UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
Commission file number 001-36126
LGI HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
46-3088013
(I.R.S. Employer Identification No.)
1450 Lake Robbins Drive, Suite 430, The Woodlands, Texas
(Address of principal executive offices)
77380
(Zip code)
(281) 362-8998
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock ($0.01 par value)
Name of each exchange on which registered
NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:58) No (cid:133)
(cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:58)
(cid:3)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (cid:58) No (cid:133)
(cid:3)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes (cid:58) No (cid:133)
(cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:133)
(cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:95)
Non-accelerated filer (cid:134)
Accelerated filer (cid:134)
Smaller reporting company (cid:134)
Emerging growth company (cid:134)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:58)
As of June 29, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately
$1.1 billion based on the closing price of such stock on such date as reported on the NASDAQ Stock Market. As of February 22, 2019, there
were 22,707,385 shares of the registrant’s common stock, par value $.01 per share, issued and outstanding.
Portions from the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders are incorporated herein by reference
(to the extent indicated) into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
PART IV
SIGNATURES
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ITEM 1.
BUSINESS
General
PART I
We are engaged in the design, construction, and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New
Mexico, South Carolina, North Carolina, Colorado, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon,
and Nevada. Our management team has been in the residential land development business since the mid-1990s. Since commencing
home building operations in 2003, we have constructed and closed over 28,000 homes. During the year ended December 31, 2018,
we had 6,512 home closings, compared to 5,845 home closings in 2017.
LGI Homes, Inc. is a Delaware corporation incorporated on July 9, 2013. Our principal executive offices are located at 1450
Lake Robbins Drive, Suite 430, The Woodlands, Texas 77380, and our telephone number is (281) 362-8998. Information on or
linked to our website is not incorporated by reference into this Annual Report on Form 10-K unless expressly noted.
Unless otherwise indicated or the context requires, “LGI,” the “Company,” “we,” “our” and “us” refer collectively to LGI
Homes, Inc. and its subsidiaries.
Business Opportunities
Since our initial public offering in November 2013, we have grown substantially by expanding our operations from nine
markets in four states to 27 markets in 17 states. We believe there is an opportunity to continue to grow in our existing markets.
Given our knowledge of and proven success in these markets, as well as the favorable demographic and economic trends forecasted
for these markets, we expect to continue to grow in our current markets.
We intend to continue to expand into new markets where we identify opportunities to build homes and develop communities
that meet our profit and return objectives. One of the keys to our successful geographic expansion is our operating model which
enables us to enter new markets efficiently and effectively. During 2019, we expect to open new communities and have homes for
sale in additional markets, including Columbia, South Carolina, Charleston, South Carolina, Richmond, Virginia, Riverside,
California, and Sarasota, Florida.
We see opportunities to develop properties with multiple product lines and within the same communities which we believe
will enable us to grow our business by increasing the number of price points in some of our existing markets. Our current product
offerings include entry-level homes, including both detached homes and townhomes, and move-up homes, which are sold under our
LGI Homes brand, and our luxury series homes, which are sold under our Terrata Homes brand. Wholesale home closings during
2018 and 2017 represented 466 and 201 homes, respectively. At December 31, 2018, we had 83 active communities with our LGI
Homes brand and five with our Terrata Homes brand.
Our Terrata Homes brand allows us to leverage our systems and process approach, including our customer centric sales
system, to deliver move-in ready homes with standardized features. During 2018, we closed 118 Terrata Homes, which had an
average sales price of $395,000, compared to 108 Terrata Homes, which had an average sales price of $409,000, in 2017.
Our townhome product enables us to keep our entry-level price point within reach of more new homebuyers. We believe that
our townhome product helps to counter rising land and home costs, and support our expansion into densely populated markets.
Similarly, we believe our wholesale home closings provide opportunities for us to leverage our systems and processes to meet
the needs of companies looking to acquire multiple homes for rental purposes, primarily thorough bulk sales agreements.
We expect to continue to pursue a flexible land acquisition strategy of purchasing or optioning finished lots, if they can be
acquired at attractive prices, or purchasing raw land for residential development. We generally target land acquisitions that are
further away from urban centers than many other suburban communities but have access to major thoroughfares, retail districts and
centers of business. These target areas that are further away from urban centers generally result in a better value for the homeowner
through either lower price points or larger lot sizes. We consider development opportunities that meet our profit and return
objectives, including opportunities which may involve the sale of home sites as a part of the product mix. We will continue to focus
primarily on entry-level home buyers. We expect our home closings in communities with our luxury series will be less than 5% of
our annual home closings during 2019 and that our wholesale closings will be approximately 5% of our annual home closings
during 2019.
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Sales and Marketing
We utilize a well-defined sales and marketing approach to identify leads for our communities and to educate potential buyers
on the process and benefits of homeownership. For many of our communities, our marketing efforts are focused on converting
renters of apartments and single-family homes into homeowners.
We use extensive print and digital advertising to attract potential homebuyers. We employ various marketing methods such as
direct mail, social media and interactive online media as well as directional signage and billboards to attract and drive potential
homebuyers to our information centers.
Our advertising methods are extensive and have proven to be effective in placing potential homebuyers in front of our trained
sales professionals. These methods have proven to be effective in reaching our target market and communicating our core message
of value and dream fulfillment.
With respect to our communities with higher price points or that include the sale of home sites, our sales and marketing
approaches are tailored to the potential purchasers of such homes and home sites and include more involvement by real estate agents
and brokers.
Across all price points, our marketing strategy calls for a balanced approach of corporate support and local expertise to attract
potential homebuyers in a focused, efficient and cost-effective manner. Our proprietary customer relationship management system
provides our management team with tools to continually monitor and measure the performance level of every sales professional
through each phase of the sales process. Utilization of these tools allows us to assess the cost effectiveness of a particular advertising
campaign and marketing medium as well as the strengths and weaknesses of every member of our sales team.
Our marketing efforts are generally designed to encourage the prospective homebuyer to call our information centers to
schedule an appointment and our primary objective is to establish direct communication between the prospective homebuyer and the
salesperson. Our professional salespeople are well-trained to determine specific needs and wants of the potential homebuyer and to
provide the potential homebuyer with all information required to make a buying decision.
Our information centers are open approximately 12 hours per day, 359 days per year, and generally staffed by two to five sales
professionals and supported by an independent on-site loan officer. Our commission-based sales professionals provide potential
homebuyers with a comprehensive and thorough understanding of the steps required to achieve homeownership. Throughout the
sales process, our sales professionals learn about the current housing situation of the potential homebuyers and seek to understand
their individual needs while also educating them on the value we provide through superior quality and affordable prices.
We provide information regarding floor plans and pricing, credit and income qualifications and conduct tours of our homes
based on the potential homebuyer’s budget. In addition, we provide each potential homebuyer with a comprehensive introduction to
the community and the surrounding area, providing them with detailed information regarding utilities, schools, homeowners
association dues and restrictions, local entertainment and nearby dining and shopping options. We provide our potential homebuyers
with a clear understanding of who we are by sharing our history, vision and values. As a result of our transparent approach, potential
homebuyers receive all this information before making a buying decision, which we believe eliminates confusion during the home
buying process and sets clear expectations. In addition, the potential home buyers benefit from the availability of move-in ready
homes by seeing the completed or near-completed home that they will own.
Recruitment, Training and Development
We focus on identifying and attracting the best talent and providing them with world-class training and continuous
development. We directly invest in our sales professionals by conducting an intensive 100-day introductory training program
consisting of 30 days of initial in-depth, in-house education about our time-proven selling strategies, which includes a two-week
training program at our headquarters, and an additional 70 days of secondary training at the local division. Our continued
commitment to our sales personnel is reflected in the ongoing weekly training sessions held in each of our information centers
coupled with quarterly regional training events. We also work closely with our subcontractors and construction managers, training
them using a comprehensive construction manual that outlines the most efficient way to build an LGI home. Many of our
subcontractors have worked on our homes since we commenced homebuilding operations in 2003, and therefore, are familiar with
our business model.
5
Homebuilding Operations
Our homebuilding operations are organized and managed by seven divisions: West, Northwest, Central, Midwest, Florida,
Southeast and Mid-Atlantic.
West
Phoenix, AZ
Northwest
Seattle, WA
Tucson, AZ
Portland, OR
Central
Houston, TX
Dallas/Ft. Worth,
TX
Midwest
Minneapolis, MN
Florida
Tampa, FL
Southeast
Atlanta, GA
Mid-Atlantic
Martinsburg, WV
Orlando, FL
Charlotte,
NC/SC
Albuquerque,
NM
Denver, CO
San Antonio, TX
Fort Myers, FL
Nashville, TN
Sacramento, CA
Colorado
Springs, CO
Las Vegas, NV
Austin, TX
Jacksonville, FL
Raleigh, NC
Oklahoma City,
OK
Wilmington, NC
Winston-Salem,
NC
Birmingham, AL
Beginning in the fourth quarter of 2018, we changed from six reportable segments to five reportable segments: Central,
Northwest, Southeast, Florida, and West. These segments reflect the way the Company evaluates its business performance and
manages its operations. Additional information on our operating segments and product information is contained in Note 16
“Segment Information” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Our even-flow, or continuous, construction methodology enables us to build and maintain an inventory of move-in ready
homes that are available for immediate sale. We offer a set number of floor plans in each community with standardized features that
commonly include upgrades such as granite countertops, appliances and ceramic tile flooring. Our homes are designed to meet the
preferences of our target market of potential homebuyers and enable cost efficient and effective construction processes. We have
developed a collection of home designs, which can be modified for local conditions and market preferences, and implemented
across multiple communities to maximize efficiency. We maintained an average home completion time of approximately 60 to 85
days during 2018; the homes closed during 2018 ranged from 1,000 to 4,100 square feet with prices ranging from the $140,000’s to
the $600,000’s.
We expect to continue to utilize our even flow construction methodology in communities with homes at all of our price points
and will maintain our focus on marketing complete or move-in ready homes with standardized features.
We employ experienced construction management professionals to perform the tasks of general contractors for home
construction in each of our communities. Our employees provide the purchasing, construction management and quality assurance
for the homes we build, while third-party subcontractors provide the material and labor components of our homes. In each of our
markets, we employ construction managers with local market knowledge and expertise. Additionally, our construction managers
monitor our compliance with zoning and other regulations, production schedules, and quality standards for our projects.
We endeavor to obtain favorable pricing from subcontractors through long-term relationships and consistent workflow. As we
have expanded into new markets outside of Texas, the employees that we have hired in those markets have brought long-term
relationships with several subcontracting firms. We have expanded upon existing relationships with subcontracting firms also
located in Texas. A number of our trade partners have subcontracted on our projects since we commenced homebuilding operations
in 2003. We purchase some components and materials centrally to leverage our purchasing power to achieve volume discounts, a
practice that often reduces costs and ensures timely deliveries. We typically do not store significant inventories of construction
materials, except for work in progress materials for homes under construction. Consistency of our trade partners is an integral part of
our homebuilding operations that also leads us to reduced warranty costs. We believe in building long lasting relationships with our
trade partners in order to provide consistent, quality and timely deliveries across our markets. We also work closely with our
construction managers and subcontractors and train them using a comprehensive construction manual that outlines the most efficient
way to build an LGI home.
Throughout our homebuilding operations, we utilize a paperless purchase order system to conduct business with our
subcontractors and suppliers. Our master build schedule allows our trade partners to receive their specific task from our electronic
system and plan several weeks in advance before starting their work. This means of communication allows our subcontractors to
schedule their crews efficiently, thereby allowing for better pricing and better quality of work. Typically, our contractors are paid
every week, which contributes to the strength of our business relationships with them.
6
Land Acquisition Policies and Development
We continue to be an active and opportunistic acquirer of land for residential development in our markets. We source land
from a wide range of landowners, brokers, lenders, builders and other land development companies. We generally acquire finished
lots and raw land in affordable locations that are further away from urban centers than many other suburban communities but have
access to major thoroughfares, retail districts and centers of business. We conduct thorough due diligence on each of our potential
land acquisitions, and we look at numerous opportunities before finding one that meets our requirements. We test the market and
speak with potential homebuyers before committing to purchase land. We also maintain a pipeline of desirable land positions for
replacement communities and new communities. We increased our active communities to 88 as of December 31, 2018 from 78 as of
December 31, 2017. We also increased our lot inventory to 51,442 owned or controlled lots as of December 31, 2018 from 39,709
owned or controlled lots as of December 31, 2017.
Our allocation of capital for land investment is performed at the corporate level with a disciplined approach to portfolio
management. Our Acquisitions Committee meets periodically and consists of our Chief Executive Officer, Chief Financial Officer,
and Executive Vice President of Acquisitions. Annually, our divisions prepare a strategic plan for their respective geographic areas.
Supply and demand are analyzed to ensure land investment is targeted appropriately. The long-term plan is compared on an ongoing
basis to our experience in the marketplace and is then adjusted to the extent necessary.
We have also purchased larger tracts of land across our markets which will provide us with more opportunities to build homes
with multiple price points in our communities. We believe that our land development expertise will allow us to meet our growth and
profit objectives with respect to opportunities in which we are the developer. Similar to our home building operations, our personnel
oversee the contractors who perform the development work. Our land development projects may include the sale of home sites or
commercial property as a part of the project.
We have strong relationships with the land brokerage community in many of our markets. We believe that in the brokerage
community, we have a reputation for knowing our business, having the capital to close deals, and making accurate and timely
decisions that benefit both the buyer and seller. For these reasons, we believe that brokers routinely notify us when desirable tracts
of land are available for purchase.
In our land acquisition process, projects of interest are evaluated at the division level using an extensive due diligence
checklist which includes assessing the permitting and regulatory requirements, environmental considerations, local market
conditions, and anticipated floor plans, pricing, and financial returns. We also determine the number of residents in the market and
rental households that are within driving distance to the proposed project and, in many cases, conduct test marketing which includes
mailings to prospective homebuyers to get their feedback on our potential land acquisition. By testing the market before entering it
and acquiring land in it, we are able to assess the level of interest in the location and amenities, determine the cost of rent in the area,
and assess the size of the market opportunity. The amount of information that we are able to ascertain about potential home buyers,
including renters, allows us to better identify the opportunity to sell move-in ready homes.
The table below shows (i) home closings by reportable segment for the year ended December 31, 2018 and (ii) our owned or
controlled lots by reportable segment as of December 31, 2018.
Reportable Segment
Central
Northwest
Southeast
Florida
West
Total
Year Ended
December 31,
2018
As of December 31, 2018
Home Closings
Owned (1)
Controlled
Total
2,937
760
1,324
864
627
6,512
15,204
1,856
7,244
2,266
2,052
28,622
7,026
1,786
10,556
1,205
2,247
22,820
22,230
3,642
17,800
3,471
4,299
51,442
(1) Of the 28,622 owned lots as of December 31, 2018, 17,381 were raw/under development lots and 11,241 were finished lots.
Homes in Inventory
When entering a new community, we build a sufficient number of move-in ready homes to meet our budgets. We base future
home starts on closings. As homes are closed, we start more homes to maintain our inventory. As of December 31, 2018, we had a
total of 1,942 completed homes, including information centers, and 987 homes in progress.
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The following is a summary of our homes in inventory by reportable segment as of December 31, 2018 (dollar values in
thousands):
Reportable Segment
Central
Northwest
Southeast
Florida
West
Total
Homes in
Inventory (1)
Inventory Value (1)
179,820
84,234
88,442
49,535
68,644
470,675
1,160 $
354
551
333
431
2,829 $
(1) Includes homes in progress and completed homes; excludes information centers.
Backlog
See discussion included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Backlog.”
Raw Materials and Labor
When constructing homes, we use various materials and components. We generally contract for our materials and labor at a
fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in
building materials and labor costs between the time construction begins on a home and the time it is closed. Typically, the raw
materials and most of the components used in our business are readily available in the United States. In addition, the majority of our
raw materials is supplied to us by our subcontractors, and is included in the price of our contract with such contractors. Most of the
raw materials necessary for our subcontractors are standard items carried by major suppliers. Substantially all of our construction
work is done by third-party subcontractors, most of whom are non-unionized. We continue to monitor the supply markets to achieve
the best prices available. Typically, the price changes that most significantly influence our operations are price increases in labor,
commodities, and lumber.
Seasonality
The homebuilding industry generally exhibits seasonality. We have historically experienced, and in the future expect to
continue to experience, variability in our results on a monthly and quarterly basis. See discussion included in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Seasonality.”
Government Regulation and Environmental Matters
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning,
development, building design, construction and similar matters which impose zoning and density requirements, the result of which
is to limit the number of homes or mandate the type of structure that can be built, within the boundaries of a particular area. Projects
that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development
in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from
developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be
implemented in the future. Local governments also have broad discretion regarding the imposition of development fees for projects
in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a
variety of other governmental approvals and permits during the development process and can also be impacted adversely by
unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development.
We are also subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the
environment. The particular environmental laws which apply to any given homebuilding site vary according to multiple factors,
including the site’s location, its environmental conditions and the present and former uses of the site, as well as adjoining properties.
Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can
prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas. In addition, in those cases where an
endangered or threatened species is involved, environmental rules and regulations can result in the restriction or elimination of
development in identified environmentally sensitive areas. From time to time, the United States Environmental Protection Agency
(the “EPA”) and similar federal or state agencies review homebuilders’ compliance with environmental laws and may levy fines and
penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance
as a result of past failures. Any such actions taken with respect to us may increase our costs. Further, we expect that increasingly
8
stringent requirements may be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact
on the availability and price of certain raw materials such as lumber.
Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may
be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a
governmental entity or to third parties for related damages, including for bodily injury, and for investigation and clean-up costs
incurred by such parties in connection with the contamination. A mitigation system may be installed during the construction of a
home if a cleanup does not remove all contaminants of concern or to address a naturally occurring condition such as methane. Some
homebuyers may not want to purchase a home with a mitigation system.
Competition
The U.S. homebuilding industry is highly competitive. We compete in each of our markets with numerous other national,
regional and local homebuilders for homebuyers, desirable properties, raw materials and skilled labor. We also compete with sales of
existing homes and with the rental housing market. Our homes compete on the basis of quality, price, design, mortgage financing
terms and location. There has been some consolidation among national homebuilders in the United States, and we expect that this
trend may continue.
Employees
As of December 31, 2018, we employed 857 people, of whom 98 were located at our corporate headquarters, 509 were on-site
sales and support personnel, and 250 were involved with construction. None of our employees are covered by collective bargaining
agreements. We believe we have good relations with our employees.
Available Information
We make available, as soon as reasonably practicable, on our website, www.lgihomes.com, all of our reports required to be
filed with the Securities and Exchange Commission (“SEC”). These reports can be found on the “Investor Relations” page of our
website under “SEC Filings” and include our annual and quarterly reports on Form 10-K and 10-Q (including related filings in
XBRL format), current reports on Form 8-K, beneficial ownership reports on Forms 3, 4, and 5, proxy statements and amendments
to such reports. Our SEC filings are also available to the public on the SEC’s website at www.sec.gov. In addition to our SEC
filings, our corporate governance documents, including our Corporate Governance Guidelines and Code of Business Conduct and
Ethics, are available on
the “Investor Relations” page of our website under “Corporate Governance” at
https://investor.lgihomes.com/corporate-governance. Our stockholders may also obtain these documents in paper format free of
charge upon request made to our Investor Relations department.
Executive Officers
The following table sets forth information regarding our executive officers as of February 26, 2019:
Name
Eric Lipar
Michael Snider
Charles Merdian
Jack Lipar
Rachel Eaton
Scott Garber
Age
48
47
49
50
37
47
Position
Chief Executive Officer and Chairman of the Board
President and Chief Operating Officer
Chief Financial Officer and Treasurer
Executive Vice President of Acquisitions
Chief Marketing Officer
General Counsel and Corporate Secretary
Eric Lipar. Mr. Lipar is our Chief Executive Officer and serves as Chairman of our Board of Directors. He has served as
our Chief Executive Officer since 2009, as a director since June 2013 and as Chairman of the Board since July 2013. Previously,
Mr. Lipar served as our President from 2003 until 2009. Mr. Lipar has been in the residential land development business since the
mid-1990s and is one of our founders. He has overseen land acquisition, development and the sales of over 28,000 homes since our
inception. Mr. Lipar currently serves on the Residential Neighborhood Development Council for the Urban Land Institute and is a
Policy Advisor Board Member for the Harvard Joint Center of Housing Studies.
Michael Snider. Mr. Snider has served as our President since 2009 and our Chief Operating Officer since July 2013. He
oversees all aspects of our sales, construction, and product development. Prior to serving as our President, Mr. Snider was
Executive Vice President of Homebuilding (2005-2009) and in the role of Homebuilding Manager (2004). Before joining the
Company in 2004, Mr. Snider was a Project Manager for Tadian Homes, a homebuilder based in Troy, Michigan.
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Charles Merdian. Mr. Merdian has served as our Chief Financial Officer and Treasurer since 2013, and served as our
Secretary from 2013 to 2016. Prior to becoming our Chief Financial Officer in 2010, Mr. Merdian was our Controller from 2004
through 2010. Prior to joining us in 2004, Mr. Merdian served as Accounting and Finance Manager for The Woodlands Operating
Company where he specialized in accounting and financial analysis of real estate ventures, focusing primarily on residential and
commercial developments. Prior to The Woodlands Operating Company, Mr. Merdian served as an accounting manager working at
the Williamson-Dickie Manufacturing Co. and as a senior auditor for Coopers & Lybrand, LLP. Mr. Merdian has worked in
residential real estate and homebuilding finance since 1998. Mr. Merdian is a Certified Public Accountant and is a member of the
Texas Society of Certified Public Accountants.
Jack Lipar. Mr. Lipar has served as our Executive Vice President of Acquisitions since March 2013. He previously served
as Vice President of Acquisitions from December 2010 through February 2013, and Acquisitions Manager from 2006 to December
2010. Mr. Lipar oversees land acquisitions and development for the Company. Prior to joining us, Mr. Lipar worked at HP Pelzer,
an auto parts manufacturing company based in Germany, as the Vice President of Purchasing and Director of Operations. Mr. Lipar
was also the General Manager and a member of the Board of Directors at Alliance Interiors, an affiliate of HP Pelzer. Prior to HP
Pelzer, Mr. Lipar was a worldwide Purchasing Manager for Cooper Standard, one of the world’s leading manufacturers of
automotive parts.
Rachel Eaton. Ms. Eaton serves as our Chief Marketing Officer and is responsible for the overall growth and direction of
our marketing initiatives, brand image, and social media. Prior to becoming our Chief Marketing Officer in June 2013, Ms. Eaton
served as our Vice President of Marketing and Administration from May 2012 through May 2013 and Director of Marketing &
Special Events from 2007 to May 2012. Ms. Eaton joined the Company in 2003.
Scott Garber. Mr. Garber has served as our General Counsel and Corporate Secretary since April 2018. His responsibilities
include all company legal matters, as well as corporate governance and risk management. Prior to joining the Company, Mr.
Garber served as Assistant General Counsel at Chevron Phillips Chemical Company (CPChem), where he was responsible for
major company transactions (both domestic and international) and corporate governance of its Qatar-based joint ventures, and
managed commercial legal matters for various company product lines and divisions. Prior to joining CPChem, Mr. Garber served
as Associate General Counsel for United Airlines (formerly Continental Airlines), then the world’s largest airline, where he was
responsible for its litigation, antitrust and intellectual property matters. Mr. Garber previously worked at Howrey Simon Arnold &
White, a major international law firm, where he specialized in all aspects of intellectual property law. Mr. Garber is a member of
the State Bar of Texas and is also admitted to practice before the U.S. Patent & Trademark Office. Mr. Garber is also a member of
the Board of Directors of Archway Insurance, Ltd, a captive insurance company.
Board of Directors of LGI Homes, Inc.
Mr. Eric Lipar - Chief Executive Officer of LGI Homes, Inc. and serves as Chairman of our Board of Directors.
Ms. Laura Miller - Senior Vice President and Global Chief Information Officer of InterContinental Hotels Group PLC, a
multinational hospitality company.
Mr. Bryan Sansbury - Chief Operating Officer and a founding partner of AEGIS Energy Risk, LLC. and serves as our Lead
Independent Director.
Mr. Ryan Edone - Chief Financial Officer of Petroleum Wholesale L.P., a distributor of branded and wholesale motor fuel products
and operator of retail convenience stores/travel centers.
Mr. Duncan Gage - Retired. Former President and Chief Executive Officer of Giant Cement Holdings, Inc. and currently manages
his personal investments.
Mr. Steven Smith - Shareholder of Baker Donelson, a law firm.
