Century Communities, Inc.: Form 10-Q for the period ended Sep 30, 2024

As used in this Quarterly Report on Form 10-Q (which we refer to as this “Form 10-Q”), references to “we,” “us,” “our,” “Century” or the “Company” refer to Century Communities, Inc., a Delaware corporation, and, unless the context otherwise requires, its subsidiaries and affiliates.

The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our Company, business, operations and present business environment and is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. We use certain non-GAAP financial measures that we believe are important for purposes of comparison to prior periods. This information is also used by our management to measure the profitability of our ongoing operations and analyze our business performance and trends.

Cautionary Note Regarding Forward-Looking Statements

Some of the statements included in this Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual results could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential,” “outlook,” the negative of such terms and other comparable terminology and the use of future dates. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors.

The forward-looking statements included in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking and subject to risks and uncertainties including among others:

economic changes, either nationally or in the markets in which we operate, including changes in interest rates and the resulting impact on the accessibility of mortgage loans to homebuyers, persistent inflation, and decreased employment levels;

shortages of or increased prices for labor, land or raw materials used in housing construction and resource shortages;

a downturn in the homebuilding industry, including a reduction in demand or a decline in real estate values or market conditions resulting in an adverse impact on our business, operating results and financial condition, including an impairment of our assets;

changes in assumptions used to make industry forecasts, population growth rates or trends affecting housing demand or prices;

volatility and uncertainty in the credit markets and broader financial markets and the impact on such markets and our ability to access them in the event of a threatened or actual U.S. government shutdown or sovereign default;

our future business operations, operating results and financial condition, and changes in our business and investment strategy;

availability and price of land to acquire, and our ability to acquire such land on favorable terms or at all;

the effect of and risks associated with our recent acquisitions;

availability, terms and deployment of capital;

availability or cost of mortgage financing or an increase in the number of foreclosures in the market;

delays in land development or home construction resulting from adverse weather conditions or other events outside our control;

delays in completion of projects, land development or home construction, or reduced consumer demand for housing resulting from significant weather conditions and natural disasters in the geographic areas where we operate;

the impact of construction defect, product liability, and/or home warranty claims, including the adequacy of accruals and the applicability and sufficiency of our insurance coverage;

changes in, or the failure or inability to comply with, governmental laws and regulations;

the timing of receipt of municipal, utility and other regulatory approvals and the opening of projects and construction and completion of our homes;

the impact and cost of compliance with evolving environmental, health and safety and other laws and regulations and third-party challenges to required permits and other approvals and potential legal liability in connection therewith;

the degree and nature of our competition;

unstable economic and political conditions as well as geopolitical conflicts, could adversely affect our supply chain by causing shortages or increases in costs for materials necessary to construct homes and/or increases to the price of gasoline and other fuels and cause higher interest rates, inflation or general economic uncertainty;

our leverage, debt service obligations and exposure to changes in interest rates and our ability to obtain additional or refinance our existing debt when needed or on favorable terms;

our ability to continue to fund and succeed in our mortgage lending business and the additional risks involved in that business;

availability of qualified personnel and contractors and our ability to obtain additional or retain existing key personnel and contractor relationships;

our ability to continue to pay dividends and make stock repurchases in the future; and

taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance.

Forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described above and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K, and other risks and uncertainties detailed in this report, including “Part II, Item 1A. Risk Factors,” and our other reports and filings with the SEC. If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Form 10-Q.

Business Overview

Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 18 states. In many of our projects, in addition to building homes, we entitle and develop the underlying land. We build and sell homes under our Century Communities and Century Complete brands. Our Century Communities brand has an emphasis on serving the entry-level homebuilding market but offers a wide range of buyer profiles including: entry-level, first and second time move-up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade opportunities. Our Century Complete brand targets entry-level homebuyers, primarily sells homes through retail studios and the internet, and generally provides no option or upgrade opportunities.

Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Century Complete. Our indirect wholly-owned subsidiaries, Inspire Home Loans Inc., Parkway Title, LLC, IHL Home Insurance Agency, LLC, and IHL Escrow Inc., which provide mortgage, title, insurance, and escrow services, respectively, primarily to our homebuyers, have been identified as our Financial Services segment. Additionally, our wholly owned subsidiary, Century Living, LLC, is engaged in the development, construction and management of multi-family rental properties, currently all located in Colorado. Century Living, LLC is included in our Corporate segment.

While we offer homes that appeal to a broad range of entry-level, move-up, and lifestyle homebuyers, our offerings are heavily weighted towards providing affordable housing options in each of our homebuyer segments. Additionally, we prefer building move-in-ready homes over built-to-order homes, which we believe allows for a faster construction process, advantageous pricing with subcontractors, and shortened time period from home sale to home delivery, thus allowing our customers greater certainty on their financing and allowing us to more appropriately price the homes and deploy our capital. Of the 7,809 homes delivered during the first nine months of 2024, approximately 93% of our deliveries were made to entry-level homebuyers that were below the Federal Housing Administration-insured mortgage limits and approximately 98% of homes delivered were built as move-in ready homes.

