UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2021
OR
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
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, TX
(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, par value $0.01 per share
Trading symbol(s)
LGIH
Name of each exchange on which registered
NASDAQ Global Select Market
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 ☒ No ☐
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 ☐ No ☒
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 ☒ No ☐
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 ☒ No ☐
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
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $3.5 billion based on the closing
price of such stock on such date as reported on the NASDAQ Stock Market. As of February 11, 2022, there were 23,917,359 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 2022 Annual Meeting of Stockholders are incorporated herein by reference (to the extent indicated) into
Part III.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
SIGNATURES
PART IV
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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, Colorado, North
Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia and Pennsylvania.
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 50,000 homes. During the year ended December 31, 2021, we had 10,442 home closings, compared to 9,339 home
closings in 2020.
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 35
markets in 19 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 2022, we expect to continue operating in our existing markets and expect to continue land development in Utah.
In addition to our geographic expansion, we have significantly diversified our operations, offering multiple entry-level product lines, including
attached and detached homes as well as active adult offerings, which are sold under our LGI Homes brand, and our luxury series homes, which are sold
under our Terrata Homes brand, as well as our wholesale business that builds and sells homes to companies looking to acquire single-family rental
properties, primarily through bulk sales agreements. In addition, our recently announced joint venture, LGI Mortgage Solutions, will have the opportunity
to facilitate financing for the majority of our customers. At December 31, 2021, we had 93 active communities with our LGI Homes brand and eight with
our Terrata Homes brand. To further assess diversification within our operations during 2021, we also began offering a limited number of single-family
rental homes in select communities with the intent to ultimately sell these homes through a bulk purchase.
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 2021, we closed 183 Terrata Homes, which had an average sales price per home closed of $482,410,
compared to 150 Terrata Homes, which had an average sales price per home closed of $424,132, in 2020.
Our attached townhome product in certain markets enables us to keep our entry-level price point within reach of more new homebuyers. We believe
that our attached townhome product helps to counter rising land and home costs, and supports our expansion into more densely populated markets.
Our active adult communities offer both open and age-restricted lifestyles in amenity-rich communities with affordable homes. The communities
leverage existing floor plans with minor modifications that present a compelling value-proposition, convenience and comfort for the product line’s target
demographic.
Additionally, we believe the creation of LGI Mortgage Solutions, a joint venture with one of our long-time, third-party preferred lenders, will
facilitate a more streamlined, customer-focused mortgage financing experience for our homebuyers.
Our wholesale business provides opportunities for us to leverage our systems and processes to meet the needs of companies looking to acquire
multiple homes for rental purposes, primarily through bulk sales agreements. During 2021 and 2020, we had 1,515 and 850 wholesale home closings,
respectively, which represented 14.5% and 9.1% of our total home closings in 2021 and 2020, respectively.
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We expect to continue to pursue a flexible land acquisition strategy of purchasing or optioning finished lots at attractive prices, or purchasing raw
land for residential development. We are experienced in converting raw land into residential communities, given our successful history as a land developer.
We endeavor to maintain a pipeline of desirable land positions for replacement communities and new communities. 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 that may involve the sale of
home sites as a part of the product mix. Projects of interest are typically evaluated at the division level using an extensive due diligence checklist that
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 potential residents in the market and rental households that are within driving distance of the
proposed project. We will continue to focus primarily on entry-level home buyers. We expect our wholesale business to represent approximately 10.0% of
our annual home closings during 2022. Additionally, we expect that home closings in our Terrata Homes branded communities will be approximately 5.0%
of our annual home closings during 2022.
Sales and Marketing
Our well-defined sales and marketing approach is primarily focused on converting renters of apartments and single-family homes into homeowners.
We use extensive digital and print advertising to attract potential homebuyers. We employ various marketing methods such as interactive online media,
social media, direct mail and directional signage and billboards. These methods have proven highly successful in reaching our target market, placing
potential homebuyers in front of our trained sales professionals and communicating our core messages of value and dream fulfillment.
While a proportion of our business comes from realtors, our marketing efforts are principally designed to connect directly with potential customers
who are currently renting their residence and to encourage them to schedule an in-person appointment at one of our information centers. Our information
centers are typically open 12 hours per day, 359 days per year, and generally staffed by two to five sales professionals who are supported by a dedicated,
independent loan officer.
Our commission-based sales professionals are trained to learn about the current housing situation of the customer, educate them on the value
proposition of owning an LGI home and provide them with a comprehensive understanding of the steps required to achieve homeownership. We also
educate customers on our history, vision and values. Our sales professionals determine credit and income qualifications, provide information regarding
floor plans and pricing and conduct tours of our homes based on the customer’s needs and budget. We provide each customer with a comprehensive
introduction to the community and the surrounding area, furnishing them with detailed information regarding utilities, schools, homeowners association
dues and restrictions, local entertainment and nearby dining and shopping options. As a result of our transparent approach, customers receive all the
information needed to make a buying decision, which we believe sets clear expectations and eliminates confusion during the home buying process.
Currently, we do not sell a home until construction has begun on the home.
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Homebuilding Operations
Our homebuilding operations are organized and managed by seven operating segments: West, Northwest, Central, Midwest, Florida, Southeast and
Mid-Atlantic. The Midwest division is included in our Central reportable segment and the Mid-Atlantic division is included in our Southeast reportable
segment.
We operate in the following markets within these seven operating segments:
West
Phoenix, AZ
Tucson, AZ
Albuquerque, NM
Las Vegas, NV
Northern CA
Southern CA
Northwest
Seattle, WA
Portland, OR
Denver, CO
Central
Houston, TX
Dallas Ft. Worth, TX
San Antonio, TX
Austin, TX
Oklahoma City, OK
Midwest
Minneapolis, MN
Florida
Tampa, FL
Orlando, FL
Fort Myers, FL
Jacksonville, FL
Fort Pierce, FL
Daytona Beach, FL
Sarasota, FL
Southeast
Atlanta, GA
Charlotte, NC
Raleigh, NC
Wilmington, NC
Winston-Salem, NC
Columbia, SC
Greenville, SC
Birmingham, AL
Nashville, TN
Mid-Atlantic
Washington, D.C.
Norfolk, VA
Richmond, VA
Baltimore, MD
During 2021, we expanded our geographic presence in the Mid-Atlantic with the addition of Baltimore, Maryland and Norfolk, Virginia. These
operating segments reflect the way we evaluate our business performance and manage our operations. Additional information on our operating segments
and product information is contained in Note 15 “Segment Information” to our consolidated financial statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
Our even-flow, continuous construction methodology enables us to build and maintain an inventory of move-in ready homes that are available for
immediate sale. Driven by commitment to our customers and the desire to make dreams of homeownership come true, we offer a set number of floor plans
in each community with standardized finishes. In 2019, we introduced the CompleteHome
packages to continue our legacy
of offering buyers beautiful move-in ready homes, a streamlined buying experience, and superior quality with even more standard features than offered
before.
and CompleteHome Plus
TM
TM
Each of these packages offers move-in ready homes with preselected, upgraded standard features, including stainless steel Whirlpool appliances,
cabinets with crown molding, granite or quartz countertops, undermount sinks, Moen faucets and Kwikset door hardware, as well as convenient outlets
with USB charging capability and a Wi-Fi-enabled garage door opener. Additionally, both packages include programmable thermostats, double-pane Low-
E vinyl windows, LED flush mount ENERGY STAR lights and a variety of other energy-saving features. Our CompleteHome Plus package includes
everything in the CompleteHome package plus 42” upper cabinets, nine-foot ceilings, designer paint selections, enhanced landscaping selections and
window blinds throughout the home. Our homes are designed to meet the preferences of our target market of potential homebuyers and enable cost efficient
and effective construction processes. We maintained an average home completion time of approximately 90 to 130 days during 2021, with homes closed
during 2021 ranging between 1,000 to 4,100 square feet and overall sales prices ranging between the $150,000’s to the $1,100,000’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, safety, 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, many employees that we have hired in those markets have brought with them long-term relationships with subcontracting
firms. We have also expanded upon existing relationships with subcontracting firms located in Texas. A number of our trade partners have subcontracted on
our projects since we commenced homebuilding
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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 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 tasks 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.
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 raw land and finished lots 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 typically look at numerous opportunities before finding one that
meets our requirements. We also maintain a pipeline of desirable land positions for replacement communities and new communities. Our lot inventory
increased to 91,845 owned or controlled lots as of December 31, 2021 from 61,504 owned or controlled lots as of December 31, 2020 due to overall
increased lot count within all reportable segments. We decreased our active communities to 101 as of December 31, 2021 from 116 as of December 31,
2020. During 2021, we experienced a decrease in our overall active community count driven by the accelerated pace of absorptions, the time lag between
the closing out of certain communities and the readiness of replacement communities and limited availability of finished lots in certain markets in 2021 as
compared to 2020. We expect this trend to continue in the beginning of 2022 until additional new communities are ready to become active communities
(i.e., home construction has begun in the community and a home has closed in the community).
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 acquire and develop land for use in our wholesale business.
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The table below shows (i) home closings by reportable segment for the year ended December 31, 2021 and (ii) our owned or controlled lots by
reportable segment as of December 31, 2021.
Reportable Segment
Central
Southeast
Northwest
West
Florida
Total
Year Ended
December 31, 2021
Home Closings
Owned
(1)
As of December 31, 2021
Controlled
Total
4,665
2,279
1,166
995
1,337
10,442
23,034
15,386
5,301
6,907
4,239
54,867
14,761
5,616
3,291
8,325
4,985
36,978
37,795
21,002
8,592
15,232
9,224
91,845
(1) Of the 54,867 owned lots as of December 31, 2021, 42,743 were raw/under development lots and 12,124 were finished lots.
Homes in Inventory
When entering a new community, we intend to build a sufficient number of move-in ready homes to meet our budgets. We base future home starts on
home closings. As homes are closed, we start more homes to maintain our inventory. As of December 31, 2021, we had a total of 683 completed homes,
including information centers, and 3,026 homes in progress.
The following is a summary of our homes in inventory by reportable segment as of December 31, 2021 (dollar values in thousands):
Reportable Segment
Central
Southeast
Northwest
West
Florida
Total
Homes in Inventory
(1)
Inventory Value
(1)
1,534 $
605
333
504
617
3,593 $
224,428
77,513
81,997
92,157
81,383
557,478
(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 subcontractors. 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.
We could see additional cost pressures associated with lumber in future quarters. Generally, we have been able to increase the sales prices of our homes to
absorb these increased costs.
Additionally, during the year ended December 31, 2021 and the beginning of 2022, significant supply chain disruptions extended construction cycles
across our markets. We have focused on our supply chain and have endeavored to manage it to limit impacts to our business and customers. We believe
these global shortages are directly related to the novel strain of coronavirus (including new variants thereof, “COVID-19”) and will continue to impact our
operations as long as the pandemic
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persists. Although we expect COVID-19 to continue to influence our future results, we believe that the desire for single-family homes outside of densely
populated urban areas combined with historically low mortgage rates and low availability of existing homes is driving an increase in demand for new
homes.
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 quarterly basis. See discussion included in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Seasonality.”
Government Regulation and Environmental, Health and Safety 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 in order 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, health and
safety. Shortly after taking office in January 2021, President Biden issued a series of executive orders designed to address climate change and requiring
agencies to review environmental actions taken by the Trump administration, as well as a memorandum to departments and agencies to refrain from
proposing or issuing rules until a departmental or agency head appointed or designated by the Biden administration has reviewed and approved the rule.
These executive orders may result in the development of additional regulations or changes to existing regulations. The particular environmental laws which
apply to any given homebuilding site vary according to multiple factors, including the site’s location, whether the site contains wetlands or other features
that may create burdensome permitting requirements, its environmental conditions, the present and former uses of the site, the presence or absence of
endangered plants or species or sensitive habitats, and environmental conditions at adjoining or nearby 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, state or local agencies review land developers’ and homebuilders’ compliance with
environmental laws and may levy fines and penalties, among other sanctions, 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 and result in
delays. Further, we expect that increasingly stringent requirements will be imposed on land developers and 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 strictly and/or jointly and severally liable to a
governmental entity or to third parties for related damages, including property damage or bodily injury, and for investigation and cleanup costs incurred by
such parties in connection with the contamination. A mitigation plan may be implemented 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 or radon. Some homebuyers may not want to purchase a home
that is, or may have been, subject to a mitigation plan.
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, financing, 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.
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Human Capital Resources
LGI Homes is committed to being a people-focused organization and actively promotes a workplace of dignity and respect for all. We strive to uphold
all applicable laws and regulations in the markets where we conduct business and pursue business relationships with external partners who share our
commitment to lawful, ethical business conduct. We believe our commitments to diversity and inclusion, training, safety and sustainability form the
foundation of our people-focused culture.
As of December 31, 2021, we employed 952 people, of whom 87 were located at our corporate headquarters. Of our employees located outside our
corporate headquarters, 528 were on-site sales and support personnel, and 337 were involved with acquisition and development, purchasing, and
construction. We have built a diverse and inclusive team of professionals with a wide range of industry experience across our markets. We are dedicated to
supporting our employees when times are challenging. None of our employees are covered by collective bargaining agreements, and we have not
experienced any strikes or work stoppages. We believe we have good relations with our employees. Our human capital resources objectives include, as
applicable, identifying, recruiting, training, retaining, incentivizing and integrating our existing and additional employees. We offer our employees a wide
array of company-paid benefits, which we believe are competitive relative to others in our industry.
We utilize subcontractors and tradespeople to perform the construction of our homes. We believe we have good relations with our subcontractors and
tradespeople.
Diversity, equity and inclusion. We are committed to equal employment and advancement opportunities for all individuals regardless of race, color,
religion, gender, gender identity or expression, sex, sexual orientation, national origin, age, disability, genetic information, marital status or status as a
covered veteran in accordance with applicable federal, state and local laws. As of December 31, 2021, our workforce at our corporate headquarters was
comprised of 65% women and 28% identified as racially or ethnically diverse. As of December 31, 2021, our on-site sales, sales support and construction
workforce located outside of our corporate headquarters was comprised of 25% women and 32% identified as racially or ethnically diverse.
We are committed to maintaining a workplace that is respectful to all individuals and we maintain a zero-tolerance policy on discrimination and
harassment of any kind. Any conduct that creates an offensive or intimidating environment runs counter to our culture and core values and is strictly
prohibited. This policy is expressly described in our Code of Business Conduct and Ethics and our Employee Handbook and includes, but is not limited to,
any protected status or characteristic, including race, color, ethnicity or national origin, age, sex, religion, disability, marital status, status as a veteran,
genetic information, or any other status or characteristic protected by any federal, state, or local law. Our employees are expected to treat their coworkers,
our business partners’ employees and our customers with dignity and respect.
Commitment to recruitment, training and advancement. We focus on identifying and attracting the best talent and providing those individuals 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 one-week training program
at our headquarters, and 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 and quarterly regional training events. Typically, all employees including construction managers,
purchasing managers and vice presidents come to our corporate headquarters for a week of training in their first 100 days. We also work closely with our
subcontractors and tradespeople, training them on the most efficient way to build an LGI home. A number of our subcontractors and tradespeople have
worked on our homes since we commenced homebuilding operations in 2003 and, therefore, are familiar with our business model.
Employee wellness, health and safety. We are committed to providing competitive benefits to attract and retain employees, including benefits that
facilitate healthy lifestyles, mental well-being and preparedness for retirement. Our commitment to wellness, health and safety was demonstrated by our
response to the COVID-19 pandemic. In May 2020, we announced we would not lay off or furlough employees due to the COVID-19 pandemic, and in
October 2020, we paid a special bonus to our “frontline” workers whose roles and responsibilities required that they directly interact with the public on a
daily basis. The bonus was in recognition of the extraordinary efforts of such workers during the COVID-19 pandemic.
We are committed to creating a safe and secure business environment that protects the health and safety of our employees, business partners and
customers. Our workplaces are required to comply with all applicable laws and regulations, including those established by the Occupational Safety and
Health Administration, as they pertain to health and safety in the workplace. As part of this commitment, we have implemented a systems-based program
of regularly scheduled safety reviews, meetings and continuing education that are held in our communities and include our employees and the employees of
our subcontractors and tradespeople.
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Commitment to community involvement and support. We are committed to improving and giving back to the communities we serve. In addition to
ongoing charitable giving throughout the year, each June we close all offices nationwide for our Service Impact Day. During this annual service event, our
focus turns away from sales and home closings as we dedicate the entire day to giving back. Every LGI employee spends the day volunteering in the local
community. From constructing fences and cleaning up parks, organizing food, and volunteering at children's clubs, we are committed to being a positive
presence in the communities we build. Since 2016, we have contributed over $1.8 million in corporate, non-profit sponsorships, donated over 20,000
employee service hours and collaborated with over 100 non-profit organizations in an effort to make a meaningful impact in our local communities.
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
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.
“Investor Relations” page of our website under
“Corporate Governance”
available on
and Ethics,
the
are
Information about our Executive Officers
The following table sets forth information regarding our executive officers as of February 15, 2022:
Name
Eric Lipar
Michael Snider
Charles Merdian
Jack Lipar
Rachel Eaton
Scott Garber
Age
51
50
52
53
40
50
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
acquisitions, development and the sale of over 50,000 homes since our inception. Mr. Lipar currently serves on the Residential Neighborhood
Development Council for the Urban Land Institute and is a member of the Policy Advisory Board for the Harvard Joint Center for 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.
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. Mr. Merdian also serves on the Montgomery County Habitat for Humanity Board of Directors.
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 of 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.
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Rachel Eaton. Ms. Eaton has served as our Chief Marketing Officer since June 2013 and is responsible for the overall growth and direction of our
marketing initiatives, brand image, and social media. Ms. Eaton is also responsible for technology, recruiting and administrative field operations for the
Company. 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, Director of Marketing & Special Events from 2007 to May 2012 and various other roles assisting with the Company’s
growth and success since joining the Company in 2003. In 2020, Ms. Eaton was recognized as a rising star in the homebuilding industry by Pro Builder
Magazine for her outstanding accomplishments in leading the Company’s marketing, talent acquisitions, and community service initiatives. Ms. Eaton is a
former member of the Zillow Group Builder Advisory Board.