Mr. Robert Vahradian - Senior Managing Director of GTIS Partners, LP, a global real estate investment firm.
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ITEM 1A.
RISK FACTORS
Discussion of our business and operations included in this Annual Report on Form 10-K should be read together with the
risk factors set forth below. They describe various risks and uncertainties we are or may become subject to, many of which are
difficult to predict or beyond our control. These risks and uncertainties, together with other factors described elsewhere in this
report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in
a material and adverse manner.
Risks Related to Our Business
Tightening of mortgage lending standards and mortgage financing requirements and rising interest rates could adversely
affect the availability of mortgage loans for potential purchasers of our homes and thereby reduce our sales.
Almost all purchasers of our homes finance their acquisition through lenders that provide mortgage financing. According to the
Federal Home Loan Mortgage Corporation (“Freddie Mac”), the 30-year average mortgage rate was approximately 4.46% in
January 2019 and is expected to increase during 2019. If mortgage interest rates increase, the ability of prospective homebuyers to
finance home purchases may be adversely affected, and, as a result, our operating results may be significantly negatively impacted.
Our homebuilding activities are dependent upon the availability of mortgage financing to homebuyers. The availability of mortgage
financing is expected to be impacted by continued regulatory changes and risk appetite of lenders. The financial documentation,
down payments amounts and income to debt ratios requirements are subject to change and could become more restrictive. First-time
homebuyers are generally more affected by the availability of mortgage financing than other potential homebuyers. These
homebuyers are a key source of demand for our new homes. A limited availability of home mortgage financing may adversely affect
the volume and sales price of our home sales.
The federal government has a significant role in supporting mortgage lending through its conservatorship of Federal National
Mortgage Association (“Fannie Mae”) and Freddie Mac, both of which purchase or insure mortgage loans and mortgage loan-
backed securities, and its insurance of mortgage loans through or in connection with the Federal Housing Administration (“FHA”),
the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). FHA and USDA backing of mortgage loans
has been particularly important to the mortgage finance industry and to our business. If either the FHA or USDA raised their down
payment requirements or lowered maximum loan amounts, our business could be materially affected. Increased lending volume and
losses insured by the FHA have resulted in a reduction of the FHA insurance fund. The USDA rural development program provides
for zero down payment and 100% financing for homebuyers in qualifying areas. If the USDA program was discontinued or if
funding was decreased, then our business could be adversely affected. In addition, if the USDA changed its determination of areas
that are eligible to qualify for the program, it could have an adverse effect on our business. In addition, changes in governmental
regulation with respect to mortgage lenders could adversely affect demand for housing.
The availability and affordability of mortgage loans, including interest rates for such loans, could also be adversely affected by
a scaling back or termination of the federal government’s mortgage loan-related programs or policies. Because Fannie Mae-, Freddie
Mac-, FHA-, USDA- and VA-backed mortgage loans have been an important factor in marketing and selling many of our homes,
any limitations or restrictions in the availability of, or higher consumer costs for, such government-backed financing could reduce
our business, prospects, liquidity, and financial condition and results of operations could be materially and adversely affected. The
elimination or curtailment of state bonds to assist homebuyers could materially and adversely affect our business, prospects,
liquidity, financial condition and results of operations.
In addition, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) established
several new standards and requirements relating to the origination, securitizing and servicing of residential consumer mortgage
loans. These and other laws and regulations could further restrict the availability and affordability of mortgage loans, which could
adversely affect our home sales, financial condition and results of operations.
The long-term sustainability and growth in our home closings depends in part upon our ability to acquire finished lots and
land parcels suitable for residential homebuilding at reasonable prices.
The long-term sustainability of our operations as well as future growth depends in large part on the price at which we are able
to obtain suitable finished lots and land parcels for development to support our homebuilding operation. Our ability to acquire
finished lots and land parcels for new single-family homes and other projects may be adversely affected by changes in the general
availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land
parcels, availability of financing to acquire land parcels, zoning, regulations that limit housing density, the ability to obtain building
permits, environmental requirements and other market conditions and regulatory requirements. If suitable lots or land at reasonable
prices become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be
increased substantially, which could adversely impact us. As competition for suitable land increases, the cost of undeveloped lots
and the cost of developing owned land could also rise and the availability of suitable land at acceptable prices may decline, which
could adversely impact us. The availability of suitable land assets could also affect the success of our land acquisition strategy,
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which may impact our ability to maintain or increase the number of our active communities, as well as to sustain and grow our
revenue and margins, and achieve or maintain profitability. Additionally, developing undeveloped land is capital intensive and time
consuming and we may develop land based upon forecasts and assumptions that prove to be inaccurate, resulting in projects that are
not economically viable.
Risks associated with our land and lot inventories could adversely affect our business or financial results.
Risks inherent in controlling, purchasing, holding and developing land for new home construction are substantial. The risks
inherent in purchasing and developing land parcels increase as consumer demand for housing decreases and the holding period
increases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. In certain
circumstances, a grant of entitlements or development agreement with respect to a particular parcel of land may include restrictions
on the transfer of such entitlements to a buyer of such land, which would negatively impact the price of such entitled land by
restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and can result in
reduced margins or losses in a poorly performing community or market. Developing land and constructing homes takes a significant
amount of time and requires a substantial cash investment. Land development is a key part of our operations and we develop land in
all of our markets. The time and investment required for development may adversely impact our business. We have substantial real
estate inventories which regularly remain on our balance sheet for significant periods of time, during which time we are exposed to
the risk of adverse market developments, prior to their sale. Our business model is based on building homes before a sales contract
is executed and a customer deposit is received. Because interest and other expenses are capitalized only during construction, we
recognize interest and maintenance expense on unsold completed homes in inventory. As of December 31, 2018, we had 1,942
completed homes in inventory and 987 homes in progress in inventory. In the event there is a downturn in home sales in our
markets, our inventory of completed homes could increase, leading to additional financing costs and lower margins, which could
have a material adverse effect on our financial results and operations. In the event of significant changes in economic or market
conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all. Additionally,
deteriorating market conditions could cause us to record significant inventory impairment charges. The recording of a significant
inventory impairment could negatively affect our reported earnings per share and negatively impact the market perception of our
business.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for reasonable
prices in response to changing economic, financial and investment conditions may be limited and we may be forced to hold
non-income producing properties for extended periods of time.
Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in
response to changing economic, financial and investment conditions is limited and we may be forced to hold non-income producing
assets for an extended period of time or sell homes or land at a loss either of which may require us to record impairment charges. We
cannot predict whether we will be able to sell any property for the price or on the terms that we set or whether any price or other
terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a
willing purchaser and to close the sale of a property.
Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could
materially and adversely affect us.
The residential construction industry experiences labor and raw material shortages from time to time, including shortages in
qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be
more severe during periods of strong demand for housing or during periods following natural disasters that have a significant impact
on existing residential and commercial structures. Our markets may exhibit a reduced level of skilled labor relative to increased
homebuilding demand in these markets. It is uncertain whether these shortages will continue as is, improve or worsen. Labor and
raw material shortages and any resulting price increases could cause delays in and increase our costs of home construction, which in
turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Our business and results of operations are dependent on the availability, skill and performance of subcontractors.
We engage subcontractors to perform the construction of our homes, and, in many cases, to select and obtain the raw materials.
Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. While we
anticipate being able to obtain sufficient materials and reliable subcontractors and believe that our relationships with subcontractors
are good, we do not have long-term contractual commitments with any subcontractors, and we can provide no assurance that skilled
subcontractors will continue to be available at reasonable rates and in our markets. The inability to contract with skilled
subcontractors at reasonable rates on a timely basis could have a material adverse effect on our business, prospects, liquidity,
financial condition and results of operations.
Despite our quality control efforts, we may discover that our subcontractors have engaged in improper construction practices
or have installed defective materials in our homes. When we discover these issues, we utilize our subcontractors to repair the homes
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in accordance with our new home warranty and as required by law. The adverse costs of satisfying our warranty and other legal
obligations in these instances may be significant and we may be unable to recover the costs of warranty-related repairs from
subcontractors, suppliers and insurers, which could have a material impact on our business, prospects, liquidity, financial condition
and results of operations. We may also suffer reputational damage from the actions of subcontractors, which are beyond our control.
We could be adversely affected by efforts to impose joint employer liability on us for labor law violations committed by our
subcontractors.
Our homes are constructed by employees of subcontractors and other parties. We do not have the ability to control what these
parties pay their employees or the rules they impose on their employees. However, various governmental agencies have taken
actions to hold parties like us responsible for violations of wage and hour laws and other labor laws by subcontractors.
Governmental rulings that hold us responsible for labor practices by our subcontractors could create substantial exposures for us
under our subcontractor relationships, which could have a material impact on our business, prospects, liquidity, financial condition
and results of operations.
Any limitation on, or reduction or elimination of, tax benefits associated with homeownership would have an adverse effect
upon the demand for homes, which could be material to our business.
Changes in federal and state income tax laws, including the federal tax legislation, P.L. 115-97, informally known as the Tax
Cuts and Jobs Act (the “Tax Act”), may affect demand for new homes. Prior to January 1, 2018, tax laws generally permitted
significant expenses associated with homeownership, primarily mortgage interest expense and real estate taxes, to be deducted for
the purpose of calculating an individual’s federal and, in many cases, state taxable income. The Tax Act significantly limited the
ability to deduct mortgage interest expense and real estate taxes for federal income tax purposes. While the recent tax changes are
not currently expected to have a significant effect on our home sales, the federal government or a state government may change or
further change its income tax laws by further eliminating, limiting or substantially reducing these income tax benefits without
offsetting provisions, which may increase the after-tax cost of owning a new home for many of our potential homebuyers. Any such
future changes may have an adverse effect on the homebuilding industry in general. For example, the loss or reduction of
homeowner tax deductions could decrease the demand for new homes. Any such future changes could have a material impact on our
business, prospects, liquidity, financial condition and results of operations.
The recent growth in the housing market may not continue at the same rate, and any decline in the growth rate in our served
housing markets or for the homebuilding industry may materially and adversely affect our business and financial condition.
Although the housing markets in the geographic areas in which we operate are generally stronger than they have been in recent
years, we cannot predict whether and to what extent this will continue, particularly if interest rates for mortgage loans, land costs,
and construction costs continue to rise. Other factors which might impact growth in the homebuilding industry include uncertainty in
domestic and international financial, credit and consumer lending markets amid slow growth or recessionary conditions in various
regions or industries around the world; tight lending standards and practices for mortgage loans that limit consumers’ ability to
qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage
loan insurance premiums and/or other fees and required down payment amounts, higher home prices, more conservative appraisals,
changing consumer preferences, higher loan-to-value ratios and extensive buyer income and asset documentation requirements,
changes to mortgage regulations, slower rates of population growth or population decline in our markets, or Federal Reserve policy
changes. Given these factors, we can provide no assurance that present housing market trends will continue, whether overall or in
our markets.
If there is limited economic growth or declines in employment and consumer income and/or tightening of mortgage lending
standards, practices and regulation in the geographic areas in which we operate or if interest rates for mortgage loans or home prices
rise, there could likely be a corresponding adverse effect on our business, prospects, liquidity, financial condition and results of
operations, including, but not limited to, the number of homes we sell, our average selling prices, the amount of revenues or profits
we generate, and the effect may be material.
If we are unable to develop our communities successfully or within expected time-frames, our results of operations could be
adversely affected.
Before a community generates any revenue, time and material expenditures are required to acquire land, obtain development
approvals and construct significant portions of project infrastructure, amenities and sales facilities. It can take several years from the
time we acquire control of an undeveloped property to the time we make our first home sale on the site. Delays in the development
of communities, including delays associated with subcontractors performing the development activities or entitlements, expose us to
the risk of changes in market conditions for homes. A decline in our ability to develop and market one of our new undeveloped
communities successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse
effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.
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In addition, higher than expected absorption rates in existing communities may result in lower than expected inventory levels until
the development for replacement communities is completed.
Third-party lenders may not complete mortgage loan originations for our homebuyers in a timely manner or at all, which
can lead to cancellations and a lower backlog of orders, or to significant delays in our closing homes sales and recognizing
revenues from those homes.
Our homebuyers may obtain mortgage financing for their home purchases from any lender or other provider of their choice. If,
due to credit or consumer lending market conditions, reduced liquidity, increased risk retention or minimum capital level obligations
and/or regulatory restrictions related to the Dodd-Frank Act or other laws, or other factors or business decisions, these lenders refuse
or are unable to provide mortgage loans to our homebuyers, or increase the costs to borrowers to obtain such loans, the number of
homes we close and our business, prospects, liquidity, financial condition and results of operations may be materially adversely
affected.
We may be unable to obtain suitable bonding for the development of our housing projects.
We are often required to provide bonds, letters of credit or guarantees to governmental authorities and others to ensure the
completion of our projects. As a result of market conditions, some surety providers have been reluctant to issue new bonds and
providers may require credit enhancements (such as cash deposits or letters of credit) in order to maintain existing bonds or to issue
new bonds. If we are unable to obtain required bonds in the future for our projects, or if we are required to provide credit
enhancements with respect to our current or future bonds or in place of bonds, our business, prospects, liquidity, financial condition
and results of operations could be materially and adversely affected.
We may incur a variety of costs to engage in future growth or expansion of our operations, including through add-on
acquisitions, and the anticipated benefits may never be realized.
We intend to grow our operations in existing markets, and we may expand into new markets or pursue opportunistic purchases
of other home builders on attractive terms as they present themselves. We may be unable to achieve the anticipated benefits of any
such growth or expansion, including through add-on acquisitions, the anticipated benefits may take longer to realize than expected
or we may incur greater costs than expected in attempting to achieve the anticipated benefits. In such cases, we will likely need to
employ additional personnel or consultants that are knowledgeable of such markets. There can be no assurance that we will be able
to employ or retain the necessary personnel, to successfully implement a disciplined management process and culture with local
management, or that our expansion operations will be successful. This could disrupt our ongoing operations and divert management
resources that would otherwise focus on developing our existing business, or that we will be able to successfully integrate any
acquired homebuilder or new market. Accordingly, any such expansion could expose us to significant risks, beyond those associated
with operating our existing business, and may adversely affect our business, prospects, liquidity, financial condition and results of
operations.
The homebuilding industry is highly competitive and, if our competitors are more successful or offer better value to our
customers, our business could decline.
We operate in a very competitive environment which is characterized by competition from a number of other homebuilders
and land developers in each market in which we operate. Additionally, there are relatively low barriers to entry into our business. We
compete with large national and regional homebuilding companies, many of which have greater financial and operational resources
than us, and with smaller local homebuilders and land developers, some of which may have lower administrative costs than us. We
may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding competitors whose
operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional
downturn in the housing market. Furthermore, we generally have a lower market share in each of our markets as compared to many
of our competitors. Many of our competitors may also have longer operating histories and longstanding relationships with
subcontractors and suppliers in the markets in which we operate. This may give our competitors an advantage in marketing their
products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at
more favorable prices. We compete for, among other things, homebuyers, desirable land parcels, financing, raw materials and skilled
management and labor resources. Our competitors may independently develop land and construct homes that are substantially
similar to our products.
Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build
homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase our selling incentives
and reduce our prices. An oversupply of homes available for sale or discounting of home prices could adversely affect pricing for
homes in the markets in which we operate. Oversupply and price discounting have periodically adversely affected certain markets,
and it is possible that our markets will be adversely affected by these factors in the future.
If we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and
our results of operations and financial condition could be adversely affected. We can provide no assurance that we will be able to
14
continue to compete successfully in any of our markets. Our inability to continue to compete successfully in any of our markets
could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operations.
We cannot make any assurances that our growth or expansion strategies will be successful or not expose us to additional
risks.
We have expanded our business through selected investments in new geographic markets and by diversifying our products in
certain markets. Investments in land, lots and home inventories can expose us to risks of economic loss and inventory impairments if
housing conditions weaken or we are unsuccessful in implementing our growth strategies.
We may develop communities in which we build townhomes or other multi-family homes in addition to single-family homes,
sell acreage home sites as a part of the development, sell homes to investors or portfolio management companies, or develop
commercial properties that may be complementary to our communities. We might acquire another homebuilder or developer in order
to accomplish our growth or expansion strategies. We can give no assurance that we will be able to successfully identify, acquire or
implement these new strategies in the future. Accordingly, any such expansion, including through acquisition, could expose us to
significant risks, beyond those associated with operating our existing business, including understanding and complying with the
laws and regulations of new jurisdictions, diversion of our management’s attention from ongoing business concerns, difficulties in
integrating an acquired business, and incurrence of unanticipated liabilities and expenses and may materially adversely affect our
business, prospects, liquidity, financial condition and results of operations.
New and existing laws and regulations or other governmental actions may increase our expenses, limit the number of homes
that we can build or delay completion of our projects.
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning,
development, building design, construction and other matters which among other things, impose restrictive zoning and density
requirements, the result of which is to limit the number of homes that can be built within the boundaries of a particular area. We may
encounter issues with entitlement, not identify all entitlement requirements during the pre-development review of a project site, or
encounter zoning changes that impact our operations. Projects that are not entitled may be subjected to periodic delays, changes in
use, less intensive development or elimination of development in certain specific areas due to government regulations. We may also
be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or
zoning changes. Such moratoriums generally relate to insufficient water supplies, sewage facilities, delays in utility hook-ups, or
inadequate road capacity within specific market areas or subdivisions. Local governments also have broad discretion regarding the
imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development
entitlements or approvals may still require a variety of other governmental approvals and permits during the development process
and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or
prevent their development. As a result of any of these statutes, ordinances, rules or regulations, our home sales could be delayed,
could decline and/or our costs could increase, which could have a material adverse effect on our business, prospects, liquidity,
financial condition and results of operations.
We are subject to environmental laws and regulations, which may increase our costs, result in liabilities, limit the areas in
which we can build homes and delay completion of our projects.
We are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations concerning the
environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental
requirements which apply to any given site vary according to multiple factors, including the site’s location, its environmental
conditions, the current and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and
conditions at nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of
project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and
other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or in
areas contaminated by others before we commence development. We are also subject to third-party challenges, such as by
environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals
for our projects and operations. Sometimes regulators from different governmental agencies do not concur on development, remedial
standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project.
From time to time, the EPA and similar federal, state or local agencies review land developers’ and homebuilders’ compliance
with environmental laws and may levy fines and penalties or other enforcement actions for failure to strictly comply with applicable
environmental laws, including those applicable to control storm water discharges during construction, or impose additional
requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and
result in project delays. We expect that increasingly stringent requirements will be imposed on land developers and homebuilders in
the future. We cannot assure you that environmental, health and safety laws will not change or become more stringent in the future
in a manner that could have a material adverse effect on our business.
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Environmental regulations can also have an adverse impact on the availability and price of certain raw materials, such as
lumber.
There is a variety of new legislation being enacted, or considered for enactment at the federal, state and local level relating to
energy and climate change. This legislation relates to items such as carbon dioxide emissions control and building codes that impose
energy efficiency standards. New building code requirements that impose stricter energy efficiency standards could significantly
increase our cost to construct homes. As climate change concerns continue to grow, legislation and regulations of this nature are
expected to continue and become costlier to comply with. Similarly, energy-related initiatives affect a wide variety of companies
throughout the United States and because our operations are heavily dependent on significant amounts of raw materials, such as
lumber, steel, and concrete, they could have an indirect adverse impact on our operations and profitability to the extent the
manufacturers and suppliers of our materials are burdened with expensive cap and trade or similar energy related regulations.
Ownership, leasing or occupation of land and the use of hazardous materials carries potential environmental risks and
liabilities.
We are subject to a variety of local, state and federal statutes, rules and regulations concerning easements, land use and the
protection of health and the environment, including those governing discharge of pollutants to soil, water and air, including asbestos,
the handling of hazardous materials and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation
or remediation of man-made or natural hazardous or toxic substances located on, under or in a property currently or formerly owned,
leased or occupied by us, whether or not we caused or knew of the pollution.
The particular impact and requirements of environmental laws that apply to any given community vary greatly according to the
site, its environmental conditions and the present and former uses of the site. We expect that increasingly stringent requirements may
be imposed on land developers and homebuilders in the future. Environmental laws may result in delays, cause us to implement time
consuming and expensive compliance programs and prohibit or severely restrict development in certain environmentally sensitive
regions or areas, such as wetlands. Concerns could arise due to post-acquisition changes in laws or agency policies, or the
interpretation thereof.
Furthermore, we could incur substantial costs, including cleanup costs, fines, penalties and other sanctions and damages from
third-party claims for property damage or personal injury, as a result of our failure to comply with, or liabilities under, applicable
environmental laws and regulations. In addition, we are subject to third-party challenges, such as by environmental groups or
neighborhood associations, under environmental laws and regulations to the permits and other approvals required for our projects
and operations. These matters could adversely affect our business, prospects, liquidity, financial condition and results of operations.
As a homebuilding and land development business with a wide variety of historic ownership, development, homebuilding and
construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials,
including building materials or fixtures known or suspected to be hazardous or to contain hazardous materials or due to use of
building materials or fixtures which are associated with mold. Any such claims may adversely affect our business, prospects,
financial condition and results of operations. Insurance coverage for such claims may be limited or nonexistent.
Difficulties with appraisal valuations in relation to the proposed sales price of our homes could force us to reduce the price of
our homes for sale.
Each of our home sales may require an appraisal of the home value before closing. These appraisals are professional
judgments of the market value of the property and are based on a variety of market factors. If our internal valuations of the market
and pricing do not line up with the appraisal valuations and appraisals are not at or near the agreed upon sales price, we may be
forced to reduce the sales price of the home to complete the sale. These appraisal issues could have a material adverse effect on our
business and results of operations.
Because of the seasonal nature of our business, our quarterly operating results fluctuate.
As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality,”
we have historically experienced, and in the future expect to continue to experience, variability in our results on a quarterly and
monthly basis. We close more homes in our second, third and fourth quarters. Thus, our revenue may fluctuate on a quarterly basis
and we may have higher capital requirements in our second, third and fourth quarters. Accordingly, there is a risk that we will invest
significant amounts of capital in the acquisition and development of land and construction of homes that we do not sell at anticipated
pricing levels or within anticipated time frames. If, due to market conditions, construction delays or other causes, we do not
complete home sales at anticipated pricing levels or within anticipated time frames, our business, prospects, liquidity, financial
condition and results of operations would be adversely affected. We expect this seasonal pattern to continue over the long term but
we can make no assurances as to the degree to which our historical seasonal patterns will occur in the future.
Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for
housing, all of which could materially and adversely affect us.
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As a homebuilder and land developer, we are subject to the risks associated with numerous weather-related and geologic
events. These weather-related and geologic events include but are not limited to hurricanes, tornadoes, droughts, floods, brushfires,
wildfires, prolonged periods of precipitation, landslides, soil subsidence and earthquakes and other natural disasters. The occurrence
of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer
demand for housing, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and
profitability. In addition to directly damaging our land or projects, many of these natural events could damage roads and highways
providing access to those assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market
homes or sell land in those areas and possibly increasing the costs of homebuilding completion.
There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with
hurricanes, landslides, prolonged periods of precipitation, earthquakes and other weather-related and geologic events may not be
insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could
materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets
should experience a decline.
Our business strategy is focused on the acquisition of suitable land and the design, construction and sale of primarily single-
family homes in residential subdivisions, including planned communities, in Texas, Arizona, Florida, Georgia, New Mexico,
Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma and Oregon as well as our expansion
states of Alabama, California, Nevada, Virginia, and West Virginia. Because our operations are currently concentrated in these areas,
a prolonged economic downturn in the future in one or more of these areas or a particular industry that is fundamental to one of
these areas, particularly within Texas or a specific geographical region, could have a material adverse effect on our business,
prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other
homebuilders with more diversified operations. To the extent the oil and gas industries, which can be very volatile, are negatively
impacted by declining commodity prices, climate change, legislation or other factors, a result could be a reduction in employment,
or other negative economic consequences, which in turn could adversely impact our home sales and activities in Texas and certain of
our other markets.
Moreover, certain insurance companies doing business in Florida and Texas have restricted, curtailed or suspended the
issuance of homeowners’ insurance policies on single-family homes. This has both reduced the availability of hurricane and other
types of natural disaster insurance in Florida and Texas, in general, and increased the cost of such insurance to prospective
purchasers of homes in Florida and Texas. Mortgage financing for a new home is conditioned, among other things, on the
availability of adequate homeowners’ insurance. There can be no assurance that homeowners’ insurance will be available or
affordable to prospective purchasers of our homes offered for sale in the Florida and Texas markets. Long-term restrictions on, or
unavailability of, homeowners’ insurance in the Florida and Texas markets could have an adverse effect on the homebuilding
industry in that market in general, and on our business within that market in particular. Additionally, the availability of permits for
new homes in new and existing developments has been adversely affected by the significantly limited capacity of the schools, roads,
and other infrastructure in that market.
