Century Communities, Inc. - Quarter Report: 2017 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



For the quarterly period ended June 30, 2017



or





Commission File Number 001-36491



Century Communities, Inc.

(Exact name of registrant as specified in its charter)









(Registrant’s telephone number, including area code): (303) 770-8300

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 an 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.



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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

On July 27, 2017, 23,013,748 shares of common stock, par value 0.01 per share, were outstanding.   

 

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CENTURY COMMUNITIES, INC.

FORM 10-Q

For the three and six months ended June 30, 2017



Index





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PART I

ITEM 1.     FINANCIAL STATEMENTS.





Century Communities, Inc.

Unaudited Condensed Consolidated Balance Sheets

As of June 30, 2017 and December 31, 2016

(in thousands, except share amounts)





See Notes to Unaudited Condensed Consolidated Financial Statements





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Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2017 and 2016

(in thousands, except share and per share amounts)













See Notes to Unaudited Condensed Consolidated Financial Statements





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Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2017 and 2016

(in thousands)











See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2017



1. Basis of Presentation

Century Communities, Inc. (which we refer to as “we,” “CCS,” or the “Company”) is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in Colorado, Austin and San Antonio, Texas (which we refer to as “Central Texas”), Houston, Texas, Las Vegas, Nevada, Salt Lake City, Utah, Atlanta, Georgia, and Charlotte, North Carolina.  In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land.  Our homebuilding operations are organized into the following seven operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Charlotte, Colorado, Houston, Nevada, and Utah.   Additionally, our indirect wholly-owned subsidiaries Inspire Home Loans Inc. and Parkway Title, LLC, which provide mortgage and title services to our home buyers, respectively, have been identified as our Financial Services operating segment.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (which we refer to as “GAAP”) for interim financial statements and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2016, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 that was filed with the SEC on February 15, 2017.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, as well as all subsidiaries in which we have a controlling interest, and variable interest entities for which the Company is deemed to be the primary beneficiary.  All intercompany accounts and transactions have been eliminated.

Mortgage Loans Held for Sale

 

We use best efforts commitments with various investors to mitigate the risk associated with mortgage loans held for sale.  Best efforts commitments which fix the forward sales price that will be realized in the secondary market are used to eliminate our interest rate and price risks.  These best effort commitments are considered derivative instruments under ASC 815, “Derivatives and Hedging,” however, we do not have any derivative instruments designated as hedging instruments as of June 30, 2017. Substantially all of the loans originated by us and their related servicing rights are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. In accordance with ASC 825, “Financial Instruments” (“ASC 825”), we use the fair value option to record residential mortgage loans available-for-sale at the price they are committed to be sold under the best efforts commitments. 



Expected gains and losses from the sale of our loans held for sale are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment.  As of June 30, 2017, mortgage loans available-for-sale had an aggregate fair value of $11.2 million and an aggregate outstanding principal balance of $10.7 million. The net gain resulting from changes in fair value of the best efforts commitments and mortgage loans held in inventory totaled $0.5 million for the three and six months ended June 30, 2017. Realized net gains from the sale of mortgages during the six months ended June 30, 2017 were $0.2 million and have been included in Financial Services revenues. 

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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Accordingly, actual results could differ from those estimates.

Reclassification

Certain items on the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2016 have been reclassified to conform to our current presentation.  We have included “Golf course and other revenue” with “Land sales and other revenues” we have included “Cost of golf course and other revenue” with “Cost of land sales and other revenues” and we have

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combined “Interest income,” “Interest expense,” and “Gain on disposition of assets” into “Other income (expense)” in our current presentation. 

Recently Issued Accounting Standards

In August 2015, the Financial Accounting Standards Board (which we refer to as “FASB”) issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606).” ASU 2015-14 defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and will be effective for the Company beginning on January 1, 2018, including interim reporting periods within that period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. We plan to adopt ASU 2015-14 on January 1, 2018 under the modified retrospective approach.   Although we have not yet adopted ASU 2015-14, we are evaluating our home sales contracts in each of our regions and have determined that there will not be a material impact on the amount or timing in recording home sales revenues as a result of adopting ASU 2015-14.   We are continuing to evaluate the other revenue streams and accounting treatment of other aspects of our business that may be affected by our adoption of ASU 2015-14.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”  ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.  ASU 2016-02 is effective for the Company beginning January 1, 2019 and interim periods within the annual periods.  We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU 2016-09 is effective for the Company beginning January 1, 2017 and interim periods within the annual periods.  We have adopted this standard and as a result have realized excess tax benefits of $1.0 million, which is included as a reduction to “Income tax expense” in our Condensed Consolidated Statements of Operations. Our calculation of earnings per share was also modified to reflect a change to exclude excess tax benefits from assumed proceeds in our computation of diluted shares outstanding under the treasury method.  We have elected to continue to estimate forfeitures in recognizing the expense for our equity awards.  Employee taxes paid by withholding shares on vesting of stock compensation are classified as a financing activity in our Condensed Consolidated Statements of Cash Flows. 