During 2024, we have completed two acquisitions. On July 31, 2024, we closed on the acquisition of substantially all the assets and operations and assumed certain liabilities of Anglia Homes LP (“Anglia”), a homebuilder with operations in the greater Houston, Texas area, for approximately $127.0 million in cash, inclusive of customary holdbacks. On January 22, 2024, we closed on the acquisition of substantially all the assets and assumed certain liabilities of Landmark Homes of Tennessee, Inc. (“Landmark”), a homebuilder with operations, including six active communities, in Nashville, Tennessee, for approximately $33.4 million in cash, inclusive of customary holdbacks.

Current housing market conditions demonstrate solid, underlying demand for affordable new homes and, coupled with a more recent moderation in mortgage rates, we experienced solid demand during the first nine months of 2024, as net new home contracts (new home contracts net of cancellations) for the three and nine months ended September 30, 2024 increased 19.3% and 26.5%, respectively, as compared to the same prior year periods. We have continued to provide, when necessary, incentive offerings across our communities during the first nine months of 2024, including discounts on base home prices, lot premiums, and options and upgrades and financing incentives, including interest rate buydowns. During the nine months ended September 30, 2024, cycle times have remained in the four- to five-month timeframe.

We anticipate the homebuilding markets in each of our operating segments will continue to be tied to both the macro-economic environment and the local economy, and we expect our operating strategy will continue to adapt to market changes, though we cannot provide any assurance that our strategies will remain consistent or continue to be successful. We believe future demand for our homes remains uncertain as future economic and market conditions remain uncertain, in particular with respect to inflation; the impact of potential future increases or decreases to the federal funds interest rate by the Federal Reserve; interest rates; availability and cost of mortgage loans to homebuyers; financial markets, credit and mortgage markets; the extent to which and how long government monetary directives, actions, and economic relief efforts will impact the U.S. economy; consumer confidence; wage growth; household formations; levels of new and existing homes for sale; prevailing home and rental prices; availability and cost of land, labor and construction materials; demographic trends; housing demand; the effect of the U.S. Presidential election on the economy, consumer confidence and homebuilding; and other factors, including those described elsewhere in this Form 10-Q. Specifically, changes in mortgage interest rates impact the costs of owning a home and affect the purchasing power of our customers and could impact homebuyer confidence. Changes in demand for our homes or cancellations due to mortgage interest rates or otherwise affect our operating results in future periods, including our net sales, home deliveries, gross margin, origination volume of and revenues from our Financial Services segment, and net income. As a result, our past performance may not be indicative of our future results.

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

Results of Operations

During the three and nine months ended September 30, 2024, we generated $109.9 million and $304.9 million, respectively, in income before income tax expense, as compared to $112.0 million and $224.8 million, respectively, in the respective prior year periods. During the three and nine months ended September 30, 2024, we generated net income of $83.0 million, or $2.59 per diluted share, and $231.1 million, or $7.19 per diluted share, respectively, as compared to $83.2 million, or $2.58 per diluted share, and $167.9 million, or $5.21 per diluted share, respectively, in the respective prior year periods.

During the three and nine months ended September 30, 2024, we generated total revenues of $1.1 billion and $3.1 billion, respectively, which represent increases of 27.8% and 25.7%, respectively, as compared to the respective prior year periods, driven primarily by increased home sales revenue from increased number of homes available for sale and increased average sales prices. During the three and nine months ended September 30, 2024, we delivered 2,834 and 7,809 homes, respectively, with an average sales price of $393.8 thousand and $391.3 thousand, respectively. The number of homes delivered increased by 25.2% and 21.8%, respectively, during the three and nine months ended September 30, 2024, as compared to the respective prior year periods, representing growth across all of our segments. Average sales price increased 3.1% and 3.7%, respectively, during the three and nine months ended September 30, 2024, as compared to the respective prior year periods. During the three and nine months ended September 30, 2024, net new contracts increased 19.3% and 26.5%, respectively, to 2,563 and 8,209, respectively, as compared to the respective prior year periods.

We ended the third quarter of 2024 with $149.2 million of cash and cash equivalents and $70.8 million of cash held in escrow. We had $414.0 million outstanding under our revolving line of credit, with a homebuilding debt to capital ratio of 35.8% and a net homebuilding debt to net capital ratio of 32.1%. During the three and nine months ended September 30, 2024, we paid quarterly cash dividends to our stockholders of $0.26 per share, which represents a 13% increase from the $0.23 per share quarterly dividends paid during the three and nine months ended September 30, 2023. During the nine months ended September 30, 2024, we have continued to strategically increase our lot pipeline, including both organically and through acquisitions, resulting in 80,121 lots owned and controlled at September 30, 2024.