If adverse conditions in these markets develop in the future, it could have a material adverse effect on our business, prospects,
liquidity, financial condition and results of operations. Furthermore, if buyer demand for new homes in these markets decreases,
home prices could decline, which would have a material adverse effect on our business.
Difficulty in obtaining sufficient capital could result in an inability to acquire land for our developments or increased costs
and delays in the completion of development projects, increase home construction costs or delay home construction entirely.
The homebuilding and land development industry is capital-intensive and requires significant up-front expenditures to acquire
land parcels and begin development. In addition, if housing markets are not favorable or permitting or development takes longer
than anticipated, we may be required to hold our investments in land for extended periods of time. If internally generated funds are
not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including
additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and
construction financing, may be constrained regionally or nationally, and the lending community may require increased amounts of
equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. Since the
global recession in 2008, credit and capital markets have, from time to time, experienced unusual volatility. If we are required to
seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such
financing. If we are not successful in obtaining sufficient funding for our planned capital and other expenditures or if we do not
properly allocate our funding, we may be unable to acquire additional land for development and/or to construct new housing.
Additionally, if we cannot obtain additional financing to fund the purchase of land under our purchase contracts, we may incur
contractual penalties, fees and increased expenses from the write-off of due diligence and pre-acquisition costs. Any difficulty in
obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in
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cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity,
financial condition and results of operations.
Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes
and, as a result, could have a material adverse effect on us.
Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of
our control, including changes in short-term and long-term interest rates; employment levels and job and personal income growth;
housing demand from population growth, household formation and other demographic changes, among other factors; availability
and pricing of mortgage financing for homebuyers; consumer confidence generally and the confidence of potential homebuyers in
particular; financial system and credit market stability; private party and government mortgage loan programs (including changes in
FHA, USDA, VA, Fannie Mae and Freddie Mac conforming mortgage loan limits, credit risk/mortgage loan insurance premiums
and/or other fees, down payment requirements and underwriting standards), and federal and state regulation, oversight and legal
action regarding lending, appraisal, foreclosure and short sale practices; federal and state personal income tax rates and provisions,
including provisions for the deduction of mortgage loan interest payments, real estate taxes and other expenses; supply of and prices
for available new or resale homes (including lender-owned homes) and other housing alternatives, such as apartments, single-family
rentals and other rental housing; homebuyer interest in our current or new product designs and new home community locations;
general consumer interest in purchasing a home compared to choosing other housing alternatives; interest of financial institutions or
other businesses in purchasing wholesale homes; and real estate taxes. Adverse changes in these conditions may affect our business
nationally or may be more prevalent or concentrated in particular submarkets in which we operate. Inclement weather, natural
disasters (such as earthquakes, hurricanes, tornadoes, floods, prolonged periods of precipitation, droughts and fires), other calamities
and other environmental conditions can delay the delivery of our homes and/or increase our costs. Civil unrest or acts of terrorism
can also have a negative effect on our business. If the homebuilding industry experiences another significant or sustained downturn,
it would materially adversely affect our business and results of operations in future years.
The potential difficulties described above can cause demand and prices for our homes to fall or cause us to take longer and
incur more costs to develop the land and build our homes. We may not be able to recover these increased costs by raising prices
because of market conditions. The potential difficulties could also lead some homebuyers to cancel or refuse to honor their home
purchase contracts altogether.
Inflation could adversely affect our business and financial results.
Inflation could adversely affect our business and financial results by increasing the costs of land, raw materials and labor
needed to operate our business. If our markets have an oversupply of homes relative to demand, we may be unable to offset any such
increases in costs with corresponding higher sales prices for our homes. Inflation may also accompany higher interest rates, which
could adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we
are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore,
if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise
our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.
Interest rate changes may adversely affect us.
We currently do not hedge against interest rate fluctuations. We may obtain in the future one or more forms of interest rate
protection in the form of swap agreements, interest rate cap contracts or similar agreements to hedge against the possible negative
effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately relieve the adverse effects of
interest rate increases or that counterparties under these agreements will honor their obligations thereunder. In addition, we may be
subject to risks of default by hedging counterparties. Adverse economic conditions could also cause the terms on which we borrow
to be unfavorable. We could be required to liquidate one or more of our assets at times which may not permit us to receive an
attractive return on our assets in order to meet our debt service obligations.
We are subject to warranty and liability claims arising in the ordinary course of business that can be significant.
As a homebuilder and developer, we are subject to construction defect, product liability and home and other warranty claims,
including moisture intrusion and related claims, arising in the ordinary course of business. These claims are common to the
homebuilding industry and can be costly. There can be no assurance that any developments we undertake will be free from defects
once completed and any defects attributable to us may lead to significant contractual or other liabilities. We maintain, and require
our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’
compensation insurance and generally seek to require our subcontractors to indemnify us for liabilities arising from their work.
While these insurance policies, subject to deductibles and other coverage limits, and indemnities protect us against a portion of our
risk of loss from claims related to our land development and homebuilding activities, we cannot provide assurance that these
insurance policies and indemnities will be adequate to address all our home and other warranty, product liability and construction
defect claims in the future, or that any potential inadequacies will not have an adverse effect on our business, financial condition or
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results of operations. Additionally, the coverage offered by and the availability of general liability insurance for completed
operations and construction defects are currently limited and costly. We cannot provide assurance that coverage will not be further
restricted, increasing our risks and financial exposure to claims, and/or become costlier.
We may suffer uninsured losses or suffer material losses in excess of insurance limits.
We could suffer physical damage to property and liabilities resulting in losses that may not be fully recoverable by insurance.
Insurance against certain types of risks, such as terrorism, earthquakes or floods or personal injury claims, may be unavailable,
available in amounts that are less than the full market value or replacement cost of investment or underlying assets or subject to a
large deductible or self-insurance retention amount. In addition, there can be no assurance certain types of risks which are currently
insurable will continue to be insurable on an economically feasible basis. Should an uninsured loss or a loss in excess of insured
limits occur or be subject to deductibles or self-insurance retention, we could sustain financial loss or lose capital invested in the
affected property as well as anticipated future income from that property. Furthermore, we could be liable to repair damage or meet
liabilities caused by risks that are uninsured or subject to deductibles. We may be liable for any debt or other financial obligations
related to affected property. Material losses or liabilities in excess of insurance proceeds may occur in the future.
If the market value of our land inventory decreases, our results of operations could be adversely affected by impairments
and write-downs.
The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into new
markets and for replacement of land inventory and expansion within our current markets. There is an inherent risk that the value of
the land owned by us may decline after purchase. The valuation of property is inherently subjective and based on the individual
characteristics of each property. We may have acquired options on or bought and developed land at a cost we will not be able to
recover fully or on which we cannot build and sell homes profitably. In addition, our deposits for lots controlled under purchase,
option or similar contracts may be put at risk.
Factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation
and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial
condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations are subject to uncertainty.
Moreover, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality.
If housing demand fails to meet our expectations when we acquired our inventory, our profitability may be adversely affected
and we may not be able to recover our costs when we build and sell houses. We regularly review the value of our land holdings and
continue to review our holdings on a periodic basis. Material write-downs and impairments in the value of our inventory may be
required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial
condition.
Fluctuations in real estate values may require us to write-down the book value of our real estate assets.
The homebuilding and land development industries are subject to significant variability and fluctuations in real estate values.
As a result, we may be required to write-down the book value of our real estate assets in accordance with U.S. GAAP, and some of
those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business,
prospects, liquidity, financial condition and results of operations.
Acts of war or terrorism may seriously harm our business.
Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power or acts of terrorism may
cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building
materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of
construction, result in uninsured losses, affect job growth and consumer confidence, or cause economic changes that we cannot
anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial
condition and results of operations.
A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational
damage.
Building sites are inherently dangerous, and operating in the homebuilding and land development industry poses certain
inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and
safety performance is critical to the success of all areas of our business.
Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements
or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential
liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our
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reputation and our relationships with relevant regulatory agencies, governmental authorities and local communities, which in turn
could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We may become subject to litigation, which could materially and adversely affect us.
In the future, we may become subject to litigation or enforcement actions, including claims relating to our operations,
securities offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs
and potentially significant judgments against us, some of which are not, or cannot be, insured against. We cannot be certain of the
ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having
to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured
levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the
resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and
adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract
directors and officers.
Poor relations with the residents of our communities could negatively impact sales, which could cause our revenue or results
of operations to decline.
Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the operation
or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the
affected residents and subsequent actions by these residents could adversely affect our sales or our reputation. In addition, we could
be required to make material expenditures related to the settlement of such issues or disputes or to modify our community
development plans, which could adversely affect our results of operations.
An information systems interruption or breach in security could adversely affect us.
We rely on accounting, financial and operational management information systems to conduct our operations. Any cyber
incident or attack or other disruption or failure in these information systems could adversely affect our ability to conduct our
business and could have a material adverse effect on our business, liquidity, financial condition and results of operations.
Furthermore, any failure or security breach of information systems or data could result in a violation of applicable privacy and other
laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which
could harm our business and could have a material adverse effect on our business, prospects, liquidity, financial condition and
results of operations.
Our business is subject to complex and evolving U.S. laws and regulations regarding privacy and data protection.
The regulatory environment surrounding data privacy and protection is constantly evolving and can be subject to significant
change. New laws and regulations governing data privacy and the unauthorized disclosure of confidential information, including
recent California legislation, pose increasingly complex compliance challenges and potentially elevate our costs. Any failure, or
perceived failure, by us to comply with applicable data protection laws could result in proceedings or actions against us by
governmental entities or others, subject us to significant fines, penalties, judgments and negative publicity, require us to change our
business practices, increase the costs and complexity of compliance, and adversely affect our business. As noted above, we are also
subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws. Additionally, if we
acquire a company that has violated or is not in compliance with applicable data protection laws, we may incur significant liabilities
and penalties as a result.
Termination of the employment agreement with our Chief Executive Officer could be costly and prevent a change in control
of our company.
The employment agreement with our Chief Executive Officer, Eric Lipar, provides that if his employment with us terminates
under certain circumstances, we may be required to pay him a significant amount of severance compensation, thereby making it
costly to terminate his employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our
company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our
stockholders, which could adversely affect the market price of our common stock.
Any future government shutdowns or slowdowns may materially adversely affect our business or financial results.
Any future government shutdowns or slowdowns may materially adversely affect our business or financial results. We can
make no assurances that potential closings affected by any such shutdown or slowdown will occur after the shutdown or slowdown
has ended.
Negative publicity could adversely affect our reputation as well as our business, financial results and stock price.
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Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or
prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at
which negative publicity can be disseminated has increased dramatically with the capabilities of electronic communication,
including social media outlets, websites, blogs, or newsletters. Our success in maintaining, extending and expanding our brand
image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary from
any media outlet could damage our reputation and reduce the demand for our homes, which would adversely affect our business.
Risks Related to Our Organization and Structure
We depend on key management personnel and other experienced employees.
Our success depends to a significant degree upon the contributions of certain key management personnel including, but not
limited to, Eric Lipar, our Chief Executive Officer and Chairman of our board of directors. Although we have entered into an
employment agreement with Mr. Lipar, there is no guarantee that Mr. Lipar will remain employed by us. If any of our key
management personnel were to cease employment with us, our operating results could suffer. Our ability to retain our key
management personnel or to attract suitable replacements should any members of our management team leave is dependent on the
competitive nature of the employment market. The loss of services from key management personnel or a limitation in their
availability could materially and adversely impact our business, prospects, liquidity, financial condition and results of operations.
Further, such a loss could be negatively perceived in the capital markets. We have not obtained key man life insurance that would
provide us with proceeds in the event of death or disability of any of our key management personnel.
Experienced employees in the homebuilding, land acquisition, development, and construction industries are fundamental to
our ability to generate, obtain and manage opportunities. In particular, local knowledge and relationships are critical to our ability to
source attractive land acquisition opportunities. Experienced employees working in the homebuilding, development and construction
industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not
lost when they leave the business through retirement, redundancy or otherwise may adversely affect the standards of our service and
may have an adverse impact on our business, prospects, liquidity, financial condition and results of operations. The loss of any of
our key personnel could adversely impact our business, prospects, financial condition and results of operations.
We may change our operational policies, investment guidelines and our business and growth strategies without stockholder
consent, which may subject us to different and more significant risks in the future.
Our board of directors will determine our operational policies, investment guidelines and our business and growth strategies.
Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies
without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments or
pursuing different business or growth strategies than those contemplated in this Annual Report on the Form 10-K. Under any of
these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material
adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.
Accounting rules and interpretations for certain aspects of our financial reporting are highly complex and involve significant
assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial
statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as
asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or
revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a
material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.
We expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our
homes. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise be recourse. As of
December 31, 2018, we had a $500.0 million revolving credit facility (the “Credit Facility” or “Credit Agreement”) to finance our
construction and development activities. As of December 31, 2018, we had outstanding borrowings of $293.8 million under the
Credit Facility and we could borrow an additional $26.3 million under the Credit Facility. As of December 31, 2018, borrowings
under the Credit Facility bore interest at a rate of LIBOR plus 2.90% per annum. In addition, as of December 31, 2018, we had
outstanding $70.0 million aggregate principal amount of our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) and
$300.0 million aggregate principal amount of our 6.875% Senior Notes due 2026 (“the Senior Notes”).
Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions
regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, if any, the
estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover
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the expected debt service. As a means of sustaining our long-term financial health and limiting our exposure to unforeseen
dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized. However, our certificate of
incorporation does not contain a limitation on the amount of indebtedness we may incur and our board of directors may change our
target debt levels at any time without the approval of our stockholders.
Incurring substantial indebtedness could subject us to many risks that, if realized, would adversely affect us, including the risk
that:
• our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt,
which is likely to result in acceleration of such indebtedness;
• our indebtedness may increase our vulnerability to adverse economic and industry conditions with no assurance that
our profitability will increase with higher financing cost;
• we may be required to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby
reducing funds available for operations and capital expenditures, future investment opportunities or other purposes;
and
•
the terms of any refinancing may not be as favorable as the terms of the indebtedness being refinanced.
If we do not have sufficient funds to repay our indebtedness at maturity, it may be necessary to refinance the indebtedness
through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors
result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flows and results of
operations. If we are unable to refinance our indebtedness on acceptable terms, we may be forced to dispose of our assets on
disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk
losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Unsecured debt agreements may
contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to
declare a default if we are in default under other indebtedness in some circumstances. Defaults under the Credit Facility and our
other debt agreements, if any, could have a material adverse effect on our business, prospects, liquidity, financial condition and
results of operations.
Access to financing sources may not be available on favorable terms, or at all, especially in light of current market
conditions, which could adversely affect our ability to maximize our returns.
Our access to additional third-party sources of financing will depend, in part, on:
• general market conditions;
the market’s perception of our growth potential;
•
• with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to
be acquired and/or developed;
• our current debt levels;
• our current and expected future earnings;
• our cash flow; and
•
the market price per share of our common stock.
Since the global recession in 2008, domestic financial markets have, from time to time, experienced unusual volatility,
uncertainty and a tightening of liquidity in both the high yield debt and equity capital markets. Credit spreads for major sources of
capital widened significantly during the U.S. credit crisis as investors demanded a higher risk premium. Given such possible
volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing
that is attractive to us or may increase collateral requirements or may charge us prohibitively high fees in order to obtain financing.
Consequently, our ability to access the credit market in order to attract financing on reasonable terms may be adversely affected.
Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional
financing on reasonable terms, if at all.
Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on
less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available
for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on
favorable terms at the desired times, or at all.
Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive
provisions.
Our current financing agreements contain, and the financing arrangements we enter into in the future likely will contain,
provisions that limit our ability to do certain things. In particular, the Credit Agreement requires us to maintain (i) a tangible net
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worth of not less than $400.0 million plus 75% of the net proceeds of all equity issuances plus 50% of the amount of our positive net
income in any fiscal quarter after December 31, 2017, (ii) a leverage ratio of not greater than 64.0%, (iii) liquidity of at least $50.0
million and (iv) a ratio of EBITDA to interest expense for the most recent four quarters of at least 2.50 to 1.00. The Credit
Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make
certain investments.
If we fail to meet or satisfy any of these provisions, we would be in default under the Credit Agreement and our lenders could
elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and
enforce their respective interests against existing collateral. A default also could limit significantly our financing alternatives, which
could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. In
addition, future indebtedness may contain financial covenants limiting our ability to, for example, incur additional indebtedness,
make certain investments, reduce liquidity below certain levels and pay dividends to our stockholders, and otherwise affect our
operating policies. If we default on one or more of our debt agreements, it could have a material adverse effect on our business,
prospects, liquidity, financial condition and results of operations.
In addition, upon the occurrence of a “Fundamental Change” (as defined in the indenture governing the Convertible Notes),
subject to certain conditions, the Convertible Notes include terms that allow a holder of the Convertible Notes to require to purchase
all or a portion of such holder’s Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible
Notes to be purchased, plus any then accrued, but unpaid, interest.
Interest expense on debt we incur may limit our cash available to fund our growth strategies.
As of December 31, 2018, we had total outstanding borrowings of $293.8 million under the Credit Facility, and we could
borrow an additional $26.3 million under the Credit Facility. As of December 31, 2018, borrowings under the Credit Facility bore
interest at a rate of LIBOR plus 2.90% per annum. In addition, as of December 31, 2018, we had outstanding $70.0 million
aggregate principal amount of the Convertible Notes and $300.0 million aggregate principal amount of the Senior Notes. As of
December 31, 2018, the Convertible Notes and the Senior Notes had a fixed rate of 4.25% and 6.875%, respectively. If our
operations do not generate sufficient cash from operations at levels currently anticipated, we may seek additional capital in the form
of debt financing. Our current indebtedness includes, and any additional indebtedness we subsequently incur may have, a floating
rate of interest. Higher interest rates could increase debt service requirements on our current floating rate indebtedness and on any
floating rate indebtedness we subsequently incur, and could reduce funds available for operations, future business opportunities or
other purposes. If we need to repay existing indebtedness during periods of rising interest rates, we could be required to refinance
our then-existing indebtedness on unfavorable terms or liquidate one or more of our assets to repay such indebtedness at times
which may not permit realization of the maximum return on such assets and could result in a loss. The occurrence of either such
event or both could materially and adversely affect our cash flows and results of operations.
We are a holding company, and we are accordingly dependent upon distributions from our subsidiaries to service our debt
and pay dividends, if any, taxes and other expenses.
We are a holding company and will have no material assets other than our ownership of membership interests or limited
partnership interests in our subsidiaries. We have no independent means of generating revenue. We intend to cause our subsidiaries
to make distributions to their members or partners in an amount sufficient to cover all applicable taxes payable and dividends, if any,
declared by us. Our ability to service our debt depends on the results of operations of our subsidiaries and upon the ability of such
subsidiaries to provide us with cash, whether in the form of dividends, loans or other distributions, to pay amounts due on our
obligations. Future financing arrangements may contain negative covenants, limiting the ability of our subsidiaries to declare or pay
dividends or make distributions. Our subsidiaries are separate and distinct legal entities; to the extent that we need funds, and our
subsidiaries are restricted from making such dividends or distributions under applicable law or regulations, or are otherwise unable
to provide such funds (for example, due to restrictions in future financing arrangements that limit the ability of our operating
subsidiaries to distribute funds), our liquidity and financial condition could be materially harmed.
The obligations associated with being a public company will require significant resources and management attention.
As a public company with listed equity securities, we must comply with laws, regulations and requirements, including the
requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), certain corporate governance provisions of
the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), related regulations of the SEC and requirements of the NASDAQ
Global Select Market. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and
financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls
and procedures for financial reporting.
Section 404 of the Sarbanes-Oxley Act (“Section 404”) requires our management and independent auditors to report annually
on the effectiveness of our internal control over financial reporting. As of December 31, 2017, we are no longer an “emerging
growth company,” and, therefore, we are no longer subject to emerging growth company exemptions from various reporting
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requirements applicable to other public companies, including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404. As of December 31, 2017, when we became a “large accelerated filer” (as defined in the
relevant SEC rules), we are required to include an opinion from our independent auditors on the effectiveness of our internal control
over financial reporting.
These reporting and other obligations place significant demands on our management, administrative, operational and
accounting resources and cause us to incur significant expenses. We may need to upgrade our systems or create new systems,
implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit
function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective
fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be
impaired. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our
business, prospects, liquidity, financial condition and results of operations.
If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our
financial results or prevent fraud. As a result, investors could lose confidence in our financial results, which could materially
and adversely affect us.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in
the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in
maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business,
our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls
remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote
significant time and incur significant expense to remediate any such material weakness or significant deficiency and management
may not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material
weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us
to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our
reported financial information, all of which could materially and adversely affect us.
Any joint venture investments that we make could be adversely affected by our lack of sole decision making authority, our
reliance on the financial condition of our joint venture partners and disputes between us and our joint venture partners.
We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-
controlling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development. In this event,
we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our
investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain
circumstances, involve risks not present were a third-party not involved, including the possibility that our joint venture partners
might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay
necessary decisions. Our joint venture partners may have economic or other business interests or goals which are inconsistent with
our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may
also have the potential risk of impasses on decisions, such as a sale, because neither we nor our joint venture partners would have
full control over the land acquisition or development. Disputes between us and our joint venture partners may result in litigation or
arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our
business. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.
Cautionary Statement about Forward-Looking Statements
From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events
or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from
those expressed or implied by these statements. You can generally identify our forward-looking statements by the words
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,”
“potential,” “predict,” “projection,” “should,” “will” or other similar words.
We have based our forward-looking statements on our management’s beliefs and assumptions based on information available
to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and
projections about future events may, and often do, vary materially from actual results. Therefore, we cannot assure you that actual
results will not differ materially from those expressed or implied by our forward-looking statements.
The following are some of the factors that could cause actual results to differ materially from those expressed or implied in
forward-looking statements:
•
adverse economic changes either nationally or in the markets in which we operate, including, among other things,
increases in unemployment, volatility of mortgage interest rates and inflation and decreases in housing prices;
24
a slowdown in the homebuilding industry;
•
• volatility and uncertainty in the credit markets and broader financial markets;
•
the cyclical and seasonal nature of our business;
• our future operating results and financial condition;
• our business operations;
•
•
changes in our business and investment strategy;
the success of our operations in recently opened new markets and our ability to expand into additional new
markets;
• our ability to successfully extend our business model to building homes with higher price points, developing larger
communities and producing and selling multi-unit products, townhouses, wholesale products, and acreage home
sites;
• our ability to develop our projects successfully or within expected timeframes;
• our ability to identify potential acquisition targets and close such acquisitions;
• our ability to successfully integrate any acquisitions, including the Wynn Homes acquisition, with our existing
operations;
availability of land to acquire and our ability to acquire such land on favorable terms or at all;
•
•
availability, terms and deployment of capital;
• decisions of the lender group of the Credit Facility;
•
• decline in the market value of our land portfolio;
• disruption in the terms or availability of mortgage financing or increase in the number of foreclosures in our
the occurrence of the specific conversion events that enable early conversion of the Convertible Notes;
markets;
•
shortages of or increased prices for labor, land, or raw materials used in land development and housing
construction;
• delays in land development or home construction resulting from natural disasters, adverse weather conditions or
other events outside our control;
changes in, liabilities under, or the failure or inability to comply with, governmental laws and regulations;
the timing of receipt of regulatory approvals and the opening of projects;
the cost and availability of insurance and surety bonds;
increases in taxes or government fees;
the degree and nature of our competition;
• uninsured losses in excess of insurance limits;
•
•
•
•
•
• poor relations with the residents of our projects;
•
•
•
• our ability to retain our key personnel;
• our leverage and future debt service obligations;
•
the impact on our business of any future government shutdown;
existing and future litigation, arbitration or other claims;
availability of qualified personnel and third-party contractors and subcontractors;
information system interruptions or breaches in security;
• other risks and uncertainties inherent in our business; and
• other factors we discuss under the section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date
of the particular statement. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking
statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on
which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Annual Report on Form 10-K.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
25
ITEM 2.
PROPERTIES
We lease approximately 22,000 square feet in The Woodlands, Texas for our corporate headquarters; this lease expires in 2028.