In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows- Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 consists of eight provisions that provide guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017.  We do not believe that ASU 2016-15 will have a material effect on our consolidated financial statements.



In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”  ASU 2017-04 requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value.  It eliminates Step 2 of the current two-step goodwill impairment test.  ASU 2017-04 is effective for annual reporting periods in fiscal years beginning after December 15, 2019 and early adoption is permitted.    We elected to early adopt ASU 2017-04 for the reporting period beginning January 1, 2017.  Our adoption of ASU 2017-04 has not had a material effect on our condensed consolidated financial statements. 



2. Reporting Segments

Our homebuilding operations are organized into the following seven operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Charlotte, Colorado, Houston, Nevada, and Utah.  We have also identified our Financial Services operations, which provide mortgage and title services to our homebuyers as an eighth reportable segment.  Our Corporate operations are a nonoperating segment, as it serves to support our homebuilding operations through functions such as our executive, finance, treasury, human resources, and accounting departments.  Our homebuilding reportable segments are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes.  Our chief operating decision makers, the Co-CEO’s of our Company, primarily rely on total revenue and income before income tax expense to determine segment profitability.

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The following table summarizes total revenue and income before income tax expense by operating segment (in thousands):







The following table summarizes total assets by operating segment (in thousands):

Corporate assets include certain cash and cash equivalents, our investment in unconsolidated subsidiaries, prepaid insurance, and deferred financing costs on our revolving line of credit.

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3. Inventories

Inventories included the following (in thousands):



 

 



4. Prepaid Expenses and Other Assets

Prepaid expenses and other assets included the following (in thousands):





 

5. Investment in Unconsolidated Subsidiaries

On November 1, 2016, we acquired  a 50% ownership of WJH LLC (which we refer to as “WJH”), which is the successor to Wade Jurney Homes, Inc. and Wade Jurney of Florida, Inc., for $15.0 million, of which $1.0 million is held by the Company for potential indemnification claims for a period of eighteen months following the closing.  WJH primarily targets first-time homebuyers in the Southeastern United States.  As a result of the transaction, we own 50% of WJH and Wade Jurney Jr., an individual, owns the other 50% interest.  Each party contributed an additional $3.0 million in capital to WJH upon its formation and we incurred $0.1 million in related acquisition costs.  The Company and Wade Jurney Jr. share responsibility for all of WJH’s strategic decisions, with Wade Jurney Jr. continuing to manage the day-to-day operations under the existing operating model.  Our investment in WJH is treated as an unconsolidated investment under the equity method of accounting. 



As of June 30, 2017, our investment in WJH was $18.4 million and we recognized $2.7 million and $3.9 million of equity in income of unconsolidated subsidiaries during the three and six months ended June 30, 2017, respectively.    During the three and six months ended June 30, 2017, we received operating distributions from WJH of $3.0 million and $3.9 million, respectively.

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6. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities included the following (in thousands):





 



7. Warranties



Estimated future direct warranty costs are accrued and charged to cost of home sales revenues in the period when the related home sales revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the consolidated balance sheets, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an internal model that incorporates historical payment trends and adjust the amounts recorded if necessary. Based on favorable warranty payment trends relative to our estimates at the time of home closing, we reduced our warranty reserve by $0.3 million during the six months ended June 30, 2017, which is included as a reduction to cost of homes sales revenues on our consolidated statement of operations.