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) from March 2012 to April 2018, where he was responsible for major company transactions (both
domestic and international), corporate governance of its Qatar-based joint ventures, and management of 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 the company’s 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.
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.
Ms. Shailee Parikh - Global Head of Strategy and Solution Development for Health Solutions at Aon plc, a leading global professional services firm.
Mr. Bryan Sansbury - Chief Executive Officer, Chairman, and a founding partner of AEGIS Hedging Solutions, LLC, formerly known as AEGIS Energy
Risk, LLC. Mr. Sansbury serves as our Lead Independent Director.
Ms. Maria Sharpe - Managing Principal of Sharpe Human Solutions, LLC, a human resource consulting and commercial real estate investment company.
Mr. Steven Smith - Owner and solo practitioner of Steven R. Smith Law, LLC. He is a former shareholder of the law firm Baker Donelson.
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.
Risk Factors Summary
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our
business, financial condition, results of operations, cash flows, strategies or prospects. These risks are discussed more fully below and include, but are not
limited to, risks related to:
• Operational Risks Related to Our Business:
◦
◦
◦
our ability to acquire finished lots and land parcels suitable for residential homebuilding at reasonable prices;
labor and raw material shortages and price fluctuations that could delay or increase the cost of home construction;
the impact of the COVID-19 pandemic;
•
Industry and Economic Risks:
◦
◦
◦
◦
◦
◦
◦
the tightening of mortgage lending standards and mortgage financing requirements, and rising mortgage interest rates;
federal income tax credits currently available to builders of certain energy efficient homes may not be extended by future legislation;
the housing market may not continue to grow at the same rate, or may decline;
the homebuilding industry is highly competitive;
new and existing laws and regulations or other governmental actions, including environmental, health and safety laws and regulations;
increasing attention to environmental, social and governance matters;
the seasonal nature of our business;
•
•
Strategic Risks Related to Our Business:
◦
our growth or expansion strategies may not be successful;
Risks Related to Our Organization and Structure:
◦ we depend on key management personnel and other experienced employees;
◦
◦
our use of leverage in executing our business strategy;
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;
• General Risks:
◦ we may be subject to litigation, arbitration or other claims;
◦
◦
◦
information system failures, cyber incidents or breaches in security;
complex and evolving U.S. laws and regulations regarding privacy and data protection; and
access to financing sources may not be available on favorable terms, or at all.
Operational Risks Related to Our Business
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
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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, which may impact our ability to maintain or increase the number of our active communities, as well as to sustain and grow our revenues 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.
In recent years, it has become more difficult to acquire finished lots in attractive locations and therefore we have been acquiring more undeveloped
land that we need to develop as compared to finished lots. This shift in our land procurement has resulted in longer lead time between when we acquire the
land and when we can start construction of a home on the land and thus a longer time that these land assets are on our balance sheet.
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 most of our markets. The time and
investment required for development may adversely impact our business. We have substantial real estate inventories that regularly remain on our balance
sheet for significant periods of time prior to their sale, during which time we are exposed to the risk of adverse market developments. 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, 2021, we had 683
completed homes in inventory and 3,026 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.
Labor and raw material shortages, price fluctuations and supply chain constraints 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 subcontractors
and 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, during periods following natural disasters that have a significant impact on existing residential and commercial structures or
as a result of broader economic disruptions, such as the COVID-19 pandemic. The current strong demand for homes and the effects of the COVID-19
pandemic have caused multiple disruptions in our supply chain and have resulted in shortages in certain building materials and tightness in the labor
market. It is uncertain whether these shortages will continue as is, improve or worsen. In addition, pricing for labor and raw materials can be affected by the
factors discussed above and various other national, regional, local, economic and political factors, including changes in immigration laws, trends in labor
migration and tariffs. Specifically, during the second and third quarters of 2021, we saw a significant increase in the cost of our lumber related to
undersupply as a result of increased demand and shutdowns of lumber mills due to the COVID-19 pandemic. We may see additional lumber cost pressures
in future quarters. Further, our success in recently-entered markets or those we may choose to enter in the future depends substantially on our ability to
source labor and local materials on terms that are favorable to us. Our markets may exhibit a reduced level of skilled labor relative to increased
homebuilding demand in these markets. In the event of shortages in labor or raw materials in such markets, local subcontractors, tradespeople and suppliers
may choose to allocate their resources to homebuilders with an established presence in the market and with whom they have longer-standing relationships.
Labor and raw material shortages, price increases for labor and raw materials and supply chain constraints 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 used in constructing
our homes. Accordingly, the timing and quality of our construction depend on the availability
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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 be available at reasonable rates and in our markets. In addition, as we expand into new markets, we typically must develop new
relationships with subcontractors in such markets, and there can be no assurance that we will be able to do so in a cost-effective and timely manner, or at
all. 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 and jobsite safety efforts, we may discover from time to time that our subcontractors have engaged in improper
construction or safety practices or have installed defective materials in our homes. When we discover these issues, we utilize our subcontractors to repair
the homes 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 adverse 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 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 rely on subcontractors to perform the construction of our homes and, in some cases, to select and obtain building
materials. Although we provide subcontractors with detailed specifications and perform quality control procedures, subcontractors may, in some cases, use
improper construction processes or defective materials. Defective products used in the construction of our homes can result in the need to perform
extensive repairs. The cost of performing such repairs, or litigation arising out of such issues, may be significant if we are unable to recover the costs from
subcontractors, suppliers and/or insurers. Warranty and construction defect matters can also result in negative publicity, including on social media outlets,
which could damage our reputation and negatively affect our ability to sell homes.
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 results of operations. Further, 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.
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, labor and raw material shortages or supply chain disruptions, 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. 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.
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 third 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
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exposures for us under our subcontractor relationships, which could have a material adverse impact on our business, prospects, liquidity, financial condition
and results of operations.
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.
Poor relations with the residents of our communities could negatively impact sales, which could cause our revenues 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.
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.
During 2021, we established LGI Mortgage Solutions, a joint venture with one of our long-time, third-party preferred lenders. We may co-invest in
the future with third parties through other 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.
Our business could be materially and adversely disrupted by an epidemic, pandemic (such as COVID-19) or similar public health threat.
An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could
significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, along with any associated
economic and social instability or distress, have a material adverse impact on our business, financial condition, results of operations, cash flows, strategies
or prospects.
For instance, the outbreak of COVID-19 and its development into a global pandemic in March 2020 resulted in federal, state and local governments
imposing varying degrees of restrictions on business and social activities to contain COVID-19, including business shutdowns and closures, travel
restrictions, quarantines, shelter-in-place orders and “stay-at-home” orders in certain of our markets. While many of the restrictions and measures initially
implemented during 2020 have since been softened or lifted in varying degrees in the United States, and the manufacture and distribution of COVID-19
vaccines during 2021 helped to initiate a recovery from the pandemic, recent increases in COVID-19 cases, the uncertainty regarding new variants of
COVID-19 and the success of any vaccines in respect thereof may in the future cause a significant reduction in economic activity or prompt the re-
imposition of certain restrictions and measures.
The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, but not limited to, the duration and
geographic spread of COVID-19, the emergence of more infectious variants of COVID-19, the impact of government actions designed to prevent the
spread of COVID-19 or the decrease in such actions and resulting increased business and social activities, the availability and timely distribution of, and
willingness to accept, effective treatments and vaccines, vaccine hesitancy, actions taken by customers, subcontractors, suppliers and other third parties,
workforce availability, and the timing and extent to which normal economic and operating conditions resume.
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Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer
confidence generally or with respect to purchasing a home; cause civil unrest; negatively impact mortgage availability or the federal government’s
mortgage loan-related programs or policies; delay mortgage originations; tighten mortgage lending standards; or precipitate a prolonged economic
downturn or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our products; negatively impact
general consumer interest in purchasing a home compared to choosing other housing alternatives; impair our ability to sell and build homes in a typical
manner or at all, generate revenues and cash flows or access the Credit Agreement (as defined herein) or the capital or lending markets (or significantly
increase the costs of doing so), as may be necessary to sustain our business; further disrupt our supply chain or increase the costs or decrease the supply of
building materials or the financial viability or availability of subcontractors, including as a result of infections or medically necessary or recommended self-
quarantining, or governmental mandates to direct production activities to support public health efforts; and result in our recognizing charges in future
periods, which may be material, for inventory impairments or land option contract abandonments, or both, related to our current inventory assets. The
inherent uncertainty surrounding COVID-19, due in part to changing governmental directives (including as a result of the change in the U.S. presidential
administration), public health challenges and progress and market reactions thereto, also makes it more challenging for our management to estimate the
future performance of our business and develop strategies to generate growth or achieve our objectives for the remainder of 2022.
Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to
experience, among other things, decreases in our net orders, homes closed, average sales prices per home closed, revenues and profitability, and such
impacts could be material to our business, financial condition, results of operations, cash flows, strategies or prospects in future quarters. In addition,
should the surge in COVID-19 cases or the public health effort related thereto intensify to such an extent that we cannot operate in most or all of our
markets, we could generate few or no orders and deliver few, if any, homes during the applicable period, which could be prolonged. Along with a potential
increase in cancellations of home purchase contracts, if prolonged government restrictions on our business and our customers return in response to
increases in COVID-19 cases, or if there is an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct
our business; meet the terms of our covenants and other requirements under the Credit Agreement, the 2029 Senior Notes (as defined herein) and the
related indenture, and/or mortgages and land contracts due to land sellers and other loans; or service our outstanding indebtedness. Such a circumstance
could, among other things, exhaust our available liquidity and ability to access liquidity sources or trigger an acceleration to pay a significant portion or all
of our then-outstanding debt obligations, which we may be unable to do.
Industry and Economic Risks
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. Inflation may also accompany higher interest rates, which could adversely impact potential customers’ ability to obtain financing on favorable
terms, thereby decreasing demand for our homes. During the year ended December 31, 2021, we have experienced a significant increase in land, labor,
materials and construction costs, which we currently expect to continue into 2022. In an inflationary environment, such as the current economic
environment, depending on the homebuilding industry and other economic conditions, we may be unable to raise the sales prices of our homes enough to
offset the increasing costs of our operations, which would decrease our profit margins. Furthermore, if we need to lower the sales prices 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.
Tightening of mortgage lending standards and mortgage financing requirements, untimely or incomplete mortgage loan originations for our
homebuyers and rising mortgage interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and
thereby materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
Almost all of our customers finance their home purchases through lenders that provide mortgage financing. Mortgage interest rates have generally
trended downward for the last several decades and reached historic lows in the summer of 2020, which has made the homes we sell more affordable.
However, we cannot predict whether mortgage interest rates will continue to fall, remain low or rise. 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, which is expected to be impacted by
continued regulatory changes and fluctuations in the risk appetites of lenders. The financial documentation, down payment amounts and income to debt
ratio requirements are subject to change and could become more restrictive.
The federal government has a significant role in supporting mortgage lending through its conservatorship of Federal National Mortgage Association
(“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), both of which
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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 mortgage 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 adversely affect our business, prospects, liquidity, financial condition and results of
operations. 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, certain current regulations impose, and future regulations may strengthen or impose new, standards and requirements relating to the
origination, securitization and servicing of residential consumer mortgage loans, which could further restrict the availability and affordability of mortgage
loans and the demand for such loans by financial intermediaries and, as a result, adversely affect our home sales, financial condition and results of
operations. Further, 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 certain regulations, 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.
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 suitable mortgage financing may adversely affect the volume and sales price of our
home sales.
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.
While tax laws generally permit 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 ability to deduct mortgage interest expense and
real estate taxes for federal income tax purposes is limited. The federal government or a state government may change its income tax laws by 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 also have a material adverse impact on
our business, prospects, liquidity, financial condition and results of operations.
Federal income tax credits currently available to builders of certain energy efficient new homes may not be extended by future legislation.
On December 21, 2020, the U.S. Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which former President Trump signed
into law on December 27, 2020. This Act extended the availability of Code Section 45L credit for energy efficient new homes (“federal energy efficient
homes tax credits”), which provides a tax credit of $2,000 per qualifying home to eligible homebuilders, and made such tax credits available for homes
delivered through December 31, 2021. Legislation to extend such tax credits beyond December 31, 2021 has not been adopted, and it is uncertain whether
an extension or similar tax credit will be adopted in the future. Federal energy efficient homes tax credits recognized during the year ended December 31,
2021 totaled $16.2 million. If legislation to extend such tax credits for periods after December 31, 2021 is not adopted, our effective income tax rates in
future periods may increase, potentially materially.
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The housing market may not continue to grow at the same rate, or may decline, and any decline in our markets or for the homebuilding industry
generally may materially and adversely affect our business and financial condition.
We cannot predict whether and to what extent the housing markets in the geographic areas in which we operate will continue to grow, particularly if
interest rates for mortgage loans, land costs, and construction costs rise. Other factors that might impact growth in the homebuilding industry include
uncertainty in domestic and international financial, credit and consumer lending markets amid slow economic growth or recessionary conditions in various
regions or industries around the world, including as a result of the COVID-19 pandemic, 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 the
present housing market will continue to be strong, whether overall or in our markets.
If there is limited economic growth, declines in employment and consumer income, changes in consumer behavior, including as a result of the
COVID-19 pandemic, 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 sales price per home closed and the amount of revenues or
profits we generate, and such effect may be material.
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 that 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, some 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 downturns in the housing market. Furthermore, our market share in certain of our markets may be lower as compared to some
of our competitors. Many of our competitors also have longer operating histories and longstanding relationships with subcontractors and suppliers in the
markets in which we operate or to which we may expand. 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 periodically adversely affect demand for our homes in certain markets and could adversely
affect pricing for homes in the markets in which we operate.
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 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 and results of operations.
Regional factors affecting the homebuilding industry in our current markets could materially and adversely affect us.
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, Alabama, California, Oregon, Nevada, West Virginia, Virginia, Pennsylvania and Maryland. In addition, we
own land or have entered into contracts for the right to purchase land or lots at a future point in time in additional states. A prolonged economic downturn
in the future in one or more of these areas, or a particular industry that is fundamental to one or more of these areas, particularly within Texas, could have a
material adverse effect on our business, prospects, liquidity, financial condition and results of operations. Our communities on the West coast are especially
susceptible to restrictive government regulations and environmental laws. To the extent the oil and gas industry, which can be very volatile, is negatively
impacted by declining commodity prices, climate
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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 certain of our markets.
Moreover, certain insurance companies doing business in states in which we operate could restrict, curtail or suspend the issuance of homeowners’
insurance policies on single-family homes. This could both reduce the availability of hurricane and other types of natural disaster insurance, in general, and
increase the cost of such insurance to prospective purchasers of homes. 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. Long-term restrictions on, or unavailability of, homeowners’ insurance could have an adverse effect on the homebuilding industry
in our markets and on our business. Additionally, the availability of permits for new homes in new and existing developments could be adversely affected
by the significantly limited capacity of the schools, roads, and other infrastructure.
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.
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 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.
Interest rate changes may adversely affect us.
We currently hedge a portion of our interest rate exposure through the use of an interest rate cap contract. We may obtain additional 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.
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 home closings affected by any such shutdown or slowdown will occur after the shutdown or slowdown has ended.
Natural disasters, severe weather and adverse geological conditions may increase costs, cause project delays and reduce consumer demand for
housing, all of which could materially and adversely affect us.
Our homebuilding operations are located in many areas that are subject to natural disasters, severe weather or adverse geological conditions. These
include, but are not limited to, hurricanes, tornadoes, droughts, floods, brushfires, wildfires, prolonged periods of precipitation, landslides, soil subsidence,
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
our 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. Furthermore, the occurrence of natural disasters, severe weather and other adverse geological conditions
has increased in recent years due to climate change and may continue to increase in the future. Climate change may have the effect of making the risks
described above occur more frequently and more severely, which could amplify the adverse impact on our business, prospects, liquidity, financial condition
and results of operations.
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.
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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, accessibility, anti-discrimination 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 for
which we have not received land use and development entitlements or approvals 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, the timing of our home sales could be delayed, the number of our home
sales 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, health and safety 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 that apply to any given site vary according to
multiple factors, including the site’s location, whether the site contains wetlands or other features that may create burdensome permitting requirements, its
environmental conditions, the present and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and
environmental conditions at adjoining or 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. In some instances, 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, among other sanctions, 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. Further, 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.
Environmental laws and regulations relating to climate change and energy can have an adverse impact on our activities, operations and
profitability and on the availability and price of certain raw materials, such as lumber, steel, and concrete.
There is a growing concern from advocacy groups and the general public that the emissions of greenhouse gases and other human activities have
caused, and will continue to cause, significant changes in weather patterns and temperatures and the frequency and severity of natural disasters.
Government mandates, standards and regulations enacted in response to these projected climate change impacts and concerns could result in restrictions on
land development in certain areas or increased energy, transportation and raw material costs. On January 20, 2021, President Biden signed an instrument
that will lead to the United States’ reentry into the Paris Agreement, which requires countries to review and “represent a progression” in their intended
nationally determined contributions, which set greenhouse gas emission reduction goals, every five years. We anticipate that a variety of new legislation
may be enacted or considered for enactment at the federal, state and local levels relating to climate change and energy, including in response to the United
States’ reentry into the Paris Agreement. This legislation could relate to, for example, matters such as greenhouse gas emissions control and building and
other codes that impose energy efficiency standards or require energy saving construction materials. Certain state and local governments in areas such as
California have passed, or are considering, legislation banning the use of natural gas-fired appliances in new homes, which could affect our costs to
construct homes as well as consumer demand for the homes we construct. New building or other code requirements that impose stricter energy efficiency
standards or requirements for building materials could
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significantly increase our cost to construct homes. As climate change concerns continue to grow, legislation, regulations, mandates, standards and other
requirements of this nature are expected to continue to be enacted and become costlier for us 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, these initiatives could have an 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, the handling of hazardous materials such as asbestos, 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 will 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. 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 that 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.
We have provided unsecured environmental indemnities to certain lenders and other contractual counterparties. These indemnities obligate us to
reimburse the guaranteed parties for damages related to environmental matters, and generally there is no term or damage limitation on these indemnities.
Increasing attention to environmental, social and governance matters may impact our business, financial results or stock price.