In addition, to adequately meet the needs of our operations, we lease offices in Arizona, Florida, Georgia, Washington, California,
West Virginia, and North Carolina. See “Business—Land Acquisition Policies and Development” for a summary of the other
property which we owned or controlled as of December 31, 2018.
ITEM 3.
LEGAL PROCEEDINGS
In the ordinary course of doing business, we are subject to claims or proceedings from time to time relating to the purchase,
development, and sale of real estate and homes and other aspects of our homebuilding operations. Management believes that these
claims include usual obligations incurred by real estate developers and residential homebuilders in the normal course of business. In
the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations
or cash flows.
We have provided unsecured environmental indemnities to certain lenders and other contractual counterparties. In each case,
we have performed due diligence on the potential environmental risks including obtaining an independent environmental review
from outside environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to
environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, we
may have recourse against other previous owners. In the ordinary course of doing business, we are subject to regulatory proceedings
from time to time related to environmental and other matters. In the opinion of management, these matters will not have a material
effect on our consolidated financial position, results of operations, or cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
26
PART II
ITEM 5.
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
Our common stock is listed on the NASDAQ Stock Market (NASDAQ) under the symbol “LGIH.” As of February 22, 2019,
the closing price of our common stock on the NASDAQ was $61.96, and we had 26 stockholders of record, including Cede & Co. as
nominee of The Depository Trust Company.
Shelf Registration Statement and ATM Offering Programs
On August 24, 2018, we and certain of our subsidiaries filed an automatic shelf registration statement on Form S-3
(Registration No. 333-227012), registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt
securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these
securities. Under our prior shelf registration statement, we established an at the market common stock offering program in
September 2015 (the “2015 ATM Program”) and September 2016 (the “2016 ATM Program”) with Deutsche Bank Securities Inc.,
J.P. Morgan Securities LLC, JMP Securities LLC and Builder Advisor Group, LLC, as sales agents to sell up to $30.0 million and
$25.0 million, respectively, of our common stock. We issued and sold 743,554 shares of our common stock under the 2015 ATM
Program, and received net proceeds of approximately $19.8 million, during 2016. We issued and sold 354,620 and 250,000 shares of
our common stock under the 2016 ATM Program, and received net proceeds of approximately $15.5 million and $9.0 million,
during 2017 and 2016, respectively.
Dividends
We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and,
therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital
requirements, restrictions contained in any of our financing arrangements and such other factors as our board of directors may deem
relevant. We have not previously declared or paid any cash dividends on our common stock.
Stock Performance Graph
This chart compares the cumulative total return on our common stock with that of the Standard & Poor’s 500 Companies Stock
Index (the “S&P 500 Index”) and the Standard & Poor’s Homebuilders Select Industry Index (the “S&P Homebuilders Index”). The
chart assumes $100.00 was invested at the close of market on December 31, 2013 and assumes the reinvestment of any dividends.
The stock price performance on the following graph is not necessarily indicative of future stock price performance.
27
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ITEM 6.
SELECTED FINANCIAL DATA
The selected historical balance sheet and statement of operations information presented as of December 31, 2018, 2017, 2016,
2015 and 2014 and for the years then ended have been derived from our audited historical consolidated financial statements. The
following table should be read together with, and is qualified in its entirety by reference to, our historical consolidated financial
statements and the accompanying notes included elsewhere in this Annual Report. The table should also be read together with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The following table presents our selected historical financial and operating data as of the dates and for the periods indicated.
Year Ended December 31,
2014
2016
2018
(dollars in thousands, except per share data and average home sales price)
2015
2017
Statement of Operations Data:
Revenues:
Home sales revenues
Expenses:
Cost of sales
Selling expenses
General and administrative
Operating income
Loss on extinguishment of debt
Other income, net
Net income before income taxes
Income tax provision
Net income
Basic earnings per share (1)
Diluted earnings per share (1)
Other Financial and Operating Data:
Active communities at end of year
Home closings
Average sales price of homes closed
Gross margin (2)
Gross margin % (3)
Adjusted gross margin (4)
Adjusted gross margin % (3)(4)
EBITDA (5)
EBITDA margin % (3)(5)
Adjusted EBITDA (5)
Adjusted EBITDA margin % (3)(5)
$ 1,504,400
$ 1,257,960
$
838,320
$
630,236
$
383,268
1,124,484
109,460
70,345
200,111
3,599
(2,586)
199,098
43,812
155,286
6.89
6.24
88
6,512
231,020
379,916
$
$
$
$
$
937,540
94,957
55,662
169,801
—
(1,601 )
171,402
58,096
113,306
5.24
4.73
78
5,845
215,220
320,420
$
$
$
$
$
616,707
66,984
43,158
111,471
—
(2,201)
113,672
38,641
75,031
3.61
3.41
63
4,163
201,374
221,613
$
$
$
$
$
463,304
52,998
34,260
79,674
—
(606)
80,280
27,450
52,830
2.65
2.44
52
3,404
185,146
166,932
$
$
$
$
$
280,481
36,672
23,744
42,371
—
(708 )
43,079
14,868
28,211
1.37
1.33
39
2,356
162,677
102,787
25.3%
25.5 %
26.4%
26.5%
26.8 %
405,635
$
338,066
$
232,778
$
175,120
$
108,111
27.0%
26.9 %
27.8%
27.8%
28.2 %
224,120
$
189,593
$
125,441
$
87,221
$
45,445
14.9%
15.1 %
15.0%
13.8%
11.9 %
226,541
$
188,238
$
123,725
$
88,746
$
48,357
15.1%
15.0 %
14.8%
14.1%
12.6 %
$
$
$
$
$
$
$
$
29
Balance Sheet Data:
Cash and cash equivalents
Real estate inventory
Goodwill and intangibles
Total assets
Notes payable
Total liabilities
Total equity
December 31,
2018
2017
2016
2015
2014
(in thousands)
67,571 $
46,624 $
$
918,933 $
$ 1,228,256 $
12,018 $
12,018 $
$
$ 1,395,473 $ 1,079,892 $
475,195 $
$
590,046 $
$
489,846 $
$
653,734 $
739,530 $
655,943 $
49,518 $
717,681 $
12,018 $
814,514 $
400,483 $
459,313 $
355,201 $
37,568 $
531,228 $
12,234 $
618,702 $
304,561 $
371,313 $
247,389 $
31,370
367,908
12,481
434,289
212,261
251,790
182,499
(1) Earnings per share is presented for the years ended December 31, 2018, 2017, 2016, 2015 and 2014. See Note 10 “Equity” to our
consolidated financial statements included in Part II, Item 8 of this Annual Report of this Form 10-K for calculation of earnings per share.
(2) Gross margin is home sales revenues less cost of sales.
(3) Calculated as a percentage of home sales revenues.
(4) Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating
performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of
purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that
capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information
excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the
utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may
not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be
considered only as a supplement to gross margin information as a measure of our performance. Please see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Non-GAAP Measures” for a reconciliation of adjusted gross margin to gross
margin, which is the GAAP financial measure that our management believes to be most directly comparable.
(5) EBITDA and Adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating
operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization
and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income
taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other
income, net and (vii) adjustments resulting from the application of purchase accounting. Our management believes that the presentation of
EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both
investors and management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA
provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of
depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that these
measures are useful for comparing general operating performance from period to period. Other companies may define these measures
differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other
companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of
these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business.
EBITDA and Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a
measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future
results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool,
and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Please see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures—Adjusted EBITDA”
for reconciliations of EBITDA and adjusted EBITDA to net income, which is the GAAP financial measure that our management believes
to be most directly comparable.
30
ITEM 7.
OF OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,”
“our,” “us” or similar terms when used in a historical context refer to LGI Homes, Inc. and its subsidiaries.
Key Results
Key financial results as of and for the year ended December 31, 2018, as compared to the year ended December 31, 2017,
were as follows:
• Home sales revenues increased 19.6% to $1.5 billion from $1.3 billion.
• Homes closed increased 11.4% to 6,512 homes from 5,845 homes.
• Average sales price of our homes increased $15,800 to $231,020 from $215,220.
• Gross margin as a percentage of home sales revenues decreased to 25.3% from 25.5%.
• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 27.0% from 26.9%.
• Net income before income taxes increased 16.2% to $199.1 million from $171.4 million.
• Net income increased 37.1% to $155.3 million from $113.3 million.
• EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 14.9% from 15.1%.
• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 15.1% from 15.0%.
• Active communities at the end of 2018 increased to 88 from 78.
• Total owned and controlled lots increased 29.5% to 51,442 lots at December 31, 2018 from 39,709 lots at
December 31, 2017.
For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the
most directly comparable GAAP financial measures, please see “—Non-GAAP Measures.”
Recent Developments
During November 2018, we announced that our Board of Directors (the “Board”) authorized a stock repurchase program,
pursuant to which we may purchase up to $50.0 million of shares of our common stock through open market transactions, privately
negotiated transactions or otherwise in accordance with applicable laws. For the year ended December 31, 2018, we
repurchased 39,000 shares of our common stock for $1.5 million to be held as treasury stock.
During January 2019, the Board increased the authorized number of directors on the Board from six directors to seven
directors and appointed Laura M. Miller to fill the newly created directorship.
31
Results of Operations
The following table sets forth our results of operations for the periods indicated:
Statement of Income Data:
Home sales revenues
Expenses:
Cost of sales
Selling expenses
General and administrative
Operating income
Loss on extinguishment of debt
Other income, net
Net income before income taxes
Income tax provision
Net income
Basic earnings per share
Diluted earnings per share
Other Financial and Operating Data:
Active communities at end of year
Home closings
Average sales price of homes closed
Gross margin (1)
Gross margin % (2)
Adjusted gross margin (3)
Adjusted gross margin % (2)(3)
EBITDA (4)
EBITDA margin % (2)(4)
Adjusted EBITDA (4)
Adjusted EBITDA margin % (2)(4)
Year Ended December 31,
2018
2017
2016
(dollars in thousands, except per share data and average home sales price)
$
1,504,400
$
1,257,960
$
838,320
1,124,484
109,460
70,345
200,111
3,599
(2,586 )
199,098
43,812
155,286
6.89
6.24
88
6,512
231,020
379,916
$
$
$
$
$
25.3 %
405,635
$
27.0 %
224,120
$
14.9 %
226,541
$
15.1 %
$
$
$
$
$
$
$
$
937,540
94,957
55,662
169,801
—
(1,601 )
171,402
58,096
113,306
5.24
4.73
78
5,845
215,220
320,420
$
$
$
$
$
25.5 %
338,066
$
26.9 %
189,593
$
15.1 %
188,238
$
15.0 %
616,707
66,984
43,158
111,471
—
(2,201 )
113,672
38,641
75,031
3.61
3.41
63
4,163
201,374
221,613
26.4 %
232,778
27.8 %
125,441
15.0 %
123,725
14.8 %
(1) Gross margin is home sales revenues less cost of sales.
(2) Calculated as a percentage of home sales revenues.
(3) Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating
performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of
purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that
capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information
excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the
utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may
not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be
considered only as a supplement to gross margin information as a measure of our performance. Please see “—Non-GAAP Measures” for a
reconciliation of adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most
directly comparable.
(4) EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating
performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv)
capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes,
(iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other
income, net and (vii) adjustments resulting from the application of purchase accounting. Our management believes that the presentation of
EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both
investors and management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA
provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of
depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that these
32
measures are useful for comparing general operating performance from period to period. Other companies may define these measures
differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other
companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of
these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business.
EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a
measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future
results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool,
and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Please see
“—Non-GAAP Measures” for reconciliations of EBITDA and adjusted EBITDA to net income, which is the GAAP financial measure that
our management believes to be most directly comparable.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Homes Sales. Our home sales revenues, home closings, average sales price (ASP), and ending community count by reportable
segment for the years ended December 31, 2018 and 2017 were as follows (Revenues in thousands):
Central
Northwest
Southeast
Florida
West
Total
Central
Northwest
Southeast
Florida
West
Total
Community count
Central
Northwest
Southeast
Florida
West
Total community count
Year Ended December 31, 2018
Revenues
$
623,751
277,567
271,073
180,950
151,059
$ 1,504,400
Home
Closings
2,937 $
760
1,324
864
627
6,512 $
ASP
212,377
365,220
204,738
209,433
240,923
231,020
Average
Community
Count
Average
Monthly
Absorption
Rate
30.7
10.3
18.7
11.6
9.3
80.6
8.0
6.1
5.9
6.2
5.6
6.7
Year Ended December 31, 2017
Average
Community
Count
Average
Monthly
Absorption
Rate
Revenues
$
533,254
215,421
183,422
199,733
126,130
$ 1,257,960
Home
Closings
2,616 $
629
973
1,014
613
5,845 $
ASP
203,843
342,482
188,512
196,975
205,759
215,220
26.2
10.3
15.0
11.5
10.1
73.1
8.3
5.1
5.4
7.3
5.1
6.7
29
11
17
11
10
78
At December 31,
2018
2017
32
11
21
14
10
88
Home sales revenues for the year ended December 31, 2018 were $1,504.4 million, an increase of $246.4 million, or 19.6%,
from $1,258.0 million for the year ended December 31, 2017. The increase in home sales revenues is primarily due to a 11.4%
increase in homes closed and an increase in the average selling price per home during the year ended December 31, 2018 as
compared to the year ended December 31, 2017. We closed 6,512 homes during 2018, as compared to 5,845 homes closed during
2017. This increase in home closings was largely due to the increase in the number of active communities in 2018. The average
33
selling price per home closed during the year ended December 31, 2018 was $231,020, an increase of $15,800, or 7.3%, from the
average selling price per home of $215,220 for the year ended December 31, 2017. This increase in the average selling price per
home was primarily due to changes in product mix, higher price points in certain new markets and a favorable pricing environment.
We continued to diversify our operations outside of our Central division during 2018. We increased our home sales revenues
in our divisions other than our Central division by $155.9 million during the year ended December 31, 2018 as compared to the year
ended December 31, 2017 representing a 10.7% increase in the number of homes closed in these divisions during 2018 as compared
to 2017. Our active selling communities at December 31, 2018 increased to 88 from 78 at December 31, 2017. Seven of the ten
active selling communities added during 2018 were outside of our Central division, contributing to the further geographic
diversification of our business.
Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the year ended
December 31, 2018 to $1,124.5 million, an increase of $186.9 million, or 19.9%, from $937.5 million for the year ended
December 31, 2017. This increase is primarily due to a 11.4% increase in homes closed during 2018 as compared to 2017 and, to a
lesser degree, product mix. The increase in average cost of sales per home is primarily due to changes in construction costs
associated with product mix and lot costs. Gross margin for the year ended December 31, 2018 was $379.9 million, an increase of
$59.5 million, or 18.6%, from $320.4 million for the year ended December 31, 2017. Gross margin as a percentage of home sales
revenues was 25.3% for the year ended December 31, 2018 and 25.5% for the year ended December 31, 2017. This decrease in
gross margin as a percentage of home sales revenues is primarily due to a combination of higher construction costs and lot costs
partially offset by higher average home sales price for the year ended December 31, 2018 as compared to the year ended
December 31, 2017 and, to a lesser extent, to 466 wholesale home closings during 2018, compared to 201 wholesale home closings
during 2017.
Selling Expenses. Selling expenses for the year ended December 31, 2018 were $109.5 million, an increase of $14.5 million,
or 15.3%, from $95.0 million for the year ended December 31, 2017. Sales commissions increased to $57.3 million for the year
ended December 31, 2018 from $50.2 million during 2017 largely due to a 19.6% increase in home sales revenues during 2018 as
compared to 2017. Selling expenses as a percentage of home sales revenues were 7.3% and 7.5% for the years ended December 31,
2018 and 2017, respectively, and generally reflect operating leverage realized relating to advertising costs.
General and Administrative. General and administrative expenses for the year ended December 31, 2018 were $70.3 million,
an increase of $14.7 million, or 26.4%, from $55.7 million for the year ended December 31, 2017. The increase in the amount of
general and administrative expenses is primarily due to additional general and administrative compensation costs associated with an
increase of active communities and home closings during 2018 as compared to 2017. General and administrative expenses as a
percentage of home sales revenues were 4.7% and 4.4% for the years ended December 31, 2018 and 2017, respectively. The
increase in general and administrative expenses as a percentage of home sales revenues reflects additional costs realized from the
increase in community count and one-time acquisition related transaction expenses associated with the Wynn Homes acquisition
during the year ended December 31, 2018 as compared to the year ended December 31, 2017.
Loss on extinguishment of debt. Loss on extinguishment of debt for the year ended December 31, 2018 was $3.6 million,
due to debt issuance costs previously capitalized that were associated with the Credit Agreement. There was no loss on
extinguishment of debt for the year ended December 31, 2017.
Operating Income, Net Income before Income Taxes, and Net Income. Operating income for the year ended December 31,
2018 was $200.1 million, an increase of $30.3 million, or 17.9%, from $169.8 million for the year ended December 31, 2017. Net
income before income taxes for the year ended December 31, 2018 was $199.1 million, an increase of $27.7 million, or 16.2%, over
the year ended December 31, 2017. Our reportable segments contributed the following amounts and percentages of net income
before income taxes during 2018: Central - $104.6 million or 52.5%; Northwest - $40.9 million or 20.5%; Florida - $21.3 million or
10.7%; Southeast - $29.1 million or 14.6%; and West - $13.6 million or 6.8%. Net income for the year ended December 31, 2018
was $155.3 million, an increase of $42.0 million, or 37.1%, from $113.3 million for the year ended December 31, 2017. The
increases are primarily attributed to a 11.4% increase in homes closed, a higher average sales price per home, and a decrease in the
effective tax rate realized during 2018 as compared to 2017.
Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
Homes Sales. Our home sales revenues, home closings, average sales price (ASP), and ending community count by
reportable segment for the years ended December 31, 2017 and 2016 were as follows (Revenues in thousands):
34
Year Ended December 31, 2017
Home
Closings
2,616 $
629
973
1,014
613
5,845 $
ASP
203,843
342,482
188,512
196,975
205,759
215,220
Average
Community
Count
Average
Monthly
Absorption
Rate
26.2
10.3
15.0
11.5
10.1
73.1
8.3
5.1
5.4
7.3
5.1
6.7
Year Ended December 31, 2016
Average
Community
Count
Average
Monthly
Absorption
Rate
Revenues
$
429,505
86,496
111,651
115,276
95,392
838,320
Home
Closings
2,143 $
270
635
595
520
4,163 $
ASP
200,422
320,356
175,828
193,741
183,446
201,374
22.9
6.3
10.3
9.4
9.0
57.9
Revenues
$
533,254
215,421
183,422
199,733
126,130
1,257,960
$
$
7.8
3.6
5.2
5.3
4.8
6.0
24
9
11
10
9
63
At December 31,
2017
2016
29
11
17
11
10
78
Central
Northwest
Southeast
Florida
West
Total
Central
Northwest
Southeast
Florida
West
Total
Community count
Central
Northwest
Southeast
Florida
West
Total community count
Home sales revenues for the year ended December 31, 2017 were $1,258.0 million, an increase of $419.6 million, or 50.1%,
from $838.3 million for the year ended December 31, 2016. The increase in home sales revenues is primarily due to a 40.4%
increase in homes closed and an increase in the average selling price per home during the year ended December 31, 2017 as
compared to the year ended December 31, 2016. We closed 5,845 homes during 2017, as compared to 4,163 homes closed during
2016. This increase in home closings was largely due to the increase in the number of active communities in 2017. The average
selling price per home closed during the year ended December 31, 2017 was $215,220, an increase of $13,846, or 6.9%, from the
average selling price per home of $201,374 for the year ended December 31, 2016. This increase in the average selling price per
home was primarily due to changes in product mix, higher price points in certain new markets and a favorable pricing environment.
We continued to diversify our operations outside of our Central division during 2017. We increased our home sales revenues
in our divisions other than our Central division by $315.9 million during the year ended December 31, 2017 as compared to the year
ended December 31, 2016 representing a 59.9% increase in the number of homes closed in these divisions during 2017 as compared
to 2016. Our active selling communities at December 31, 2017 increased to 78 from 63 at December 31, 2016. Ten of the fifteen
active selling communities added during 2017 were outside of our Central division, contributing to the further geographic
diversification of our business.
Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the year ended
December 31, 2017 to $937.5 million, an increase of $320.8 million, or 52.0%, from $616.7 million for the year ended
December 31, 2016. This increase is primarily due to a 40.4% increase in homes closed during 2017 as compared to 2016 and, to a
lesser degree, product mix. The increase in average cost of sales per home is primarily due to changes in construction costs
associated with product mix and lot costs. Gross margin for the year ended December 31, 2017 was $320.4 million, an increase of
$98.8 million, or 44.6%, from $221.6 million for the year ended December 31, 2016. Gross margin as a percentage of home sales
35
revenues was 25.5% for the year ended December 31, 2017 and 26.4% for the year ended December 31, 2016. This decrease in
gross margin as a percentage of home sales revenues is primarily due to a combination of higher construction costs and lot costs
partially offset by higher average home sales price for the year ended December 31, 2017 as compared to the year ended
December 31, 2016 and, to a lesser extent, to 201 wholesale home closings during 2017 compared to no wholesale home closings
during 2016.
Selling Expenses. Selling expenses for the year ended December 31, 2017 were $95.0 million, an increase of $28.0 million, or
41.8%, from $67.0 million for the year ended December 31, 2016. Sales commissions increased to $50.2 million for the year ended
December 31, 2017 from $31.1 million during 2016 largely due to a 50.1% increase in home sales revenues during 2017 as
compared to 2016. Selling expenses as a percentage of home sales revenues were 7.5% and 8.0% for the years ended December 31,
2017 and 2016, respectively, and generally reflect operating leverage realized relating to advertising costs.
General and Administrative. General and administrative expenses for the year ended December 31, 2017 were $55.7 million,
an increase of $12.5 million, or 29.0%, from $43.2 million for the year ended December 31, 2016. The increase in the amount of
general and administrative expenses is primarily due to additional general and administrative compensation costs associated with an
increase of active communities and home closings during 2017 as compared to 2016. General and administrative expenses as a
percentage of home sales revenues were 4.4% and 5.1% for the years ended December 31, 2017 and 2016, respectively. The
decrease in general and administrative expenses as a percentage of home sales revenues reflects leverage realized from the increase
in home sales revenues during 2017 as compared to 2016.
Operating Income, Net Income before Income Taxes, and Net Income. Operating income for the year ended December 31,
2017 was $169.8 million, an increase of $58.3 million, or 52.3%, from $111.5 million for the year ended December 31, 2016. Net
income before income taxes for the year ended December 31, 2017 was $171.4 million, an increase of $57.7 million, or 50.8%, over
the year ended December 31, 2016. Our reportable segments contributed the following amounts and percentages of net income
before income taxes during 2017: Central - $89.1 million or 52.0%; Northwest - $34.2 million or 20.0%; Florida - $25.7 million or
15.0%; Southeast - $20.0 million or 11.6%; and West - $5.9 million or 3.4%. Net income for the year ended December 31, 2017 was
$113.3 million, an increase of $38.3 million, or 51.0%, from $75.0 million for the year ended December 31, 2016. The increases are
primarily attributed to a 40.4% increase in homes closed, a higher average sales price and improved leverage realized during 2017 as
compared to 2016.
Non-GAAP Measures
In addition to the results reported in accordance with U.S. GAAP, we have provided information in this Annual Report on
Form 10-K relating to adjusted gross margin, EBITDA and adjusted EBITDA.
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating
operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the
application of purchase accounting included in the cost of sales. Our management believes this information is useful because it
isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted
gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and
could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited.
In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly,
adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our
performance.
The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our
management believes to be most directly comparable (dollars in thousands):
Home sales revenues
Cost of sales
Gross margin
Capitalized interest charged to cost of sales
Purchase accounting adjustments (a)
Adjusted gross margin
Gross margin % (b)
Adjusted gross margin % (b)
36
Year Ended December 31,
2018
2017
$ 1,504,400
1,124,484
379,916
24,311
1,408
405,635
$
$ 1,257,960
937,540
320,420
17,400
246
338,066
$
$
$
2016
838,320
616,707
221,613
10,680
485
232,778
25.3 %
27.0 %
25.5 %
26.9 %
26.4 %
27.8 %
(a) Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up
adjustments included in cost of sales for real estate inventory sold after the acquisition dates.
(b) Calculated as a percentage of home sales revenues.
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in
evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation
and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i)
interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss
on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting
included in the cost of sales. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful
information to investors regarding our results of operations because it assists both investors and management in analyzing and
benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic
performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and
items considered to be unusual or non-recurring. Accordingly, our management believes that these measures are useful for
comparing general operating performance from period to period. Other companies may define these measures differently and, as a
result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies.
Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these
measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business.
EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with
GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication
that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as
an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported
under GAAP. Some of these limitations are:
(i) they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments,
including for purchase of land;
(ii) they do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our
debt;
(iii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to
be replaced or require improvements in the future, and EBITDA and adjusted EBITDA do not reflect any cash requirements
for such replacements or improvements;
(iv) they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
(v) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing
operations; and
(vi) other companies in our industry may calculate them differently than we do, limiting their usefulness as a comparative
measure.
Because of these limitations, our EBITDA and adjusted EBITDA should not be considered as measures of discretionary cash
available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We
compensate for these limitations by using our EBITDA and adjusted EBITDA along with other comparative tools, together with
GAAP measures, to assist in the evaluation of operating performance. These GAAP measures include operating income, net income
and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments and other non-
recurring charges, which are not reflected in our EBITDA or adjusted EBITDA. EBITDA and adjusted EBITDA are not intended as
alternatives to net income as indicators of our operating performance, as alternatives to any other measure of performance in
conformity with GAAP or as alternatives to cash flows as a measure of liquidity. You should therefore not place undue reliance on
our EBITDA or adjusted EBITDA calculated using these measures.
The following table reconciles EBITDA and adjusted EBITDA to net income, which is the GAAP measure that our
management believes to be most directly comparable (dollars in thousands):
37
Net income
Income taxes
Depreciation and amortization
Capitalized interest charged to cost of sales
EBITDA
Purchase accounting adjustments(1)
Loss on extinguishment of debt
Other income, net
Adjusted EBITDA
EBITDA margin %(2)
Adjusted EBITDA margin %(2)
Year Ended December 31,
2018
2017
2016
$
$
155,286
43,812
711
24,311
224,120
1,408
3,599
(2,586 )
226,541
$
$
113,306
58,096
791
17,400
189,593
246
—
(1,601 )
$
188,238
$
14.9 %
15.1 %
15.1 %
15.0 %
75,031
38,641
1,089
10,680
125,441
485
—
(2,201 )
123,725
15.0 %
14.8 %
(1) Adjustments result from the application of purchase accounting related to prior acquisitions and represent the amount of the fair value
step-up adjustments for real estate inventory included in cost of sales.
(2) Calculated as a percentage of home sales revenues.
38
Backlog
We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of
signing the purchase contract. The amount of the required deposit is minimal (generally $1,000 or less). The deposits are refundable
if the retail homebuyer is unable to obtain mortgage financing. We permit our retail homebuyers to cancel the purchase contract and
obtain a refund of their deposit in the event mortgage financing cannot be obtained within a certain period of time, as specified in
their purchase contract. Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing
within 14 days after the purchase contract is signed. If we determine that the homebuyer is not qualified to obtain mortgage
financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract. If a purchase contract
has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the
preliminary criteria to obtain mortgage financing. Only purchase contracts that are signed by homebuyers who have met the
preliminary criteria to obtain mortgage financing are included in new (gross) orders.
Our “backlog” consists of homes that are under a purchase contract that has been signed by homebuyers who have met the
preliminary criteria to obtain mortgage financing but have not yet closed and wholesale contracts for which the required deposit has
been made. Since our business model is generally based on building move-in ready homes before a purchase contract is signed, the
majority of our homes in backlog are currently under construction or complete. Ending backlog represents the number of homes in
backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the
current period minus the number of homes closed during the current period. Our backlog at any given time will be affected by
cancellations, the number of our active communities and the timing of home closings. Homes in backlog are generally closed within
one to two months, although we may experience cancellations of purchase contracts at any time prior to closing. It is important to
note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a
general gauge to evaluate performance. Backlog may be impacted by customer cancellations for various reasons that are beyond our
control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation
of the purchase contract.
As of the dates set forth below, our net orders, cancellation rate, and ending backlog homes and value were as follows (dollars
in thousands):
Backlog Data
Net orders (1)
Cancellation rate (2)
Ending backlog - homes (3)
Ending backlog - value (3)
Year Ended December 31,
2018 (4)
2017 (5)
2016 (6)
6,320
24.2 %
624
156,109
$
6,215
25.4%
816
191,831
$
4,086
24.5 %
446
96,940
$
(1) Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the
period.
(2) Cancellation rate for a period is the total number of purchase contracts cancelled during the period divided by the total new (gross) orders
for the purchase of homes during the period.
(3) Ending backlog consists of homes at the end of the period that are under a purchase contract that has been signed by homebuyers who
have met our preliminary financing criteria but have not yet closed and wholesale contracts for which the required deposit has been made.
Ending backlog is valued at the contract amount.
(4) 92 units and values related to bulk sales agreements are not included in the table above.
(5) 106 units and values related to bulk sales agreements are not included in the table above.
(6) 156 units and values related to a bulk sales agreement are not included in the table above.
Land Acquisition Policies and Development
See discussion included in “Business—Land Acquisition Policies and Development.”
Homes in Inventory
See discussion included in “Business—Homes in Inventory.”
Raw Materials
See discussion included in “Business—Raw Materials and Labor.”
39
Seasonality
In all of our divisions, we have historically experienced similar variability in our results of operations and in capital
requirements from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in our
second, third and fourth quarters. Thus, our revenue may fluctuate on a quarterly basis and we may have higher capital requirements
in our second, third and fourth quarters in order to maintain our inventory levels. Our revenue and capital requirements are generally
similar across our second, third and fourth quarters.
As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular quarter,
especially the first quarter, are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to
continue in the long term.
Liquidity and Capital Resources
Overview
As of December 31, 2018, we had $46.6 million of cash and cash equivalents. Cash flows for each of our active communities
depend on the status of the development cycle and can differ substantially from reported earnings. Early stages of development or
expansion require significant cash outlays for land acquisitions, land development, plats, vertical development, construction of
information centers, general landscaping and other amenities. Because these costs are a component of our inventory and are not
recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of home sales
revenues. In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement
purposes, as the costs associated with home and land construction were previously incurred.
Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs
on our indebtedness and the payment of various liabilities. In addition, we may purchase land, lots, homes under construction or
other assets as part of a business combination.
We generally rely on our ability to finance our operations by generating operating cash flows, borrowing under the Credit
Facility or the issuance and sale of shares of our common stock. As needed, we will consider accessing the debt and equity capital
markets as part of our ongoing financing strategy. We also rely on our ability to obtain performance, payment and completion surety
bonds as well as letters of credit to finance our projects.
On August 24, 2018, we and certain of our subsidiaries filed an automatic shelf registration statement on Form S-3
(Registration No. 333-227012), registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt
securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these
securities. Under the shelf registration statement, we have the ability to access the debt and equity capital markets as needed as part
of our ongoing financing strategy.
We believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our
cash on hand, cash generated from operations, and cash expected to be available from the Credit Facility or through accessing debt
or equity capital, as needed.
Revolving Credit Facility
On May 25, 2018, we entered into that certain Third Amended and Restated Credit Agreement with several financial
institutions, and Wells Fargo Bank, National Association, as administrative agent, which was amended as of June 19, 2018 by that
certain First Amendment thereto (the “First Amendment”; such credit agreement, as amended by the First Amendment, the “Credit
Agreement”). The Credit Agreement has substantially similar terms and provisions to our second amended and restated credit
agreement entered into in May 2017 with several financial institutions, and Wells Fargo Bank, National Association, as
administrative agent (the “2017 Credit Agreement”) but, among other things, provided for, a revolving credit facility of $450.0
million, which could be increased at our request by up to $50.0 million if the lenders make additional commitments, subject to the
terms and conditions of the Credit Agreement (which was requested and approved in October 2018). On October 18, 2018, we
entered into a Lender Acknowledgement Agreement with certain lenders and Wells Fargo Bank, National Association, as
administrative agent, whereby the aggregate revolving commitments under the Credit Agreement increased by $50.0 million from
$450.0 million to $500.0 million in accordance with the relevant provisions of the Credit Agreement.
The Credit Agreement matures on May 31, 2021. Before each anniversary of the closing of the Credit Agreement, we may
request a one-year extension of the maturity date. The Credit Agreement is guaranteed by each of our subsidiaries that have gross
assets equal to or greater than $0.5 million. The revolving credit facility is currently unsecured, but we have agreed to provide
collateral if we fail to meet certain financial conditions in the future. As of December 31, 2018, the borrowing base under the Credit
Agreement was $695.2 million, of which borrowings, including the Convertible Notes (as defined below) and the Senior Notes (as
40
defined below), of $663.8 million were outstanding, $5.1 million of letters of credit were outstanding and $26.3 million was
available to borrow under the Credit Agreement.
The Credit Agreement requires us to maintain (i) a tangible net worth of not less than $400.0 million plus 75% of the net
proceeds of all equity issuances plus 50% of the amount of our positive net income in any fiscal quarter after December 31, 2017,
(ii) a leverage ratio of not greater than 64.0%, (iii) liquidity of at least $50.0 million and (iv) a ratio of EBITDA to interest expense
for the most recent four quarters of at least 2.50 to 1.00. The Credit Agreement contains various covenants that, among other
restrictions, limit the amount of our additional debt and our ability to make certain investments. At December 31, 2018, we were in
compliance with all of the covenants contained in the Credit Agreement.
In connection with the issuance of our 6.875% Senior Notes due 2026 (the “Senior Notes”) in July 2018, we reduced the
revolving commitment under the Credit Agreement from $750.0 million to $450.0 million pursuant to the First Amendment. During
the year ended December 31, 2018, we recognized on our consolidated statements of operations $3.4 million in debt extinguishment
costs related to the Credit Agreement.
Senior Notes Offering
On July 6, 2018, we issued $300.0 million aggregate principal amount of the Senior Notes in an offering to persons reasonably
believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as
amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S
under the Securities Act. Interest on the Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually in arrears on
January 15 and July 15 of each year, commencing on January 15, 2019, and the Senior Notes mature on July 15, 2026. Terms of the
Senior Notes are governed by an indenture and supplemental indenture, each dated as of July 6, 2018, among us, our subsidiaries
that guarantee our obligations under the Credit Agreement (the “Subsidiary Guarantors”) and Wilmington Trust, National
Association, as trustee.
We received net proceeds from the offering of the Senior Notes of approximately $296.2 million, after deducting the initial
purchasers’ discounts and commissions and offering expenses. The net proceeds from the offering were used to repay a portion of
the borrowings under the Credit Agreement.
Convertible Notes
In November 2014, we issued $85.0 million aggregate principal amount of our 4.25% Convertible Notes due 2019 (the
“Convertible Notes”) pursuant to an exemption from the registration requirements afforded by Section 4(a)(2) of the Securities Act.
The Convertible Notes mature on November 15, 2019 and bear interest at a rate of 4.25%, payable semi-annually in arrears on May
15 and November 15 of each year.
Prior to May 15, 2019, the Convertible Notes are convertible only upon satisfaction of any of the specified conversion events.
On or after May 15, 2019 until the close of business on November 14, 2019 (the business day immediately preceding the stated
maturity date of the Convertible Notes), the holders of Convertible Notes can convert their Convertible Notes at any time at their
option. Upon the election of a holder of Convertible Notes to convert their Convertible Notes, we may settle the conversion of the
Convertible Notes using any combination of cash and shares of our common stock. It is our intent, and belief that we have the
ability, to settle in cash the conversion of any Convertible Notes that the holders elect to convert. The initial conversion rate of the
Convertible Notes is 46.4792 shares of our common stock for each $1,000 principal amount of Convertible Notes, which represents
an initial conversion price of approximately $21.52 per share of our common stock. The conversion rate is subject to adjustments
upon the occurrence of certain specified events.
During the fourth quarter of 2017, we received notice from holders of $15.0 million principal amount of the Convertible Notes
to convert their Convertible Notes. The conversion of such Convertible Notes was settled in the first quarter of 2018, resulting in the
issuance of 486,679 shares of our common stock, a $0.6 million reduction to debt discount and additional paid in capital, a $0.2
million loss on the extinguishment of debt and a cash payment of $15.0 million for the principal amount of such Convertible Notes.
As of December 31, 2018, we have $70.0 million aggregate principal amount of Convertible Notes outstanding.
During the fourth quarter of 2018, the Convertible Notes were convertible because the closing sale price of our common stock
was greater than 130% of the $21.52 conversion price on at least 20 trading days during the 30 trading day period ending on
September 30, 2018. As a result, the holders of the Convertible Notes could elect to convert some or all of their Convertible Notes in
accordance with the terms and provisions of the indenture governing the Convertible Notes during the conversion period of October
1, 2018 through December 31, 2018 (inclusive). The Convertible Notes continue to be convertible during the first quarter of 2019.
As of the date of the filing of this Annual Report on Form 10-K, no other conversion notices have been received by us.
On July 6, 2018, concurrently with the offering of the Senior Notes, we entered into that certain First Supplemental Indenture,
dated as of July 6, 2018, among us, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee, which
supplements the indenture governing the Convertible Notes, pursuant to which (i) the subordination provisions in the indenture
governing the Convertible Notes were eliminated, (ii) each Subsidiary Guarantor agreed (A) to, concurrently with the issuance of
41
the Senior Notes, fully and unconditionally guarantee the Convertible Notes to the same extent that such Subsidiary Guarantor is
guaranteeing the Senior Notes and (B) that such Subsidiary Guarantor’s guarantee of the Convertible Notes ranks equally with such
Subsidiary Guarantor’s guarantee of the Senior Notes and (iii) the Company agreed to not, directly or indirectly, incur any
indebtedness in the form of, or otherwise become liable in respect of, any notes or other debt securities issued pursuant to an
indenture or note purchase agreement (including the Senior Notes) unless such indebtedness is equal with or contractually
subordinated to the Convertible Notes in right of payment.
Letters of Credit, Surety Bonds and Financial Guarantees
We are often required to provide letters of credit and surety bonds to secure our performance under construction contracts,
development agreements and other arrangements. The amount of such obligations outstanding at any time varies in accordance with
our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to
reimburse the issuer of such bonds or letters of credit.
Under these letters of credit, surety bonds and financial guarantees, we are committed to perform certain development and
construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit, surety bonds
and financial guarantees under these arrangements, totaled $77.5 million as of December 31, 2018. Although significant
development and construction activities have been completed related to the improvements at these sites, the letters of credit and
surety bonds are not generally released until all development and construction activities are completed. We do not believe that it is
probable that any outstanding letters of credit, surety bonds or financial guarantees as of December 31, 2018 will be drawn upon.
Cash Flows
Year Ended December 31, 2018 compared to Year Ended December 31, 2017
Net cash used in operating activities during the year ended December 31, 2018 was $116.7 million as compared to $68.5
million during the year ended December 31, 2017. The $48.3 million increase in net cash used in operating activities was primarily
attributable to cash outlays for the $34.1 million increase in the net change in real estate inventory year-over-year, which was
primarily related to our increased community count, additional homes under construction and land acquisitions, and to the $88.9
million decrease in accounts payable, accrued expenses, and other liabilities, and the payment of income taxes. Year-over-year
change in net cash provided by working capital items included a $29.5 million decrease in accounts receivable and a $7.2 million
decrease in other assets, offset by a $10.6 million increase in cash paid for pre-acquisition costs and deposits year-over-year. The
increase in cash used in operating activities reflects our continued growth and, to a lesser extent, the timing of home sales and
homebuilding activities.
Net cash used in investing activities during the year ended December 31, 2018 was $74.9 million as compared to $0.5 million
during the year ended December 31, 2017. The $74.4 million increase in net cash used in investing activities is primarily due to the
business acquisition of Wynn Homes.
Net cash provided by financing activities during the year ended December 31, 2018 was $170.7 million as compared to $87.0
million during the year ended December 31, 2017. The $83.7 million increase in net cash provided by financing activities consists
primarily of the $297.7 million increase in net borrowings from the issuance of the Senior Notes, including the related $2.3 million
discount and from the $196.2 million decrease in net borrowings associated with the Credit Facility, offset by the related $2.4
million in loan issuance costs, the $14.4 million decrease in net proceeds realized from the issuance and sale of shares of our
common stock, and $1.5 million of common stock repurchases under our common stock repurchase program.
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
Net cash used in operating activities during the year ended December 31, 2017 was $68.5 million as compared to $108.2
million during the year ended December 31, 2016. The $39.7 million decrease in net cash used in operating activities was primarily
attributable to a $63.7 million increase in accounts payable, accrued expenses, and other liabilities, offset by cash outlays for the
$16.7 million increase in the net change in real estate inventory year-over-year, which is primarily related to our increased
community count, additional homes under construction and land acquisitions combined with year-over-year change in net cash
provided by working capital items ($27.9 million increase in accounts receivable, $14.1 million increase in other assets and $4.6
million increase in cash paid for pre-acquisition costs and deposits).
Net cash used in investing activities during the year ended December 31, 2017 was $0.5 million as compared to $0.7 million
during the year ended December 31, 2016 and reflects the purchase of property and equipment.
Net cash provided by financing activities totaled $87.0 million during the year ended December 31, 2017 as compared to
$120.9 million during the year ended December 31, 2016. The $33.8 million decrease in net cash provided by financing activities is
primarily due to the $20.0 million decrease in net borrowings under the Credit Facility, the $12.3 million decrease in net proceeds
realized from the issuance and sale of shares of our common stock, and the $1.7 million increase in loan issuance costs associated
with the Credit Agreement.
42
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into land purchase contracts in order to procure land and lots for the construction
of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved
lots. These contracts typically require cash deposits and the purchase of properties under these contracts is generally contingent upon
satisfaction of certain requirements by the sellers, which may include obtaining applicable property and development entitlements or
the completion of development activities and the delivery of finished lots. We also utilize contracts with land sellers as a method of
acquiring lots and land in staged takedowns, which helps us manage the financial and market risk associated with land holdings and
minimize the use of funds from our corporate financing sources. Such contracts generally require a non-refundable deposit for the
right to acquire land or lots over a specified period of time at pre-determined prices. We generally have the right at our discretion to
terminate our obligations under purchase contracts during the initial feasibility period and receive a refund of our deposit, or we may
terminate the contracts after the end of the feasibility period by forfeiting our cash deposit with no further financial obligations to the
land seller. In addition, our deposit may also be refundable if the land seller does not satisfy all conditions precedent in the
respective contract. As of December 31, 2018, we had $40.0 million of cash deposits pertaining to land purchase contracts for
22,820 lots with an aggregate purchase price of $776.2 million. Approximately $25.2 million of the cash deposits as of
December 31, 2018 are secured by third-party guarantees or indemnity mortgages on the related property.
Our utilization of land purchase contracts is dependent on, among other things, the availability of land sellers willing to enter
into contracts at acceptable terms, which may include option takedown arrangements, the availability of capital to financial
intermediaries to finance the development of optioned lots, general housing conditions, and local market dynamics. Land purchase
contracts may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain markets.
Inflation
Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material, and construction
costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing
to homebuyers.
Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2018 and the effect such obligations are
expected to have on our liquidity and cash flows in future periods.
Payments due by period (in thousands)
Total
Less
than
1 year
1-3
years
3-5
years
More than
5 years
Contractual Obligations
Borrowings:
Credit Facility (a)
Senior Notes (b)
Convertible Notes (c)
$
293,800 $
300,000
69,962
— $
—
69,962
293,800 $
—
—
444
Inventory related obligations(d)
7,041
205
Interest and fees (e)
Operating leases
Total
231,042
6,620
908,465 $
50,878
827
121,872 $
82,012
1,528
377,784 $
$
— $
—
—
495
41,981
1,428
43,904 $
—
300,000
—
5,897
56,171
2,837
364,905
(a) Represents borrowings under our $500.0 million revolving credit facility which matures on May 31, 2021. See Note 8 “Notes Payable” to
our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding
our long-term debt.
(b) Represents $300.0 million aggregate principal amount of our 6.875% Senior Notes due 2026. The Senior Notes mature on July 15, 2026.
See Note 8 “Notes Payable” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for
additional information regarding our long-term debt.
(c) Represents $70.0 million aggregate principal amount of our 4.25% Convertible Notes due 2019. The Convertible Notes mature on
November 15, 2019. See Note 8 “Notes Payable” to our consolidated financial statements included in Part II, Item 8 of this Annual Report
on Form 10-K for additional information regarding our long-term debt.
(d) The Company owns lots in certain communities that have Community Development Districts or similar utility and infrastructure
development special assessment programs that allocate a fixed amount of debt service associated with development activities to each lot.
Such obligations represent a non-cash cost of the lots.
43
(e) All of the outstanding borrowings under the Credit Facility are at variable rates based on LIBOR, or subject to an interest rate floor. The
interest rate for our variable rate indebtedness as of December 31, 2018 was LIBOR plus 2.90%. Fees on the Credit Facility are
approximately $0.1 million per year. Interest on the Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually in arrears
on January 15 and July 15 of each year. Interest on the Convertible Notes accrues at a rate of 4.25% per year and is payable semi-annually
in arrears on May 15 and November 15 of each year. Inventory related obligations for infrastructure development attached to the land are
subject to a fixed interest rate generally ranging from 1.28% to 7.12%, typically payable over a 30 year period, and are ultimately
assumed by the homebuyer when home sales are closed.
Critical Accounting Policies
Discussed below are accounting policies that we believe are critical because of the significance of the activity to which they
relate or because they require the use of significant judgment in their application.
Revenue Recognition
Effective January 1, 2018, we adopted the Financial Accounting Standards Board Accounting Standards Update No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), which provides guidance for revenue recognition. Topic 606
affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer
of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” (“Topic 605”) and
most industry-specific guidance. Topic 606 also supersedes certain cost guidance included in Subtopic 605-35, “Revenue
Recognition—Construction-Type and Production-Type Contracts.” Topic 606’s core principle is that a company will recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company
expects to be entitled in exchange for those goods or services. We adopted Topic 606 using the modified retrospective transition
method only with respect to contracts not completed at the date of adoption. We have developed the additional expanded disclosures
required; however, the adoption of Topic 606 did not have a material effect on our consolidated statements of operations, balance
sheets or cash flows.
We recognize revenue upon the transfer of promised goods to our customers in an amount that reflects the consideration to
which we expect to be entitled by applying the following five-step process specified in Topic 606.
Identify the contract(s) with a customer
Identify the performance obligations
•
•
• Determine the transaction price
• Allocate the transaction price
• Recognize revenue when the performance obligations are met
Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We
generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms as
customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is
complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title
company within a few business days after closing.
Sales and broker commissions are incremental costs incurred to obtain a contract with a customer that would not have been
incurred if the contract had not been obtained. Sales and broker commissions are expensed upon fulfillment of a home closing.
Advertising costs are costs to obtain a contract that would have been incurred regardless of whether the contract was obtained and
are recognized as an expense when incurred. Sales and broker commissions and advertising costs are recorded within sales and
marketing expense presented in our consolidated statements of operations as selling expenses.
Real Estate Inventory and Cost of Home Sales
Inventory consists of land, land under development, finished lots, information centers, homes in progress and completed
homes. Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case inventory is written
down to fair value.
Pre-acquisition costs, land, development and other project costs, including interest and property taxes, incurred during
development and home construction, and net of expected reimbursements of development costs, are capitalized to real estate
inventory. Pre-acquisition costs, land development and other common costs that benefit the entire community, including field
construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate, on a pro rata basis
which we believe approximates the costs that would be determined using an allocation method based on relative sales values since
the individual lots or homes within a community are similar in value.
Changes to estimated total development costs subsequent to initial home closings in a community are allocated to the
remaining unsold homes in the community on a prospective basis. Home construction costs and related carrying charges are
allocated to the cost of individual homes using the specific identification method and are capitalized as they are incurred.
44
Capitalized interest, property taxes, and other carrying costs are generally capitalized to real estate inventory from the point
development begins to the point construction is completed. Costs associated with homes closed are charged to cost of sales
simultaneously with revenue recognition.
Impairment of Real Estate Inventories.
In accordance with Accounting Standards Codification Topic 360, Property, Plant, and Equipment, real estate inventory is
evaluated for indicators of impairment by each community during each reporting period. In conducting our review for indicators of
impairment on a community level, we evaluate, among other things, the margins on homes that have been closed, communities with
slow moving inventory, projected margins on future home sales over the life of the community, and the estimated fair value of the
land. We pay particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and
communities whose average sales prices and/or margins are trending downward and are anticipated to continue to trend downward.
