalization ratio. The following table represents a reconciliation of the net debt to total capitalization ratio as of December 31, 2022.

Key Sources of Liquidity

Our key sources of liquidity were funds generated by operations and provided by borrowings during the year ended December 31, 2022.

Debt Instruments

Borrowings on lines of credit outstanding, net of debt issuance costs, as of December 31, 2022 and December 31, 2021 consisted of the following (in thousands):

Secured Revolving Credit Facility – As of December 31, 2022, we had no outstanding amounts under our Secured Revolving Credit Facility, compared to $2.0 million as of December 31, 2021. Borrowings under the Secured Revolving Credit Facility bear interest at a floating rate per annum equal to the rate announced by Bank of America, N.A. as its “Prime Rate” less 0.25%, subject to a minimum rate. On February 9, 2022, the Company entered into the Eighth Amendment to this credit agreement to extend its maturity date to May 1, 2025 and to reduce the minimum interest rate from 4.00% to 3.15%. All other material terms of the credit agreement, as amended, remained unchanged.

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Unsecured Revolving Credit Facility – As of December 31, 2022, we had $20.0 million outstanding under our Unsecured Revolving Credit facility. We had no outstanding amounts as of December 31, 2021. On December 9, 2022, the Company entered into the Tenth Amendment to this credit agreement which increased the secured outstanding commitments from $300.0 million to $325.0 million, replaced the Eurodollar rate, and extended the termination date by one year to December 14, 2025. Outstanding advances under the Unsecured Revolving Credit Facility accrue interest at the benchmark rate plus 2.5%. As of December 31, 2022, the interest rate on outstanding borrowings under the Unsecured Revolving Credit Facility was 6.9% per annum. As amended, the aggregate principal amount of the revolving credit commitments under the Credit Agreement is $325.0 million through December 14, 2025.

Senior Unsecured Notes - As of December 31, 2022, we had four series of senior unsecured notes outstanding which were each issued pursuant to a note purchase agreement. The aggregate amount of senior unsecured notes outstanding was $335.8 million as of December 31, 2022, up from $335.4 million as of December 31, 2021, respectively, net of issuance costs.

•In August 2019, we issued $75 million of senior unsecured notes (the “2026 Notes”). Interest accrues at an annual rate of 4.0% and is payable quarterly. Principal on the 2026 Notes is required to be paid in increments of $12.5 million on August 8, 2024 and $12.5 million on August 8, 2025 with a final principal payment of $50.0 million on August 8, 2026.

•In August 2020, we issued $37.5 million of senior unsecured notes (the “2027 Notes”). Interest accrues at an annual rate of 3.35% and is payable quarterly. Principal on the 2027 Notes is due on August 26, 2027.

•In February 2021, we issued $125.0 million of senior unsecured notes (the “2028 Notes”). Interest accrues at an annual rate of 3.25% and is payable quarterly. Principal on the 2028 Notes is due in increments of $25.0 million annually on February 25 in each of 2024, 2025, 2026, 2027, and 2028.

•In December 2021, we issued $100.0 million of senior unsecured notes (the “2029 Notes”). Interest accrues at an annual rate of 3.25% and is payable quarterly. A required principal prepayment of $30.0 million is due on December 28, 2028. The remaining unpaid principal balance is due on December 28, 2029.

Optional prepayment is allowed with payment of a “make-whole” premium which fluctuates depending on market interest rates. Interest is payable quarterly in arrears.

Our debt instruments require us to maintain specific financial covenants, each of which we were in compliance with as of December 31, 2022. Specifically, under the most restrictive covenants, we are required to maintain the following:

•a minimum interest coverage (consolidated EBITDA to interest incurred) of no less than 2.0 to 1.0. As of December 31, 2022, our interest coverage on a last 12 months’ basis was 24.1 to 1.0;

•a Consolidated Tangible Net Worth of no less than approximately $678.8 million. As of December 31, 2022, our Consolidated Tangible Net Worth was $1,060.6 million; and

•a maximum debt to total capitalization rolling average ratio of no more than 40.0%. As of December 31, 2022, we had a rolling average ratio of 27.1%.