The following table summarizes the changes in our warranty accrual (in thousands):



 



8. Notes Payable and Revolving Line of Credit







6.875% senior notes

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of senior unsecured notes due 2022 (which we refer to as the “Initial Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended (which we refer to as the “Securities Act”).  The Initial Senior Notes were issued under the Indenture, dated as of May 5, 2014, among the Company, our subsidiary guarantors party thereto, and U.S Bank National Association, as trustee (which we refer to as the “May 2014 Indenture,” as it is and may in the future be supplemented or amended from time to time).  The Initial Senior Notes were issued at a price equal to 99.239% of their principal amount, and we received net proceeds of approximately $193.3 million.  In February 2015, we completed an offer to exchange $200.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “Initial Exchange Notes”), for all of the Initial Senior Notes.  The terms of the Initial Exchange Notes are identical in all material respects to the Initial Senior Notes, except that the Initial Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions that were applicable to the Initial Senior Notes do not apply to the Initial Exchange Notes. 

In April 2015, we completed a private offering of an additional $60 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “April 2015 Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act.  The April 2015 Senior Notes were issued at a price equal to 98.26% of their principal amount, and we received net proceeds of approximately $58.5 million.  The April 2015 Senior Notes were additional notes issued under the May 2014 Indenture pursuant to which the Initial Exchange Notes were issued.  In October 2015, we completed an offer to exchange $60.0 million in aggregate

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principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “October 2015 Exchange Notes”), for all of the April 2015 Senior Notes.  The terms of the October 2015 Exchange Notes are identical in all material respects to the April 2015 Senior Notes, except that the October 2015 Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions that were applicable to the April 2015 Senior Notes do not apply to the October 2015 Exchange Notes. 

In January 2017, we completed a private offering of an additional $125 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “January 2017 Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act.  The January 2017 Senior Notes were issued at a price equal to 102.00% of their principal amount, and we received net proceeds of approximately $125.4 million.  The January 2017 Senior Notes were additional notes issued under the May 2014 Indenture pursuant to which the Initial Exchange Notes and the October 2015 Exchange Notes were issued.  In April 2017, we completed an offer to exchange $125.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “April 2017 Exchange Notes”), for all of the January 2017 Senior Notes.  The terms of the April 2017 Exchange Notes are identical in all material respects to the January 2017 Senior Notes, except that the April 2017 Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions that were applicable to the January 2017 Senior Notes do not apply to the April 2017 Exchange Notes.

The Initial Exchange Notes, October 2015 Exchange Notes, and April 2017 Exchange Notes (which we refer to collectively, as the “Existing 6.875% Notes”) will be treated as a single series of notes under the May 2014 Indenture, and will vote as a single class of notes for all matters submitted to a vote of holders under the May 2014 Indenture. 

The Existing 6.875% Notes are unsecured senior obligations which are guaranteed on an unsecured senior basis by certain of our current and future subsidiaries. The Existing 6.875% Notes contain certain restrictive covenants on issuing future secured debt and other transactions.  The aggregate principal balance of the Existing 6.875% Notes is due May 2022, with interest only payments due semi-annually in May and November of each year.

As of June 30, 2017, the aggregate amount outstanding on the Existing 6.875% Notes was $378.6 million.

5.875% senior notes

In May 2017, we completed a private offering of $400 million in aggregate principal amount of our 5.875% Senior Notes due 2025 (which we refer to as the “May 2017 Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act.  The May 2017 Senior Notes were issued under the Indenture, dated as of May 12, 2017, among the Company, our subsidiary guarantors party thereto, and U.S Bank National Association, as trustee (which we refer to as the “May 2017 Indenture,” as it may be supplemented or amended from time to time).  The May 2017 Senior Notes were issued at a price equal to 100.00% of their principal amount, and we received net proceeds of approximately $395.5 million.

As of June 30, 2017, we had $394.8 million outstanding on the May 2017 Senior Notes.

Other financing obligations

As of June 30, 2017, we had one insurance premium note with an outstanding balance of $3.5 million, which matures in December 2017 and bears interest at a rate of 3.88%.  During the six months ended June 30, 2017, we repaid one insurance premium note with an outstanding balance of $0.1 million.   As of December 31, 2016, we had an aggregate of $6.0 million of outstanding insurance premium notes.

Revolving line of credit 

On October 21, 2014, we entered into a credit agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders from time to time party thereto (which, as modified as described below, we refer to as the “Credit Agreement”). The Credit Agreement provided us with a revolving line of credit of up to $120 million (which, as modified as described below, we refer to as the “Revolving Credit Facility”).  

Under the terms of the Credit Agreement, we were entitled to request an increase in the size of the Revolving Credit Facility by an amount not exceeding $80 million. If the existing lenders elect not to provide the full amount of a requested increase, we may invite one or more other lender(s) to become a party to the Credit Agreement, subject to the approval of the Administrative Agent and L/C Issuer. The Credit Agreement includes a letter of credit sublimit of $20 million. The obligations under the Revolving Credit Facility were guaranteed by certain of our subsidiaries.