For the three and nine months ended September 30, 2024, our Financial Services segment generated income before income tax of $3.1 million and $18.8 million, respectively, representing a decrease of 74.8% and 36.9%, respectively, as compared to the respective prior year periods. During the three and nine months ended September 30, 2024, the number of mortgages originated increased 45.5% and 41.6%, respectively, as compared to the respective prior year periods, which benefited from increased capture rates, and the number of loans sold to third parties increased 35.5% and 37.0%, respectively, as compared to the respective prior year periods. While total loan origination volumes increased during the three and nine months ended September 30, 2024, the decrease in income before income tax is primarily driven by lower margins on mortgages originated due to a more competitive market, as well as a decrease in the fair value of our mortgage servicing rights portfolio.

Our Century Living operations are engaged in the development, construction and management of multi-family rental properties in Colorado, and currently comprise over 1,200 total units. As of September 30, 2024, one project had been successfully completed and available for leasing, and three projects remain under construction, two of which were available for pre-leasing. As of September 30, 2024, 407 units had been completed, 193 units of which were occupied, and 872 units were under development.

The following table summarizes our results of operations for the three and nine months ended September 30, 2024 and 2023:

(in thousands, except per share amounts)

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

(2) Homebuilding gross margin percentage is inclusive of impairment charges, if applicable. We recorded impairment charges of $1.4 million and $1.9 million during the three and nine months ended September 30, 2024. No impairment charges were recorded during the three and nine months ended September 30, 2023.

Results of Operations by Segment

(dollars in thousands)

West

During the three and nine months ended September 30, 2024, our West segment generated income before income tax expense of $35.2 million and $94.1 million, respectively, an increase of 12.1% and 73.1%, respectively, over the respective prior year period, which were driven by increases in home sales revenue of $73.0 million and $180.8 million, respectively. The revenue increases for the three- and nine-month comparisons were primarily driven by an increase of 29.2% and 31.7%, respectively, in the number of homes delivered, and increases of 11.1% and 7.4%, respectively, in the average sales price per home. The increases in the number of homes delivered were primarily driven by increases in the number of homes under construction, and the average sales price increases were driven by the mix of deliveries within individual communities.

Mountain

During the three and nine months ended September 30, 2024, our Mountain segment generated income before income tax expense of $31.8 million and $93.9 million, respectively, an increase of 24.8% and 20.5%, respectively, over the respective prior year period, which were driven by increases in home sales revenue of $64.2 million and $102.4 million, respectively. The revenue increases for the three and nine-month comparisons were primarily driven by an increase of 23.6% and 12.8%, respectively, in the number of homes delivered, and increases of 6.0% and 2.0%, respectively, in the average sales price per home. The increases in the number of homes delivered were primarily driven by increases in the number of homes under construction, and the average sales price increases were driven by the mix of deliveries within individual communities.

Texas

During the three months ended September 30, 2024, our Texas segment generated income before income tax expense of $14.7 million, a decrease of 10.3% over the prior year period, which was primarily driven by a decrease of 5.5% in the percentage of income before income tax expense to home sales revenues due to a decreased gross margin on home sales, which included purchase price accounting of $2.7 million related to our purchase of Anglia. This decrease was partially offset by an increase in home sales revenue of $47.8 million, primarily driven by an increase of 38.7% in the number of homes delivered and an increase of 2.9% in the average sales price per home. During the nine months ended September 30, 2024, our Texas segment generated income before income tax expense of $46.4 million, an increase of 47.2% over the prior year period, which was driven by an increase in home sales revenue of $109.0 million. The revenue increase was primarily driven by an increase of 24.2% in the number of homes delivered, and an increase of 7.3% in the average sales price per home. For both the three- and nine-month comparisons, the increases in the number of homes delivered were primarily driven by increases in the number of homes under construction, and the average sales price increases were driven by the mix of deliveries within individual communities.

Southeast

During the three months ended September 30, 2024, our Southeast segment generated income before income tax expense of $27.2 million, a decrease of 19.3% over the prior year period, which was primarily driven by a decrease of 5.4% in the percentage of income before income tax expense to home sales revenues due to a decreased margin on home sales and impairment recognized during the current year period. This decrease was partially offset by an increase in home sales revenue of $15.4 million, primarily driven by an increase of 13.0% in the number of homes delivered, and partially offset by a decrease of 3.2% in the average sales price per home. During the nine months ended September 30, 2024, our Southeast segment generated income before income tax expense of $73.9 million, an increase of 16.0% over the prior year period, which was driven by an increase in home sales revenue of $126.6 million. The revenue increase was primarily driven by an increase of 35.7% in the number of homes delivered, and partially offset by a decrease of 1.0% in the average sales price per home. For both the three- and nine-month comparisons, the increases in the number of homes delivered were primarily driven by increases in the number of homes under construction, and the average sales price decreases were driven by the mix of deliveries within individual communities.