As of December 31, 2022, we believe that our cash on hand, capacity available under our lines of credit and cash flows from operations for the next twelve months will be sufficient to service our outstanding debt during the next twelve months and fund our operations. For more detailed information on our lines of credit, refer to Note 8 to the Consolidated Financial Statements located in Part II, Item 8 of this Annual Report on Form 10-K.

Preferred Equity

As of December 31, 2022 and December 31, 2021 we had issued and outstanding 2,000,000 Depositary Shares, each representing 1/1000 of a share of our 5.75% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”). We pay cumulative cash dividends on the Series A Preferred Stock, when and as declared by the Board, at the rate of 5.75% of the $25,000 liquidation preference per share. Dividends are payable quarterly in arrears. During the year ended December 31, 2022, we paid dividends of $2.8 million on the Series A Preferred Stock. As the series A Preferred Stock was issued in December 2021, no dividend payments were made during the year ended December 31, 2021. On February 14, 2023, the Board declared a quarterly cash dividend of $0.359 per depositary share on the Series A Preferred Stock. The dividend is payable on March 15, 2023 to stockholders of record as of March 1, 2023.

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Registration Statements

In December 2020, we filed with the SEC a shelf registration statement on Form S-3 registering up to $500 million of securities, including shares of common stock, preferred stock or debt securities either separately or represented by warrants, or depositary shares as well as units that include any of these securities. Under the rules governing shelf registration statements, we will file a prospectus supplement and advise the SEC of the amount and type of securities each time we issue securities under this registration statement.

Cash Flows

The following summarizes our primary sources and uses of cash for the year ended December 31, 2022 as compared to the year ended December 31, 2021:

•Operating activities. Net cash provided by operating activities for the year ended December 31, 2022 was $90.7 million, compared to a $92.4 million use of cash from operating activities during the year ended December 31, 2021. The net cash inflows for the year ended December 31, 2022 were primarily generated from business operations of $314.0 million, partially offset by an increase in inventory of $217.6 million.

•Investing activities. Net cash used in investing activities for the year ended December 31, 2022 increased to $6.5 million compared to $2.0 million for the year ended December 31, 2021. The increase in cash outflows was primarily due to a $3.6 million capital contribution to our joint venture GBTM Sendera, LLC during the year ended December 31, 2022.

•Financing activities. Net cash used in financing activities for the year ended December 31, 2022 was $84.5 million, compared to a $154.3 million source of cash during the year ended December 31, 2021. The cash outflows for the year ended December 31, 2022 were primarily for share repurchases of $101.5 million, partially offset by net borrowings from lines of credit of $18.0 million.

For discussion and analysis our cash flows for the year ended December 31, 2021 as well as for comparison to our cash flows for the year ended December 31, 2020, refer to Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021.

Off-Balance Sheet Arrangements

Land and Lot Option Contracts

In the ordinary course of business, we enter into land purchase contracts with third-party developers to procure lots for the construction of our homes in the future. We are subject to customary obligations associated with such contracts. These purchase contracts typically require an earnest money deposit, and the purchase of properties under these contracts is generally contingent upon satisfying certain requirements, including obtaining applicable property and development entitlements.

We also utilize option contracts with lot sellers as a method of acquiring lots in staged takedowns, which are the schedules that dictate when lots must be purchased to help manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Lot option contracts generally require us to pay a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices which typically include escalations in lot prices over time.

Our utilization of lot option contracts is dependent on, among other things, our supply of internally developed lots, the availability of land sellers willing to enter into these arrangements, the availability of capital 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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We generally have the right, at our discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting the earnest money deposit with no further financial responsibility to the land seller.

As of December 31, 2022, we had earnest money deposits of $24.6 million at risk associated with contracts to purchase 2,923 lots past feasibility studies with an aggregate purchase price of approximately $219.8 million.

Letters of Credit and Performance Bonds

Refer to Note 18 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for details of letters of credit and performance bonds outstanding.

Guarantee

Refer to Note 5 in the accompanying Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for details of our guarantee in relation to our joint venture with EJB River Holdings, LLC (“EJB River Holdings”).

Critical Accounting Policies

The preparation of financial statements in accordance with GAAP requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues, costs and expenses during the reporting period. Management bases estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from estimates under different assumptions or conditions. Management believes that the following accounting area is most critical to the portrayal of our financial condition and results of operations and requires the most subjective or complex judgments.