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On July 31, 2015, we entered into a First Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which modified the Credit Agreement.  The First Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $120 million to $200 million, (ii) extended the maturity date of the Revolving Credit Facility from October 21, 2017 to October 21, 2018, (iii) admitted Bank of America, N.A. as a new lender under the Revolving Credit Facility, and ( iv) increased the amount of the increase in the size of the Revolving Credit Facility that we had the option to request, from time to time, from an amount not exceeding $80 million to an amount not exceeding $100 million, subject to the terms and conditions of the First Modification Agreement and the Credit Agreement.  

On December 22, 2015, we entered into a Second Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement.  The Second Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $200 million to $300 million, and (ii) admitted Compass Bank, an Alabama Banking Corporation, and U.S. Bank National Association as new lenders under the Revolving Credit Facility.

On August 19, 2016, we entered into a Third Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement.  The Third Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $300 million to $380 million through our exercise of $80 million of the accordion feature of the Credit Agreement, (ii) admitted Citibank, N.A. and Flagstar Bank, FSB as new lenders under the Revolving Credit Facility, (iii) increased certain lenders’ respective commitments to the Revolving Credit Facility, and (iv) extended the term of the Revolving Credit Facility by one year to mature on October 21, 2019.

On February 24, 2017, we entered into a Commitment Increase Agreement with Texas Capital Bank, National Association, as Administrative Agent, Flagstar Bank, FSB (which we refer to as “Flagstar”), and our subsidiary guarantors party thereto. The Commitment Increase Agreement supplements the Credit Agreement, and (i) increased the Revolving Credit Facility from $380 million to $400 million through our exercise of the remaining $20 million of the accordion feature of the Credit Agreement, and (ii) increased Flagstar’s commitment to the Credit Facility.

Unless terminated earlier, the principal amount under the Revolving Credit Facility, together with all accrued unpaid interest and other amounts owing thereunder, if any, will be payable in full on October 21, 2019, the maturity date of the Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at a floating rate equal to the London Interbank Offered Rate plus an applicable margin between 2.75% and 3.25% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.75% and 2.25% per annum. The “applicable margins” described above are determined by a schedule based on our leverage ratio, as defined in the Credit Agreement. The Credit Agreement also provides for fronting fees and letter of credit fees payable to the L/C Issuer and commitment fees payable to the Administrative Agent equal to 0.20% of the unused portion of the Revolving Credit Facility.



The 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. The Credit Agreement also requires us to maintain (i) a leverage ratio of not more than 1.50 to 1.0 as of the last day of any fiscal quarter, based upon our and our subsidiaries’ (on a consolidated basis) ratio of debt to tangible net worth, (ii) an interest coverage ratio of not less than 1.50 to 1.0 for any four fiscal quarter period, based upon our and our subsidiaries’ (on a consolidated basis) ratio of EBITDA to cash interest expense, (iii) a consolidated tangible net worth of not less than the sum of $250 million, plus 50% of the net proceeds of any issuances of equity interests by us and the guarantors of the Revolving Credit Facility, plus 50% of the amount of our and our subsidiaries’ consolidated net income, (iv) liquidity of not less than $25 million, and (v) a risk asset ratio of not more than 1.25 to 1.0, based upon the ratio of the book value of all risk assets owned by us and our subsidiaries to our tangible net worth.  As a result of the issuance of our 5.875% senior notes, our leverage ratio was 1.58 to 1.0 as of June 30, 2017.  We have received a waiver from the Administrative Agent and the Required Lenders (as defined in the Credit Agreement) regarding the leverage ratio exceeding the 1.50 to 1.0 requirement under the Credit Agreement as of June 30, 2017.  The waiver is applicable until our Compliance Certificate is due for the fiscal quarter ended September 30, 2017.

As of June 30, 2017, we did not have any amounts outstanding under the Credit Agreement.