Century Complete

During the three and nine months ended September 30, 2024, our Century Complete segment generated income before income tax expense of $34.1 million and $84.2 million, respectively, an increase of 10.3% and 37.6%, respectively, over the respective prior year period, which increases were driven by increases in home sales revenue of $50.7 million and $118.0 million, respectively. The revenue increases for the three and nine- month comparisons were primarily driven by an increase of 23.9% and 17.6%, respectively, in the number of homes delivered, primarily driven by increases in the number of homes under construction.

Financial Services

Our Financial Services segment originates mortgages primarily for our homebuyers, and as such, the volume of loans originated typically correlates to our number of homes delivered. Fluctuations in financial services income before income tax may occur because some components of revenue fluctuate differently than loan volumes, and some expenses are not directly related to mortgage loan volume or to changes in the amount of revenue earned. For the three and nine months ended September 30, 2024, our Financial Services segment generated income before income tax of $3.1 million and $18.8 million, respectively, representing a decrease of 74.8% and 36.9%, respectively, as compared to the respective prior year periods. During the three and nine months ended September 30, 2024, the number of mortgages originated increased 45.5% and 41.6%, respectively, as compared to the respective prior year periods, which benefited from increased capture rates, and the number of loans sold to third parties increased 35.5% and 37.0%, respectively, as compared to the respective prior year periods. While total loan origination volumes increased during the three and nine months ended September 30, 2024, the decrease in income before income tax is primarily driven by lower margins on mortgages originated due to a more competitive market, as well as a decrease in the fair value of our mortgage servicing rights portfolio.

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

Corporate

During the three and nine months ended September 30, 2024, our Corporate segment generated losses of $36.1 million and $106.4 million, respectively as compared to a losses of $38.0 million and $93.7 million, respectively, during the same respective periods in 2023. The decrease in loss for the three-month comparison was primarily due to a decrease in compensation costs as compared to the prior year period. The increase in loss for the nine-month comparison was primarily due to increased insurance and acquisition costs and a reduction in interest income as compared to the prior year period, as well as a $7.7 million impairment related to other investments during the nine months ended September 30, 2024.

Homebuilding Gross Margin

Homebuilding gross margin represents home sales revenues less cost of home sales revenues and inventory impairment, if applicable. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased to 21.7% for the three months ended September 30, 2024 as compared to 24.6% in the prior year period, and increased to 21.9% during the nine months ended September 30, 2024 as compared to 21.0% in the prior year period. The decrease for the three-month comparison was primarily driven by higher incentives in the current year period. The increase for the nine-month comparison was primarily driven by deliveries during the prior year period that carried higher incentives.

In the following table, we calculate our homebuilding gross margin and our adjusted homebuilding gross margin, as adjusted to exclude inventory impairment, if applicable, and interest in cost of home sales revenues, and further adjusted to exclude the effect of purchase price accounting for acquired work in process inventory, if applicable.

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

For the three and nine months ended September 30, 2024, our adjusted homebuilding gross margin percentage, excluding inventory impairment (if applicable), interest in cost of home sales revenues, and purchase price accounting for work in process inventory (if applicable), was 23.6% and 23.5%, respectively, as compared to 25.8% and 22.3% for the same respective periods in 2023. We believe the above information is meaningful as it isolates the impact that inventory impairment (if applicable), indebtedness, and acquisitions (if applicable) have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.

Selling, General and Administrative Expense

(dollars in thousands)

Our selling, general and administrative expense increased $21.1 million and $57.7 million for the three and nine months ended September 30, 2024, respectively, as compared to the respective prior year periods. For both the three and nine-month comparisons, these increases were primarily attributable to an increase in internal and external commission expense associated with the increase in home sales revenue and increased compensation and other costs due to increased active community count. As a percentage of home sales revenue, our selling, general and administrative expense decreased 100 basis points and 80 basis points during the three and nine months ended September 30, 2024, respectively, driven primarily by increased revenue on a partially fixed cost base.

Income Tax Expense

At the end of each interim period, we are required to estimate our annual effective tax rate for the fiscal year and to use that rate to provide for income taxes for the current year-to-date reporting period. Our 2024 estimated annual effective tax rate, before discrete items, of 24.6%, is driven by our blended federal and state statutory rate of 24.6%, and certain permanent differences between GAAP and tax, including disallowed deductions for executive compensation offset by estimated federal energy home credits for current year home deliveries.

For the nine months ended September 30, 2024, our estimated annual rate of 24.6% was benefitted by discrete items which had a net impact of decreasing our rate by 0.4%, including the impact of excess tax benefits for vested stock-based compensation.