In recent years, increasing attention has been given to corporate activities related to environmental, social and governance (“ESG”) matters in public
discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and
private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers,
public pension funds, universities and other members of the investing community. These activities include increasing attention and demands for action
related to climate change and promoting the use of energy saving building materials. A failure to comply with investor or customer expectations and
standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues, regardless of whether
there is a legal requirement to do so, could also cause reputational harm to our business and could have a material adverse effect on us.
In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for
evaluating companies on their approach to ESG matters. These ratings are used by some investors to inform their investment and voting decisions.
Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other
industries, which could have a negative impact on our stock price and our access to and costs of capital.
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 of operations from quarter to quarter due to the seasonal nature of
the homebuilding industry. We generally close more homes in our second, third and fourth quarters. Thus, our revenues may fluctuate on a quarterly basis,
and we may have higher capital
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requirements in our second, third and fourth quarters in order to maintain our inventory levels. 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.
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; consumer spending; 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 described above could also lead some homebuyers to cancel or refuse to honor their home purchase contracts altogether.
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.
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.
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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.
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 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.
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. Furthermore, any downgrade of our credit ratings or
other negative rating actions by credit agencies may make it more difficult and costly for us to access capital. 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 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.
Strategic Risks Related to Our Business
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, finished lots, home inventories and rental properties 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
acquisitions, 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.
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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 homebuilders
on attractive terms as, and if, such opportunities arise. We may be unable to achieve the anticipated benefits of any such growth or expansion, including
through add-on acquisitions or through efficiencies that we may be unable to achieve, 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, that our expansion operations will be
successful, or that we will be able to successfully integrate any acquired homebuilder. This could disrupt our ongoing operations and divert management
resources that would otherwise focus on developing our existing business. 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.
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 the Board. Although we have entered into an employment agreement with Mr. Lipar, there is no guarantee that
Mr. Lipar will remain employed by us. 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 the 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.
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.
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, 2021, we had a $850.0 million
revolving credit facility under the Credit Agreement to finance our construction and development activities. As of December 31, 2021, we had outstanding
borrowings of $517.4 million under the Credit Agreement and we could borrow an additional $321.3 million under the Credit Agreement. As of December
31, 2021, borrowings under the Credit Agreement bore interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 1.45% per annum. In
addition, as of December 31, 2021, we had outstanding $300.0 million aggregate principal amount of the 2029 Senior Notes.
The Board 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 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,
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our certificate of incorporation does not contain a limitation on the amount of indebtedness we may incur, and the Board 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 Agreement and our other debt agreements, if any, could have a
material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
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 worth of not less than $850.0 million plus 75% of
the net proceeds of all equity issuances after December 31, 2020 plus 50.0% of the amount of our positive net income in each fiscal quarter ending after
March 31, 2021, (ii) a leverage ratio of not greater than 60.0%, (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 1.75 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.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest
expense related to outstanding debt.
Borrowings under the Credit Agreement bear interest at LIBOR plus an applicable margin. On July 27, 2017, the Financial Conduct Authority in the
United Kingdom (the “FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. On November
30, 2020, the FCA and ICE Benchmark Administration, which administers LIBOR quotations, announced a consultation on the extension of the quotation
of certain LIBOR tenors to June 30, 2023 for legacy contracts only. The Credit Agreement, which, at the present time, has a term that extends to April 28,
2025, provides for a mechanism to amend the Credit Agreement to reflect the establishment of an alternate rate of interest upon the occurrence of certain
events related to the phase-out of any applicable interest rate. However, we have not yet pursued any technical amendment or other contractual alternative
to address this matter and are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate on the Credit Agreement. In
addition, the overall financial markets may be disrupted as a result of the phase-out or replacement of LIBOR. Uncertainty as to the nature of such potential
phase-out and alternative reference rates or disruption in the financial market could have a material adverse effect on our cost of capital, financial
condition, cash flows and results of operations.
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Interest expense on debt we incur may limit our cash available to fund our growth strategies.
As of December 31, 2021, we had total outstanding borrowings of $517.4 million under the Credit Agreement, and we could borrow an additional
$321.3 million under the Credit Agreement. As of December 31, 2021, borrowings under the Credit Agreement bore interest at a rate of LIBOR plus
1.45% per annum. In addition, as of December 31, 2021, we had outstanding $300.0 million aggregate principal amount of the 2029 Senior Notes, which
bear interest at a fixed rate of 4.000%. 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 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 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 that limit 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 declaring or paying such dividends or making such 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.
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.
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.
The Board will determine our operational policies, investment guidelines and our business and growth strategies. The Board 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
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.
We participate in certain unconsolidated entities where we may be adversely impacted by the failure of the limited partnership or joint venture or
its participants to fulfill their obligations.
We currently participate through a real estate investment fund as a limited partner and operate through a mortgage service joint venture with
independent third parties in which we do not have a controlling interest. As of December 31, 2021 and 2020, we have contributed a total of $5.6 million
and $3.9 million, respectively, relating to our investment in the real estate
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investment fund and the mortgage joint venture. Contributions into these unconsolidated entities are used by the entities to invest in certain real estate
transactions and residential mortgage services, respectively.
As a result of not having a controlling interest in these entities, we have limited influence over decisions made with regard to these entities and are not
able to require these entities or their participants to honor their obligations. If these entities or their participants do not honor their obligations, we may be
required to expend additional resources or suffer losses of our investments in these entities.
General Risk Factors
Failure to comply with laws and regulations may adversely affect us.
We are required to comply with laws and regulations governing many aspects of our business, such as land acquisition and development, home
construction and sales, and employment practices. Despite our oversight, contractual protections, and other mitigation efforts, our employees or
subcontractors could violate some of these laws or regulations, as a result of which we may incur fines, penalties or other liabilities, which could be
significant, and our reputation with governmental agencies, customers, vendors or suppliers could be damaged.
We are subject to litigation, arbitration or other claims, which could materially and adversely affect us.
We are subject to litigation and we may in the future be subject to enforcement actions, such as 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. Although we have established warranty, claim and litigation reserves that we believe are adequate,
we cannot be certain of the ultimate outcomes of any claims that may arise in the future, and legal proceedings may result in the award of substantial
damages against us beyond our reserves. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or
settlements, which, if uninsured or in excess of insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely
affecting us. Furthermore, plaintiffs may in certain of these legal proceedings seek class action status with potential class sizes that vary from case to case.
Class action lawsuits can be costly to defend, and if we were to lose any certified class action suit, it could result in substantial liability for us. Certain
litigation or the resolution thereof 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.
We may suffer uninsured losses or 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, 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 that certain types of risks that 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 also be liable for any debt or other financial obligations related to affected
property.
Information system failures, cyber incidents or breaches in security could adversely affect us.
We rely on accounting, financial, operational, management and other information systems, including the Internet and third-party hosted services, to
conduct our operations, store sensitive data, process financial information and results of operations for internal reporting purposes and comply with
financial reporting, legal and tax requirements. Our information systems, and those of our vendors and service providers, are subject to damage or
interruption from power outages, computer and telecommunication failures, computer viruses, security breaches, including malware and phishing,
cyberattacks, natural disasters, usage errors by employees and other related risks. Any cyber incident or attack or breach or other disruption or failure in
these information systems, or other systems or infrastructure upon which they rely, could adversely affect our ability to conduct our business and could
have a material adverse effect on our business, prospects, 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, or 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. We have been the target of a number of unsuccessful cyber-attacks and we expect these
attacks to continue into the foreseeable future. Although we have implemented systems and processes intended to secure our information systems, there can
be no assurance that our efforts to maintain the security and integrity of our
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information systems will be effective or that future attempted security breaches or disruptions would not be successful or damaging.
Our business is subject to complex and evolving U.S. laws and regulations regarding privacy and data security.
As part of our normal business activities, we collect and store certain information, including information specific to homebuyers, customers,
employees, vendors and suppliers. We may share some of this information with third parties who assist us with certain aspects of our business. Consumer
personal privacy and data security have become significant issues and the subject of rapidly evolving regulation in the United States. Furthermore, federal,
state and local government bodies or agencies have in the past adopted, and may in the future adopt, more laws and regulations affecting data privacy.
Laws and regulations governing data privacy and the unauthorized disclosure of confidential information, including recently-implemented and forthcoming
California legislation, may significantly impact our business activities and require substantial compliance costs, which could have a material adverse effect
on our business, prospects, liquidity, financial condition and results of operations.
Any failure, or perceived failure, by us to adequately address privacy and data security concerns, even if unfounded, or comply with applicable
privacy and data security laws, regulations and policies 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. If we are not able to adjust to changing laws, regulations and standards relating to privacy or data security, our business
may be materially harmed. 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.
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, acts of terrorism, political uncertainty or civil
unrest 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.
Negative publicity could adversely affect our reputation as well as our business, financial results and stock price.
Our reputation and brand are critical to our success. 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, newsletters, and other digital platforms. 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 outlets could damage our reputation and
reduce the demand for our homes, which would adversely affect our business.
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 those related to 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.
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 duration and effects of the COVID-19 pandemic;
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;
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•
•
•
•
our current debt levels;
our current and expected future earnings;
our cash flow; and
the market price per share of our common stock.
The global credit and equity markets and the overall economy can be extremely volatile, which could have a number of adverse effects on our
operations and capital requirements. For the past decade, the domestic financial markets have experienced a high degree of volatility, uncertainty and,
during certain periods, tightening of liquidity in both the high yield debt and equity capital markets, resulting in certain periods where new capital has been
both more difficult and more expensive to access. If we are unable to access the credit markets, we could be required to defer or eliminate important
business strategies and growth opportunities in the future. In addition, if there is prolonged 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.
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, potential impacts from
political uncertainty, civil unrest, increases in unemployment, volatility of mortgage interest rates, supply chain disruptions, inflation and
decreases in housing prices;
the impact of the COVID-19 pandemic and its effect on us, our business, customers, subcontractors and suppliers (including associated
supply chain disruptions), and the markets in which we operate, U.S. and world financial markets, mortgage availability, potential regulatory
actions, changes in customer and stakeholder behaviors and impacts on and modifications to our operations, business and financial condition
relating to COVID-19;
a slowdown in the homebuilding industry or changes in population growth rates in our markets;
volatility and uncertainty in the credit markets and broader financial markets;
disruption in the terms or availability of mortgage financing or increase in the number of foreclosures in our markets;
the cyclical and seasonal nature of our business;
our future operating results and financial condition;
our business operations;
changes in our business and investment strategy;
the success of our operations in recently opened new markets and our ability to expand into additional new markets;
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•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to successfully extend our business model to building homes with higher price points, developing larger communities and
producing and selling multi-unit products, townhouses, wholesale products, and acreage home sites;
our ability to develop our projects successfully or within expected timeframes;
our ability to identify potential acquisition targets, close such acquisitions and realize the benefits of such acquisitions;
our ability to successfully integrate any acquisitions with our existing operations;
availability of land to acquire and our ability to acquire such land on favorable terms or at all;
availability, terms and deployment of capital and ability to meet our ongoing liquidity needs;
decisions of the Credit Agreement lender group;
decline in the market value of our land portfolio;
shortages of or increased prices for labor, land, or raw materials used in land development and housing construction, including due to
changes in trade policies;
delays in land development or home construction resulting from natural disasters, adverse weather conditions or other events outside our
control;
uninsured losses in excess of insurance limits;
the cost and availability of insurance and surety bonds;
changes in (including as a result of the change in the U.S. presidential administration), liabilities under, or the failure or inability to comply
with, governmental laws and regulations, including environmental laws and regulations;
the timing of receipt of regulatory approvals and the opening of projects;
the degree and nature of our competition;
increases in taxes or government fees;
our continued ability to qualify for additional federal energy efficient homes tax credits and the extension of the availability of such tax
credits beyond December 31, 2021;
information system failures, cyber incidents or breaches in security;
negative publicity or poor relations with the residents of our projects;
existing and future litigation, arbitration or other claims;
availability of qualified personnel and third-party contractors and subcontractors;
our ability to retain our key personnel;
our leverage and future debt service obligations;
the impact on our business of any future government shutdown;
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.
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, Nevada, California, Washington, Colorado, Florida, Georgia, Minnesota, North
Carolina, Tennessee, Texas, Utah and West Virginia. See “Business—Land
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Acquisition Policies and Development” for a summary of the other property which we owned or controlled as of December 31, 2021.
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is listed on the NASDAQ Stock Market (NASDAQ) under the symbol “LGIH.” As of February 11, 2022, the closing price of our
common stock on the NASDAQ was $120.97, and we had 20 stockholders of record, including Cede & Co. as nominee of The Depository Trust Company.
Stock Repurchase Program
The following table summarizes the repurchase of shares of our common stock during the three months ended December 31, 2021.
Period
October 1-31, 2021
November 1-30, 2021
December 1-31, 2021
Total Number of Shares
Purchased
Average Price Paid Per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
(1)
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the Plans
(1)
or Programs
(in thousands)
— $
177,143 $
201,382 $
378,525 $
—
143.89
153.07
148.20
— $
177,143 $
201,382 $
378,525
162,726
133,828
106,630
(1)
In November 2018, 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. On October 30, 2020, the Board approved an increase in
our stock repurchase program by an additional $300.0 million of shares of our common stock. The timing, amount and other terms and conditions of any repurchases
of shares of our common stock under our stock repurchase program will be determined by our management at its discretion based on a variety of factors, including the
market price of our common stock, corporate considerations, general market and economic conditions and legal requirements. Our stock repurchase program may be
modified, discontinued or suspended at any time.
Dividends
We have not previously declared or paid any cash dividends on our common stock. Any future determination to pay cash dividends on our common
stock will be at the discretion of the Board 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 the Board may deem relevant.
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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, 2016 and assumes the reinvestment of any dividends. The stock price performance on the following graph is not
necessarily indicative of future stock price performance.
Comparison of Cumulative Total Return among LGI Homes, Inc. Common Stock, the S&P 500 Index, and the S&P Homebuilders Index for the
years ended December 31, 2021, 2020, 2019, 2018 and 2017.
LGIH
S&P 500 Index
S&P Homebuilders Index
12/31/2016
$100.00
$100.00
$100.00
12/31/2017
$261.16
$119.42
$130.65
12/31/2018
$157.40
$111.97
$95.95
12/31/2019
$245.91
$144.31
$134.45
12/31/2020
$368.43
$167.77
$169.62
12/31/2021
$537.70
$212.89
$252.40
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our historical
consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K contain additional information that
should be referred to when reviewing this material. For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of
Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc. and its subsidiaries.
Key Results
Key financial results as of and for the year ended December 31, 2021, as compared to the year ended December 31, 2020, were as follows:
• Home sales revenues increased 28.8% to $3.1 billion from $2.4 billion.
• Homes closed increased 11.8% to 10,442 homes from 9,339 homes.
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• Average sales price per home closed increased 15.2% to $292,104 from $253,553.
• Gross margin as a percentage of home sales revenues increased to 26.8% from 25.5%.
• Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 28.2% from 27.4%.
• Net income before income taxes increased 47.6% to $542.8 million from $367.8 million.
• Net income increased 32.6% to $429.6 million from $323.9 million.
•
EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.1% from 17.3%.
• Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.4% from 17.3%.
• Active communities at the end of 2021 decreased to 101 from 116.
•
Total owned and controlled lots increased 49.3% to 91,845 lots at December 31, 2021 from 61,504 lots at December 31, 2020.
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.”
COVID-19 Impact and Strategy
The outbreak of COVID-19 and its development into a global pandemic in March 2020 resulted in federal, state and local governments imposing
varying degrees of restrictions on business and social activities to contain COVID-19, including business shutdowns and closures, travel restrictions,
quarantines, shelter-in-place orders and “stay-at-home” orders in certain of our markets. In March 2020, we were required to temporarily stop our
construction of homes in certain markets in which we do business. Beginning in April 2020, we resumed construction of homes in those markets. Although
we continued to build and sell homes in all of our markets, at that time the pace of sales declined and we experienced an increase in the rate of contract
cancellations. Since May 2020, the pace of sales has rebounded and we have experienced a sustained increase in demand in our markets. While many of the
restrictions and measures initially implemented during 2020 have since been softened or lifted in varying degrees in the United States, and the manufacture
and distribution of COVID-19 vaccines during 2021 helped to initiate a recovery from the pandemic, recent increases in COVID-19 cases, the uncertainty
regarding new variants of COVID-19 and the success of any vaccines in respect thereof may in the future cause a significant reduction in economic activity
or prompt the re-imposition of certain restrictions and measures. Such measures have previously caused, and may in the future cause, us, our
subcontractors, suppliers and other business counterparties to experience operational delays.
Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market
valuations, consumer confidence, housing demand, availability of financing for home buyers, availability and prices of new homes compared to existing
inventory, and demographic trends. These factors, and in particular consumer confidence, can be significantly adversely affected by a variety of factors
beyond our control. The outbreak of COVID-19 caused the shutdown of large portions of our national economy during the first half of 2020. The spread of
COVID-19 has also caused significant volatility in U.S. and international debt and equity markets, which can negatively impact consumer confidence.
In response to COVID-19, we continue to take steps to prioritize the health and safety of our employees, customers, subcontractors and suppliers,
including expanded safety policies and practices based on Center for Disease Control guidelines to reduce the spread of COVID-19.
As a homebuilder and developer, we provide an important service to our customers. During the COVID-19 outbreak, our main focus beyond the
health and safety mentioned above is to continue our efforts to sell homes and complete our homes under construction. In addition to the measures
discussed above, beginning in March 2020, we implemented certain cash management policies, including eliminating business air travel, cancelling in-
person group meetings, delaying or canceling land acquisitions, deferring new starts to manage our overall inventory, significantly reducing marketing
expenditures and delaying major expenditures. In May 2020, we began to acquire land and release starts for home construction in addition to increasing
marketing expenditures and later began reinstating some necessary travel. From time to time during the COVID-19 outbreak, we have had to close
individual sales offices for a limited period of time, as a result of potential or actual exposure to COVID-19 by one or more of our employees. In September
2020, our employees working in our corporate headquarters returned to working under modified protocols to ensure health and safety at the office.