Mortgage Repurchase Facility – Financial Services

On April 10, 2017, Inspire Home Loans Inc. (which we refer to as “Inspire”), an indirect wholly-owned subsidiary of ours, entered into a Master Repurchase Agreement (which we refer to as the “Master Repurchase Agreement”) with Branch Banking and Trust Company, as the buyer thereunder (which we refer to as the “Buyer”). The Master Repurchase Agreement provides Inspire with a revolving mortgage loan repurchase facility of up to $25 million (which we refer to as the “Repurchase Facility”). The primary purpose of the Repurchase Facility is to provide financing and liquidity to Inspire by facilitating purchase transactions in which Inspire transfers eligible loans to the Buyer, and the Buyer transfers funds, subject to a simultaneous agreement by the Seller to repurchase from the Buyer such eligible loans (i) upon written notice to the Buyer by Inspire, (ii) on a prescribed date in the future, (iii) upon the occurrence of prescribed events, or (iv) on the Termination Date (as defined below). The purchase transactions are based

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on and subject to the terms and conditions set forth in the Master Repurchase Agreement. The maximum aggregate amount of the Buyer’s commitment to fund purchase transactions under the Repurchase Facility is $25 million (which we refer to as the “Commitment”), subject to certain sublimits. The Repurchase Facility and the Buyer’s Commitment thereunder expires on the earlier of (i) April 9, 2018, and (ii) the date when the Buyer’s Commitment is terminated pursuant to the Master Repurchase Agreement or by operation of law (which we refer to as the “Termination Date”). Amounts outstanding under the Repurchase Facility are not guaranteed by us or any of our subsidiaries. The Master Repurchase Agreement contains various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type.

As of June 30, 2017, there was  $10.6 million outstanding under the Master Repurchase Agreement.  The amount outstanding under the Master Repurchase Agreement was collateralized by the mortgage loans held for sale.



9. Interest

Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed.  As our qualifying assets exceeded our outstanding debt during the three and six months ended June 30, 2017 and 2016, we capitalized all interest costs incurred during these periods, except for interest incurred on capital leases of equipment related to our golf course operations.

Our interest costs are as follows (in thousands):

















10. Income Taxes



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 2017 estimated annual effective tax rate of 35.6% is driven by our blended federal and state statutory rate of 37.4%, which is partially offset by net estimated benefits of 1.8% primarily from additional deductions for tax related to domestic production activities.  During the six months ended June 30, 2017, we also recorded a discrete item for excess tax benefits related to share based awards that vested in the first and second quarter of 2017.



For the three months ended June 30, 2017 and 2016, we recorded income tax expense of $8.3 million and $6.0 million, respectively.  For the six months ended June 30, 2017 and 2016, we recorded income tax expense of $11.5 million and $10.4 million, respectively.



11. Fair Value Disclosures

Accounting Standards Codification Topic 820, Fair Value Measurement, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date.

Level 3 — Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date.

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The following table presents carrying values and estimated fair values of financial instruments (in thousands):



The carrying amount of cash and cash equivalents approximates fair value. Non-financial assets and liabilities include items such as inventory and long-lived assets that are measured at fair value when acquired and resulting from impairment, if deemed necessary.



12. Stock-Based Compensation

During the three months ended June 30, 2017, we granted 11.6 thousand shares of restricted stock units with a weighted average grant date fair value of $25.95 per share, which vest over a three year period from the grant date.  During the six months ended June 30, 2017, we granted 0.2 million shares of restricted stock units with a weighted average grant date fair value of $23.12 per share, which vest over a one or three year period from the grant date. 

A summary of our outstanding awards of restricted common stock and restricted stock units are as follows (in thousands, except years):



During the three months ended June 30, 2017 and 2016, we recognized stock-based compensation of $2.0 million and $1.7 million, respectively. During the six months ended June 30, 2017 and 2016, we recognized stock-based compensation of $3.9 million and $3.5 million, respectively. Stock-based compensation expense is included in selling, general, and administrative on our consolidated statements of operations.

13. Stockholders’ Equity

Our authorized capital stock consists of 100.0 million shares of common stock, par value $0.01 per share, and 50.0 million shares of preferred stock, par value $0.01 per share. As of June 30, 2017 and December 31, 2016, there were 22.6 million and 21.6 million shares of common stock issued and outstanding, respectively, inclusive of the restricted common stock issued.

We issued 47.7 thousand and 0.2 million shares of common stock related to the vesting of restricted stock awards during the three and six months ended June 30, 2017, respectively, under our First Amended & Restated 2013 Long-Term Incentive Plan.  At our 2017 annual meeting of stockholders held on May 10, 2017, our stockholders approved the adoption of the Century Communities, Inc. 2017 Omnibus Incentive Plan (which we refer to as our “2017 Incentive Plan”), which replaced our First Amended & Restated 2013 Long-Term Incentive Plan.  We had reserved a total of 1.8 million shares of our common stock for issuance under our First Amended & Restated 2013 Long-Term Incentive Plan, of which approximately 0.6 million shares rolled over into the 2017 Incentive Plan when it became effective.  As of June 30, 2017, approximately 1.4 million shares remain available for issuance under the 2017 Incentive Plan.