Impairment of Inventory

We value inventory at cost unless the carrying value is determined to be not recoverable in which case the affected inventory is written down to fair value. In accordance with Accounting Standards Codification 360, Property, Plant, and Equipment (“ASC 360”), we evaluate our inventory for indicators of impairment by individual community and development during each reporting period.

For our builder operations segments, during each reporting period, contribution margins on closed homes, average margins of homes under construction, and forecasted margins for future starts are reviewed at a community level by management. In the event that this review suggests higher potential for losses at a specific community, the Company monitors such communities by adding them to our “watchlist” communities, and, when an impairment indicator is present, further analysis is performed.

For our land development segment, we perform a quarterly review for indicators of impairment for each project which involves comparing anticipated lot sale revenues to projected costs (i.e. lot gross margins). For lots designated for our builders, we review land for indicators of impairment on a consolidated level for each community, looking at overall projected home contribution margins. In determining the allocation of costs to a particular land parcel, we rely on project budgets which are based on a variety of assumptions, such as development schedules and future costs to be incurred. It is common that actual results differ from budgeted amounts for various reasons, including delays, changes in costs that have not been committed, unforeseen issues encountered during project development that fall outside the scope of existing contracts, or items that ultimately cost more or less than the budgeted amount. We apply procedures to maintain best estimates in our budgets, including assessing and revising project budgets on a periodic basis, obtaining commitments from subcontractors and vendors for future costs to be incurred and utilizing the most recent information available to estimate costs.

For each real estate asset that has an indicator of impairment, we analyze whether the estimated remaining undiscounted future cash flows are more or less than the asset’s carrying value. The estimated cash flows are determined by projecting the remaining revenue from closings based on the contractual lot takedowns remaining, future projected lot takedowns, or historical and projected home sales or delivery absorptions for homebuilding operations and then comparing such projections to the remaining projected expenditures for development or home construction. Remaining projected expenditures are based on the most current pricing/bids received from subcontractors for current phases or homes under development. For future phases of land development, management uses its judgment to project potential cost increases. In determining the estimated cash flows for land held for sale, management considers recent comparisons to market comparable transactions, bona fide letters of intent from outside parties, executed sales contracts, broker quotes, and similar information. When projecting revenue, management does not assume improvement in market conditions.

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If the estimated undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and written down to fair value. These impairment evaluations require us to make estimates and assumptions regarding future conditions, including the timing and amounts of development costs and sales prices of real estate assets, to determine if expected future cash flows will be sufficient to recover the asset’s carrying value.

Fair value is determined based on estimated future cash flows discounted for inherent risks associated with real estate assets. These discounted cash flows are impacted by expected risk based on estimated land development activities, construction and delivery timelines, market risk of price erosion, uncertainty of development or construction cost increases, and other risks specific to the asset or market conditions where the asset is located when the assessment is made. These factors are specific to each community and may vary among communities. When deemed appropriate, we use recent comparisons to market comparable transactions, bona fide letters of intent from outside parties, executed sales contracts, broker quotes, or similar information as inputs to estimate the fair value of certain real estate assets.

When estimating cash flows of a community, management makes various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended 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 overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, the level of time-sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model home maintenance costs and advertising costs). Due to uncertainties in the estimation process, the volatility in demand for new housing and the long life cycle of many communities, actual results could differ significantly from such estimates.

Refer to Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further description of our significant accounting policies.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for recent accounting pronouncements.

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

For business overview and developments during the year ended December 31, 2021, refer to Part I, Item 1 of this Annual Report on Form 10-K.

Overview and Outlook

Our key financial and operating metrics are home deliveries, home closings revenue, average sales price of homes delivered, and net new home orders, which refers to sales contracts executed reduced by the number of sales contracts canceled during the relevant period. Our results for each key financial and operating metric, as compared to the year ended December 31, 2020, are provided below:

The United States has been impacted by the coronavirus (“COVID-19”) pandemic. However, throughout the pandemic, we have continued to build, close and sell homes in our markets. The overwhelming expansion of our revenues is attributable to the strong performance of our new Trophy brand division, and the impact of macroeconomic factors such as low interest rates, an influx of millennia first-time home buyers and demand for suburban homes from apartment dwellers in response to COVID-19. The significant increase in new home demand has, in turn, led to increased demand for labor and the raw materials, products and appliances for new homes. Due to the increased demand, we have and expect to continue to experience increases in cost and decreased availability of skilled labor as well as increases, shortages and significant extensions to our lead time for the delivery of key materials and inputs.