We cannot estimate with any degree of certainty the full impact of COVID-19 on our financial condition and future results of operations. We also
cannot predict the full impact that the significant disruption and volatility currently being experienced in the markets will have on our business, cash flows,
liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts of COVID-19 and related mitigation
efforts will depend on future developments, including, but not limited to, the duration and geographic spread of COVID-19, the emergence of more
infectious variants of
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COVID-19, the impact of government actions designed to prevent the spread of COVID-19 or the decrease in such actions and resulting increased business
and social activities, the availability and timely distribution of, and willingness to accept, effective treatments and vaccines, vaccine hesitancy, actions taken
by customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating
conditions resume. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A. Risk Factors in Part I of this Annual
Report on Form 10-K. Additionally, during the year ended December 31, 2021 and the beginning of 2022, significant supply chain disruptions extended
construction cycles across our markets. While we have carefully managed our supply chain to limit impacts to our business and customers, we believe these
global shortages are directly related to COVID-19 and will continue to impact our operations as long as the pandemic persists. Although, we expect
COVID-19 to continue to influence our future results, we believe that the desire for single-family homes outside of densely populated urban areas
combined with historically low mortgage rates and low availability of existing homes is driving an increase in demand for new homes.
Current Homebuilding and Inventory Environment
Despite the 10,442 home closings we delivered in 2021, representing an 11.8% increase over our 2020 home closings, numerous challenges,
including impacts from the COVID-19 pandemic, supply chain issues, volatile cost increases for certain supplies, tight labor markets and a shortage of
available finished lots, impacted operations and extended our cycle times. Our average home completion time was approximately 90 to 135 days during
2021 as compared to 80 to 105 days in 2020. In light of these factors, among others, during the second half of 2021, we elected to delay entering into sales
contracts until vertical construction had begun and our costs for the home were readily determined.
In recent years, it has become more difficult to acquire finished lots. As a result, more of the land we have acquired is raw land that will require
significant development before home construction can begin. This shift in our land portfolio has extended the time period between when the land is
purchased and when construction of homes can begin.
During 2021, we experienced a decrease in our overall active community count driven by the accelerated pace of absorptions, the time lag between
the closing of certain communities and opening of their replacements and the limited availability of finished lots in certain markets in 2021 as compared to
2020.
We expect that many of these challenges will persist in 2022.
Recent Developments
On February 11, 2022, the Board approved an increase in our stock repurchase program by an additional $200.0 million, increasing the available
authorization under the program to purchase up to $306.6 million of shares of our common stock as of the date of this Annual Report on Form 10-K.
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Results of Operations
The following table sets forth our results of operations for the years ended December 31, 2021, 2020 and 2019.
Year Ended December 31,
2020
(dollars in thousands, except per share data and average home sales price)
2019
2021
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:
Average community count
Community count at end of period
Home closings
Average sales price per home closed
Gross margin
Gross margin %
Adjusted gross margin
Adjusted gross margin %
EBITDA
EBITDA margin %
(4)
Adjusted EBITDA
Adjusted EBITDA margin %
(2)(4)
(2)(3)
(2)(4)
(3)
(4)
(1)
(2)
$
3,050,149
$
2,367,929
$
1,838,154
2,232,115
170,005
100,331
547,698
13,976
(9,053)
542,775
113,130
429,645
17.46
17.25
104.4
101
10,442
292,104
818,034
26.8 %
860,544
28.2 %
581,475
19.1 %
591,362
19.4 %
$
$
$
$
$
$
$
$
1,764,832
148,366
90,021
364,710
—
(3,139)
367,849
43,954
323,895
12.89
12.76
111.9
116
9,339
253,553
603,097
25.5 %
648,350
27.4 %
408,940
17.3 %
410,673
17.3 %
$
$
$
$
$
$
$
$
1,401,675
131,561
77,380
227,538
169
(4,463)
231,832
53,224
178,608
7.70
7.02
95.8
106
7,690
239,032
436,479
23.7 %
475,033
25.8 %
267,705
14.6 %
266,735
14.5 %
$
$
$
$
$
$
$
$
(1) Gross margin is home sales revenues less cost of sales.
(2) Calculated as a percentage of home sales revenues.
(3) Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted
gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our
management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin.
However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and
could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies
may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a
supplement to gross margin information as a measure of our performance. Please see “—Non-GAAP Measures” for a reconciliation of adjusted gross margin to
gross margin, which is the GAAP financial measure that our management believes to be most directly comparable.
(4) EBITDA 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
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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 “—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.
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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Homes Sales. Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption
rate and closing community count by reportable segment for the years ended December 31, 2021 and 2020 were as follows (revenues in thousands):
Year Ended December 31, 2021
Revenues
Home Closings
ASP
1,252,782
594,742
510,497
351,219
340,910
3,050,149
4,665 $
2,279
1,166
995
1,337
10,442 $
268,549
260,966
437,819
352,984
254,981
292,104
Average
Community
Count
Average
Monthly
Absorption
Rate
36.5
25.6
11.1
11.4
19.8
104.4
10.7
7.4
8.8
7.3
5.6
8.3
Year Ended December 31, 2020
Revenues
Home Closings
ASP
850,375
559,226
389,523
286,130
282,675
2,367,929
3,654 $
2,382
1,000
1,043
1,260
9,339 $
232,724
234,772
389,523
274,334
224,345
253,553
Average
Community
Count
Average
Monthly
Absorption
Rate
34.6
33.5
11.9
13.9
18.0
111.9
8.8
5.9
7.0
6.2
5.8
7.0
$
$
$
$
At December 31,
2021
Community
Count at End of
Period
35
25
11
11
19
101
At December 31,
2020
Community
Count at End of
Period
38
31
13
13
21
116
Central
Southeast
Northwest
West
Florida
Total
Central
Southeast
Northwest
West
Florida
Total
Home Sales Revenues. Home sales revenues for the year ended December 31, 2021 were $3.1 billion, an increase of $682.2 million, or 28.8%, from
$2.4 billion for the year ended December 31, 2020. The increase in home sales revenues is primarily due to an 11.8% increase in homes closed and an
increase in the average sales price per home closed during the year ended December 31, 2021 as compared to the year ended December 31, 2020. We
closed 10,442 homes during 2021, as compared to 9,339 homes closed during 2020. The average sales price per home closed during the year ended
December 31, 2021 was $292,104, an increase of $38,551, or 15.2%, from the average sales price per home closed of $253,553 for the year ended
December 31, 2020. This increase in the average sales price per home closed was primarily due to higher price points in certain markets, partially offset by
additional wholesale home closings. The overall increase in home closings was primarily driven by strong demand in all reportable segments during the
year ended December 31, 2021 as compared to the year ended December 31, 2020. The overall decrease in average community count relates to timing
associated with the opening, close out or transition between certain active communities during the year ended December 31, 2021 as compared to the year
ended December 31, 2020.
We increased our home sales revenues in our reportable segments other than our Central reportable segment by $279.8 million during the year ended
December 31, 2021 as compared to the year ended December 31, 2020, representing a 1.6% increase in the number of homes closed in these reportable
segments and increased average sales price per home closed on a consolidated basis during 2021 as compared to 2020.
Home sales revenues in our Central reportable segment increased by $402.4 million, or 47.3%, during the year ended December 31, 2021 as
compared to the year ended December 31, 2020, primarily due to an increase in the number of homes closed at a higher average sales price per home
closed and increased average community count at a higher absorption rate in this reportable segment. Home sales revenues in our Southeast reportable
segment increased by $35.5 million, or 6.4%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due
to higher average sales price per home closed and improved absorption rate associated with increased closings in certain markets in North Carolina and
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South Carolina, partially offset by lower community count at December 31, 2021 as compared to December 31, 2020. Home sales revenues in our
Northwest reportable segment increased by $121.0 million, or 31.1%, during the year ended December 31, 2021 as compared to the year ended
December 31, 2020, primarily due to a 16.6% increase in the number of homes closed in this reportable segment, as a result of increased demand. Home
sales revenues in our West reportable segment increased by $65.1 million, or 22.7%, during the year ended December 31, 2021 as compared to the year
ended December 31, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased demand in
certain markets in this reportable segment, partially offset by lower average community count. Home sales revenues in our Florida reportable segment
increased by $58.2 million, or 20.6%, largely due to an increase of 13.7% in the average sales price per home closed as a result of strong demand and
complemented by increased average community count during the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the year ended December 31, 2021 to $2.2
billion, an increase of $467.3 million, or 26.5%, from $1.8 billion for the year ended December 31, 2020. This increase is primarily due to an 11.8%
increase in homes closed, higher construction costs and product mix during 2021 as compared to 2020. Gross margin for the year ended December 31,
2021 was $818.0 million, an increase of $214.9 million, or 35.6%, from $603.1 million for the year ended December 31, 2020. Gross margin as a
percentage of home sales revenues was 26.8% for the year ended December 31, 2021 and 25.5% for the year ended December 31, 2020. This increase in
gross margin as a percentage of home sales revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was
primarily due to raising prices higher than increases in input costs.
Selling Expenses. Selling expenses for the year ended December 31, 2021 were $170.0 million, an increase of $21.6 million, or 14.6%, from $148.4
million for the year ended December 31, 2020. Sales commissions increased to $115.4 million for the year ended December 31, 2021 from $89.2 million
for the year ended December 31, 2020 partially due to a 28.8% increase in home sales revenues during 2021 as compared to 2020. Selling expenses as a
percentage of home sales revenues were 5.6% and 6.3% for the years ended December 31, 2021 and 2020, respectively. The decrease in selling expenses as
a percentage of home sales revenues was driven primarily by operating leverage obtained from the increase in home sales revenues and to a lesser extent
lower advertising expenses during the year ended December 31, 2021 as compared to the year ended December 31, 2020.
General and Administrative. General and administrative expenses for the year ended December 31, 2021 were $100.3 million, an increase of $10.3
million, or 11.5%, from $90.0 million for the year ended December 31, 2020. The increase in the amount of general and administrative expenses is
primarily due to increased overhead. General and administrative expenses as a percentage of home sales revenues were 3.3% and 3.8% for the years ended
December 31, 2021 and 2020, respectively. The decrease in general and administrative expenses as a percentage of home sales revenues reflects operating
leverage realized from the increase in home sales revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Loss on extinguishment of debt. Loss on extinguishment of debt was $14.0 million for the year ended December 31, 2021 primarily due to the
redemption premium associated with the optional redemption of our 6.875% Senior Notes due 2026 (the “2026 Senior Notes”), as well as debt issuance
costs and discount previously capitalized that were associated with our 2026 Senior Notes and debt issuance costs previously capitalized that were
associated with our 2020 Credit Agreement (as defined herein). There was no loss on extinguishment of debt for the year ended December 31, 2020.
Other Income. Other income, net of other expenses was $9.1 million for the year ended December 31, 2021, an increase of $5.9 million from $3.1
million for the year ended December 31, 2020. The increase in other income primarily reflects the gain realized from the sale of lots not directly associated
with our core homebuilding operations.
Operating Income and Net Income before Income Taxes. Operating income for the year ended December 31, 2021 was $547.7 million, an increase of
$183.0 million, or 50.2%, from $364.7 million for the year ended December 31, 2020. Net income before income taxes for the year ended December 31,
2021 was $542.8 million, an increase of $174.9 million, or 47.6%, from $367.8 million for the year ended December 31, 2020. Our reportable segments
contributed the following amounts and percentages of net income before income taxes during 2021: Central - $242.6 million or 44.7%; Southeast - $105.6
million or 19.5%; Northwest - $115.0 million or 21.2%; West - $50.8 million or 9.4%; and Florida - $49.9 million or 9.2%. The increases in operating
income and net income before income taxes are primarily attributed to operating leverage realized from the increase in home sales revenues and higher
average sales price per home closed during the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Income Taxes. Income tax provision for the year ended December 31, 2021 was $113.1 million, an increase of $69.2 million, or 157.4%, from income
tax provision of $44.0 million for the year ended December 31, 2020. The increase in the amount of income tax provision is primarily due to the retroactive
tax benefits relating to the federal energy efficient homes tax credits we recognized during 2020 and the 47.6% increase in net income before taxes, which
resulted in an increase in our effective tax rate for the year ended December 31, 2021 to 20.8% from 11.9% for the year ended December 31, 2020.
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Net Income. Net income for the year ended December 31, 2021 was $429.6 million, an increase of $105.8 million, or 32.6%, from $323.9 million for
the year ended December 31, 2020. The increase in net income is primarily attributed to operating leverage realized from the increase in home sales
revenues and higher average sales price per home closed, partially offset by tax benefits relating to the federal energy efficient homes tax credits we
recognized for the year ended December 31, 2020.
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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Homes Sales. Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption
rate and closing community count by reportable segment for the years ended December 31, 2020 and 2019 were as follows (revenues in thousands):
Year Ended December 31, 2020
Revenues
Home Closings
ASP
850,375
559,226
389,523
286,130
282,675
2,367,929
3,654 $
2,382
1,000
1,043
1,260
9,339 $
232,724
234,772
389,523
274,334
224,345
253,553
Average
Community
Count
34.6
33.5
11.9
13.9
18.0
111.9
Year Ended December 31, 2019
Revenues
Home Closings
ASP
724,981
347,817
304,294
271,186
189,876
1,838,154
3,304 $
1,592
827
1,056
911
7,690 $
219,425
218,478
367,949
256,805
208,426
239,032
Average
Community
Count
33.0
24.5
12.4
12.8
13.1
95.8
$
$
$
$
Average
Monthly
Absorption Rate
8.8
5.9
7.0
6.2
5.8
7.0
Average
Monthly
Absorption Rate
8.3
5.4
5.6
6.9
5.8
6.7
At December 31,
2020
Community
Count at End of
Period
38
31
13
13
21
116
At December 31,
2019
Community
Count at End of
Period
33
29
13
14
17
106
Central
Southeast
Northwest
West
Florida
Total
Central
Southeast
Northwest
West
Florida
Total
Our results of operations for the year ended December 31, 2020 reflect a significant rebound following the slowdown related to the COVID-19
pandemic that occurred during March and April 2020. Since May 2020, we have seen a continued and material increase in the demand for our homes
driven by a renewed interest in the benefits of homeownership, low interest rates and an undersupply of new and existing homes available for sale. Despite
high levels of demand, our closings in July and August 2020 were limited by our decision to pause our construction and land acquisition activities in March
and April as we evaluated the potential impacts of the COVID-19 pandemic on our business. Beginning in May 2020, we resumed construction activities
and accelerated the pace of our new home starts.
Home Sales Revenues. Home sales revenues for the year ended December 31, 2020 were $2.4 billion, an increase of $529.8 million, or 28.8%, from
$1.8 billion for the year ended December 31, 2019. The increase in home sales revenues is primarily due to a 21.4% increase in homes closed, a 16.8%
increase in average community count and an increase in the average sales price per home closed during the year ended December 31, 2020 as compared to
the year ended December 31, 2019. We closed 9,339 homes during 2020, as compared to 7,690 homes closed during 2019. The average sales price per
home closed during the year ended December 31, 2020 was $253,553, an increase of $14,521, or 6.1%, from the average sales price per home closed of
$239,032 for the year ended December 31, 2019. This increase in the average sales price per home closed was primarily due to a favorable pricing
environment, increased closings at higher price points in certain markets and changes in product mix. The overall increase in home closings was largely
due to deepening our presence within certain markets in the Southeast and Florida reportable segments during the year ended December 31, 2020 as
compared to the year ended December 31, 2019 and strong demand resulting in an increase in the number of homes closed on average on a per community
basis.
We continued to diversify our operations outside of our Central reportable segment during 2020. We increased our home sales revenues in our
reportable segments other than our Central reportable segment by $404.4 million during the year ended
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December 31, 2020 as compared to the year ended December 31, 2019, representing a 29.6% increase in the number of homes closed in these reportable
segments and increased average community count on a consolidated basis during 2020 as compared to 2019.
Home sales revenues in our Central reportable segment increased by $125.4 million, or 17.3%, during the year ended December 31, 2020 as
compared to the year ended December 31, 2019, primarily due to an increase in the average sales price per home closed and increased community count at
a higher absorption rate. Home sales revenues in our Southeast reportable segment increased by $211.4 million, or 60.8%, during the year ended
December 31, 2020 as compared to the year ended December 31, 2019, primarily due to an increase in community count associated with deepening our
presence within existing markets and to a lesser extent our geographic expansion into certain markets in North Carolina and South Carolina at
December 31, 2020 as compared to December 31, 2019. Home sales revenues in our Northwest reportable segment increased by $85.2 million, or 28.0%,
during the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily due to a 20.9% increase in the number of homes
closed in this reportable segment, as a result of increased demand slightly offset by a lower average community count at a higher absorption rate. Home
sales revenues in our West reportable segment increased by $14.9 million, or 5.5%, during the year ended December 31, 2020 as compared to the year
ended December 31, 2019, primarily due to an increase of 6.8% in the average sales price per home closed in this reportable segment offset by lower home
closings, largely due to close out of or transition between, and to a lesser extent available inventory in, certain active communities. Home sales revenues in
our Florida reportable segment increased by $92.8 million, or 48.9%, primarily due to an increased community count with an increase of 7.6% in the
average sales price per home closed during the year ended December 31, 2020 as compared to the year ended December 31, 2019.
Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the year ended December 31, 2020 to $1.8
billion, an increase of $363.2 million, or 25.9%, from $1.4 billion for the year ended December 31, 2019. This increase is primarily due to a 21.4% increase
in homes closed, as well as higher vertical and lot costs recognized as a percentage of revenues during 2020 as compared to 2019. Gross margin for the
year ended December 31, 2020 was $603.1 million, an increase of $166.6 million, or 38.2%, from $436.5 million for the year ended December 31, 2019.
Gross margin as a percentage of home sales revenues was 25.5% for the year ended December 31, 2020 and 23.7% for the year ended December 31, 2019.
This increase in gross margin as a percentage of home sales revenues during the year ended December 31, 2020 as compared to the year ended
December 31, 2019 is primarily due to an increase in homes closed with a higher average sales price per home closed, which was primarily driven by a
favorable pricing environment, operating leverage obtained and product mix, partially offset by an increase in wholesale home closings as a percentage of
total home closings.