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On November 7, 2016, we entered into a Distribution Agreement (which we refer to as the “Distribution Agreement”) with J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Citigroup Global Markets Inc. (which we refer to collectively as the “Sales Agents”), relating to our common stock.  Under the Distribution Agreement we are authorized to offer and sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time through any of our Sales Agents in “at the market” offerings.    During the three and six months ended June 30, 2017, we sold and issued 0.4 million and 1.2 million shares of our common stock under the Distribution Agreement, respectively, which provided net proceeds of $9.6 million and $24.6 million, respectively, and in connection with such sales, paid total commissions and fees to the Sales Agents of $0.2 million and $0.5 million, respectively. 



14.  Earnings Per Share

We use the two-class method of calculating earnings per share (which we refer to as “EPS”) as our non-vested restricted stock awards have non-forfeitable rights to dividends and, accordingly, represent a participating security. The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period.  We use the treasury stock method to calculate the dilutive effect of our restricted stock units as the restricted stock units do not have participating rights.

The following table sets forth the computation of basic and diluted EPS for the three and six months ended June 30, 2017 and 2016 (in thousands, except share and per share information):



We have excluded from diluted earnings per share the common unit equivalents related to 113 restricted stock units for the six months ended June 30, 2017, because their effect would be anti-dilutive.













15. Commitments and Contingencies

Letters of Credit and Performance Bonds

In the normal course of business, the Company posts letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of June 30, 2017 and December 31, 2016, we had $72.1 million and $70.1 million, respectively, in letters of credit and performance bonds issued and outstanding.

Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business, which consist primarily of construction defect claims. It is the opinion of our management that if the claims have merit, parties other than the Company would be, at least in part, liable for the claims, and eventual outcome of these claims will not have a material adverse effect upon our consolidated financial condition, results of operations, or cash flows. When we believe that a loss is probable and estimable, we record a charge to selling, general, and administrative on our consolidated statements of operations for our estimated loss.

We do not believe that the ultimate resolution of any claims and lawsuits will have a material adverse effect upon our consolidated financial position, results of operations, or cash flow.





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16. Supplemental Guarantor Information

The Existing 6.875% Notes and the May 2017 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 as “Guarantors”).

Each of the May 2014 Indenture governing the Existing 6.875% Notes, and the May 2017 Indenture governing the May 2017 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.

As the guarantees were made in connection with the February 2015 exchange offer for the Initial Exchange Notes, the October 2015 exchange offer for the October 2015 Exchange Notes, the April 2017 exchange offer for the April 2017 Exchange Notes, and the issuance of the May 2017 Senior Notes, the Guarantors’ condensed financial information is presented as if the guarantees existed during the periods presented. If any Guarantors are released from the guarantees in future periods, the changes are reflected prospectively.

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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:





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17. Subsequent Events



On April 11, 2017, we announced that we had entered into a definitive agreement pursuant to which UCP, Inc. (NYSE: UCP) will be merged into the Company.  UCP, Inc. is a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales, with operations in California, Washington, North Carolina, South Carolina and Tennessee.  The transaction has been unanimously approved by the board of directors of both the Company and UCP and was also approved by UCP shareholders on August 1, 2017.  Upon completion of the merger, each share of UCP Class A common stock outstanding immediately prior to the closing will be converted into the right to receive $5.32 in cash and 0.2309 of a newly issued share of our common stock.  Approximately 4.2 million shares of our common stock are expected to be issued in connection with the transaction.  The merger is expected to close on August 4, 2017. 







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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Some of the statements included in this Quarterly Report on Form 10-Q (which we refer to as 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 events and results of operations 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” or the negative of such terms and other comparable terminology.  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:





The 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 in “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part II, Item 1A.  Risk Factors” in this Form 10-Q, and other risks and uncertainties detailed in this 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.