For the three months ended September 30, 2024 and 2023, we recorded income tax expense of $26.9 million and $28.8 million, respectively. For the nine months ended September 30, 2024 and 2023, we recorded income tax expense of $73.8 million and $56.9 million, respectively.

Segment Assets

(dollars in thousands)

Total assets increased to $4.8 billion as of September 30, 2024 as compared to $4.1 billion as of December 31, 2023, primarily as a result of changes in our inventory balances within our homebuilding segments related to the timing of home and land development construction activities and an increase in the number of homes under construction.

Lots owned and controlled

During the nine months ended September 30, 2024, we continued to strategically increase our lot pipeline, including both organically and through acquisitions, resulting in 80,121 lots owned and controlled at September 30, 2024, compared to 73,720 at December 31, 2023. Of our total lots owned and controlled as of September 30, 2024, 44.5% were owned and 55.5% were controlled, as compared to 41.5% owned and 58.5% controlled as of December 31, 2023.

Other Homebuilding Operating Data

Net new home contracts

Net new home contracts (new home contracts net of cancellations) for the three months ended September 30, 2024 increased by 414 homes, or 19.3%, to 2,563 as compared to 2,149 for the same period in 2023. Net new home contracts for the nine months ended September 30, 2024 increased by 1,721 homes, or 26.5%, to 8,209 as compared to 6,488 for the same period in 2023. These increases were primarily due to more homes available for sale, as well as favorable market conditions including a more recent moderation in mortgage interest rates.

Monthly absorption rate

Our overall monthly “absorption rate” (calculated as monthly net new home contracts divided by selling communities at period end) for the three and nine months ended September 30, 2024 and 2023 by segment are included in the tables below:

During the three months ended September 30, 2024 and 2023, our absorption rates remained consistent at 2.8 per month, respectively. Absorptions in our Texas segment during the three months ended September 30, 2024 were impacted by a partial period of operations from our Anglia acquisition, which occurred on July 31, 2024. During the nine months ended September 30, 2024, our absorption rates increased by 17.2% per month, as compared to the same respective period in 2023, driven by strong demand for new homes during the current period.

Selling communities at period end

Our selling communities increased by 53 communities to 305 communities at September 30, 2024 as compared to 252 at September 30, 2023. This 21.0% increase was a result of an increased land pipeline that resulted in new community openings in excess of community closeouts during the first nine months of 2024, and includes our acquisition of Anglia, which added 26 new communities in our Texas segment as of September 30, 2024.

Backlog

(dollars in thousands)

Backlog reflects the number of homes, net of cancellations, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home. As of September 30, 2024, we had 1,580 homes in backlog, which represents a decrease of 16.3% as compared to 1,887 homes in backlog at September 30, 2023, with a total value of $671.4 million, as compared to $707.2 million at September 30, 2023. Backlog dollar value decreased due to the decrease in the number of backlog units, and was partially offset by a 13.4% increase in the average sales price of backlog units, largely due to mix.

Supplemental Guarantor Information

Our 6.750% senior notes due 2027 (which we collectively refer to as our “2027 Notes”) and our 3.875% senior notes due 2029 (which we collectively refer to as our “2029 Notes” and together with the 2027 Notes, the “Senior Notes”) are our unsecured senior obligations and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our direct and indirect wholly-owned operating subsidiaries (which we refer to collectively as “Guarantors”). Our subsidiaries associated with our Financial Services operations (referred to as “Non-Guarantors”) do not guarantee the Senior Notes. The guarantees are senior unsecured obligations of the Guarantors that rank equal with all existing and future senior debt of the Guarantors and senior to all subordinated debt of the Guarantors. The guarantees are effectively subordinated to any secured debt of the Guarantors. As of September 30, 2024, Century Communities, Inc. had outstanding $1.0 billion in total principal amount of Senior Notes.

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

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

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

The Guarantors’ condensed supplemental financial information is presented in this report as if the Senior Note guarantees existed during the periods presented pursuant to applicable SEC rules and guidance. If any Guarantors are released from the guarantees in future periods, the changes are reflected prospectively. We have determined that separate, full financial statements of the Guarantors would not be material to investors, and accordingly, supplemental financial information is presented below.

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

Century Communities, Inc. and Guarantor Subsidiaries

Critical Accounting Policies

Critical accounting estimates are those that we believe are both significant and require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and the estimates included in our financial statements might be impacted if we used different assumptions or conditions. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 5, 2024, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”

Liquidity and Capital Resources

Overview

Our liquidity, consisting of our cash and cash equivalents and cash held in escrow and revolving line of credit availability, was $605.9 million as of September 30, 2024 and $1.1 billion as of December 31, 2023.

Our principal uses of capital for the nine months ended September 30, 2024 were our land purchases, land development, home construction, the acquisition of Anglia and Landmark, share repurchases, dividends, and the payment of routine liabilities.