Selling Expenses. Selling expenses for the year ended December 31, 2020 were $148.4 million, an increase of $16.8 million, or 12.8%, from $131.6
million for the year ended December 31, 2019. Sales commissions increased to $89.2 million for the year ended December 31, 2020 from $68.1 million for
the year ended December 31, 2019 largely due to a 28.8% increase in home sales revenues during 2020 as compared to 2019. Selling expenses as a
percentage of home sales revenues were 6.3% and 7.2% for the years ended December 31, 2020 and 2019, respectively. The decrease in selling expenses as
a percentage of home sales revenues was driven primarily by cost saving measures implemented and the increased demand for our homes in response to the
COVID-19 pandemic, as well as operating leverage realized from the increase in home sales revenues during the year ended December 31, 2020 as
compared to the year ended December 31, 2019.
General and Administrative. General and administrative expenses for the year ended December 31, 2020 were $90.0 million, an increase of $12.6
million, or 16.3%, from $77.4 million for the year ended December 31, 2019. The increase in the amount of general and administrative expenses is
primarily due to increased personnel and other costs associated with an increase of active communities during 2020 as compared to 2019. General and
administrative expenses as a percentage of home sales revenues were 3.8% and 4.2% for the years ended December 31, 2020 and 2019, respectively. The
decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales
revenues and cost saving measures implemented as a result of COVID-19 during the year ended December 31, 2020 as compared to the year ended
December 31, 2019.
Operating Income and Net Income before Income Taxes. Operating income for the year ended December 31, 2020 was $364.7 million, an increase of
$137.2 million, or 60.3%, from $227.5 million for the year ended December 31, 2019. Net income before income taxes for the year ended December 31,
2020 was $367.8 million, an increase of $136.0 million, or 58.7%, from $231.8 million for the year ended December 31, 2019. Our reportable segments
contributed the following amounts and percentages of net income before income taxes during 2020: Central - $154.8 million or 42.1%; Southeast - $79.4
million or 21.6%; Northwest - $71.3 million or 19.4%; West - $35.8 million or 9.7%; and Florida - $32.6 million or 8.8%. The increases in operating
income and net income before income taxes are primarily attributed to higher gross margins during the year ended December 31, 2020 as compared to the
year ended December 31, 2019.
Income Taxes. Income tax provision for the year ended December 31, 2020 was $44.0 million, a decrease of $9.3 million, or 17.4%, from income tax
provision of $53.2 million for the year ended December 31, 2019. The decrease in the amount of income tax provision is primarily due to the change in our
effective tax rate to 11.9% from 23.0% effective tax provision as a
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result of the tax benefits relating to the federal energy efficient homes tax credits we recognized during the year ended December 31, 2020, partially offset
by the 58.7% increase in net income before taxes. Federal energy efficient homes tax credits recognized during the year ended December 31, 2020 totaled
$41.2 million, of which $29.7 million related to homes closed in prior open tax years. We believe this tax credit will continue, at a lesser extent, to impact
our results of operations during 2021.
Net Income. Net income for the year ended December 31, 2020 was $323.9 million, an increase of $145.3 million, or 81.3%, from $178.6 million for
the year ended December 31, 2019. The increase in net income is primarily attributed to overall stronger gross margins driven by the 28.8% increase in
home sales revenues, 6.1% higher average sales price per home closed and the $41.2 million of tax benefits relating to the federal energy efficient homes
tax credits recognized during 2020 as compared to 2019.
Non-GAAP Measures
In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided
information in this Annual Report on Form 10-K relating to adjusted gross margin, EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings
per share.
Adjusted Gross Margin
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We
define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the
cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting
adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments,
which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance
may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted
gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.
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
(1)
Adjusted gross margin
Gross margin %
Adjusted gross margin %
(2)
(2)
$
$
2021
3,050,149
2,232,115
818,034
37,546
4,964
860,544
26.8 %
28.2 %
Year Ended December 31,
2020
$
$
2,367,929
1,764,832
603,097
40,381
4,872
648,350
$
$
25.5 %
27.4 %
2019
1,838,154
1,401,675
436,479
35,230
3,324
475,033
23.7 %
25.8 %
(1) Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of
sales for real estate inventory sold after the acquisition dates.
(2) Calculated as a percentage of home sales revenues.
EBITDA 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 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,
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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):
Net income
Income tax provision
Depreciation and amortization
Capitalized interest charged to cost of sales
EBITDA
Purchase accounting adjustments
Loss on extinguishment of debt
Other income, net
(1)
Adjusted EBITDA
EBITDA margin %
Adjusted EBITDA margin %
(2)
(2)
$
$
2021
Year Ended December 31,
2020
2019
$
$
429,645
113,130
1,154
37,546
581,475
4,964
13,976
(9,053)
591,362
19.1 %
19.4 %
$
$
323,895
43,954
710
40,381
408,940
4,872
—
(3,139)
410,673
17.3 %
17.3 %
178,608
53,224
643
35,230
267,705
3,324
169
(4,463)
266,735
14.6 %
14.5 %
(1) Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of
sales for real estate inventory sold after the acquisition dates.
(2) Calculated as a percentage of home sales revenues.
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Adjusted Net Income and Adjusted Earnings per Share
Adjusted net income and adjusted earnings per share are non-GAAP financial measures used by management as supplemental measures in evaluating
operating performance. We define adjusted net income as net income less the retroactive federal energy efficient homes tax credits. We define adjusted
earnings per share as adjusted net income divided by weighted average shares outstanding. Our management believes that the presentation of adjusted net
income and adjusted earnings per share provides useful information to investors because such measures isolate the impact that material retroactive tax
adjustments have on net income and earnings per share. However, because adjusted net income and adjusted earnings per share information excludes the
retroactive federal energy efficient homes tax credits, which have real economic effects and could impact our results, the utility of adjusted net income and
adjusted earnings per share as measures of our operating performance may be limited. In addition, other companies may not calculate adjusted net income
and adjusted earnings per share in the same manner that we do. Accordingly, adjusted net income and adjusted earnings per share information should be
considered only as a supplement to net income and earnings per share information as measures of our performance.
The following table reconciles adjusted net income and adjusted earnings per share to net income and earnings per share, respectively, which are the
GAAP measures that our management believes to be most directly comparable (dollars in thousands):
Numerator (in thousands):
Net income (Numerator for basic and diluted earnings per share)
Retroactive federal energy efficient homes tax credits
Adjusted net income (Numerator for adjusted basic and diluted
earnings per share)
Denominator:
Basic weighted average shares outstanding
Effect of dilutive securities:
Convertible Notes - treasury stock method
Stock-based compensation units
Diluted weighted average shares outstanding
Basic earnings per share
Diluted earnings per share
Adjusted basic earnings per share
Adjusted diluted earnings per share
2021
Year Ended December 31,
2020
2019
429,645 $
—
429,645 $
323,895 $
29,703
294,192 $
178,608
—
178,608
24,607,231
25,135,077
23,191,595
—
301,760
24,908,991
—
245,483
25,380,560
1,966,639
272,607
25,430,841
17.46 $
17.25 $
17.46 $
17.25 $
12.89 $
12.76 $
11.70 $
11.59 $
7.70
7.02
7.70
7.02
$
$
$
$
$
$
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Backlog
We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase
contract. The amount of the required deposit is minimal (typically $1,000 to $5,000). We permit our retail homebuyers to cancel the purchase contract and
obtain a refund of their deposit in the event mortgage financing cannot be obtained within a certain period of time, as specified in their purchase contract.
Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is
signed. If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will
terminate the purchase contract. If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then
the homebuyer has met the preliminary criteria to obtain mortgage financing. Only purchase contracts that are signed by homebuyers who have met the
preliminary criteria to obtain mortgage financing are included in new (gross) orders.
Our “backlog” consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to
obtain mortgage financing but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to
twelve months. Since our business model is generally based on building move-in ready homes before a purchase contract is signed, the majority of our
homes in backlog are currently under construction or complete. Ending backlog represents the number of homes in backlog from the previous period plus
the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes closed during the
current period. Our backlog at any given time will be affected by cancellations, the number of our active communities and the timing of home closings.
Homes in backlog are generally closed within one to two months, although home closings have been, and may continue to be, delayed during the COVID-
19 pandemic. In addition, we may experience cancellations of purchase contracts at any time prior to closing. It is important to note that net orders, backlog
and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. Backlog may be
impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative
impact to the potential homebuyer from the cancellation of the purchase contract.
Our net orders decreased in 2021 primarily due to the availability of finished lots brought on by sustained demand and the rapid pace of fluctuating
rising costs for certain supplies and labor, experienced in 2021. During the second half of 2021, due to limited supply, we elected to not enter into sales
contracts until construction on the home had begun and our costs for the home were readily determined. Similarly, wholesale orders decreased 57.8% to 481
units from 1,139 units for the year ended December 31, 2021, as compared to the year ended December 31, 2020.
As of the dates set forth below, our net orders, cancellation rate, and ending backlog homes and value were as follows (dollars in thousands):
(1)
Backlog Data
Net orders
Cancellation rate
Ending backlog - homes
(3)
Ending backlog - value
(2)
(3)
Year Ended December 31,
2021
(4)
2020
(5)
2019
(6)
9,533
19.3 %
2,055
659,234
$
11,070
21.6 %
2,964
775,468
$
8,299
20.6 %
1,233
290,438
$
(1) Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period.
(2) Cancellation rate for a period is the total number of purchase contracts cancelled during the period divided by the total new (gross) orders for the purchase of homes
during the period.
(3) Ending backlog consists of retail homes at the end of the period that are under a purchase contract that has been signed by homebuyers who have met our
preliminary financing criteria but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve
months. Ending backlog is valued at the contract amount.
(4) As of December 31, 2021, we had 481 units related to bulk sales agreements associated with our wholesale business.
(5) As of December 31, 2020, we had 1,139 units related to bulk sales agreements associated with our wholesale business.
(6) As of December 31, 2019, we had 481 units related to bulk sales agreements associated with our wholesale business, of which 117 units and values are not included
in the table above.
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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 and Labor
See discussion included in “Business—Raw Materials and Labor.”
Seasonality
In all of our reportable segments, we have historically experienced similar variability in our results of operations and in capital requirements from
quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in our second, third and fourth quarters. Thus,
our revenues may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain
our inventory levels. Our revenues and capital requirements are generally similar across our second, third and fourth quarters.
As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular quarter, especially the first quarter,
are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to continue in the long term.
Liquidity and Capital Resources
Overview
As of December 31, 2021, we had $50.5 million of cash and cash equivalents. Cash flows for each of our active communities depend on the status of
the development cycle and can differ substantially from reported earnings.
Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness
and the payment of various liabilities. In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition and
repurchase shares of our common stock. Early stages of development or expansion require significant cash outlays for land acquisitions, land development,
plats, vertical development, construction of information centers, general landscaping and other amenities. Because these costs are a component of our
inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of home sales
revenues. In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement purposes, as the costs
associated with home and land construction were previously incurred.
Short-term Liquidity and Capital Resources
We generally rely on our ability to finance our operations by generating operating cash flows and borrowing under the Credit Agreement to
adequately fund our short-term working capital obligations and to purchase land and other assets, develop lots and homes and repurchase shares of our
common stock. As needed, we will consider accessing the debt and equity capital markets as part of our ongoing financing strategy. We also rely on our
ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects.
While the COVID-19 pandemic and related mitigation efforts have created significant uncertainty as to general economic and housing market
conditions, as of the date of this Annual Report on Form 10-K, we believe that we will be able to fund our current and foreseeable liquidity needs for at
least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from the Credit Agreement or
through accessing debt or equity capital, as needed. However, with the uncertainty surrounding COVID-19, our ability to engage in the transactions
described above may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as moderated investor or lender
interest or capacity and our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational
limitations arising from any one or series of such transactions.
Long-term Liquidity and Capital Resources
We believe that our long-term principal uses of liquidity and capital resources will be inventory related purchases concerning land, lot development,
other capital expenditures, and principal and interest payments on our debt obligations maturing in 2025 and 2029. We believe that we will be able to fund
our long-term liquidity needs with cash generated from operations and cash expected to be available to borrow under the Credit Agreement or through
accessing debt or equity capital, as needed, although no assurance can be provided that such additional debt or equity capital will be available when needed
or on terms that we find attractive. To the extent these sources of capital are insufficient to meet our needs, we may also conduct additional public or private
offerings of our securities, refinance our indebtedness, or dispose of certain assets to fund our operating activities and capital needs.
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Material Cash Requirements
The following is a summary of our material cash requirements from known contractual and other obligations as of December 31, 2021 and the effect
such obligations are expected to have on our liquidity and cash flows in future periods.
Borrowings:
(a)
Credit Agreement
Senior Notes
Interest and fees
Operating Leases
(b)
(c)
Total
Total
< 1 year
1 - 3 years
3 - 5 yrs
More than 5 years
Payments due by period (in thousands)
$
$
517,439
300,000
129,319
6,136
952,894 $
—
—
24,453
1,423
25,876 $
— $
—
48,906
2,298
51,204 $
517,439
—
25,954
1,411
544,804 $
—
300,000
30,006
1,004
331,010
(a) Represents borrowings under the Credit Agreement, which matures on April 28, 2025. Interest calculated using the effective rate as of December 31,
2021. See Note 7 “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 4.000% 2029 Senior Notes. The 2029 Senior Notes mature on July 15, 2029. See Note 7
“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) All of the outstanding borrowings under the Credit Agreement 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, 2021 was LIBOR plus 1.45%. Fees under the Credit Agreement are approximately $0.1 million
per year. Interest on the 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each
year.
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, 2021, we had $37.5 million
of cash deposits pertaining to land purchase contracts for 36,978 lots with an aggregate purchase price of $921.3 million. Approximately $19.3 million of
the cash deposits as of December 31, 2021 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.
Revolving Credit Facility
On April 28, 2021, we entered into that certain Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo
Bank, National Association, as administrative agent (the “Credit Agreement”), which amends and restates that certain Fourth Amended and Restated Credit
Agreement, dated as of May 6, 2019 (as amended, the “2020 Credit Agreement”). The Credit Agreement (a) increases the commitments to $850.0 million,
(b) allows the Company to increase the commitments by up to $100.0 million, subject to terms and conditions, (c) extends the maturity to April 28, 2025
for all lenders, (d) increases the sublimit for letters of credit to $50.0 million, (e) adds unrestricted cash in excess of $10.0 million as a component of the
borrowing base and removes certain exclusions from the borrowing base, (f) reduces the applicable margin for LIBOR loans to a range of 1.45% to 2.10%,
based on our leverage ratio, (g) reduces the LIBOR floor to 0.50%, (h) increases the minimum tangible net worth requirement to $850.0 million plus 75%
of the net proceeds of equity issuances after December 31, 2020 and 50% of consolidated earnings for each quarter ending after March 31, 2021 and (i)
provides for a
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“hardwired” transition from LIBOR loan pricing that is intended to be economically neutral to the Company; otherwise, the Credit Agreement is on
substantially the same terms as the 2020 Credit Agreement.
The Credit Agreement matures on April 28, 2025. Before each anniversary of the Credit Agreement, we may request a one-year extension of its
maturity date. The Credit Agreement is guaranteed by each of our subsidiaries that have gross assets of at least $0.5 million. The borrowings and letters of
credit outstanding under the Credit Agreement, together with the outstanding principal balance of our 4.000% Senior Notes due 2029 (the “2029 Senior
Notes”), may not exceed the borrowing base under the Credit Agreement. As of December 31, 2021, the borrowing base under the Credit Agreement was
$1.1 billion, of which borrowings, including the 2029 Senior Notes, of $817.4 million were outstanding, $9.1 million of letters of credit were outstanding
and $321.3 million was available to borrow under the Credit Agreement.
Interest is paid monthly on borrowings at LIBOR plus 1.45%. The Credit Agreement applicable margin for LIBOR loans ranges from 1.45% to
2.10% based on our leverage ratio. At December 31, 2021, LIBOR was 0.10%; however, the Credit Agreement has a 0.50% LIBOR floor.
The Credit Agreement requires us to maintain (i) a tangible net worth of not less than $850.0 million plus 75% of the net proceeds of all equity
issuances after December 31, 2020 plus 50.0% of the amount of our positive net income in each fiscal quarter ending after March 31, 2021, (ii) a leverage
ratio of not greater than 60.0%, (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 1.75 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, 2021, we were in compliance with all of the covenants contained in the Credit Agreement.
In July 2017, the FCA, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. On November 30,
2020, the FCA and ICE Benchmark Administration, which administers LIBOR quotations, announced a consultation on the extension of the quotation of
certain LIBOR tenors to June 30, 2023 for legacy contracts only. The Credit Agreement, which, at the present time, has a term that extends to April 28,
2025, provides for a mechanism to amend the Credit Agreement to reflect the establishment of an alternate rate of interest upon the occurrence of certain
events related to the phase-out of any applicable interest rate. However, we have not yet pursued any technical amendment or other contractual alternative
to address this matter. We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate on the Credit Agreement.
Senior Notes Offerings
On June 28, 2021, we issued $300.0 million aggregate principal amount of the 2029 Senior Notes in an offering to persons reasonably believed to be
qualified institutional buyers in the United States pursuant to Rule 144A (“Rule 144A”) under the Securities Act of 1933, as amended (the “Securities
Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S (“Regulation S”) under the Securities Act. Interest
on the 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each year. The 2029 Senior
Notes mature on July 15, 2029. Terms of the 2029 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Third Supplemental Indenture
thereto, dated as of June 28, 2021, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit
Agreement and Wilmington Trust, National Association, as trustee.
On July 6, 2018, we issued $300.0 million aggregate principal amount of the 2026 Senior Notes in an offering to persons reasonably believed to be
qualified institutional buyers in the United States pursuant to Rule 144A and to certain non-U.S. persons in transactions outside the United States pursuant
to Regulation S. On July 15, 2021, we redeemed all of the outstanding 2026 Senior Notes, which resulted in the principal payment of $300.0 million and a
redemption premium of $10.3 million. Additionally, we expensed $3.0 million of deferred financing costs and discounts that were being previously
amortized in association with the 2026 Senior Notes. We financed the redemption of the 2026 Senior Notes with a portion of the net proceeds from the
offering of the 2029 Senior Notes, together with cash on hand.
Convertible Notes
On November 15, 2019, our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) matured, which resulted in the principal payment of $70.0
million and the issuance of 2,381,751 shares of our common stock for the premium associated with the Convertible Notes.
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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 $206.8 million as of December 31, 2021. 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, 2021 will be drawn
upon.