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

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Overview

We are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in Colorado, Austin and San Antonio, Texas (which we refer to as “Central Texas”), Houston, Texas, Las Vegas, Nevada, Atlanta, Georgia, Charlotte, North Carolina, and Salt Lake City, Utah.  We build and sell an extensive range of home types across a variety of price points. Our emphasis is on acquiring well-located land positions and offering quality homes with innovative design elements.  In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land. Our homebuilding operations are organized into the following seven homebuilding operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Charlotte, Colorado, Houston, Nevada, and Utah.    Additionally, our indirect wholly owned subsidiaries Inspire Home Loans Inc. and Parkway Title, LLC, which provide mortgage and title services to our home buyers, respectively, have been identified as our Financial Services operating segment.

On April 11, 2017, we announced that we had entered into a definitive agreement pursuant to which UCP, Inc. (NYSE: UCP) will be merged into the Company. UCP, Inc. is a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales, with operations in California, Washington, North Carolina, South Carolina and Tennessee.  The transaction has been unanimously approved by the board of directors of both the Company and UCP and was also approved by UCP shareholders on August 1, 2017.  Upon completion of the merger, each share of UCP Class A common stock immediately outstanding prior to the closing will be converted into the right to receive $5.32 in cash and 0.2309 of a newly issued share of our common stock.  Approximately 4.2 million shares of our common stock are expected to be issued in connection with the transaction.  The merger is expected to close on August 4, 2017. 



 

Results of Operations

During the three months ended June 30, 2017, we delivered 753 homes, with an average sales price of $381.9 thousand. During the same period, we generated approximately $287.6 million in home sales revenues, approximately $23.1 million in income before income tax expense, and approximately $14.8 million in net income.

During the six months ended June 30, 2017, we delivered 1,361 homes, with an average sales price of $377.7 thousand. During the same period, we generated approximately $514.0 million in home sales revenues, approximately $35.2 million in income before income tax expense, and approximately $23.6 million in net income.

For the three and six months ended June 30, 2017, our net new home contracts totaled 1,021 and 1,978, respectively, a 17.5% and 18.9% increase over the same periods in 2016, respectively. As of June 30, 2017, we had a backlog of 1,366 sold but unclosed homes, a 27.7% increase as compared to June 30, 2016, representing approximately $522.6 million in sales value, a 28.5% increase as compared to June 30, 2016.    

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The following table summarizes our results of operation for the three and six months ended June 30, 2017 and 2016.    







(1) Non-GAAP financial measure.

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Results of Operations by Operating Segment

(dollars in thousands)







Atlanta 

In our Atlanta operating segment, for the three and six months ended June 30, 2017, our income before income tax decreased by $3.4 million and $2.8 million, respectively, to $5.3 million and $11.2 million, respectively, as compared to $8.7 million and $14.0 million, for the same periods in 2016, respectively.  This decrease is a result of a decrease in the number of new homes delivered year over year, partially offset by an increase in the average selling price of the homes delivered.



Central Texas 

In our Central Texas operating segment, for the three and six months ended June 30, 2017, our income before income tax increased by $1.3 million and $1.8 million, respectively, to $3.2 million and $5.9 million, respectively, as compared to $1.9 million and $4.1 million, for the same periods in 2016, respectively.  This increase is related to an increase in the number of homes delivered and an increase in the average selling price of those homes during the periods, year over year.  



Colorado 

In our Colorado operating segment, for the three and six months ended June 30, 2017, our income before income tax increased by $3.1 million and $3.9 million, respectively, to $16.0 million and $27.7 million, respectively, as compared to $12.9 million and $23.8 million, for the same periods in 2016, respectively.  This increase is related to an increase in the number of homes delivered and an increase in the average selling price of those homes during the periods, year over year.  



  

Houston 

In our Houston operating segment, for the three and six months ended June 30, 2017, our loss before income tax decreased by $0.1 million and $6.0 thousand, respectively, to $0.8 million and $1.7 million, respectively, as compared to $0.9 million and $1.7 million, for the same periods in 2016, respectively.  While the number of homes delivered in Houston decreased year over year, the average selling price increased slightly, resulting in the minor decrease in loss before income tax year over year.  

  

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Nevada 

In our Nevada operating segment, for the three and six months ended June 30, 2017, our income before income tax increased by $1.9 million and $4.7 million, respectively, to $5.6 million and $9.3 million, respectively, as compared to $3.7 million and $4.6 million, for the same periods in 2016, respectively.  This increase is related to an increase in the number of homes sold and an increase in the average selling price of those homes during the periods, year over year.  



Utah 

We began operations in Utah during the second half of 2016.  For the three and six months ended June 30, 2017, we had 23 and 28 home deliveries, respectively, with an average selling price of $381.7 thousand and $382.9 thousand, respectively.