Cash flows for each of our communities depend on the stage in the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and not recognized in our consolidated statements of operations until a home closes, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we continue to acquire and develop lots in our markets when they meet our current investment criteria.

Short-term Liquidity and Capital Resources

We use funds generated by operations, available borrowings under our revolving line of credit, and proceeds from issuances of debt or equity to fund our short-term working capital obligations and our purchases of land, as well as land development, home construction activities, and other cash needs. We had $414.0 million outstanding under our revolving line of credit as of September 30, 2024, as compared to no amounts outstanding as of December 31, 2023, which increase was primarily driven by increased community count and an increase in our investment in homes under construction during the period, as well as our acquisitions of Anglia and Landmark.

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

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

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

Long-term Liquidity and Capital Resources

Beyond the next twelve months, we believe that our principal uses of capital will be land and inventory purchases and other expenditures, as well as principal and interest payments on our long-term debt obligations. We believe that we will be able to fund our long-term liquidity needs with cash generated from operations and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available, or on favorable terms, especially if interest rates remain high. In a higher interest rate environment, we may incur additional interest expense on borrowings that bear floating interest rates, such as under our revolving line of credit, repurchase facilities, and construction loan agreements. 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 debt, or dispose of certain assets to fund our operating activities and capital needs.

Material Cash Requirements

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future in addition to our outstanding debt obligations and debt service requirements described below. These obligations impact our short-term and long-term liquidity and capital resource needs. For the three and nine months ended September 30, 2024, there were no material changes to the contractual obligations we previously described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 that was filed with the SEC on February 5, 2024.

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

As of September 30, 2024, we had outstanding purchase contracts and option contracts for 44,435 lots totaling approximately $2.6 billion and we had $94.4 million of deposits for land contracts, of which $56.0 million were non-refundable cash deposits pertaining to land contracts. For contracts for which cash deposits were non-refundable, and subject to the terms of the outstanding contracts continuing to meet our investment criteria, we currently anticipate performing on the majority of our purchase and option contracts during the next 24 months. Our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change and dependent on future market conditions. Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.

In addition, in the ordinary course of business, we explore, and from time to time, enter into purchase agreements to opportunistically acquire other homebuilders to add existing and future lots to our land portfolio and augment the organic expansion of our land portfolio. These acquisitions are often legally structured as asset acquisitions for cash and conditioned upon a due diligence investigation by us of the business for a limited period of time, in addition to other standard and customary closing conditions.

Outstanding Debt Obligations and Debt Service Requirements

One of our principal liquidity needs is the payment of principal and interest on our outstanding indebtedness. Our outstanding indebtedness is described in detail in Note 10 – Debt in the Notes to the Condensed Consolidated Financial Statements. We are required to meet certain covenants, and as of September 30, 2024, we were in compliance with all such covenants and requirements under the agreements governing our revolving line of credit, mortgage repurchase facilities, and construction loan agreements. See Note 10 – Debt in the Notes to the Condensed Consolidated Financial Statements for further detail.

Our outstanding debt obligations included the following as of September 30, 2024 and December 31, 2023 (in thousands):

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

(2) As of September 30, 2024, other financing obligations included $14.5 million related to insurance premium notes and certain secured borrowings, as well as $110.3 million outstanding under construction loan agreements, as described below. As of December 31, 2023, other financing obligations included $24.7 million related to insurance premium notes and certain secured borrowings, as well as $44.9 million outstanding under construction loan agreements.

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

Letters of Credit and Performance Bonds

In the normal course of business, we post letters of credit and performance and other bonds primarily related to our land development performance obligations with local municipalities. As of September 30, 2024 and December 31, 2023, we had $527.9 million and $510.5 million, respectively, in letters of credit and performance and other bonds issued and outstanding. Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and performance and other bonds are not generally fully released until all development and construction activities are completed.

Construction Loan Agreements

Certain wholly owned subsidiaries of Century Living, LLC are parties to construction loan agreements with various banks (which we collectively refer to as “the lenders”). These construction loan agreements collectively provide that we may borrow up to an aggregate of $187.6 million from the lenders for purposes of construction of multi-family projects in Colorado, with advances made by the lenders upon the satisfaction of certain conditions. Borrowings under the construction loan agreements bear interest at various rates, including a fixed rate and floating interest rates per annum equal to the Secured Overnight Financing Rate (which we refer to as “SOFR”) and the Bloomberg Short-term Bank Yield Index, plus an applicable margin. The outstanding principal balances and all accrued and unpaid interest is due on varying maturity dates from March 17, 2026 through March 17, 2028, with certain of the construction loan agreements allowing for the option to extend the maturity dates for a period of 12 months if certain conditions are satisfied. The construction loan agreements contain customary affirmative and negative covenants (including covenants related to construction completion, and limitations on the use of loan proceeds, transfers of land, equipment, and improvements), as well as customary events of default. Interest on our construction loan agreements is capitalized to the multi-family properties assets included in prepaid expenses and other assets on the condensed consolidated balance sheets while the related multi-family rental properties are being actively developed.