Due largely to the relatively short development and construction periods for our communities and our growth, we have not
experienced circumstances during 2018, 2017 or 2016 that are indicators of impairment. Our future sales and margins may be
impacted by our inability to realize continued growth, increased cost associated with holding and developing land, local economic
factors, pressure on home sales prices, increased carrying costs, and insufficient access to labor and materials at reasonable costs.
For individual communities with indicators of impairment, we perform additional analysis to estimate the community’s
undiscounted future cash flows. If the estimated undiscounted future cash flows are greater than the carrying value of the asset, no
impairment adjustment is required. If the undiscounted cash flows are less than the asset’s carrying value, the asset is impaired and
is written down to its fair value. We estimate the fair value of communities using a discounted cash flow model; changes to the
expected cash flows may lead to changes in the outcome of our impairment analysis.
The life cycle of a community generally ranges from two to five years, commencing with the acquisition of land, continuing
through the land development phase, and concluding with the construction, sale, and delivery of homes. A constructed home is used
as the community information center during the life of the community and then sold. Actual individual community lives will vary
based on the size of the community, the sales absorption rate, whether we purchased the property as raw land or finished lots, and
the timing and phasing of development on larger projects.
Impairment of land and land under development.
For raw land, land under development and completed lots that our management anticipates will be utilized for future
homebuilding activities or to be sold as finished lots to individuals, the recoverability of assets is measured by comparing the
carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets based on home or lot sales,
consistent with the evaluation of operating communities discussed above. As of December 31, 2018, we had not identified any raw
land, land under development or completed lots that management intends to market for sale in bulk to a third-party.
Pre-acquisition costs and controlled lots not owned.
We enter into land purchase agreements in the ordinary course of business in order to secure land for the construction of homes
in the future. Pursuant to these agreements, we typically provide a deposit to the seller as consideration for the right to purchase land
at different times in the future, usually at predetermined prices. We do not have title to the property and our obligations with respect
to the contracts are generally limited to the forfeiture of the related nonrefundable cash deposits.
To the extent that any deposits are nonrefundable and the associated land acquisition process is terminated or no longer
determined probable, the deposit and any related pre-acquisition costs (e.g. due diligence costs) are charged to other income, net. We
review the likelihood of the acquisition of contracted lots in conjunction with our periodic real estate impairment analysis.
Warranty Reserves
We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in
structural elements. Estimated future direct warranty costs are accrued and charged to cost of sales in connection with our home
sales.
Our warranty liability is based upon historical warranty cost experience on a per house basis established based on (i) trends in
historical warranty payment levels, (ii) the historical range of amounts paid per house, (iii) any warranty expenditures not
considered to be normal and recurring, and is adjusted as appropriate to reflect qualitative risks associated with the types of homes
built, the geographic areas in which they are built, and potential impacts of our expansion. Our analysis also considers
improvements in quality control and construction techniques expected to impact future warranty expenditures and the expertise of
our personnel. Our warranty reserves are reviewed quarterly to assess the reasonableness and adequacy and we make adjustments to
the balance of the pre-existing reserves, as needed, to reflect changes in trends and historical data as information becomes available.
45
Goodwill
We record goodwill associated with our acquisitions of businesses when the consideration paid exceeds the fair value of the net
tangible and identifiable intangible assets acquired. We evaluate our goodwill balances for potential impairment on an annual basis.
In applying the goodwill impairment test, we have the option to perform a qualitative test (also known as “Step 0”) or a two-step
quantitative test (consisting of “Step 1” and “Step 2”). Under the Step 0 test, we first assess qualitative factors to determine whether
it is more likely than not that the fair value of the reporting units is less than their carrying value. Qualitative factors may include,
but are not limited to economic conditions, industry and market considerations, cost factors, overall financial performance of the
reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines
it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing the two-step
quantitative test is necessary. During 2018 and 2017, we performed a Step 0 analysis and determined that it is not “more likely than
not” that the fair values of the reporting units were less than their carrying amounts. During 2016, we performed the two-step
quantitative impairment test.
Taxes
We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are
recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and
liabilities, changes in tax rate are recognized in the year of enactment. Deferred tax assets are reduced by a valuation allowance if it
is more likely than not that some portion or all of the net deferred tax assets will not be realized. Our ability to realize deferred tax
assets is assessed throughout the year and a valuation allowance is established, if required. We recognize the impact of a tax position
only if it is more likely than not to be sustained upon examination based on the technical merits of the position. We recognize
potential interest and penalties related to uncertain tax positions in income tax expense, as applicable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our operations are interest rate sensitive. As overall housing demand is adversely affected by increases in interest rates, a
significant increase in mortgage interest rates may negatively affect the ability of homebuyers to secure adequate financing. Higher
interest rates could adversely affect our revenues, gross margin, and net income. We do not enter into, or intend to enter into,
derivative financial instruments for trading or speculative purposes.
Quantitative and Qualitative Disclosures About Interest Rate Risk
We utilize both fixed-rate debt ($70.0 million aggregate principal amount of the Convertible Notes, $300.0 million aggregate
principal amount of the Senior Notes and certain inventory related obligations) and variable-rate debt (our $500.0 million revolving
credit facility) as part of financing our operations. Upon the election of a holder of Convertible Notes to convert their Convertible
Notes, we may settle the conversion of the Convertible Notes using any combination of cash and shares of our common stock. Other
than as a result of an election of a holder of Convertible Notes to convert their Convertible Notes, we do not have the obligation to
prepay the Convertible Notes, the Senior Notes or our fixed-rate inventory related obligations prior to maturity, and, as a result,
interest rate risk and changes in fair market value should not have a significant impact on our fixed-rate debt. The Convertible Notes
mature on November 15, 2019.
We are exposed to market risks related to fluctuations in interest rates on our outstanding variable rate indebtedness. We did
not utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivative financial instruments as
of or during the year ended December 31, 2018. We have not entered into and currently do not hold derivatives for trading or
speculative purposes, but we may do so in the future. Many of the statements contained in this section are forward looking and
should be read in conjunction with our disclosures under the heading “Cautionary Statement about Forward-Looking Statements” in
Item 1A. Risk Factors.
As of December 31, 2018, we had $293.8 million of variable rate indebtedness outstanding under the Credit Agreement. All of
the outstanding borrowings under the Credit Agreement are at variable rates based on LIBOR. The interest rate for our variable rate
indebtedness as of December 31, 2018 was LIBOR plus 2.90%. At December 31, 2018, LIBOR was 2.46%. A hypothetical 100
basis point increase in the average interest rate on our variable rate indebtedness would increase our annual interest cost by
approximately $2.9 million.
Based on the current interest rate management policies we have in place with respect to our outstanding indebtedness, we do
not believe that the future interest rate risks related to our existing indebtedness will have a material adverse impact on our financial
position, results of operations, or liquidity.
46
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of LGI Homes, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LGI Homes, Inc. (the Company) as of December 31, 2018
and 2017, the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended
December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018
and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework), and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2013.
Houston, Texas
February 26, 2019
47
LGI HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
Cash and cash equivalents
Accounts receivable
Real estate inventory
Pre-acquisition costs and deposits
Property and equipment, net
Other assets
Deferred tax assets, net
Goodwill
Total assets
LIABILITIES AND EQUITY
Accounts payable
Accrued expenses and other liabilities
Notes payable
Total liabilities
COMMITMENTS AND CONTINGENCIES
EQUITY
Common stock, par value $0.01, 250,000,000 shares authorized, 23,746,385 shares
issued and 22,707,385 shares outstanding as of December 31, 2018 and
22,845,580 shares issued and 21,845,580 shares outstanding as of December 31,
2017
Additional paid-in capital
Retained earnings
Treasury stock, at cost 1,039,000 shares and 1,000,000 shares, respectively
Total equity
Total liabilities and equity
December 31,
2018
2017
46,624 $
42,836
1,228,256
45,752
1,432
15,765
2,790
12,018
1,395,473 $
9,241 $
76,555
653,734
739,530
67,571
44,706
918,933
18,866
1,674
14,196
1,928
12,018
1,079,892
12,020
102,831
475,195
590,046
237
241,988
431,774
(18,056)
655,943
1,395,473 $
228
229,680
276,488
(16,550)
489,846
1,079,892
$
$
$
$
See accompanying notes to the consolidated financial statements.
48
LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
For the Year Ended December 31,
2017
2016
2018
Home sales revenues
$
1,504,400 $
1,257,960 $
838,320
Cost of sales
Selling expenses
General and administrative
Operating income
Loss on extinguishment of debt
Other income, net
Net income before income taxes
Income tax provision
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
1,124,484
109,460
70,345
200,111
3,599
(2,586 )
199,098
43,812
155,286 $
6.89 $
6.24 $
937,540
94,957
55,662
169,801
—
(1,601 )
171,402
58,096
113,306 $
5.24 $
4.73 $
616,707
66,984
43,158
111,471
—
(2,201 )
113,672
38,641
75,031
3.61
3.41
22,551,762
24,892,274
21,604,932
23,933,122
20,798,333
22,024,091
$
$
$
See accompanying notes to the consolidated financial statements.
49
LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Total Equity
BALANCE—December 31, 2015
21,270,389
$
213
$
175,575
$
88,151
$
(16,550 ) $
247,389
Net income
Issuance of shares, net of offering costs
Issuance of restricted stock units in settlement of
accrued bonuses
Compensation expense for equity awards
—
993,554
—
—
Stock issued under employee incentive plans
47,367
—
10
—
—
—
—
75,031
28,467
138
3,396
770
—
—
—
—
—
—
—
—
—
75,031
28,477
138
3,396
770
BALANCE—December 31, 2016
22,311,310
$
223
$
208,346
$
163,182
$
(16,550 ) $
355,201
Net income
Issuance of shares, net of offering costs
Issuance of restricted stock units in settlement of
accrued bonuses
Compensation expense for equity awards
—
354,620
—
—
Stock issued under employee incentive plans
179,650
—
3
—
—
2
—
113,306
15,339
167
4,188
1,640
—
—
—
—
—
—
—
—
—
113,306
15,342
167
4,188
1,642
BALANCE—December 31, 2017
22,845,580
$
228
$
229,680
$
276,488
$
(16,550 ) $
489,846
Net income
Issuance of shares in settlement of Convertible
Notes
—
486,679
Issuance of shares, Wynn Homes Acquisition
70,746
Repurchase of shares
Issuance of restricted stock units in settlement of
accrued bonuses
Compensation expense for equity awards
—
—
—
Stock issued under employee incentive plans
343,380
—
5
1
—
—
—
3
—
155,286
(482)
3,999
—
181
5,923
2,687
—
—
—
—
—
—
—
—
—
155,286
(477)
4,000
(1,506)
(1,506)
—
—
—
181
5,923
2,690
BALANCE—December 31, 2018
23,746,385
$
237
$
241,988
$
431,774
$
(18,056 ) $
655,943
See accompanying notes to the consolidated financial statements.
50
LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization
Loss on extinguishment of debt
Loss on disposal of assets
Excess tax benefits from stock based compensation
Compensation expense for equity awards
Deferred income taxes
Changes in assets and liabilities:
Accounts receivable
Real estate inventory
Pre-acquisition costs and deposits
Other assets
Accounts payable
Accrued expenses and other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Payment for business acquisition
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from notes payable
Payments on notes payable
Loan issuance costs
Proceeds from sale of stock, net of offering expenses
Stock repurchase
Payment for offering costs
Payment for earnout obligation
Excess tax benefits from equity awards
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
For the Year Ended December 31,
2017
2016
2018
$
155,286 $
113,306 $
75,031
711
3,588
6
—
5,937
(724)
1,870
(234,664)
(18,853)
(1,398)
(2,779)
(25,703)
(116,723)
(475)
(74,463)
(74,938)
612,717
(436,238)
(6,741)
2,690
(1,506)
(76)
(132)
—
170,714
(20,947)
67,571
46,624 $
791
—
13
—
4,188
(2,092 )
(27,651 )
(200,609 )
(8,215 )
(8,643 )
(257 )
60,702
(68,467 )
(518 )
—
(518 )
100,000
(25,000 )
(4,375 )
17,130
—
(69 )
(648 )
—
87,038
18,053
49,518
67,571 $
1,089
—
1
(138 )
3,396
(2,562 )
270
(183,884 )
(3,650 )
5,472
(11,747 )
8,539
(108,183 )
(722 )
—
(722 )
140,000
(45,000 )
(2,684 )
29,448
—
(204 )
(843 )
138
120,855
11,950
37,568
49,518
$
See accompanying notes to the consolidated financial statements.
51
LGI HOMES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION AND BUSINESS
Organization and Description of the Business
LGI Homes, Inc., a Delaware corporation (the “Company”, “us,” “we,” or “our”), was organized on July 9, 2013 as a holding
company for the purposes of facilitating the initial public offering (the “IPO”) of its common stock in November 2013.
Headquartered in the Woodlands, Texas, we engage in the design, construction and sale of new homes in Texas, Arizona,
Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama,
California, Oregon, and Nevada.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles
(“GAAP”) and include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates, and these differences could have a significant impact on the financial statements. The significant accounting estimates
include real estate inventory and cost of sales, impairment of real estate inventory and property and equipment, goodwill, warranty
reserves, the fair value of the convertible debt, loss contingencies, incentive compensation expense, and income taxes.
Cash and Cash Equivalents and Concentration of Credit Risk
Cash and cash equivalents are defined as cash on hand, demand deposits with financial institutions, and short-term liquid
investments with an initial maturity date of less than three months. Our cash in demand deposit accounts may exceed federally
insured limits and could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions
in the financial markets. To date, we have experienced no loss or diminished access to cash in our demand deposit accounts.
Accounts Receivable
Accounts receivable consist primarily of proceeds due from title companies for sales closed prior to period end and are
generally collected within a few days from closing.
Real Estate Inventory
Inventory consists of land, land under development, finished lots, information centers, homes in progress, and completed
homes. Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case the affected
inventory is written down to fair value.
Land, development and other project costs, including interest and property taxes incurred during development and home
construction and net of expected reimbursements of development costs, are capitalized to real estate inventory. Land development
and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are
allocated to individual lots or homes, as appropriate. The costs of lots are transferred to homes in progress when home construction
begins. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific
identification method. Costs that are not specifically identifiable to a home are allocated on a pro rata basis, which we believe
approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots
or homes within a community are similar in value. Inventory costs for completed homes are expensed to cost of sales as homes are
closed. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to
the remaining unsold lots and homes in the community on a pro rata basis.
The life cycle of a community generally ranges from two to five years, commencing with the acquisition of land, continuing
through the land development phase, and concluding with the construction and sale of homes. A constructed home is used as the
community information center during the life of the community and then sold. Actual individual community lives will vary based on
the size of the community, the sales absorption rate, and whether the property was purchased as raw land or finished lots.
52
In accordance with the Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment, real estate
inventory is evaluated for indicators of impairment by each community during each reporting period. In conducting its review for
indicators of impairment on a community level, management evaluates, among other things, the margins on homes that have been
closed, communities with slow moving inventory, projected margins on future home sales over the life of the community, and the
estimated fair value of the land. For individual communities with indicators of impairment, additional analysis is performed to
estimate the community’s undiscounted future cash flows. If the estimated undiscounted future cash flows are greater than the
carrying value of the community group of assets, no impairment adjustment is required. If the undiscounted cash flows are less than
the community’s carrying value, the asset group is impaired and is written down to its fair value. We estimate the fair value of
communities using a discounted cash flow model. As of December 31, 2018 and 2017, the real estate inventory is stated at cost;
there were no inventory impairment charges recorded during the years ended December 31, 2018, 2017 and 2016.
Capitalized Interest
Interest and other financing costs are capitalized as cost of inventory during community development and home construction
activities, in accordance with ASC Topic 835, Interest and expensed in cost of sales as homes in the community are closed. To the
extent the debt exceeds qualified assets, a portion of the interest incurred is expensed.
Pre-Acquisition Costs and Deposits
Amounts paid for land options, deposits on land purchase contracts, and other pre-acquisition costs are capitalized and
classified as deposits to purchase. Upon execution of the purchase, these deposits are applied to the acquisition price of the land and
recorded as a cost component of the land in real estate inventory. To the extent that any deposits are nonrefundable and the
associated land acquisition process is terminated or no longer determined probable, the deposit and related pre-acquisition costs are
charged to other income, net. Management reviews the likelihood of the acquisition of contracted lots in conjunction with its
periodic real estate impairment analysis.
Under ASC Topic 810, Consolidation (“ASC 810”), a nonrefundable deposit paid to an entity is deemed to be a variable
interest that will absorb some or all of the entity’s expected losses if they occur. Non-refundable land purchase and lot option
deposits generally represent our maximum exposure if we elect not to purchase the optioned property. In some instances, we may
also expend funds for due diligence, development and construction activities with respect to optioned land prior to close. Such costs
are classified as preacquisition costs, which we would have to absorb should the option not be exercised. Therefore, whenever we
enter into a land option or purchase contract with an entity and make a nonrefundable deposit, we may have a variable interest in a
variable interest entity (“VIE”). In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary
beneficiary of a VIE and would consolidate the VIE if we are deemed to be the primary beneficiary. As of December 31, 2018 and
2017, we were not deemed to be the primary beneficiary for any VIEs associated with non-refundable land deposits.
Deferred Loan Costs
Deferred loan costs represent debt issuance costs related to a recognized debt liability and are presented in the balance sheet as
a direct deduction from the carrying amount of that debt liability.
Other Assets
Other assets consist primarily of prepaid insurance, security deposits, and prepaid expenses. Our prepaid expenses were $8.5
million and $7.5 million as of December 31, 2018 and 2017, respectively.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation. Depreciation expense is
recorded in general and administrative expenses. Upon sale or retirement, the costs and related accumulated depreciation are
eliminated from the respective accounts and any resulting gain or loss is included in other income, net. Depreciation is generally
computed using the straight-line method over the estimated useful lives of the assets, ranging from two to five years for property and
equipment. Leasehold improvements are depreciated over the shorter of the asset life or the term of the lease. Maintenance and
repair costs are expensed as incurred.
Impairments of long-lived assets are determined periodically when indicators of impairment are present. If such indicators are
present, the determination of the amount of impairment is based on judgments as to the future undiscounted operating cash flows to
be generated from these assets throughout the remaining estimated useful lives. If these undiscounted cash flows are less than the
carrying amount of the related asset, impairment is recognized for the excess of the carrying value over its fair value. There were no
impairments of property, equipment and leasehold improvements recorded during the years ended December 31, 2018, 2017 and
2016.
53
Goodwill and Intangible Assets
The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is
capitalized as goodwill in accordance with ASC Topic 805, Business Combinations. Goodwill and intangible assets that do not have
finite lives are not amortized, but are assessed for impairment at least annually or more frequently if certain impairment indicators
are present. The $12.0 million of goodwill is related to the reorganization transactions completed in connection with the initial public
offering of our common stock in November 2013. In applying the goodwill impairment test, we have the option to perform a
qualitative test (also known as “Step 0”) or a two-step quantitative test (consisting of “Step 1” and “Step 2”). Under the Step 0 test,
we first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than
their carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market
considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If
after assessing these qualitative factors, we determine it is “more-likely-than-not” that the fair value of the reporting unit is less than
the carrying value, then performing the two-step quantitative test is necessary. During 2018 and 2017, we performed a Step 0
analysis and determined that it is not “more likely than not” that the fair values of the reporting units were less than their carrying
amounts. During 2016, we performed the two-step quantitative impairment test. No goodwill impairment charges were recorded in
2018, 2017 and 2016.
Warranty Reserves
Future direct warranty costs are accrued and charged to cost of sales in the period when the related home is closed. Our
warranty liability is based upon historical warranty cost experience and is adjusted as appropriate to reflect qualitative risks
associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our continued
expansion.
Warranty reserves are reviewed quarterly to assess the reasonableness and adequacy and adjusted, as needed, to reflect changes
in trends and historical data as information becomes available.
Customer Deposits
Customer deposits are received upon signing a purchase contract and are generally $1,000 or less. Deposits are generally
refundable if the customer is unable to obtain financing. Forfeited buyer deposits related to home sales are recognized in other
income in the period in which it is determined that the buyer will not complete the purchase of the property and the deposit is
nonrefundable to the buyer.
Home Sales
Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the buyer,
and we have no significant continuing involvement with the home. Home sales proceeds are generally received from the title
company within a few days after closing. Home sales are reported net of sales discounts and incentives granted to home buyers,
which are primarily seller-paid closing costs.
Cost of Sales
As discussed under Real Estate Inventory above, cost of sales for homes closed include the construction costs of each home
and allocable land acquisition and land development costs, capitalized interest, and other related common costs (both incurred and
estimated to be incurred).
Selling and Commission Costs
Sales commissions are paid and expensed based on homes closed. Other selling costs are expensed in the period incurred.
Advertising Costs
Advertising and direct mail costs are expensed as incurred. Advertising and direct mail costs were $17.6 million, $15.2 million
and $11.3 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Income Taxes
We are a taxable entity subject to federal and state taxes. We utilize the liability method of accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences
between the book and tax bases of recorded assets and liabilities. Changes in tax rate are recognized in the year of enactment.
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax
assets will not be realized. Our ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is
established, if required. We recognize the impact of a tax position only if it is more likely than not to be sustained upon examination
54
based on the technical merits of the position. We recognize potential interest and penalties related to uncertain tax positions in
income tax expense.
Earnings Per Share
Basic earnings per share is based on the weighted average number of shares of common stock outstanding. Diluted earnings
per share is based on the weighted average number of shares of common stock and dilutive securities outstanding. In accordance
with ASC 260-10, Earnings Per Share, we calculated the dilutive effect of the Convertible Notes using the treasury stock method,
since we have the intent and ability to settle the principal amount of the outstanding Convertible Notes in cash. Under the treasury
stock method, the Convertible Notes have a dilutive impact on diluted earnings per share to the extent that the average market price
of our common stock for a reporting period exceeds the conversion price of $21.52 per share. Diluted earnings per share excludes all
dilutive potential shares of common stock if their effect is antidilutive.
Stock-Based Compensation
Compensation costs for non-performance-based restricted stock awards are measured using the closing price of our common
stock on the date of grant and are expensed on a straight-line basis over the requisite service period of the award. Compensation
costs for performance-based restricted stock awards also contain a market condition. These costs are measured using the derived
grant date fair value, based on a third party valuation analysis, and are expensed in accordance with ASC 718-10-25-20,
Compensation - Stock Compensation, which requires an assessment of probability of attainment of the performance target. Once the
performance target outcome is determined to be probable, the cumulative expense is adjusted, as needed, to recognize compensation
expense on a straight-line basis over the award’s requisite service period.
Recently Adopted Accounting Standards
Effective January 1, 2018, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update
(“ASU”) No. 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”),
which addresses specific classification issues and is intended to reduce diversity in current practice regarding the manner in which
certain cash receipts and cash payments are presented and classified in the consolidated statements of cash flows. The adoption of
ASU 2016-15 did not have a material effect on our consolidated statements of cash flows or disclosures.
Effective January 1, 2018, we adopted the FASB ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”
(“Topic 606”), which provides guidance for revenue recognition. Topic 606 affects any entity that either enters into contracts with
customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue
recognition requirements in Topic 605, “Revenue Recognition” (“Topic 605”) and most industry-specific guidance. Topic 606 also
supersedes certain cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type
Contracts.” Topic 606’s core principle is that a company will recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or
services. We adopted Topic 606 using the modified retrospective transition method only with respect to contracts not completed at
the date of adoption. We have developed the additional expanded disclosures required; however, the adoption of Topic 606 did not
have a material effect on our consolidated statements of operations, balance sheets or cash flows. See Note 4 for further details.
Effective January 1 2018, we adopted the FASB ASU No. 2017-01, “Business Combinations - Clarifying the Definition of
a Business” (“ASU 2017-01”). ASU 2017-01 provides additional guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of ASU 2017-01 was applied
prospectively and had no effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework - Changes
to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements of fair
value measurements. ASU 2018-13 is effective for us beginning January 1, 2020. Certain disclosures are required to be applied on a
retrospective basis and others on a prospective basis. We are currently evaluating the impact that adoption of this guidance will have
on our financial statement disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the
Accounting for Goodwill Impairment.” (“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price
allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us beginning January 1,
2020, with early adoption permitted, and applied prospectively. We do not expect ASU 2017-04 to have a material impact on our
financial statements.
55
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which amends the existing
accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. Under ASU
2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than twelve months. Lessor
accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities will be expanded to include
qualitative and specific quantitative information. ASU 2016-02 will be effective for annual reporting periods beginning after
December 15, 2018, and early adoption is permitted. We expect to adopt the new standard in the quarter ending March 31, 2019.