Stock Repurchase Program
In November 2018, we announced that 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. In
October 2020, the Board approved an increase in our stock repurchase program by an additional $300.0 million. For the year ended December 31, 2021, we
repurchased 1,288,563 shares of our common stock for $193.8 million to be held as treasury stock. For the year ended December 31, 2020, we repurchased
718,993 shares of our common stock for $48.1 million to be held as treasury stock. A total of 2,046,556 shares of our common stock has been repurchased
since our stock repurchase program commenced. As of December 31, 2021, we may purchase up to $106.6 million of shares of our common stock under
our stock repurchase program. On February 11, 2022, the Board approved an increase in our stock repurchase program by an additional $200.0 million,
increasing the available authorization under the program to purchase up to $306.6 million of shares of our common stock as of the date of this Annual
Report on Form 10-K. The timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase
program will be determined by our management at its discretion based on a variety of factors, including the market price of our common stock, corporate
considerations, general market and economic conditions and legal requirements. Our stock repurchase program may be modified, discontinued or
suspended at any time.
Cash Flows
Operating Activities
Net cash provided by operating activities was $21.7 million during the year ended December 31, 2021. The primary drivers of operating cash flows
are typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash provided by operating activities during
the year ended December 31, 2021 was primarily driven by net income of $429.6 million, and included cash outflows from the $463.6 million increase in
the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity
and a $58.0 million decrease in the net change in accounts receivable.
Net cash provided by operating activities was $202.2 million during the year ended December 31, 2020. The primary drivers of operating cash flows
are typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash provided by operating activities during
the year ended December 31, 2020 was primarily driven by net income of $323.9 million, offset by cash outflows from the $70.2 million increase in the net
change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity and a
$59.5 million increase in the net change in accounts receivable.
Net cash used in operating activities was $41.9 million during the year ended December 31, 2019. The primary drivers of operating cash flows are
typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash used in operating activities during the year
ended December 31, 2019 was primarily driven by net income of $178.6 million, and included cash outlays for the $266.7 million increase in the net
change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity, offset
by changes in non-inventory balances of $46.1 million.
Investing Activities
Net cash used in investing activities was $70.4 million during the year ended December 31, 2021, primarily due to the business acquisitions of certain
real estate assets owned by KenRoe Inc. and its affiliated entities, including R Home LLC and Paxmar Land Development, and the real estate assets of
Buffington Homebuilding Group, Ltd. in 2021.
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Net cash used in investing activities was $5.6 million and $1.8 million during the years ended December 31, 2020 and 2019, respectively, which
reflects the purchase of property and equipment and investment in unconsolidated entity.
Financing Activities
Net cash provided by financing activities during the year ended December 31, 2021 was $63.3 million, primarily driven by borrowings of $1.2 billion
under the Credit Agreement, offset by $969.0 million of payments associated with the 2026 Senior Notes and under the 2020 Credit Agreement and the
Credit Agreement and by the $193.8 million payment for shares of our common stock repurchased under our stock repurchase program to be held as
treasury stock.
Net cash used by financing activities during the year ended December 31, 2020 was $198.9 million, primarily driven by $530.0 million of payments
under the 2020 Credit Agreement and by the $48.1 million payment for shares of our common stock repurchased under our stock repurchase program to be
held as treasury stock, offset by borrowings of $377.1 million under the 2020 Credit Agreement.
Net cash provided by financing activities during the year ended December 31, 2019 was $35.4 million, primarily driven by net borrowings of $105.5
million under the 2020 Credit Agreement, offset by the principal payment of $70.0 million on the Convertible Notes upon their maturity.
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. During the year ended
December 31, 2021, we have experienced a significant increase in land, labor, materials and construction costs, which we currently expect to continue
throughout 2022. Generally, we have been able to increase the sales prices of our homes to absorb such increased costs. See “Industry and Economic Risks
—Inflation could adversely affect our business and financial results” in Item 1A. Risk Factors in Part I of this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
In preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make
estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates, judgments and
assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ
materially from these estimates under different assumptions or conditions. We evaluate our estimates, judgments and assumptions on a regular basis. We
also discuss our critical accounting policies and estimates with the Audit Committee of the Board. 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.
Home Sales Revenue Recognition
We recognize home sales 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:
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. Little to no estimation is involved in
recognizing such revenues.
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.
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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.
We use judgements and assumptions to recognize the appropriate amount of cost of sales by estimating the total land development costs. We use
estimates which are affected by changes to the land development project’s schedule; the cost of labor, materials, and subcontractors; and potential cost
reimbursements from various municipalities. Changes to estimated total remaining 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. 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. We believe that our policies provide for reasonably dependable
estimates to be used in the calculation and reporting of land development and home construction costs.
Impairment of Real Estate Inventories
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 experienced limited circumstances during 2021, 2020 or 2019 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 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. We are currently experiencing a shift towards more lots being acquired as raw land as compared to
finished lots. As a result of this shift within our inventory and the time to develop raw land to finished lots, a longer life cycle of a community is expected,
to range from seven to nine years. Sustained changes in the life cycle of a community, which is an indicator used for impairment, may negatively impact
our results of operations.
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, 2021, 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 general and
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administrative expense. Assessments are made on each agreement based on criteria including, but not limited to, market absorption, historical and current
average sales price per home, timing of purchase and size of land parcel. We terminated $2.4 million, $2.1 million and $1.5 million of nonrefundable pre-
acquisition costs or controlled lots deposits for the years ended December 31, 2021, 2020 and 2019, respectively. We regularly 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 assessed monthly on a consistent basis as part of our policy and accrued and charged to cost of sales in
connection with our home sales.
The primary assumption to record amounts accrued for our warranty liability is based upon a trailing 120 month period of 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. We increased our warranty reserve by $2.5 million, $1.9 million and $0.6 million
for the years ended December 31, 2021, 2020 and 2019, respectively.
Business Acquisitions
We account for certain homebuilding asset purchases as business combinations using the acquisition method of accounting and allocate the purchase
price of an acquired business to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date with excess
recorded as goodwill. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair value of the
acquired assets. We determine the estimated fair values of the real estate inventory with the assistance of appraisals performed by independent third-party
specialists and estimates by management. Assumptions utilized in our estimates of the fair value of the assets acquired may 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.
Stock-based Compensation
We account for both non-performance and performance based compensation. Our 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 an assessment of probability of attainment of the performance target based on
assumptions that factor in historical data and volatility. Once the performance target outcome is determined to be probable, the cumulative expense is
adjusted, as needed, based on estimates to recognize compensation expense on a straight-line basis over the award’s requisite service period.
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 compute our provision for income taxes based on the statutory tax rates. Judgment is required in evaluating our tax positions and determining our
annual tax provision. 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.
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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.
Quantitative and Qualitative Disclosures About Interest Rate Risk
We utilize both fixed-rate debt ($300.0 million aggregate principal amount of the 2029 Senior Notes and certain inventory related obligations) and
variable-rate debt (our $850.0 million Credit Agreement) as part of financing our operations. We do not have the obligation to prepay the 2029 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.
We are exposed to market risks related to fluctuations in interest rates on our outstanding variable rate indebtedness. In November 2020, we entered
into a three-year interest rate cap of LIBOR of 0.70% to hedge a portion of our Credit Agreement risk exposure and future variable cash flows associated
with LIBOR interest rates. 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, 2021, we had $517.4 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, 2021
was LIBOR plus 1.45%. At December 31, 2021, LIBOR was 0.10%, subject to the 0.50% LIBOR floor as included in the Credit Agreement. A
hypothetical 100 basis point increase in the average
interest rate above the LIBOR floor on our variable rate indebtedness would increase our annual interest cost by approximately $5.2 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.
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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, 2021 and 2020, the related
consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2021, 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, 2021, 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 15, 2022 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 included 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
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Description of the
Matter
How We Addressed
the Matter in Our
Audit
Land development costs
For the year ended December 31, 2021, the Company’s cost of sales was approximately $2.2 billion, which includes construction
costs of each closed home and allocable land acquisition and land development costs, capitalized interest, and other related costs.
As discussed in Note 2 to the consolidated financial statements, land development costs that are not specifically identifiable to a
home are allocated on a pro rata basis. At the time of home closings, land development activities may not be finalized. To
recognize the appropriate amount of cost of sales, the Company estimates the total remaining development costs. Estimates are
affected by changes to the land development project’s schedule; the cost of labor, materials, and subcontractors; and potential
cost reimbursements from various municipalities.
Auditing the Company's land development cost measurement to unsold lots and homes was complex and subjective due to the
significant estimation required to determine the costs to complete land development. Specifically, the land development cost
estimate is sensitive to significant management assumptions, including the project’s schedule, estimated cost of materials and
labor and potential reimbursements.
We obtained an understanding and tested the design and operating effectiveness of the Company's process and controls over its
land development cost measurement and allocation to unsold lots and homes, including controls over management's review of
the estimated costs to complete.
To test the Company's land development cost measurement and allocation to unsold lots and homes, our audit procedures
included, among others, testing the significant assumptions used to develop the estimated costs to complete the land
development projects and testing the completeness and accuracy of the underlying data and allocation calculation. For example,
we sampled the Company’s land development project budgets and agreed the estimated development costs and cost
reimbursements to supporting documentation, including underlying contracts; and performed observational procedures to
understand the completeness of development activities included in the estimated land development costs. In addition, we
performed lookback analyses to historical actual costs to assess management’s ability to estimate and performed sensitivity
analyses of the significant assumptions to evaluate the changes in total costs of land development that would result from changes
in these assumptions.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2013.
Houston, Texas
February 15, 2022
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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
LGI HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
2021
2020
$
$
$
$
50,514 $
57,909
2,085,904
40,702
16,944
81,676
6,198
12,018
2,351,865 $
14,172 $
136,609
805,236
956,017
269
291,577
1,363,922
(259,920)
1,395,848
2,351,865 $
35,942
115,939
1,569,489
37,213
3,618
44,882
6,986
12,018
1,826,087
13,676
135,008
538,398
687,082
267
270,598
934,277
(66,137)
1,139,005
1,826,087
Common stock, par value $0.01, 250,000,000 shares authorized, 26,963,915 shares issued and
23,917,359 shares outstanding as of December 31, 2021 and 26,741,554 shares issued and
24,983,561 shares outstanding as of December 31, 2020
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 3,046,556 shares and 1,757,993 shares, respectively
Total equity
Total liabilities and equity
See accompanying notes to the consolidated financial statements.
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LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
2021
For the Year Ended December 31,
2020
2019
Home sales revenues
$
3,050,149 $
2,367,929 $
1,838,154
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
2,232,115
170,005
100,331
547,698
13,976
(9,053)
542,775
113,130
429,645 $
17.46 $
17.25 $
1,764,832
148,366
90,021
364,710
—
(3,139)
367,849
43,954
323,895 $
12.89 $
12.76 $
1,401,675
131,561
77,380
227,538
169
(4,463)
231,832
53,224
178,608
7.70
7.02
24,607,231
24,908,991
25,135,077
25,380,560
23,191,595
25,430,841
$
$
$
See accompanying notes to the consolidated financial statements.
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BALANCE—December 31, 2018
Net income
Issuance of shares in settlement of
Convertible Notes
Restricted stock units granted for accrued
annual bonuses
Compensation expense for equity awards
Stock issued under employee incentive
plans
BALANCE—December 31, 2019
Net income
Stock repurchase
Restricted stock units granted for accrued
annual bonuses
Compensation expense for equity awards
Stock issued under employee incentive
plans
BALANCE—December 31, 2020
Net income
Stock repurchase
Restricted stock units granted for accrued
annual bonuses
Compensation expense for equity awards
Stock issued under employee incentive
plans
BALANCE—December 31, 2021
LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
Shares
23,746,385 $
—
2,381,751
—
—
Common Stock
Amount
Additional
Paid-In
Capital
Retained
Earnings
Treasury Stock
Total Equity
237 $
—
241,988 $
—
431,774 $
178,608
(18,056) $
—
655,943
178,608
24
—
—
(24)
217
7,539
—
—
—
—
—
—
270,273
26,398,409 $
3
264 $
2,883
252,603 $
—
610,382 $
—
(18,056) $
—
—
—
—
—
—
—
—
—
—
222
13,517
323,895
—
—
(48,081)
—
—
—
—
343,145
26,741,554 $
3
267 $
4,256
270,598 $
—
934,277 $
—
(66,137) $
—
—
—
—
—
—
—
—
—
—
272
13,595
222,361
26,963,915 $
2
269 $
7,112
291,577 $
429,645
—
—
(193,783)
—
—
—
—
—
—
1,363,922 $
(259,920) $
—
217
7,539
2,886
845,193
323,895
(48,081)
222
13,517
4,259
1,139,005
429,645
(193,783)
272
13,595
7,114
1,395,848
See accompanying notes to the consolidated financial statements.
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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 provided by (used in)
operating activities:
Depreciation and amortization
Loss on extinguishment of debt
Loss (gain) on disposal of assets
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 provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Investment in unconsolidated entities
Payment for business acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from notes payable
Payments on notes payable
Redemption premium
Loan issuance costs
Proceeds from sale of stock, net of offering expenses
Stock repurchases
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
2021
For the Year Ended December 31,
2020
2019
$
429,645 $
323,895 $
178,608
1,154
13,976
(717)
13,595
788
58,030
(463,643)
3,238
(28,689)
(760)
(4,917)
21,700
(1,729)
(1,692)
(66,970)
(70,391)
1,239,818
(969,000)
(10,314)
(10,572)
7,114
(193,783)
63,263
14,572
35,942
50,514 $
710
—
(4)
13,517
(2,365)
(59,549)
(70,228)
32
(25,686)
1,181
20,655
202,158
(2,692)
(2,956)
—
(5,648)
377,064
(530,000)
—
(2,155)
4,259
(48,081)
(198,913)
(2,403)
38,345
35,942 $
643
169
37
7,539
(1,831)
(13,554)
(266,651)
8,507
6,228
3,254
35,117
(41,934)
(734)
(1,059)
—
(1,793)
309,308
(273,762)
—
(2,984)
2,886
—
35,448
(8,279)
46,624
38,345
See accompanying notes to the consolidated financial statements.
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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”, “we,” “us,” or “our”), is headquartered in The Woodlands, Texas. We engage in the
development of communities and the design, construction and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, Colorado,
North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia and
Pennsylvania.
Acquisitions
On May 6, 2021, we acquired certain real estate assets owned by KenRoe Inc. and its affiliated entities, including R Home LLC and Paxmar Land
Development (collectively, “KenRoe”), and assumed certain related liabilities. As a result of the KenRoe acquisition, we expanded our Minnesota presence
in the Minneapolis market. We acquired approximately 100 homes under construction and more than 3,000 owned and controlled lots. The total purchase
price for the KenRoe assets, primarily consisting of inventory, was approximately $27.3 million in cash, subject to certain potential post-closing
adjustments. The acquisition is accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC
805”). Our purchase accounting for KenRoe as of December 31, 2021 is preliminary and we expect to complete the working capital adjustment and
valuation of the tangible assets, intangible assets and liabilities assumed as of the acquisition date within one year from the acquisition date.
On July 14, 2021, we acquired the real estate assets of Buffington Homebuilding Group, Ltd. (“Buffington”) and assumed certain related liabilities.
The total purchase price for the Buffington assets, primarily consisting of inventory, was approximately $39.1 million in cash, subject to certain potential
post-closing adjustments. This acquisition further expands our land position in the Austin, Texas market. The acquired assets include over 100 homes under
construction, and more than 500 owned and controlled lots. The acquisition is accounted for in accordance with ASC 805. Our purchase accounting for
Buffington as of December 31, 2021 is preliminary and we expect to complete the working capital adjustment and valuation of the tangible assets,
intangible assets and liabilities assumed as of the acquisition date within one year from the acquisition date.
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 periods. Actual results could differ from those estimates, and these differences could have a significant impact
on the financial statements. The significant accounting estimates include land development cost of sales, impairment of real estate inventory, warranty
reserves, 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.
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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, net of expected
reimbursable 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. 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. Inventory costs for completed homes are expensed to cost of sales as homes
are closed.
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.
In accordance with 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, 2021
and 2020, the real estate inventory is stated at cost; there were no inventory impairment charges recorded during the years ended December 31, 2021, 2020
and 2019.
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 general and administrative expenses. 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, 2021 and 2020, we were not deemed to be the primary
beneficiary for any VIEs associated with non-refundable land deposits.
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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 municipal utility district reimbursements, income tax receivables related to the federal energy efficient homes tax
credit, prepaid insurance, prepaid expenses, right-of-use (“ROU”) assets, investments in unconsolidated entities and other receivables. Our prepaid
insurance and prepaid expenses were $12.0 million and $6.5 million as of December 31, 2021 and 2020, respectively.
Investment in Unconsolidated Entities
We have investments in unconsolidated entities with independent third parties. The equity method of accounting is used for unconsolidated entities
over which we have significant influence; generally, this represents ownership interests of at least 20% and not more than 50%. Under the equity method of
accounting, we recognize our proportionate share of the earnings and losses of this entity. In the event we buy land from this entity we intend to defer the
recognition of profits from such activities until the time we ultimately sell the related land. Additionally, in 2021, we entered into a mortgage joint venture,
which is engaged in mortgage activities and primarily provides services to our retail homebuyers.
We evaluate our investments in unconsolidated entities for recoverability in accordance with ASC Topic 323, Investments - Equity Method and Joint
Ventures. If we determine that a loss in the value of any of the investments is other than temporary, we write down the investment to its estimated fair value.
Any such losses are recorded to equity in (earnings) loss of unconsolidated entities, which is reflected in other income, net.
Property and Equipment, Net
Property and equipment 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 and 30 years for our rental properties. 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, 2021, 2020 and 2019.
Goodwill
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 805, Business Combinations. Goodwill 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. Under the optional qualitative 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 a quantitative test is necessary. Annually, we have performed a qualitative 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. No goodwill impairment charges were recorded in 2021, 2020 and 2019.
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.
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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 typically $1,000 to $5,000. 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
In accordance with ASC Topic 606, Revenue from Contracts with Customers, 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. 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.