As of September 30, 2024, $110.3 million was outstanding under the construction loan agreements, with borrowings that bore a weighted average interest rate of 7.2% as of September 30, 2024, and we were in compliance with all covenants thereunder.

Revolving Line of Credit

We are party to a Second Amended and Restated Credit Agreement, as amended, (which we refer to as the “Second A&R Credit Agreement”) with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders party thereto. The Second A&R Credit Agreement, which amended and restated our prior Amended and Restated Credit Agreement, provides us with a senior unsecured revolving line of credit (which we refer to as the “revolving line of credit”) of up to $800.0 million, and unless terminated earlier, will mature on April 30, 2026. The revolving line of credit includes a $250.0 million sublimit for standby letters of credit and a $50.0 million sublimit for swingline loans. Under the terms of the Second A&R Credit Agreement, we are entitled to request an increase in the size of the revolving line of credit by an amount not exceeding $200.0 million. Our obligations under the Second A&R Credit Agreement are guaranteed by certain of our subsidiaries. The Second A&R Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. Borrowings under the Second A&R Credit Agreement are based on an adjusted term SOFR reference rate, which equals the greater of (i) 0.50% or (ii) the one-month quotation of the SOFR administered by the Federal Reserve Bank of New York, plus 0.10%.

As of September 30, 2024, $414.0 million was outstanding under our revolving line of credit, with borrowings that bore an interest rate of 7.4%, and were in compliance with all covenants under the Second A&R Credit Agreement. As of December 31, 2023, no amount was outstanding under the revolving line of credit.

Mortgage Repurchase Facilities – Financial Services

Inspire is party to mortgage warehouse facilities with J.P. Morgan Chase Bank, N.A., U.S. Bank National Association and Truist Bank, which provide Inspire with uncommitted repurchase facilities of up to an aggregate of $475.0 million as of September 30, 2024, secured by the mortgage loans financed thereunder. The repurchase facilities have varying short term maturity dates through September 26, 2025. Borrowings under the mortgage repurchase facilities bear interest at variable interest rates per annum equal to SOFR plus an applicable margin, and bore a weighted average interest rate of 6.8% as of September 30, 2024.

Amounts outstanding under the repurchase facilities are not guaranteed by us or any of our subsidiaries, and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2024 and December 31, 2023, we had $247.2 million and $239.3 million outstanding under the repurchase facilities, respectively, and were in compliance with all covenants thereunder.

Stock Repurchases

Our stock repurchase programs, authorized by our Board of Directors, authorize us to repurchase up to 9.0 million shares of our outstanding common stock, of which 5.1 million shares remained available to be repurchased as of September 30, 2024. We did not repurchase any shares of our common stock during the three months ended September 30, 2024. During the nine months ended September 30, 2024, an aggregate of 651.9 thousand shares were repurchased for a total purchase price of approximately $53.1 million and a weighted average price of $81.49 per share. During the three and nine months ended September 30, 2023, an aggregate of 247.8 thousand and 278.2 thousand shares, respectively, were repurchased for a total purchase price of approximately $17.3 million and $19.2 million, respectively, and a weighted average price of $69.61 and $69.09 per share, respectively.

Under the terms of these programs, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws. The actual manner, timing, amount and value of repurchases under the stock repurchase program is determined by management at its discretion and depends on a number of factors, including, among others, the market price of our common stock, trading volume, our available cash balance, our anticipated working capital needs, other capital management objectives and opportunities, applicable legal requirements, applicable tax effects including the 1% excise tax instituted under the Inflation Reduction Act of 2022, and general market and economic conditions. We finance any stock repurchases through available cash and our revolving line of credit. Repurchases also may be made under a trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, which would permit shares to be repurchased when we otherwise may be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. Our stock repurchase programs have no expiration dates and may be extended, suspended or discontinued by our Board of Directors at any time without notice at our discretion. All shares of common stock repurchased under the programs will be cancelled and returned to the status of authorized but unissued shares of common stock.

Cash Dividends

The following table sets forth cash dividends declared by our Board of Directors to holders of record of our common stock during the nine months ended September 30, 2024 and 2023, respectively (in thousands, except per share information):

We expect to continue paying our quarterly cash dividends to stockholders for the remainder of 2024. However, the declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our Board of Directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions.