ASU 2016-02 requires a modified retrospective transition approach. We believe the recognition of new right-of-use (“ROU”) assets
and lease liabilities will be the most significant change for us under ASU 2016-02. ASU 2016-02 includes several practical
expedients, which we anticipate we will elect upon adoption, including to not reassess the lease classification for any expired or
existing leases. Management is continuing to assess the values of the ROU assets and lease liabilities that will be included on the
balance sheet as of January 1, 2019. Management does not expect the adoption of ASU 2016-02 to have a material impact on our
results of operations or cash flows.
3.
ACQUISITION
On August 2, 2018, we acquired certain homebuilding assets owned by Crosswind Properties, LLC, Wynn Construction, Inc.,
Crosswind Development, Inc., Crosswind Investments, Inc. and First Continental Communities, Inc. (collectively, “Wynn Homes”),
and assumed certain related liabilities. As a result of the Wynn Homes acquisition, we expanded our North Carolina presence in the
Raleigh market, as well as established an immediate presence in the Wilmington market. We acquired approximately 200 homes
under construction and more than 4,000 owned and controlled lots. The total purchase price for the Wynn Homes acquisition was
approximately $78.5 million, consisting of approximately $74.5 million in cash and $4.0 million in shares of our common stock.
The acquisition was accounted for in accordance with ASC Topic 805, Business Combinations (“ASC 805”). Our purchase
accounting for Wynn Homes as of December 31, 2018 was complete concerning the working capital adjustment and valuation of the
tangible assets, intangible assets and liabilities assumed as of the acquisition date. At December 31, 2018, the acquired assets and
assumed liabilities have been recorded at their estimated fair values at the acquisition date as noted below (amounts in thousands):
Purchase Consideration:
Cash paid for net assets
Common Stock
Total consideration
Assets acquired and liabilities assumed:
Real estate inventory
Pre-acquisition costs, deposits and other assets
Total assets
Accounts payable and accrued liabilities
Total liabilities
$
Total
74,463
4,000
78,463
75,927
8,143
84,070
(5,607 )
(5,607 )
Net assets acquired
$
78,463
Pre-acquisition costs, which approximate fair value, deposits and other assets, accounts payable and accrued liabilities, are
stated at historical carrying values given the short-term nature of these assets and liabilities. Real estate inventory was adjusted to
reflect fair value.
We determined the estimated fair values of the real estate inventory with the assistance of appraisals performed by independent
third-party specialists and estimates by management.
Significant assumptions included in our estimates of the fair value of the assets acquired include market comparisons, gross
margin comparisons, future development costs and the timing of the completion of development activities, absorption rates, and mix
of products sold in each community. Based on the estimated purchase consideration, management believes that the purchase price
for the Wynn Homes acquisition was at market value and there was no excess of purchase price over the net fair value of assets
acquired and liabilities assumed.
We expensed approximately $0.8 million of acquisition related costs for legal and due diligence services; these costs are
included in the general and administrative expenses in the accompanying consolidated statements of operations.
4.
REVENUES
Adoption of Topic 606, “Revenue from Contracts with Customers”
56
On January 1, 2018, we adopted Topic 606 using the modified retrospective method. Results for reporting periods beginning
after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in
accordance with our historic accounting under Topic 605. We did not record any adjustments or net reductions to opening retained
earnings as of January 1, 2018 in relation to the adoption of Topic 606.
Revenue Recognition
Revenues from home sales are recognized when control of the promised goods or services is transferred to our customers, in
an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues from home
sales are recorded at the time each home sale is closed, title and possession are transferred to the customer and we have no
significant continuing involvement with the home. Proceeds from home sales are generally received from the title company within a
few business days after closing. Home sales discounts and incentives granted to customers, which are related to the customers’
closing costs that we pay on the customers’ behalf, are recorded as a reduction of revenue in our consolidated financial statements of
operations.
The following table presents our home sales revenues disaggregated by revenue stream (in thousands):
Retail home sales revenues
Other
Total home sales revenues
For the Year Ended December 31,
2018
2017
2016
$
$
1,394,475 $
109,925
1,504,400 $
1,217,191 $
40,769
1,257,960 $
838,320
—
838,320
The following table presents our home sales revenues disaggregated by geography, based on our determined operating
segments in Note 16 (in thousands):
Central
Northwest
Southeast
Florida
West
Home sales revenues
Home Sales Revenues
For the Year Ended December 31,
2018
2017
2016
$
$
623,751 $
277,567
271,073
180,950
151,059
1,504,400 $
533,254 $
215,421
183,422
199,733
126,130
1,257,960 $
429,505
86,496
111,651
115,276
95,392
838,320
We generate revenues primarily by delivering move-in ready spec homes with our entry-level and move-up homes sold under
our LGI Homes brand and our luxury series homes sold under our Terrata Homes brand.
Retail homes sold under both our LGI Homes brand and Terrata Homes brand focus on providing move-in ready homes with
standardized features within favorable markets that meet certain demographic and economic conditions. Our LGI Homes brand
primarily markets to entry-level or first-time homebuyers, while our Terrata Homes brand primarily markets to move-up
homebuyers.
Our other revenues are composed of our wholesale home sales under our LGI Homes brand and Terrata Homes brand in
existing markets. Wholesale homes are primarily sold under a bulk sales agreement and focus on providing move-in ready homes
with standardized features to real estate investors that will ultimately use the single-family homes as rental properties.
57
Performance Obligations
Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We
generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms as
customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is
complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title
company within a few business days after closing.
Sales and broker commissions are incremental costs incurred to obtain a contract with a customer that would not have been
incurred if the contract had not been obtained. Sales and broker commissions are expensed upon fulfillment of a home closing.
Advertising costs are costs to obtain a contract that would have been incurred regardless of whether the contract was obtained and
are recognized as an expense when incurred. Sales and broker commissions and advertising costs are recorded within sales and
marketing expense presented in our consolidated statements of operations as selling expenses.
5.
REAL ESTATE INVENTORY
Our real estate inventory consists of the following (in thousands):
Land, land under development, and finished lots
Information centers
Homes in progress
Completed homes
Total real estate inventory
December 31,
2018
2017
$
$
736,402 $
21,179
149,506
321,169
1,228,256 $
494,552
18,327
191,659
214,395
918,933
See “Real Estate Inventory” under Note 2 for more information.
Interest and financing costs incurred under our debt obligations, as more fully discussed in Note 8, are capitalized to qualifying
real estate projects under development and homes under construction.
6.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Computer equipment
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Total property and equipment
Less: Accumulated depreciation
Property and equipment, net
Asset Life
(years)
2-5
$
5
2-5
5
$
December 31,
2018
2017
1,342 $
102
3,183
267
4,894
(3,462 )
1,432 $
1,483
112
2,987
240
4,822
(3,148 )
1,674
Depreciation expense incurred for the years ended December 31, 2018, 2017 and 2016 was $0.7 million, $0.8 million and $0.9
million, respectively.
58
7.
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued and other liabilities consist of the following (in thousands):
Inventory related obligations
Taxes payable
Retentions and development payable
Accrued compensation, bonuses and benefits
Accrued interest
Warranty reserve
Other
Total accrued expenses and other liabilities
Inventory Related Obligations
December 31,
2018
2017
7,041 $
10,773
18,899
13,913
12,339
2,950
10,640
76,555 $
12,906
48,733
12,025
14,462
2,096
2,450
10,159
102,831
$
$
We own lots in certain communities in Arizona, California, Florida, and Texas that have Community Development Districts
(“CDD”) or similar utility and infrastructure development special assessment programs that allocate a fixed amount of debt service
associated with development activities to each lot. This obligation for infrastructure development is attached to the land, is typically
payable over a 30-year period, and is ultimately assumed by the homebuyer when home sales are closed. Such obligations represent
a non-cash cost of the lots. At December 31, 2018 and 2017, we had CDD and other utility development obligations of
approximately $7.0 million and $12.9 million, respectively.
Estimated Warranty Reserve
We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in
structural elements such as framing components and foundation systems.
Changes to our warranty accrual are as follows (in thousands):
Warranty reserves, beginning of period
Warranty provision
Warranty expenditures
Warranty reserves, end of period
8.
NOTES PAYABLE
Revolving Credit Agreement
$
$
2018
December 31,
2017
2,450 $
4,438
(3,938 )
2,950 $
1,600 $
4,999
(4,149)
2,450 $
2016
1,325
3,084
(2,809)
1,600
On May 25, 2018, we entered into that certain Third Amended and Restated Credit Agreement with several financial
institutions, and Wells Fargo Bank, National Association, as administrative agent, which was amended as of June 19, 2018 by that
certain First Amendment thereto (the “First Amendment”; such credit agreement, as amended by the First Amendment, the “Credit
Agreement”). The Credit Agreement has substantially similar terms and provisions to our second amended and restated credit
agreement entered into in May 2017 with several financial institutions, and Wells Fargo Bank, National Association, as
administrative agent (the “2017 Credit Agreement”) but, among other things, provided for, a revolving credit facility of $450.0
million, which could be increased at our request by up to $50.0 million if the lenders make additional commitments, subject to the
terms and conditions of the Credit Agreement (which was requested and approved in October 2018). On October 18, 2018, we
entered into a Lender Acknowledgement Agreement with certain lenders and Wells Fargo Bank, National Association, as
administrative agent, whereby the aggregate revolving commitments under the Credit Agreement increased by $50.0 million from
$450.0 million to $500.0 million in accordance with the relevant provisions of the Credit Agreement.
The Credit Agreement matures on May 31, 2021. Before each anniversary of the Credit Agreement, we may request a one-year
extension of the maturity date. The Credit Agreement is guaranteed by each of our subsidiaries that have gross assets equal to or
greater than $0.5 million. The revolving credit facility is currently unsecured, but we have agreed to provide collateral if we fail to
meet certain financial conditions in the future. As of December 31, 2018, the borrowing base under the Credit Agreement was
$695.2 million, of which borrowings, including the Convertible Notes (as defined below) and the Senior Notes (as defined below),
59
of $663.8 million were outstanding, $5.1 million of letters of credit were outstanding and $26.3 million was available to borrow
under the Credit Agreement.
Interest is paid monthly on borrowings under the Credit Agreement at LIBOR plus 2.90%. The Credit Agreement applicable
margin for LIBOR loans ranges from 2.65% to 3.25% based on our leverage ratio. At December 31, 2018, LIBOR was 2.46%.
The Credit Agreement contains various financial covenants, including a minimum tangible net worth, a leverage ratio, a
minimum liquidity amount and an EBITDA to interest expense ratio. The Credit Agreement contains various covenants that, among
other restrictions, limit the amount of our additional debt and our ability to make certain investments. At December 31, 2018, we
were in compliance with all of the covenants contained in the Credit Agreement.
In connection with the issuance of our 6.875% Senior Notes due 2026 (the “Senior Notes”) in July 2018, we reduced the
revolving commitment under the Credit Agreement from $750.0 million to $450.0 million pursuant to the First Amendment. During
the year ended December 31, 2018, we recognized on our consolidated statements of operations $3.4 million in debt extinguishment
costs related to the Credit Agreement.
Convertible Notes
We issued $85.0 million aggregate principal amount of our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) in
November 2014 pursuant to an exemption from the registration requirements afforded by Section 4(a)(2) of the Securities Act of
1933, as amended (the “Securities Act”). The Convertible Notes mature on November 15, 2019. Interest on the Convertible Notes is
payable semi-annually in arrears on May 15 and November 15 of each year at a rate of 4.25%. When the Convertible Notes were
issued, the fair value of $76.5 million was recorded to notes payable. $5.5 million of the remaining proceeds was recorded to
additional paid in capital to reflect the equity component and the remaining $3.0 million was recorded as a deferred tax liability. The
carrying amount of the Convertible Notes is being accreted to face value over the term to maturity.
Prior to May 15, 2019, the Convertible Notes are convertible only upon satisfaction of any of the specified conversion events.
On or after May 15, 2019 until the close of business on November 14, 2019 (the business day immediately preceding the stated
maturity date of the Convertible Notes), the holders of the Convertible Notes can convert their Convertible Notes at any time at their
option. Upon the election of a holder of Convertible Notes to convert their Convertible Notes, we may settle the conversion of the
Convertible Notes using any combination of cash and shares of our common stock. It is our intent, and belief that we have the
ability, to settle in cash the conversion of any Convertible Notes that the holders elect to convert. The initial conversion rate of the
Convertible Notes is 46.4792 shares of our common stock for each $1,000 principal amount of Convertible Notes, which represents
an initial conversion price of approximately $21.52 per share of our common stock. The conversion rate is subject to adjustments
upon the occurrence of certain specified events.
During the fourth quarter of 2017, we received notice from holders of $15.0 million principal amount of the Convertible Notes
to convert their Convertible Notes. The conversion of such Convertible Notes was settled in the first quarter of 2018, resulting in the
issuance of 486,679 shares of our common stock, a $0.6 million reduction to debt discount and additional paid in capital, a $0.2
million loss on the extinguishment of debt and a cash payment of $15.0 million for the principal amount of such Convertible Notes.
As of December 31, 2018, we have $70.0 million aggregate principal amount of Convertible Notes outstanding.
During the fourth quarter of 2018, the Convertible Notes were convertible because the closing sale price of our common stock
was greater than 130% of the $21.52 conversion price on at least 20 trading days during the 30 trading day period ending on
September 30, 2018. As a result, the holders of the Convertible Notes could elect to convert some or all of their Convertible Notes in
accordance with the terms and provisions of the indenture governing the Convertible Notes during the conversion period of October
1, 2018 through December 31, 2018 (inclusive). The Convertible Notes continue to be convertible during the first quarter of 2019.
As of the date of the filing of this Annual Report on Form 10-K, no other conversion notices have been received by us.
On July 6, 2018, concurrently with the offering of the Senior Notes, we entered into that certain First Supplemental Indenture,
dated as of July 6, 2018, among us, our subsidiaries that guarantee our obligations under the Credit Agreement (the “Subsidiary
Guarantors”) and Wilmington Trust, National Association, as trustee, which supplements the indenture governing the Convertible
Notes, pursuant to which (i) the subordination provisions in the indenture governing the Convertible Notes were eliminated, (ii) each
Subsidiary Guarantor agreed (A) to, concurrently with the issuance of the Senior Notes, fully and unconditionally guarantee the
Convertible Notes to the same extent that such Subsidiary Guarantor is guaranteeing the Senior Notes and (B) that such Subsidiary
Guarantor’s guarantee of the Convertible Notes ranks equally with such Subsidiary Guarantor’s guarantee of the Senior Notes and
(iii) the Company agreed to not, directly or indirectly, incur any indebtedness in the form of, or otherwise become liable in respect
of, any notes or other debt securities issued pursuant to an indenture or note purchase agreement (including the Senior Notes) unless
such indebtedness is equal with or contractually subordinated to the Convertible Notes in right of payment.
60
Senior Notes Offering
On July 6, 2018, we issued $300.0 million aggregate principal amount of the Senior Notes in an offering to persons reasonably
believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act and to certain non-
U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act. Interest on the Senior Notes
accrues at a rate of 6.875% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on
January 15, 2019, and the Senior Notes mature on July 15, 2026. Terms of the Senior Notes are governed by an indenture and
supplemental indenture, each dated as of July 6, 2018, among us, the Subsidiary Guarantors and Wilmington Trust, National
Association, as trustee.
We received net proceeds from the offering of the Senior Notes of approximately $296.2 million, after deducting the initial
purchasers’ discounts of $2.3 million and commissions and offering expenses of $1.5 million. The net proceeds from the offering
were used to repay a portion of the borrowings under the Credit Agreement.
Notes payable consist of the following (in thousands):
Notes payable under the Credit Agreement ($500.0 million revolving credit
facility at December 31, 2018) maturing on May 31, 2021; interest paid
monthly at LIBOR plus 2.90%; net of debt issuance costs of approximately $3.7
million and $5.3 million at December 31, 2018 and December 31, 2017,
4.25% Convertible Notes due November 15, 2019; interest paid semi-annually
at 4.25%; net of debt issuance costs of approximately $0.4 million and $1.0
million at December 31, 2018 and December 31, 2017, respectively; and
approximately $1.3 million and $3.5 million in unamortized discount at
December 31, 2018 and December 31, 2017, respectively
ti
l
December 31,
2018
2017
$
290,131
$
394,714
68,251
80,481
Senior Notes due July 15, 2026; interest paid semi-annually at 6.875%; net of
debt issuance costs of approximately $2.5 million at December 31, 2018 and
approximately $2.1 million in unamortized discount at December 31, 2018
Total Notes Payable
$
295,352
653,734 $
—
475,195
As of December 31, 2018, the annual aggregate maturities of notes payable during each of the next five fiscal years are as
follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total notes payable
Less: Debt discount
Less: Debt issuance costs
Net notes payable
Amount
69,962
—
293,800
—
—
300,000
663,762
(3,447 )
(6,581 )
653,734
$
$
61
Capitalized Interest
Interest activity, including other financing costs, for notes payable for the periods presented is as follows (in thousands):
Interest incurred
Less: Amounts capitalized
Interest expense
Cash paid for interest
Year Ended December 31,
2018
38,216 $
(38,216 )
— $
2017
24,275 $
(24,275 )
— $
2016
18,457
(18,457 )
—
23,376 $
19,704 $
14,339
$
$
$
Included in interest incurred was amortization of deferred financing costs for notes payable and amortization of the
Convertible Notes and the Senior Notes discounts of $4.6 million, $4.1 million, and $3.6 million for the years ended December 31,
2018, 2017, and 2016, respectively.
9.
INCOME TAXES
All Company operations are domestic. The provision for income taxes consisted of the following (in thousands):
Current:
Federal
State
Current tax provision
Deferred:
Federal
State
Deferred tax provision (benefit)
Total income tax provision
Year ended December 31,
2018
2017
2016
$
$
39,053 $
5,483
44,536
(663)
(61)
(724)
43,812 $
55,218 $
4,970
60,188
(1,918)
(174)
(2,092)
58,096 $
37,751
3,452
41,203
(2,451)
(111)
(2,562)
38,641
Income taxes paid were $83.3 million, $16.8 million and $42.4 million for the years ended December 31, 2018, 2017 and
2016, respectively.
A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate to
income before provision for income taxes for the years ended December 31, 2018, 2017 and 2016 (in thousands):
Tax at federal statutory rate (1)
State income taxes (net of federal benefit)
Domestic production activity deduction
Non deductible expenses and other
Change in tax rates - deferred taxes
Tax at effective rate
Year Ended December 31,
2018
2017
2016
$ 41,816
4,263
—
(2,257 )
(10 )
$ 43,812
21.0 % $ 60,008
2.1
3,060
—
(5,461 )
(1.1 )
—
(657 )
1,146
22.0 % $ 58,096
35.0 % $ 39,791
2,143
1.8
(3,727 )
(3.2 )
435
(0.4 )
0.7
(1 )
33.9 % $ 38,641
35.0 %
1.9
(3.3 )
0.4
—
34.0 %
(1) The Tax Act (as defined below) reduced the U.S. federal statutory rate from 35% to 21% beginning in 2018.
62
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The components of net deferred tax assets and liabilities at December 31, 2018 and 2017 are as follows (in thousands):
Deferred tax assets:
Accruals and reserves
Inventory
Stock-based compensation
Other
Debt extinguishment
Total deferred tax assets
Deferred tax liabilities:
Discount on Convertible Notes
Prepaids
Tax depreciation in excess of book depreciation
Goodwill and other assets amortized for tax
Total deferred tax liabilities
Total net deferred tax assets (liabilities)
December 31
2018
2017
2,642 $
755
1,918
297
531
6,143
(307 )
(2,370 )
(183 )
(493 )
(3,353 )
2,790 $
2,756
475
1,048
38
—
4,317
(801)
(1,035)
(177)
(376)
(2,389)
1,928
$
$
The Company has not recorded any accruals related to uncertain tax positions as of December 31, 2018 and 2017, respectively.
We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The statute of limitations with regards
to our federal income tax filings is three years. The statute of limitations for our state tax jurisdictions is three to four years
depending on the jurisdiction. In the normal course of business, we are subject to tax audits in various jurisdictions, and such
jurisdictions may assess additional income taxes. We do not expect the outcome of any examination to have a material effect on our
consolidated financial statements; however, audit outcomes and the timing of audit adjustments are subject to significant uncertainty.
On December 22, 2017, the President signed into law the U.S. federal income tax legislation commonly referred to as the “Tax
Cuts and Jobs Act” (the “Tax Act”), reducing the U.S. federal corporate income tax rate for tax years beginning after December 31,
2017, among other changes. Under ASC 740, Income Taxes (“ASC 740”), the effects of the Tax Act are recognized in the period that
includes the date of enactment. The effect of this change impacts our effective tax rate. The estimated impact on 2017 was to reduce
the value of our deferred tax assets by approximately $1.1 million and has been reflected in our effective tax rate reconciliation.The
disclosed impact was our most reasonable estimate at that time based on our understanding of the Tax Act as it applied to our
business. At December 31, 2018, we have completed our accounting for the income tax effects of the Tax Act on our deferred tax
assets in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118 and ASC 740, and no
material adjustments were required.
10.
EQUITY
We are authorized to issue 250,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred
stock, par value $0.01 per share. As of December 31, 2018 and 2017, no shares of preferred stock were issued or outstanding.
At December 31, 2018, we had 23,746,385 shares of common stock issued and 22,707,385 shares of common stock
outstanding, including 1,039,000 treasury shares of our common stock. On November 19, 2018, we purchased 39,000 shares of our
common stock at $38.58 per share to be held as treasury stock, in addition to the 1,000,000 treasury shares of our common stock
previously purchased by us on November 21, 2014 at $16.55 per share. At December 31, 2017, we had 22,845,580 shares of
common stock issued and 21,845,580 shares of common stock outstanding, including the 1,000,000 treasury shares of our common
stock purchased by us on November 21, 2014.
Shelf Registration Statement and ATM Offering Programs
63
On August 24, 2018, we and certain of our subsidiaries filed an automatic shelf registration statement on Form S-3
(Registration No. 333-227012), registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt
securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these
securities. Under our prior shelf registration statement, we established an at the market common stock offering program in
September 2015 (the “2015 ATM Program”) and September 2016 (the “2016 ATM Program”) with Deutsche Bank Securities Inc.,
J.P. Morgan Securities LLC, JMP Securities LLC and Builder Advisor Group, LLC, as sales agents to sell up to $30.0 million and
$25.0 million, respectively, of our common stock. We issued and sold 743,554 shares of our common stock under the 2015 ATM
Program, and received net proceeds of approximately $19.8 million, during 2016. We issued and sold 354,620 and 250,000 shares of
our common stock under the 2016 ATM Program, and received net proceeds of approximately $15.5 million and $9.0 million,
during 2017 and 2016, respectively.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2018,
2017, and 2016.
Numerator (in thousands):
Net income
Denominator:
Basic weighted average shares outstanding
Effect of dilutive securities:
Convertible Notes - treasury stock method
Stock-based compensation units
Diluted weighted average shares outstanding
For the Year Ended December 31,
2018
2017
2016
$
155,286 $
113,306 $
75,031
22,551,762
21,604,932
20,798,333
2,030,023
310,489
24,892,274
1,975,648
352,542
23,933,122
1,044,519
181,239
22,024,091
Basic earnings per share
Diluted earnings per share
$
$
6.89 $
6.24 $
5.24 $
4.73 $
3.61
3.41
Antidilutive non-vested restricted stock units excluded from
calculation of diluted earnings per share
20,462
16,473
13,613
In accordance with ASC 260-10, Earnings Per Share, we calculated the dilutive effect of the Convertible Notes using the
treasury stock method, since we have the intent and ability to settle the principal amount of the outstanding Convertible Notes in
cash. Under the treasury stock method, the Convertible Notes have a dilutive impact on diluted earnings per share to the extent that
the average market price of our common stock for a reporting period exceeds the conversion price of $21.52 per share.
During the years ended December 31, 2018 , 2017, and 2016, the average market price of our common stock exceeded the
conversion price of $21.52 per share, therefore the calculation of diluted earnings per share for all years presented includes the effect
of our common stock related to the conversion spread of the Convertible Notes.
11.
STOCK-BASED COMPENSATION
Non-performance Based Restricted Stock Units
A total of 3,000,000 shares of our common stock have been reserved for issuance under the LGI Homes, Inc. Amended and
Restated 2013 Equity Incentive Plan (the “2013 Incentive Plan”). The 2013 Incentive Plan was approved by our stockholders at our
2017 Annual Meeting of Stockholders in May 2017. There were 171,055 restricted stock units (“RSUs”) outstanding at
December 31, 2018, issued at a $0.00 exercise price.