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 costs are expensed as incurred. Advertising costs were $7.7 million, $10.7 million and $20.2 million for the years ended December 31,
2021, 2020, and 2019, 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 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 our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) using the treasury stock method, since we had the intent
and ability to settle the principal amount of the outstanding Convertible Notes in cash. 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.
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3. REVENUES
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. 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
Wholesale home sales revenues
Total home sales revenues
2021
For the Year Ended December 31,
2020
2019
$
$
2,700,866 $
349,283
3,050,149 $
2,191,301 $
176,628
2,367,929 $
1,714,277
123,877
1,838,154
The following table presents our home sales revenues disaggregated by geography, based on our determined reportable segments in Note 15 (in
thousands):
Central
Southeast
Northwest
West
Florida
Home sales revenues
Home Sales Revenues
2021
For the Year Ended December 31,
2020
2019
$
$
1,252,782 $
594,742
510,497
351,219
340,910
3,050,149 $
850,375 $
559,226
389,523
286,130
282,675
2,367,929 $
724,981
347,817
304,294
271,186
189,876
1,838,154
We generate revenues primarily by delivering move-in ready entry-level and move-up spec homes sold under our LGI Homes brand and our luxury
series spec 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.
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.
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.
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4. 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
See “Real Estate Inventory” under Note 2 for more information.
December 31,
2021
2020
$
$
1,499,761 $
28,665
449,742
107,736
2,085,904 $
981,838
30,201
337,364
220,086
1,569,489
Interest and financing costs incurred under our debt obligations, as more fully discussed in Note 7, are capitalized to qualifying real estate projects
under development and homes under construction.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Computer software and equipment
Machinery and equipment
Furniture and fixtures
Rental properties
Leasehold improvements
Total property and equipment
Less: Accumulated depreciation
Property and equipment, net
Asset Life
(years)
2-5
5
2-5
30
5-10
$
$
December 31,
2021
2020
2,950 $
87
979
13,390
1,345
18,751
(1,807)
16,944 $
3,152
147
4,290
145
682
8,416
(4,798)
3,618
During the year ended December 31, 2021, we transferred $13.2 million of home assets from real estate inventory to rental properties within property
and equipment. We are lessors of homes. Contracts are typically one year or less.
Depreciation expense incurred for the years ended December 31, 2021, 2020 and 2019 was $1.1 million, $0.7 million and $0.6 million, respectively.
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6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued and other liabilities consist of the following (in thousands):
Real estate inventory development and construction payable
Accrued compensation, bonuses and benefits
Taxes payable
Contract deposits
Accrued interest
Inventory related obligations
Lease liability
Warranty reserve
Other
Total accrued expenses and other liabilities
Inventory Related Obligations
December 31,
2021
2020
48,656
24,914
11,604
12,182
7,431
8,803
5,333
7,850
9,836
136,609 $
29,938
28,579
26,181
17,151
10,853
4,515
5,287
5,350
7,154
135,008
$
We own lots in certain communities in Arizona, Florida, and Texas 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. This obligation
for infrastructure development is attached to the land, which is typically payable over a 30-year period, and is ultimately assumed by the homebuyer when
home sales are closed. The obligations assumed by the homebuyer represent a non-cash cost of the lots.
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
7. NOTES PAYABLE
Revolving Credit Agreement
2021
December 31,
2020
2019
$
$
5,350 $
11,223
(8,723)
7,850 $
3,500 $
7,040
(5,190)
5,350 $
2,950
5,286
(4,736)
3,500
On April 28, 2021, we entered into that certain Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo
Bank, National Association, as administrative agent (the “Credit Agreement”), which amends and restates that certain Fourth Amended and Restated Credit
Agreement, dated as of May 6, 2019 (as amended, the “2020 Credit Agreement”). The Credit Agreement (a) increases the commitments to $850.0 million,
(b) allows the Company to increase the commitments by up to $100.0 million, subject to terms and conditions, (c) extends the maturity to April 28, 2025
for all lenders, (d) increases the sublimit for letters of credit to $50.0 million, (e) adds unrestricted cash in excess of $10.0 million as a component of the
borrowing base and removes certain exclusions from the borrowing base, (f) reduces the applicable margin for LIBOR loans to a range of 1.45% to 2.10%,
based on our leverage ratio, (g) reduces the LIBOR floor to 0.50%, (h) increases the minimum tangible net worth requirement to $850.0 million plus 75%
of the net proceeds of equity issuances after December 31, 2020 and 50% of consolidated earnings for each quarter ending after March 31, 2021 and (i)
provides for a “hardwired” transition from LIBOR loan pricing that is intended to be economically neutral to the Company; otherwise, the Credit
Agreement is on substantially the same terms as the 2020 Credit Agreement.
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As of December 31, 2021, the borrowing base under the Credit Agreement was $1.1 billion, of which borrowings, including the 2029 Senior Notes
(as defined herein), of $817.4 million were outstanding, $9.1 million of letters of credit were outstanding and $321.3 million was available to borrow under
the Credit Agreement.
Interest is paid monthly on borrowings at LIBOR plus 1.45%. The Credit Agreement applicable margin for LIBOR loans ranges from 1.45% to
2.10% based on our leverage ratio. At December 31, 2021, LIBOR was 0.10%; however, the Credit Agreement has a 0.50% LIBOR floor.
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, 2021, we were in compliance with all of the covenants contained in the Credit
Agreement.
Senior Notes Offerings
On June 28, 2021, we issued $300.0 million aggregate principal amount of our 4.000% Senior Notes due 2029 (the “2029 Senior Notes”) in an
offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A (“Rule 144A”) under the Securities
Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S
(“Regulation S”) under the Securities Act. Interest on the 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on
January 15 and July 15 of each year. The 2029 Senior Notes mature on July 15, 2029. Terms of the 2029 Senior Notes are governed by an Indenture, dated
as of July 6, 2018, and Third Supplemental Indenture thereto, dated as of June 28, 2021, as may be supplemented from time to time, among us, our
subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.
On July 6, 2018, we issued $300.0 million aggregate principal amount of our 6.875% Senior Notes due 2026 (the “2026 Senior Notes”) in an offering
to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A and to certain non-U.S. persons in
transactions outside the United States pursuant to Regulation S. On July 15, 2021, we redeemed all of the outstanding 2026 Senior Notes, which resulted in
the principal payment of $300.0 million and a redemption premium of $10.3 million. Additionally, we expensed $3.0 million of deferred financing costs
and discounts that were being previously amortized in association with the 2026 Senior Notes. We financed the redemption of the 2026 Senior Notes with a
portion of the net proceeds from the offering of the 2029 Senior Notes, together with cash on hand.
Notes payable consist of the following (in thousands):
Notes payable under the Credit Agreement ($850.0 million revolving credit facility at
December 31, 2021) maturing on April 28, 2025; interest paid monthly at LIBOR plus 1.45%.
4.000% Senior Notes due July 15, 2029; interest paid semi-annually at 4.000%.
6.875% Senior Notes due July 15, 2026; interest paid semi-annually at 6.875%.
Net discount and debt issuance costs
Total notes payable
$
$
December 31,
2021
2020
517,439 $
300,000
—
(12,203)
805,236 $
246,621
—
300,000
(8,223)
538,398
As of December 31, 2021, the annual aggregate maturities of notes payable during each of the next five fiscal years are as follows (in thousands):
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2022
2023
2024
2025
2026
Thereafter
Total notes payable
Less: Debt issuance costs
Net notes payable
Capitalized Interest
Amount
—
—
—
517,439
—
300,000
817,439
(12,203)
805,236
$
$
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
2021
Year Ended December 31,
2020
2019
$
$
$
28,360 $
(28,360)
— $
37,285 $
(37,285)
— $
28,850 $
34,924 $
45,555
(45,555)
—
42,438
Included in interest incurred was amortization of deferred financing costs and discounts for notes payable of $2.9 million for each of the years ended
December 31, 2021 and 2020 and $4.1 million for the year ended December 31, 2019.
8. INCOME TAXES
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
2021
Year ended December 31,
2020
2019
$
$
95,343 $
16,999
112,342
751
37
788
113,130 $
35,207 $
11,112
46,319
(2,136)
(229)
(2,365)
43,954 $
47,886
7,169
55,055
(1,637)
(194)
(1,831)
53,224
Income taxes paid were $127.9 million, $68.4 million and $38.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
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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, 2021, 2020 and 2019 (in thousands):
Tax at federal statutory rate
State income taxes (net of federal benefit)
Stock-based compensation
Non deductible expenses and other
Change in tax rates - deferred taxes
Federal energy efficient homes tax credits
Retroactive federal energy efficient homes tax
credits
Tax at effective rate
2021
Year Ended December 31,
2020
2019
$
114,081
13,467
(2,243)
4,343
(367)
(16,151)
—
113,130
$
21.0 % $
2.5
(0.4)
0.8
(0.1)
(3.0)
—
20.8 % $
77,248
8,530
(994)
439
(78)
(11,488)
(29,703)
43,954
21.0 % $
2.3
(0.3)
0.1
—
(3.1)
(8.1)
11.9 % $
48,685
5,497
(1,749)
771
20
—
—
53,224
21.0 %
2.4
(0.8)
0.4
—
—
—
23.0 %
The 2021 effective tax rate differs from the federal statutory rate primarily due to benefits associated with the federal energy efficient homes tax
credits enacted into law in December 2019 and the deductions in excess of compensation cost (“windfalls”) for share-based payments, partially offset by
state income tax expense on current year earnings and non-deductible salaries related to Section 162(m) of the Internal Revenue Code of 1986, as amended.
The 2020 effective tax rate differs from the federal statutory rate primarily due to benefits associated with the federal energy efficient homes tax credits
enacted into law in December 2019, partially offset by state income tax expense on current year earnings. The 2019 effective tax rate differs from the
federal statutory rate primarily due to non-deductible salaries related to Section 162(m) of the Internal Revenue Code of 1986, as amended, and state
income tax expense on current year earnings offset by the windfalls for share-based payments.
Income tax expense for 2021 includes a benefit of $16.2 million associated with the extension of federal energy efficient homes tax credits. Income
tax expense for 2020 includes a benefit of $41.2 million associated with the extension of federal energy efficient homes tax credits, including $29.7 million
related to homes closed in prior open tax years. The federal energy efficient homes tax credit provision applies to qualifying homes closed through
December 31, 2021.
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.
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The components of net deferred tax assets and liabilities at December 31, 2021 and 2020 are as follows (in thousands):
Deferred tax assets:
Accruals and reserves
Leases
Inventory
Stock-based compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Prepaids
Leases
Tax depreciation in excess of book depreciation
Goodwill and other assets amortized for tax
Other
Total deferred tax liabilities
Total net deferred tax assets
December 31,
2021
2020
5,163 $
959
470
4,397
310
11,299
(2,433)
(1,137)
(488)
(860)
(183)
(5,101)
6,198 $
5,149
946
239
4,347
56
10,737
(1,372)
(1,124)
(499)
(738)
(18)
(3,751)
6,986
$
$
All Company operations are domestic. 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 audit to have a material effect on our consolidated financial statements; however,
audit outcomes and the timing of audit adjustments are subject to significant uncertainty.
9. 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, 2021 and 2020, no shares of preferred stock were issued or outstanding.
At December 31, 2021, we had 26,963,915 shares of common stock issued and 23,917,359 shares of common stock outstanding, including 3,046,556
treasury shares of our common stock. At December 31, 2020, we had 26,741,554 shares of common stock issued and 24,983,561 shares of common stock
outstanding, including 1,757,993 treasury shares of our common stock.
On November 15, 2019, the Convertible Notes matured, which resulted in the principal payment of $70.0 million and the issuance of 2,381,751
shares of our common stock for the premium associated with the Convertible Notes.
Stock Repurchase Program
In 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. In October 2020, the Board approved an increase in our stock repurchase program by an additional $300.0 million. For the year ended
December 31, 2021, we repurchased 1,288,563 shares of our common stock for $193.8 million to be held as treasury stock. For the year ended December
31, 2020, we repurchased 718,993 shares of our common stock for $48.1 million to be held as treasury stock. For the year ended December 31, 2019, we
did not repurchase any shares of our common stock. A total of 2,046,556 shares of our common stock has been repurchased since our stock repurchase
program commenced. As of December 31, 2021, we may purchase up to $106.6 million of shares of our common stock under our stock repurchase
program. On February 11, 2022, the Board approved an increase in our stock repurchase program by an additional $200.0 million, increasing the available
authorization under the program to purchase up to $306.6 million of shares of our common stock as of the date of this Annual Report on Form 10-K. The
timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase program will be determined
by our management at its discretion based on a variety of factors,
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including the market price of our common stock, corporate considerations, general market and economic conditions and legal requirements. Our stock
repurchase program may be modified, discontinued or suspended at any time.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2021, 2020, and 2019.
Numerator (in thousands):
Net income (Numerator for basic and dilutive earnings per share)
Denominator:
Basic weighted average shares outstanding
Effect of dilutive securities:
Convertible Notes - treasury stock method
Stock-based compensation units
Diluted weighted average shares outstanding
Basic earnings per share
Diluted earnings per share
Antidilutive non-vested restricted stock units excluded from calculation of
diluted earnings per share
2021
For the Year Ended December 31,
2020
2019
$
$
$
429,645 $
323,895 $
178,608
24,607,231
25,135,077
23,191,595
—
301,760
24,908,991
—
245,483
25,380,560
17.46 $
17.25 $
5,970
12.89 $
12.76 $
9,482
1,966,639
272,607
25,430,841
7.70
7.02
14,211
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 had the intent and ability to settle the principal amount of the outstanding Convertible Notes in cash. The Convertible Notes matured and were
repaid in full on November 15, 2019. Prior to the maturity of the Convertible Notes, we included the effect of the additional potential dilutive shares if our
common stock price exceeded the conversion price of $21.52 per share under the treasury stock method.
Throughout 2019 to the maturity date of the Convertible Notes, 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 2019 prior to the maturity date includes the effect of our common stock related
to the conversion spread of the Convertible Notes.
10. 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”). There were 117,874 restricted stock units (“RSUs”) outstanding at December 31, 2021, issued at a $0.00
exercise price.
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The following table summarizes the activity of our time-vested RSUs:
Balance at December 31, 2018
Granted
Vested
Forfeited
Balance at December 31, 2019
Granted
Vested
Forfeited
Balance at December 31, 2020
Granted
Vested
Forfeited
Balance at December 31, 2021
Shares
Weighted Average Grant
Date Fair Value
171,055 $
62,512 $
(55,230) $
(15,651) $
162,686 $
56,735 $
(73,360) $
(3,323) $
142,738 $
29,664 $
(47,213) $
(7,315) $
117,874 $
39.04
60.72
26.47
47.73
50.84
67.63
40.77
57.26
62.54
144.17
65.99
76.15
80.85
In 2021, we issued 11,511 RSUs to senior management for the time-based portion of our 2021 long-term incentive compensation program and 8,094
RSUs for 2020 annual bonuses to managers, which generally cliff vest on the third anniversary of the grant date. In 2020, we issued 22,141 RSUs to senior
management for the time-based portion of our 2020 long-term incentive compensation program and 15,585 RSUs for 2019 annual bonuses to managers,
which generally cliff vest on the third anniversary of the grant date. In 2019, we issued 20,847 RSUs to senior management for the time-based portion of
our 2019 long-term incentive compensation program and 16,159 RSUs for 2018 annual bonuses to managers, which generally cliff vest on the third
anniversary of the grant date. In addition, during the years ended December 31, 2021, 2020 and 2019, we issued 10,059, 19,009 and 25,506 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 $3.3 million, $3.5 million, and $2.2 million of stock-based compensation expense related to RSUs for the years ended December 31,
2021, 2020 and 2019, respectively. At December 31, 2021, we had unrecognized compensation cost of $4.3 million related to unvested RSUs, which is
expected to be recognized over a weighted average period of 1.7 years.
Performance-Based Restricted Stock Units
The Compensation Committee of the Board 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, 2021, there were 215,807 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 PSU grants 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.
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Period Granted
2018
2019
2020
2021
Total
Performance
Period
2018 - 2020
2019 - 2021
2020 - 2022
2021 - 2023
Target PSUs
Outstanding at
December 31,
2020
60,040
81,242
88,538
—
229,820
Target PSUs
Granted
Target PSUs
Vested
Target PSUs
Forfeited
—
—
—
46,027
46,027
(60,040)
—
—
—
(60,040)
—
—
—
—
—
Target PSUs
Outstanding at
December 31,
2021
—
81,242
88,538
46,027
215,807
Weighted
Average
Grant Date
Fair Value
64.60
56.49
59.81
141.00
At December 31, 2021, management estimates that the recipients will receive approximately 200% of the 2021, 2020, and 2019 target number of
PSUs at the end of the applicable three-year performance cycle based on projected performance compared to the target performance metrics. We
recognized $9.0 million, $9.2 million, and $4.8 million of total stock-based compensation expense related to PSUs for the years ended December 31, 2021,
2020 and 2019, respectively. The 2018 - 2020 performance period PSUs vested and issued on March 15, 2021 at 200% of the target number. At
December 31, 2021, we had unrecognized compensation cost of $12.1 million, based on the probable amount, related to unvested PSUs, which is expected
to be recognized over a weighted average period of 1.9 years.
Employee Stock Purchase Plan
The LGI Homes, Inc. Employee Stock Purchase Plan (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, 2021, 2020 and 2019, we issued 55,068, 60,918, and 47,731 shares of our common stock to
the ESPP participants. We received net proceeds of approximately $7.1 million, $4.3 million and $2.9 million related to the ESPP for 2021, 2020, and
2019, respectively. We recognized $1.3 million, $0.8 million, and $0.5 million in stock compensation expense related to the ESPP for 2021, 2020, and
2019, 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, 2021, 233,254 shares of our
common stock remain available for issuance under the ESPP.
11. 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, accounts payable and certain accrued liabilities approximate their carrying amounts due to the
short-term nature of these instruments. As of December 31, 2021, the Credit Agreement’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.
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In order to determine the fair value of the 2029 Senior Notes and the 2026 Senior Notes, 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 senior notes within the homebuilding
industry (Level 2 measurement).