Cash Flows— Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

For the nine months ended September 30, 2024 and 2023, the comparison of cash flows is as follows:

Our primary sources of cash flows from operations are from the sale of single-family attached and detached homes and mortgages. Our primary uses of cash flows from operations are the acquisition of land and expenditures associated with the construction of our single-family attached and detached homes and the origination of mortgages held for sale. Net cash used in operating activities was $174.0 million during the nine months ended September 30, 2024 as compared to net cash provided by operating activities of $33.0 million during the prior year period. This change is primarily a result of increased expenditures related to land acquisition and expenditures associated with the construction of homes during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. These increased expenditures were primarily offset by a $63.2 million increase in net income.

Net cash used in investing activities increased to $277.7 million during the nine months ended September 30, 2024, compared to $74.6 million used during the prior year period. This increase was primarily related to (1) $157.1 million in expenditures related to our acquisitions of Anglia and Landmark during the nine months ended September 30, 2024 and (2) a $38.2 million increase in expenditures related to the development, construction, and management of multi-family rental properties by our wholly owned subsidiary, Century Living.

Net cash provided by financing activities was $388.6 million during the nine months ended September 30, 2024, compared to net cash used in financing activities of $56.8 million during the prior year period. This change was primarily attributable to (1) a $414.0 increase in borrowings under our revolving credit facility; (2) a $43.4 million increase in net proceeds for our mortgage repurchase facilities; and (3) a $44.0 million increase in borrowings under construction loan agreements, in each case, during the nine months ended September 30, 2024, and as compared to the prior year period. These increases were partially offset by $53.1 million in repurchases of our common stock during the nine months ended September 30, 2024 as compared to $19.2 million in repurchases of our common stock during the prior year period.

As of September 30, 2024, our cash and cash equivalents and restricted cash balance was $178.9 million, as compared to $242.0 million as of December 31, 2023.

Non-GAAP Financial Measures

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

EBITDA and Adjusted EBITDA

The following table presents EBITDA and adjusted EBITDA for the three and nine months ended September 30, 2024 and 2023. EBITDA and adjusted EBITDA are non-GAAP financial measures we use as a supplemental measure in evaluating operating performance. We define EBITDA as net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense (income), and (iv) depreciation and amortization expense. We define adjusted EBITDA as EBITDA before loss on debt extinguishment (if applicable), inventory impairment (if applicable), purchase price accounting for acquired work in process inventory (if applicable), and impairment on other investments (if applicable). We believe EBITDA and adjusted EBITDA provide an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization, and items considered to be non-recurring. Accordingly, our management believes that these measurements are useful for comparing general operating performance from period to period. Neither EBITDA or adjusted EBITDA should be considered in addition to, and not as a substitute for, consolidated net income in accordance with GAAP as a measure of performance. Our presentation of adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Each of our EBITDA and adjusted EBITDA is limited as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

(dollars in thousands)

NM – Not Meaningful

Net Homebuilding Debt to Net Capital

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

(dollars in thousands)

Adjusted Net Income and Adjusted Diluted Earnings per Share

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

(in thousands, except share and per share information)

(1) The tax rates used in calculating adjusted net income for the three and nine months ended September 30, 2024 were 24.2%, respectively, which are reflective of our GAAP tax rates for the nine months ended September 30, 2024. The tax rates used in calculating adjusted net income for the three and nine months ended September 30, 2023 were 25.8% and 25.3%, respectively, which are reflective of our GAAP tax rates for the applicable periods.

Interest Rates

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our Second A&R Credit Agreement and construction loan agreements. There have been no material changes in our market risk since December 31, 2023. For additional information regarding our market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section of our Annual Report on Form 10-K for the year ended December 31, 2023.

Inflation

Our homebuilding operations have been and may continue to be adversely impacted by inflation, primarily from higher land, financing, labor, material, and construction costs. The Federal Reserve aggressively raised the federal funds interest rates during 2022 and 2023, in order to mitigate persistent inflation, which significantly impacting the U.S housing market. While the Federal Reserve reduced the federal funds interest rate during the third quarter of 2024, we cannot provide any assurance as to the impact of changes to the federal funds interest rate or mortgage rates on our current or future business. Inflation has led and could continue to lead to higher mortgage rates, which has and could continue to significantly affect the affordability of mortgage financing to homebuyers and lead to weakened demand for our homes, as well as increased cancellations compared to prior year periods.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity during the spring, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes four to five months to construct a new home, we typically deliver more homes in the second half of the year as spring and summer home starts convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of our cash receipts from home deliveries occurs during the second half of the year. This seasonality pattern may be affected by volatility in the homebuilding industry, supply chain challenges, subcontractor and labor shortages, and changes in demand for our homes.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our co-principal executive officers and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”)) as of September 30, 2024, the end of the period covered by this Form 10-Q. Based on this evaluation, our co-principal executive officers and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2024 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes during the third quarter of 2024 in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting, except for changes to integrate the operations of Anglia.

There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 that was filed with the SEC on February 5, 2024.