64
The following table summarizes the activity of our time-vested RSUs:
Balance at December 31, 2015
Granted
Vested
Forfeited
Balance at December 31, 2016
Granted
Vested
Forfeited
Balance at December 31, 2017
Granted
Vested
Forfeited
Balance at December 31, 2018
Shares
Weighted Average
Grant Date Fair
Value
107,814 $
62,453 $
(29,010 ) $
(7,404 ) $
133,853 $
76,586 $
(25,803 ) $
(9,536 ) $
175,100 $
54,874 $
(51,694 ) $
(7,225 ) $
171,055 $
16.48
23.66
14.73
17.97
20.13
36.83
18.45
20.48
27.66
57.60
20.79
34.77
39.04
In 2018, we issued 15,867 RSUs to senior management for the time-based portion of our 2018 long-term incentive
compensation program and 11,780 RSUs for 2017 bonuses to managers under the Annual Bonus Plan, which generally cliff vest on
the third anniversary of the grant date. In 2017, we issued 27,764 RSUs to senior management for the time-based portion of our
2017 long-term incentive compensation program and 18,366 RSUs for 2016 bonuses to managers under the Annual Bonus Plan,
which generally cliff vest on the third anniversary of the grant date. In 2016, we issued 21,905 RSUs to senior management for the
time-based portion of our 2016 long-term incentive compensation program and 22,059 RSUs for 2015 bonuses to certain officers
and managers under the Annual Bonus Plan, which vest over three years. In addition, during the years ended December 31, 2018,
2017 and 2016, we issued 27,227, 30,456 and 18,489 RSUs, respectively, to certain employees, executives and non-employee
directors, which vest over periods ranging from one to three years. Under the terms of the grant award agreements, all of the RSUs
may only be settled in shares of our common stock.
We recognized $2.0 million, $1.3 million, and $0.8 million of stock-based compensation expense related to outstanding RSUs
grants for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018, we had unrecognized
compensation cost of $3.6 million related to unvested RSUs, which is expected to be recognized over a weighted average period of
2.1 years.
Performance Based Restricted Stock Units
The Compensation Committee of our Board of Directors has granted awards of performance-based RSUs (“PSUs”) under the
2013 Incentive Plan to certain members of senior management based on three-year performance cycles. At December 31, 2018,
there were 253,821 PSUs outstanding that have been granted to certain members of management at a $0.00 exercise price. The
PSUs provide for shares of our common stock to be issued based on the attainment of certain performance metrics over the
applicable three-year periods. The number of shares of our common stock that may be issued to the recipients for the PSUs range
from 0% to 200% of the target amount depending on actual results as compared to the target performance metrics. The terms of the
PSUs provide that the payouts will be capped at 100% of the target number of PSUs granted if absolute total stockholder return is
negative during the performance period, regardless of EPS performance; this market condition applies for amounts recorded above
target. The compensation expense associated with the grants of PSU is determined using the derived grant date fair value, based on a
third-party valuation analysis, and expensed over the applicable period. The PSUs vest upon the determination date for the actual
results at the end of the three-year period and require that the recipients continue to be employed by us through the determination
date. The PSUs can only be settled in shares of our common stock.
65
Period
Granted
2015
2016
2017
2018
Total
Performance
Period
2015 - 2017
2016 - 2018
2017 - 2019
2018 - 2020
Target PSUs
Outstanding
at December
31, 2017
Target
PSUs
Granted
120,971
87,605
111,035
—
319,611
—
—
—
61,898
61,898
Target
PSUs
Forfeited
Target PSUs
Outstanding
at December
31, 2018
Weighted
Average
Grant
Date Fair
Value
—
(3,929 )
(2,788 )
—
(6,717 )
— $
83,676 $
108,247 $
61,898 $
253,821
13.34
21.79
31.64
64.60
Target
PSUs
Vested
(120,971 )
—
—
—
(120,971 )
At December 31, 2018, management estimates that the recipients will receive approximately100%, 200%, and 200%, of the
2018, 2017, and 2016 target number of PSUs, respectively, at the end of the applicable three-year performance cycle based on
projected performance compared to the target performance metrics. The 2015 - 2017 performance period grants vested on March 15,
2018 at 200% of the target number. We recognized $4.0 million, $2.9 million, and $2.6 million of total stock-based compensation
expense related to outstanding PSUs grants for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31,
2018, we had unrecognized compensation cost of $5.3 million, based on the probable amount, related to unvested PSUs, which is
expected to be recognized over a weighted average period of 1.8 years.
Employee Stock Purchase Plan
In 2016, we adopted the LGI Homes, Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP provides for employees
to make quarterly elections for payroll withholdings to purchase shares of our common stock at a 15% discount from the closing
price of our common stock on the purchase date, which is the last business day of each calendar quarter. During the years ended
December 31, 2018, 2017 and 2016, we issued 49,744, 33,887, and 19,398 shares of our common stock to the ESPP participants. We
received net proceeds of approximately $2.7 million, $1.6 million and $0.6 million related to the ESPP for 2018, 2017, and 2016,
respectively. We recognized $0.4 million, $0.2 million, and $0.1 million in stock compensation expense related to the ESPP for
2018, 2017, and 2016, respectively. The ESPP contributions are not refundable (other than in the case of termination of
employment) and, therefore, the shares purchasable with the amounts withheld are included in weighted-average shares outstanding
for both basic and diluted earnings per share. The maximum aggregate number of shares of our common stock which may be issued
pursuant to the ESPP is 500,000 shares, and as of December 31, 2018, 396,971 shares of our common stock remain available for
issuance under the ESPP.
12.
FAIR VALUE DISCLOSURES
ASC Topic 820, Fair Value Measurements (“ASC 820”), defines fair value as “the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s
principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability
with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a
particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result
in a fair value that differs from the transaction price or market price of the asset or liability.
ASC 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and
establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows:
Level 1 - Fair value is based on quoted prices in active markets for identical assets or liabilities.
Level 2 - Fair value is determined using significant observable inputs, generally either quoted prices in active markets for
similar assets or liabilities, or quoted prices in markets that are not active.
Level 3 - Fair value is determined using one or more significant inputs that are unobservable in active markets at the
measurement date, such as a pricing model, discounted cash flow, or similar technique.
We utilize fair value measurements to account for certain items and account balances within our consolidated financial
statements. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets.
The fair value of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate
their carrying amounts due to the short-term nature of these instruments. As of December 31, 2018, the Credit Facility’s carrying
value approximates market value since it has a floating interest rate, which increases or decreases with market interest rates and our
leverage ratio.
66
In order to determine the fair value of the Convertible Notes and the Senior Notes listed below, the future contractual cash
flows are discounted at our estimate of current market rates of interest, which were determined based upon the average interest rates
of similar convertible notes and senior notes within the homebuilding industry (Level 2 measurement).
The following table below shows the level and measurement of liabilities at December 31, 2018 and 2017 (in thousands):
December 31, 2018
December 31, 2017
Convertible Notes
Senior Notes
Fair Value
Hierarchy
Level 2
Level 2
$
$
Carrying
Value
Estimated Fair
Value (1)
Carrying
Value
Estimated Fair
Value(1)
68,251 $
295,352 $
67,787 $
296,905 $
80,481 $
— $
81,523
—
(1) Excludes the fair value of the equity component of the Convertible Notes. See the “Convertible Notes” section within Note 8 for further
details.
13.
RELATED PARTY TRANSACTIONS
Land Purchases from Affiliates
As of December 31, 2018, we have two land purchase contracts to purchase a total of 198 finished lots in Pasco County and
Manatee County, Florida from affiliates of one of our directors for a total base purchase price of approximately $6.9 million. The
lots will be purchased in takedowns, subject to annual price escalation ranging from 3% to 6% per annum, and may provide for
additional payments to the seller at the time of sale to the homebuyer. We have a $0.7 million non-refundable deposit at
December 31, 2018 related to these land purchase contracts. We anticipate closing on these contracts in the first half of 2019.
In April 2018, we completed our commitments under a land purchase contract to purchase 106 finished lots in Montgomery
County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately
$8.0 million. The lots were purchased in takedowns of at least 21 lots during successive six-month periods, subject to 5% annual
price escalation and certain price protection terms. During 2018, we purchased the final takedown of 22 lots under this land
purchase contract for $1.8 million and a $100,000 non-refundable deposit related to this land purchase contract was applied to this
takedown. We purchased 42 lots under this land purchase contract during 2017 and 2016 for $3.4 million (escalated price) and $3.2
million, respectively.
Consulting Fees
We had a three-year consulting agreement with a family member of our chief executive officer for $100,000 per year payable
on a monthly basis, which was terminated in June 2016 by mutual agreement of the parties. Consulting fees were $83,333 for the
year ended December 31, 2016.
Home Sales to Affiliates
In 2018, we had no home closings to affiliates. In 2017, we sold three homes to an affiliate of one of our directors for
approximately $0.7 million. In 2016, we sold two homes to an affiliate of one of our directors for approximately $0.5 million.
14.
RETIREMENT BENEFITS
Our employees are eligible to participate in a 401(k) savings plan. Employees are eligible to participate after completing 90
days of service and having attained the age of 21. Salary deferrals are allowed in amounts up to 100% of an eligible employee’s
salary, not to exceed the maximum allowed by law. A discretionary match may be made by us of up to 100% of the first 4% of an
eligible employee’s deferral, not to exceed the maximum allowed by law. For each of the years ended December 31, 2018, 2017 and
2016, our matching contributions were $2.6 million, $1.8 million and $0.8 million, respectively.
15.
COMMITMENTS AND CONTINGENCIES
Contingencies
In the ordinary course of doing business, we are subject to claims or proceedings from time to time relating to the purchase,
development, and sale of real estate and homes and other aspects of our homebuilding operations. Management believes that these
claims include usual obligations incurred by real estate developers and residential home builders in the normal course of business. In
the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations
or cash flows.
67
We have provided unsecured environmental indemnities to certain lenders and other counterparties. In each case, we have
performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside
environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to environmental
matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, we may have
recourse against other previous owners. In the ordinary course of doing business, we are subject to regulatory proceedings from time
to time related to environmental and other matters. In the opinion of management, these matters will not have a material effect on
our consolidated financial position, results of operations, or cash flows.
Land Deposits
We have land purchase contracts, generally through cash deposits, for the right to purchase land or lots at a future point in time
with predetermined terms. We do not have title to the property, and obligations with respect to the land purchase contracts are
generally limited to the forfeiture of the related nonrefundable cash deposits. The following is a summary of our land purchase
deposits included in pre-acquisition costs and deposits (in thousands, except for lot count):
Land deposits and option payments
Commitments under the land purchase contracts if the purchases are
consummated
Lots under land purchase contracts
December 31,
2018
2017
$
$
40,015 $
776,224
$
22,820
17,761
460,714
18,758
As of December 31, 2018 and 2017, approximately $25.2 million and $8.4 million, respectively, of the land deposits are
related to purchase contracts to deliver finished lots that are refundable under certain circumstances and secured by mortgages or
letters of credit, or guaranteed by the seller or its affiliates.
Leasing Arrangements
We lease office facilities and certain equipment under non-cancellable operating lease agreements. Rent escalation provisions
are accounted for using the straight-line method. Rent expense includes common area maintenance costs. Rent expense totaled $1.0
million, $1.0 million and $0.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Future minimum lease payments under non-cancellable operating lease agreements are as follows at December 31, 2018 (in
thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
827
760
768
706
722
2,837
6,620
Bonding and Letters of Credit
We have outstanding letters of credit and performance and surety bonds totaling $77.5 million (including $5.1 million of
letters of credit issued under the Credit Agreement) and $49.7 million at December 31, 2018 and 2017, respectively, related to our
obligations for site improvements at various projects. Management does not believe that draws upon the letters of credit, surety
bonds, or financial guarantees if any, will have a material effect on our consolidated financial position, results of operations, or cash
flows.
68
16.
SEGMENT INFORMATION
Beginning in the fourth quarter of 2018, we changed our reportable segments to Central, Northwest, Southeast, Florida, and
West. These segments reflect the way the Company evaluates its business performance and manages its operations. Prior year
information has been restated for corresponding items of our segment information.
We operate one principal homebuilding business that is organized and reports by division. We have seven operating segments
that we aggregate into five reportable segments at December 31, 2018: our Central, Northwest, Southeast, Florida, and West
divisions. The Central division is our largest division and comprised approximately 41.5%, 42.4% and 51.2% of total home sales
revenues for the years ended December 31, 2018, 2017 and 2016, respectively.
In accordance with ASC Topic 280, Segment Reporting, operating segments are defined as components of an enterprise for
which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in
deciding how to allocate resources and in assessing performance. The CODMs primarily evaluate performance based on the number
of homes closed, gross margin and average sales price.
The seven operating segments qualify as our five reporting segments. In determining the most appropriate reportable segments,
we consider operating segments’ economic and other characteristics, including home floor plans, average selling prices, gross
margin percentage, geographical proximity, production construction processes, suppliers, subcontractors, regulatory environments,
customer type, and underlying demand and supply. Each operating segment follows the same accounting policies and is managed by
our management team. We have no inter-segment sales, as all sales are to external customers. Operating results for each segment
may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.
Financial information relating to our reportable segments was as follows (in thousands):
Revenues:
Central
Northwest
Southeast
Florida
West
Total home sales revenues
Net income (loss) before income taxes:
Central
Northwest
Southeast
Florida
West
Corporate (1)
$
$
$
Total net income (loss) before income taxes
$
For the Year Ended December 31,
2018
2017
2016
623,751 $
277,567
271,073
180,950
151,059
1,504,400 $
104,625 $
40,906
29,078
21,341
13,595
(10,447)
199,098 $
533,254 $
215,421
183,422
199,733
126,130
1,257,960 $
89,133 $
34,206
19,959
25,687
5,890
(3,473)
171,402 $
429,505
86,496
111,651
115,276
95,392
838,320
73,026
6,612
11,996
14,471
10,108
(2,541)
113,672
(1) The Corporate balance consists primarily of general and administration unallocated costs for various shared service functions, as well
as our warranty reserve and loss on extinguishment of debt. Actual warranty expenses are reflected within the reportable segments.
Assets:
Central
Northwest
Southeast
Florida
West
Corporate (1)
Total assets
December 31,
2018
2017
569,409 $
200,443
300,758
106,398
161,514
56,951
1,395,473 $
454,899
159,489
155,928
119,257
96,647
93,672
1,079,892
$
$
69
(1) As of December 31, 2018, the Corporate balance consists primarily of cash, prepaid insurance and prepaid expenses. As of December
31, 2017, the Corporate balance consists primarily of cash, deposits and pre-acquisition costs, prepaid insurance and prepaid expenses.
As of December 31, 2017, $18.9 million of deposits and pre-acquisition costs were reported at Corporate and balances as of December
31, 2018 were allocated to the five reportable segments.
17.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results are as follows (in thousands, except per share data):
First
Quarter
2018
Second
Quarter
2018
Third
Quarter
2018
Fourth
Quarter
2018
$ 279,024 $ 419,847 $ 380,369 $ 425,160
103,558
56,209
42,653
1.89
109,765
62,671
47,608
2.11
97,334
48,991
37,723
1.66
69,259
31,227
27,302
1.23
1.10
1.90
1.52
1.72
First
Quarter
2017
Second
Quarter
2017
Third
Quarter
2017
Fourth
Quarter
2017
$ 162,911 $ 324,178 $ 365,896 $ 404,975
98,677
55,041
35,640
1.65
1.43
91,896
50,877
33,687
1.55
1.40
43,499
16,842
11,780
0.55
0.52
86,348
48,642
32,199
1.49
1.39
Total home sales revenues
Gross margin
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share
Total home sales revenues
Gross margin
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share
70
ITEM 9.
FINANCIAL DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has
evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2018. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, our disclosure controls and procedures are effective to ensure information is
recorded, processed, summarized and reported within the periods specified in the Securities and Exchange Commission’s rules and
forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management of LGI Homes, Inc. (the “Company”) is responsible for establishing and maintaining effective internal control
over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. The Company’s
internal control over financial reporting is a process designed, as defined in Rule 13a-15(f) under the Exchange Act, to provide
reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles
in the United States.
In connection with respect to the preparation of the Company’s annual consolidated financial statements, and the processes
under which they were prepared, management of the Company has undertaken an assessment of the effectiveness of the Company’s
internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the 2013 COSO framework). Management’s assessment
included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational
effectiveness of the Company’s internal control over financial reporting. Based on this assessment, management has concluded that
the Company’s internal control over financial reporting was effective as of December 31, 2018.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial
statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s
internal control over financial reporting which appears below.
Changes in Internal Controls
No change in our internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) occurred
during the year ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of LGI Homes, Inc.
Opinion on Internal Control over Financial Reporting
We have audited LGI Homes, Inc.'s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 Framework), (the COSO criteria). In our opinion, LGI Homes, Inc. (the Company) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements
of operations, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and our
report dated February 26, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on
Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Houston, Texas
February 26, 2019
ITEM 9B.
OTHER INFORMATION
None.
72
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by Item 10, to the extent not set forth in “Business—Executive Officers” in Item 1, will be set forth
in the definitive proxy statement relating to the 2019 annual meeting of stockholders of LGI Homes, Inc. pursuant to SEC
Regulation 14A. Such definitive proxy statement relates to a meeting of stockholders involving the election of directors and the
portions thereof called for by Item 10 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
ITEM 11.
EXECUTIVE COMPENSATION
The information called for by Item 11 will be set forth in the definitive proxy statement relating to the 2019 annual meeting of
stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of
stockholders involving the election of directors and the portions thereof called for by Item 11 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
ITEM 12.
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
The information called for by Item 12 will be set forth in the definitive proxy statement relating to the 2019 annual meeting of
stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of
stockholders involving the election of directors and the portions thereof called for by Item 12 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
ITEM 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information called for by Item 13 will be set forth in the definitive proxy statement relating to the 2019 annual meeting of
stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of
stockholders involving the election of directors and the portions thereof called for by Item 13 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by Item 14 will be set forth in the definitive proxy statement relating to the 2019 annual meeting of
stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of
stockholders involving the election of directors and the portions thereof called for by Item 14 are incorporated herein by reference
pursuant to Instruction G to Form 10-K.
73
EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
PART IV
ITEM 15.
(1)
The following Consolidated Financial Statements as set forth in Item 8 of this report are filed herein.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity from December 31, 2015 to December 31, 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to the Consolidated Financial Statements for the years ended December 31, 2018, 2017 and 2016
(2)
Financial Statement Schedules
All schedules are omitted because the required information is not present, in amounts sufficient to require submission of
the schedule, or because the required information is included in the financial statements and related notes thereto.
74
(3)
Exhibits
The exhibits filed or furnished as part of this annual report on Form 10-K are listed in the Index to Exhibits, which Index
includes the management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report on
Form 10-K by Item 601(b)(10)(iii) of Regulation S-K, and is incorporated in this Item by reference.
Exhibit No.
3.1
Description
Certificate of Incorporation of LGI Homes, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (Registration No. 333-190853) of LGI Homes, Inc. filed with the SEC on August 28, 2013).
3.2
4.1
4.2
4.3
4.4
10.1+
10.2+
10.3+
10.4
10.5
10.6
21.1*
23.1*
31.1*
31.2*
32.1*
Bylaws of LGI Homes, Inc. (incorporated herein by reference to Exhibit 3.2 to the Registration Statement on Form
S-1 (Registration No. 333-190853) of LGI Homes, Inc. filed with the SEC on August 28, 2013).
Indenture dated as of November 21, 2014, by and between LGI Homes, Inc. and Wilmington Trust, National
Association, as trustee, governing LGI Homes, Inc.’s 4.25% Convertible Notes due 2019, including a form of note
(incorporated herein by reference to Exhibit 4.01 to the Current Report on Form 8-K (File No. 001-36126) of LGI
Homes, Inc. filed with the SEC on November 26, 2014).
First Supplemental Indenture, dated as of July 6, 2018, among LGI Homes, Inc., the subsidiary guarantors listed
therein and Wilmington Trust, National Association, as trustee, governing LGI Homes, Inc.’s 4.25% Convertible
Notes due 2019 (incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K (File No. 001-
36126) of LGI Homes, Inc. filed with the SEC on July 6, 2018).
Indenture, dated as of July 6, 2018, among LGI Homes, Inc., the potential subsidiary guarantors listed therein and
Wilmington Trust, National Association, as trustee (incorporated herein by reference to Exhibit 4.1 to the Current
Report on Form 8-K (File No. 001-36126) of LGI Homes, Inc. filed with the SEC on July 6, 2018).
First Supplemental Indenture, dated as of July 6, 2018, among LGI Homes, Inc., the subsidiary guarantors listed
therein and Wilmington Trust, National Association, as trustee, governing LGI Homes, Inc.’s 6.875% Senior Notes
due 2026, including the form of the senior notes (incorporated herein by reference to Exhibit 4.2 to the Current
Report on Form 8-K (File No. 001-36126) of LGI Homes, Inc. filed with the SEC on July 6, 2018).
Employment Agreement, dated as of November 13, 2018, between the Company and Eric Lipar, the Company’s
Chief Executive Officer and Chairman of the Board (incorporated herein by reference to Exhibit 10.1 to the Current
Report on Form 8-K (File No. 001-36126) of LGI Homes, Inc. filed with the SEC on November 16, 2018).
LGI Homes, Inc. Amended and Restated 2013 Equity Incentive Plan (incorporated herein by reference to Exhibit
10.1 to Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-190853) of LGI Homes,
Inc. filed with the SEC on May 9, 2017).
LGI Homes, Inc. 2016 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 to the
Registration Statement on Form S-8 (Registration No. 333-211843) of LGI Homes, Inc. filed with the SEC on June
3, 2016).
Third Amended and Restated Credit Agreement, dated as of May 25, 2018, by and among LGI Homes, Inc., each of
the financial institutions initially a signatory thereto, and Wells Fargo Bank, National Association, as administrative
agent, with Wells Fargo Securities, LLC, as sole Lead Arranger and sole Bookrunner, and Fifth Third Bank and U.S.
Bank, National Association, as Documentation Agents (incorporated herein by reference to Exhibit 10.1 to the
Current Report on Form 8-K (File No. 001-36126) of LGI Homes, Inc. filed with the SEC on May 29, 2018).
First Amendment to the Third Amended and Restated Credit Agreement, dated as of June 19, 2018, by and among
LGI Homes, Inc., the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent
(incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-36126) of LGI
Homes, Inc. filed with the SEC on June 21, 2018).
Lender Acknowledgement Agreement dated as of October 18, 2018 by and among LGI Homes, Inc.,Wells Fargo
Bank, National Association, as an Increasing Lender and as administrative agent, Fifth Third Bank, U.S. Bank
National Association d/b/a Housing Capital Company, Bank of America, N.A., BMO Harris Bank N.A., Compass
Bank, Flagstar Bank, FSB, Deutsche Bank AG New York Branch, ZB, N.A. dba Amegy Bank, Associated Bank,
National Association, Academy Bank, N.A., and Sunflower Bank, N.A. (incorporated herein by reference to Exhibit
10.1 to the Form 8-K of LGI Homes, Inc. (File No. 001-36126) filed with the SEC on October 23, 2018).
List of Subsidiaries of LGI Homes, Inc.
Consent of Independent Registered Public Accounting Firm
CEO Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CFO Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
75
32.2*
Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
XBRL Instance Document.
101.INS†
101.SCH† XBRL Taxonomy Extension Schema Document.
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF† XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB† XBRL Taxonomy Extension Label Linkbase Document.
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document.
*
+
†
Filed herewith.
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
XBRL information is deemed not filed or a part of a registration statement or Annual Report for purposes of Sections 11
and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and otherwise is not subject to liability under such sections.
76
ITEM 16. FORM 10-K SUMMARY
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date:
February 26, 2019
LGI Homes, Inc.
/s/ Eric Lipar
Eric Lipar
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Eric Lipar
Eric T. Lipar
/s/ Charles Merdian
Charles Merdian
/s/ Ryan Edone
Ryan Edone
/s/ Duncan Gage
Duncan Gage
/s/ Laura Miller
Laura Miller
/s/ Bryan Sansbury
Bryan Sansbury
/s/ Steven Smith
Steven Smith
/s/ Robert Vaharadian
Robert Vaharadian
Title
Chief Executive Officer and Chairman
of the Board
(Principal Executive Officer)
Date
February 26, 2019
Chief Financial Officer and Treasurer
February 26, 2019
(Principal Financial and Accounting
Officer)
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
Director
Director
Director
Director
Director
Director
77