The following table below shows the level and measurement of liabilities at December 31, 2021 and 2020 (in thousands):
2029 Senior Notes
(1)
2026 Senior Notes
(2)
Fair Value
Hierarchy
Level 2
Level 2
$
$
December 31, 2021
December 31, 2020
Carrying Value
Estimated Fair
Value
Carrying Value
Estimated Fair
Value
300,000 $
299,302 $
— $
—
— $
— $
300,000 $
340,388
(1) On June 28, 2021, we completed an offering of $300.0 million aggregate principal amount of the 2029 Senior Notes. See Note 7 for more details regarding this
offering.
(2) On July 15, 2021, we redeemed all of the outstanding 2026 Senior Notes. See Note 7 for more details regarding the redemption.
12. RELATED PARTY TRANSACTIONS
Land Purchases from Affiliates
For the year ended December 31, 2021, we completed a land purchase contract to purchase a total of 110 finished lots in Pasco County, Florida from
an affiliate of one of our directors for a total base purchase price of approximately $4.0 million. The lots were purchased in takedowns, subject to a
maximum price escalation of 6% per annum, and provide for additional payments to the seller at the time of sale to the homebuyer. In August 2019, we
purchased our first takedown of 58 lots under the Pasco County contract for a base purchase price of approximately $2.1 million. In April 2021, we
purchased the remaining land in a takedown of 52 lots under the Pasco County contract for a base purchase price of approximately $1.9 million.
For the year ended December 31, 2021, we completed a land purchase contract to purchase a total of 25 finished lots in Burnet County, Texas from an
affiliate of a family member of our chief executive officer for a total base purchase price of approximately $2.5 million.
For the year ended December 31, 2020, we purchased in three separate transactions a total of 55 finished lots in Montgomery County and Travis
County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately $4.7 million.
13. 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, 2021, 2020 and 2019, our matching contributions were $4.6 million, $4.0 million and $2.9 million,
respectively.
14. 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.
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.
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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,
2021
2020
$
$
37,499 $
921,345 $
36,978
34,097
663,006
26,236
As of December 31, 2021 and 2020, approximately $19.3 million and $24.0 million, respectively, of the land deposits are related to purchase
contracts to deliver finished lots that are refundable under certain circumstances, such as feasibility or specific performance, and secured by mortgages or
letters of credit or guaranteed by the seller or its affiliates.
Lease Obligations
We recognize lease obligations and associated ROU assets for our existing non-cancelable leases. Our lease agreements do not contain any material
residual value guarantees or material restrictive covenants. We have non-cancelable operating leases primarily associated with our corporate and regional
office facilities. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations
regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. Leases with an initial term of 12 months
or less are not recorded on the balance sheet. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will
exercise that option. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at
commencement date in determining the present value of lease payments. ROU assets, as included in other assets on the consolidated balance sheets, were
$5.1 million and $4.9 million as of December 31, 2021 and 2020, respectively. Lease obligations, as included in accrued expenses and other liabilities on
the consolidated balance sheets, were $5.3 million as of December 31, 2021 and 2020.
Operating lease cost, as included in general and administrative expense in our consolidated statements of operations, totaled $1.7 million, $1.6
million and $1.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Cash paid for amounts included in the measurement of lease
liabilities for operating leases during the years ended December 31, 2021 and 2020 was $1.6 million and $1.4 million, respectively. As of December 31,
2021, the weighted-average discount rate was 4.93% and our weighted-average remaining life was 3.9 years. We do not have any significant lease contracts
that have not yet commenced at December 31, 2021.
The table below shows the future minimum payments under non-cancelable operating leases at December 31, 2021 (in thousands):
Year Ending December 31,
2022
2023
2024
2025
2026
Thereafter
Total
Lease amount representing interest
Present value of lease liabilities
Bonding and Letters of Credit
Operating leases
1,423
1,263
1,035
753
658
1,004
6,136
(803)
5,333
$
$
We have outstanding letters of credit and performance and surety bonds totaling $206.8 million (including $9.1 million of letters of credit
issued under the Credit Agreement) and $143.8 million (including $10.5 million of letters of credit issued under the Credit Agreement) at December 31,
2021 and 2020, 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.
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Investment in Unconsolidated Entities
In 2019, we became a limited partner in a real estate investment fund with a maximum $30.0 million commitment. The term of the commitment is
eight years and includes renewals of up to two additional years. Additionally, during 2021, we entered into a joint venture with a mortgage lender. As of
December 31, 2021 and 2020, we have a total of $5.6 million and $3.9 million, respectively, within other assets on the balance sheet relating to our
investment in the real estate investment fund and the mortgage joint venture. Contributions into these unconsolidated entities are used by the entities to
invest in certain real estate transactions and to provide residential mortgage services, respectively.
15. SEGMENT INFORMATION
We operate one principal homebuilding business that is organized and reports by division. We have seven operating segments (our Central, Midwest,
Southeast, Mid-Atlantic, Northwest, West and Florida divisions) that we aggregate into five qualifying reportable segments at December 31, 2021: our
Central, Southeast, Northwest, West and Florida divisions. These segments reflect the way the Company evaluates its business performance and manages
its operations. The Central division is our largest division and comprised approximately 41.1%, 35.9% and 39.4% of total home sales revenues for the years
ended December 31, 2021, 2020 and 2019, respectively.
In accordance with ASC 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 per home
closed.
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
Southeast
Northwest
West
Florida
Total home sales revenues
Net income (loss) before income taxes:
Central
Southeast
Northwest
West
Florida
Corporate
(1)
Total net income before income taxes
2021
For the Year Ended December 31,
2020
2019
$
$
$
$
1,252,782 $
594,742
510,497
351,219
340,910
3,050,149 $
242,615 $
105,572
115,002
50,809
49,927
(21,150)
542,775 $
850,375 $
559,226
389,523
286,130
282,675
2,367,929 $
154,772 $
79,394
71,256
35,847
32,550
(5,970)
367,849 $
724,981
347,817
304,294
271,186
189,876
1,838,154
117,350
30,316
46,863
28,504
16,012
(7,213)
231,832
(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.
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Assets:
Central
Southeast
Northwest
West
Florida
Corporate
(1)
Total assets
December 31,
2021
2020
$
$
857,174 $
438,423
349,752
384,548
221,763
100,205
2,351,865 $
708,087
401,725
252,098
228,186
157,169
78,822
1,826,087
(1) The Corporate balance consists primarily of cash, prepaid insurance, ROU assets, prepaid expenses, investments in unconsolidated entities and income tax
receivables related to the federal energy efficient homes tax credit.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results are as follows (in thousands, except per share data):
Total home sales revenues
Gross margin
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share
(1)
(1)
Total home sales revenues
Gross margin
Income before income taxes
Net income
Basic earnings per share
Diluted earnings per share
(1)
(1)
$
$
First
Quarter
2021
Second
Quarter
2021
Third
Quarter
2021
Fourth
Quarter
2021
705,953 $
189,949
123,276
99,658
3.99
3.95
791,512 $
214,079
149,121
118,134
4.75
4.71
751,608 $
202,289
126,994
100,550
4.10
4.05
801,076
211,717
143,384
111,303
4.61
4.53
First
Quarter
2020
Second
Quarter
2020
Third Quarter
2020
Fourth
Quarter
2020
454,727 $
106,564
54,889
42,839
1.69
1.67
481,602 $
117,973
68,597
55,624
2.22
2.21
534,202 $
135,231
77,815
89,004
3.55
3.52
897,398
243,329
166,548
136,428
5.45
5.34
(1) Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the
quarters may not agree with per share amounts for the year.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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, 2021. 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, 2021.
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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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, 2021, 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,
2021, 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, 2021 and 2020, the related consolidated statements of operations, equity and cash flows
for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 15, 2022 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 15, 2022
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ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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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 2022 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 2022 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information called for by Item 12 will be set forth in the definitive proxy statement relating to the 2022 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 2022 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 2022 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.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(1)
The following Consolidated Financial Statements as set forth in Item 8 of this report are filed herein.
PART IV
Consolidated Financial Statements
The report of LGI Homes, Inc’s independent registered public accounting firm (PCAOB ID:42) with respect to the below-referenced financial statements
and their report on internal control over financial reporting are included in Item 8 and Item 9A of this Form 10-K. Their consent appears as Exhibit 23.1
of this Form 10-K.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Equity from December 31, 2018 to December 31, 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
Notes to the Consolidated Financial Statements for the years ended December 31, 2021, 2020 and 2019
(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.
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(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
3.2
4.1
4.2
4.3
10.1+
10.2+
10.3+
10.4
21.1*
23.1*
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).
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).
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated herein by reference to
Exhibit 4.1 to the Annual Report on Form 10-K for the year ended December 31, 2019 (File No. 001-36126) of LGI Homes, Inc. filed with
the SEC on February 25, 2020).
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).
Third Supplemental Indenture, dated as of June 28, 2021, among LGI Homes, Inc., the subsidiary guarantors listed therein and Wilmington
Trust, National Association, as trustee, governing LGI Homes, Inc.’s 4.000% Senior Notes due 2029, including the form of the Notes
(incorporated 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 June 28, 2021).
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).
Fifth Amended and Restated Credit Agreement, dated as of April 28, 2021, by and among LGI Homes, Inc., each of the financial
institutions initially a signatory thereto, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (File No. 001-36126) of LGI Homes, Inc. filed
with the SEC on May 4, 2021).
List of Subsidiaries of LGI Homes, Inc.
Consent of Independent Registered Public Accounting Firm
31.1*
31.2*
32.1*
32.2*
101.INS†
101.SCH†
101.CAL†
101.DEF†
101.LAB†
101.PRE†
104†
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
Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Inline XBRL Instance Document — the instance document does not appear in the Interactive Date File because its XBRL tags are
embedded within the Inline XBRL document.
Inline XBRL Taxonomy Extension Schema Document.
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Inline XBRL Taxonomy Extension Definition Linkbase Document.
Inline XBRL Taxonomy Extension Label Linkbase Document.
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Filed herewith.
85
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+
†
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.
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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 15, 2022
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
Title
/s/ Eric Lipar
Eric Lipar
/s/ Charles Merdian
Charles Merdian
/s/ Ryan Edone
Ryan Edone
/s/ Shailee Parikh
Shailee Parikh
/s/ Bryan Sansbury
Bryan Sansbury
/s/ Maria Sharpe
Maria Sharpe
/s/ Steven Smith
Steven Smith
/s/ Robert Vaharadian
Robert Vaharadian
Chief Executive Officer and Chairman of the
Board
(Principal Executive Officer)
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
87
Date
February 15, 2022
February 15, 2022
February 15, 2022
February 15, 2022
February 15, 2022
February 15, 2022
February 15, 2022
February 15, 2022
LIST OF SUBSIDIARIES OF LGI HOMES, INC.
Exhibit 21.1
LGI HOMES GROUP, LLC, a Texas limited liability company
LGI HOMES - DECKER OAKS, LLC, a Texas limited liability company
LGI HOMES - E SAN ANTONIO, LLC, a Texas limited liability company
LGI HOMES - FW, LLC, a Texas limited liability company
LGI HOMES - GEORGIA, LLC, a Georgia limited liability company
LGI HOMES - LAKES OF MAGNOLIA, LLC, a Texas limited liability company
LGI HOMES - PRESIDENTIAL GLEN, LLC, a Texas limited liability company
LGI HOMES - QUAIL RUN, LLC, a Texas limited liability company
LGI HOMES - SALTGRASS, LLC, a Texas limited liability company
LGI HOMES - STEWARTS FOREST, LLC, a Texas limited liability company
LGI HOMES - TEXAS, LLC, a Texas limited liability company
LGI HOMES - WINDMILL FARMS, LLC, a Texas limited liability company
LGI HOMES - WOODLAND CREEK, LLC, a Texas limited liability company
LGI HOMES AZ CONSTRUCTION, LLC, an Arizona limited liability company
LGI HOMES AZ SALES, LLC, an Arizona limited liability company
LGI HOMES - ARIZONA, LLC, an Arizona limited liability company
LGI HOMES - FLORIDA, LLC, a Florida limited liability company
LGI HOMES - GLENNWILDE, LLC, an Arizona limited liability company
LGI HOMES - SAN TAN HEIGHTS, LLC, an Arizona limited liability company
LGI HOMES - NEW MEXICO, LLC, a New Mexico limited liability company
LGI HOMES NM CONSTRUCTION, LLC, a New Mexico limited liability company
LGI HOMES - COLORADO, LLC, a Colorado limited liability company
LGI HOMES - NC, LLC, a North Carolina limited liability company
LGI HOMES - SC, LLC, a South Carolina limited liability company
LGI FUND III HOLDINGS, LLC, a Texas limited liability company
LGI CROWLEY LAND PARTNERS, LLC, a Texas limited liability company
LGI HOMES AVONDALE, LLC, a Georgia limited liability company
LGI HOMES - MAPLE PARK, LLC, a Georgia limited liability company
LGI HOMES - MAPLE LEAF, LLC, a Texas limited liability company
LGI HOMES - SHALE CREEK, LLC, a Texas limited liability company
LGI HOMES - STERLING LAKES PARTNERS, LLC, a Texas limited liability company
LGI HOMES CORPORATE, LLC, a Texas limited liability company
LGI HOMES SERVICES, LLC, a Texas limited liability company
LGI HOMES - LUCKEY RANCH, LLC, a Delaware limited liability company
LGI HOMES - MALLARD CROSSING, LLC, a Delaware limited liability company
LGI HOMES - WEST MEADOWS, LLC, a Delaware limited liability company
LGI HOMES - OAK HOLLOW, LLC, a Delaware limited liability company
LGI HOMES - SONTERRA, LLC, a Delaware limited liability company
LGI HOMES - BLUE HILLS, LLC, an Arizona limited liability company
LGI HOMES - KRENSON WOODS, LLC, a Delaware limited liability company
LGI HOMES - NORTHPOINTE, LLC, a Delaware limited liability company
LGI HOMES - OAK HOLLOW PHASE 6, LLC, a Delaware limited liability company
LGI HOMES - SALTGRASS CROSSING, LLC, a Delaware limited liability company
LUCKEY RANCH PARTNERS, LLC, a Delaware limited liability company
LGI HOMES - CANYON CROSSING, LLC, a Texas limited liability company
LGI HOMES - DEER CREEK, LLC, a Texas limited liability company
LGI HOMES II, LLC, a Texas limited liability company
LGI HOMES - SUNRISE MEADOW, LLC, a Texas limited liability company
RIVERCHASE ESTATES PARTNERS, LLC, a South Carolina limited liability company
LGI HOMES REALTY LLC, a Georgia limited liability company
LGI HOMES – TENNESSEE, LLC, a Tennessee limited liability company
LGI HOMES – WASHINGTON, LLC, a Washington limited liability company
LGI REALTY – WASHINGTON, LLC, a Washington limited liability company
LGI HOMES – OREGON LLC, an Oregon limited liability company
Exhibit 21.1
LGI HOMES – ALABAMA, LLC, an Alabama limited liability company
LGI HOMES – MINNESOTA, LLC, a Minnesota limited liability company
LGI REALTY – MINNESOTA, LLC, a Minnesota limited liability company
LGI HOMES – NEVADA, LLC, a Nevada limited liability company
LGI HOMES – OKLAHOMA, LLC, an Oklahoma limited liability company
LGI LEASING, LLC, a Texas limited liability company
LGI LIVING, LLC, a Texas limited liability company
LGI HOMES – CALIFORNIA, LLC, a California limited liability company
LGI HOMES – MARYLAND, LLC, a Maryland limited liability company
LGI HOMES – PENNSYLVANIA, LLC, a Pennsylvania limited liability company
LGI HOMES – VIRGINIA, LLC, a Virginia limited liability company
LGI HOMES – WEST VIRGINIA, LLC, a West Virginia limited liability company
LGI HOMES – WISCONSIN, LLC, a Wisconsin limited liability company
LGI REALTY – CALIFORNIA, INC, a California for profit corporation
LGI REALTY – NC, LLC, a North Carolina limited liability company
LGI REALTY – OKLAHOMA, LLC, an Oklahoma limited liability company
LGI REALTY – WEST VIRGINIA, LLC, a West Virginia limited liability company
LGI HOMES – UTAH, LLC, a Utah limited liability company
LGI REALTY – VIRGINIA, LLC, a Virginia limited liability company
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-217811) of LGI Homes, Inc. pertaining to the Amended and Restated LGI Homes, Inc. 2013 Equity
Incentive Plan, and
(2) Registration Statement (Form S-8 No. 333-211843) of LGI Homes, Inc. pertaining to the LGI Homes, Inc. 2016 Employee Stock Purchase Plan;
of our reports dated February 15, 2022, with respect to the consolidated financial statements of LGI Homes, Inc. and the effectiveness of internal control
over financial reporting of LGI Homes, Inc. included in this Annual Report (Form 10-K) of LGI Homes, Inc. for the year ended December 31, 2021.
/s/ Ernst & Young LLP
Houston, Texas
February 15, 2022
CEO CERTIFICATION
PURSUANT TO SECTION 302 OF THE
SARBANES - OXLEY ACT OF 2002
EXHIBIT 31.1
I, Eric Lipar, certify that:
1. I have reviewed this Annual Report on Form 10-K of LGI Homes, Inc. (the “Registrant”);
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and
d. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent
fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of Registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control
over financial reporting.
Date: February 15, 2022
By:
/s/ Eric Lipar
Eric Lipar
Chief Executive Officer and Chairman of the Board
LGI Homes, Inc.
CFO CERTIFICATION
PURSUANT TO SECTION 302 OF THE
SARBANES - OXLEY ACT OF 2002
EXHIBIT 31.2
I, Charles Merdian, certify that:
1. I have reviewed this Annual Report on Form 10-K of LGI Homes, Inc. (the “Registrant”);
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report based on such evaluation; and
d. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent
fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the audit committee of Registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control
over financial reporting.
Date: February 15, 2022
By:
/s/ Charles Merdian
Charles Merdian
Chief Financial Officer and Treasurer
LGI Homes, Inc.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of LGI Homes, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2021 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Eric Lipar, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
February 15, 2022
/s/ Eric Lipar
Eric Lipar
Chief Executive Officer and Chairman of the Board
LGI Homes, Inc.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of LGI Homes, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2021 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Charles Merdian, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
February 15, 2022
/s/ Charles Merdian
Charles Merdian
Chief Financial Officer and Treasurer
LGI Homes, Inc.