2021 Developments

From October 2020 to October 2021, homes in the DFW and Atlanta markets appreciated by 24.6% and 21.4%, respectively, compared to 18.4% average appreciation for 20 major U.S. metropolitan areas (Source: S&P Dow Jones Indices & CoreLogic, October 31, 2021). Among the 12 largest metropolitan areas in the country, the Dallas area ranked third and the Atlanta area ranked seventh in annual rate of job growth from November 2020 to November 2021 (Source: US Bureau of Labor Statistics, November 2021). We believe that we operate in two of the most desirable housing markets in the nation and that increasing demand and supply constraints in our target markets create favorable conditions for our future growth.

Results of Operations

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

Residential Units Revenue and New Homes Delivered

The table below represents residential units revenue and new homes delivered for the years ended December 31, 2021 and December 31, 2020 (dollars in thousands):

The $379.5 million increase in residential units revenue was driven by the 10.1% increase in the average sales price of homes delivered for the year ended December 31, 2021 and the 28.4% increase in the number of homes delivered. The 10.1%

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increase in the average sales price of homes delivered for the year ended December 31, 2021 was attributable to overall price increases driven by high demand and low supply of inventory.

New Home Orders and Backlog

The table below represents new home orders and backlog related to our builder operations segments, excluding mechanic’s liens contracts (dollars in thousands):

Net new home orders decreased by 1.2% over the prior year period and our absorption rate per average active selling community increased 9.3% year over year. The absorption rate per average active selling community per quarter of 8.2 homes during the year ended December 31, 2021, was a direct result of pro-active metering of home sales by withholding homes from sale and by limiting sales per community to better align the absorption rate of sales with the ability to deliver new homes. Because of rising input costs and strong sales demand, we prefer to increase our level of spec inventory than sell as many homes yet to be built. The absorption rate per average active selling community per quarter of 8.2 homes during the year ended December 31, 2021, exceed the 5.6 net new home orders during the year ended December 31, 2019 by 46.4%.

Backlog refers to homes under sales contracts that have not yet closed at the end of the relevant period, and absorption rate refers to the rate at which net new home orders are contracted per average active selling community during the relevant period. Upon a cancellation, the escrow deposit may be returned to the prospective purchaser. Accordingly, backlog may not be indicative of our future revenue.

Our cancellation rate, which refers to sales contracts canceled divided by sales contracts executed during the relevant period, was 7.7% for the year ended December 31, 2021, compared to 13.0% for the year ended December 31, 2020. Sales contracts relating to homes in backlog may be canceled by the prospective purchaser for a number of reasons, such as the prospective purchaser’s inability to obtain suitable mortgage financing. Upon a cancellation, the escrow deposit may be returned to the prospective purchaser. Management believes a cancellation rate in the range of 15% to 20% is representative of an industry average cancellation rate. Our cancellation rate is on the lower end of the industry average, which we believe is due to favorable market conditions through December 31, 2021.

The $183.0 million increase in value of backlog was due to the 25.2% increase in the average sales price of backlog and the 1.2% increase in the number of homes in backlog. The increase of the average sales price of homes in backlog was the result of price increases driven by the high demand and low supply of inventory.

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Residential Units Gross Margin

The table below represents the components of residential units gross margin (dollars in thousands):

Cost of residential units for the year ended December 31, 2021 increased by $258.5 million, or 36.6%, compared to the year ended December 31, 2020, primarily due to the 28.4% increase in the number of new homes delivered in addition to increasing levels of cost input prices.

Residential units gross margin for the year ended December 31, 2021 increased to 26.4%, compared to 24.1% for the year ended December 31, 2020, primarily because of overall price increases that outpaced the levels of cost input price increases.

Land and Lots Revenue

The table below represents lots closed and land and lots revenue (dollars in thousands):