Charlotte 

We began operations in Charlotte during 2017. During the three months ended June 30, 2017, we had 3 net new home orders.  We had net loss before income tax of $0.5 million and $0.6 million for the three and six months ended June 30, 2017, respectively, as a result of our beginning operations without any home sales during the periods.



Corporate

During the three and six months ended June 30, 2017, our Corporate segment generated losses of $6.1 million and $16.0 million, respectively, as compared to losses of $7.2 million and $13.1 million, for the same periods in 2016, respectively.  The decrease in expenses during the three months ended June 30, 2017 was primarily attributed to the following: (1) an increase of $0.2 million in our compensation related expenses, including non-cash expenses for share based payments, (2) an increase of $0.4 million in legal costs, (3) an increase of $0.6 million in information technology related expenses, and (4) an increase of $0.7 million in acquisition costs, offset by an increase in equity in income from joint ventures of $2.7 million. The increase in expenses during the six months ended June 30, 2017 was primarily attributed to the following: (1) an increase of $3.0 million in our compensation related expenses, including non-cash expenses for share based payments, (2) an increase of $0.6 million in legal costs, (3) an increase of $1.5 million in information technology related expenses, (4) an increase of $1.0 million in acquisition costs, and (5) an decrease in gain on disposition of assets of $0.3 million, partially offset by an increase in equity in income from joint ventures of $3.9 million.



Homebuilding Gross Margin

Homebuilding gross margin represents home sales revenues less cost of home sales revenues. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, decreased during the three and six months ended June 30, 2017 to 18.7% and 19.0%, respectively,  as compared to 19.2% and 19.6%, for the same periods in 2016, respectively.  The decrease is primarily driven by higher interest expense in cost of sales as a result of higher average debt balances outstanding in 2017 as compared to 2016.

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In the following table, we calculate our homebuilding gross margin adjusting for interest in cost of sales, and purchase price accounting for acquired work in process inventory.



 (1)Non-GAAP financial measure.

 For the three and six months ended June 30, 2017, excluding interest in cost of home sales revenues and purchase price accounting for acquired work in process inventory, our adjusted homebuilding gross margin percentage was 21.1%  and 21.4%, respectively, as compared to 21.1%   and 21.5%, for same periods in 2016, respectively.  We believe the above information is meaningful as it isolates the impact that indebtedness and acquisitions have on homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.    

Financial Services Operations

Our indirect wholly-owned subsidiaries Inspire Home Loans Inc. and Parkway Title, LLC, which provide mortgage and title services to our home buyers, respectively, have been identified as our Financial Services operating segment.  We began providing mortgage services to our customers during the second quarter of 2017.  Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days.  During the three and six months ended June 30, 2017, we originated and closed 71 loans with total principal of $22.6 million.  As of June 30, 2017, we have 30 sold loan applications in backlog with total principal of $10.2 million.

Selling, General and Administrative Expense



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Our selling, general and administrative costs increased $2.8 million for the three months ended June 30, 2017 as compared to the same period in 2016. The increase was primarily attributable to the following: (1) an increase of $0.8 million in commission expense resulting from a 12%  increase in home sales revenues, (2) an increase of $1.2 million in our compensation-related expenses, including incentive compensation, (3) an increase of $0.6 million in legal expenses, and (4)  a net increase of $0.2 million related to individually insignificant changes in rent, advertising, information technology and other corporate expenses. 

Our selling, general and administrative costs increased $10.9 million for the six months ended June 30, 2017 as compared to the same period in 2016. The increase was primarily attributable to the following: (1) an increase of $2.3 million in commission expense resulting from a 17%  increase in home sales revenues, (2) an increase of $5.4 million in our compensation-related expenses, including incentive compensation, (3) an increase of $0.8 million in legal expenses, (4) an increase of $0.7 million in information technology related costs, and (5) a net increase of $1.7 million related to individually insignificant changes in rent, model expenses,  and other corporate expenses. 

Other Income (Expense)

For the three and six months ended June 30, 2017, other income (expense) increased to $0.8 million and $1.3 million, respectively, from $0.4 million and $1.0 million, for the same periods in 2016, respectively.  The increases were related to increases in interest income partially offset by decreases in gain (loss) on disposition of assets.

Equity in Income from Unconsolidated Subsidiaries



As of June  30, 2017, our investment in WJH was $18.4 million and we recognized $2.7 million and $3.9 million of equity in income of unconsolidated subsidiaries during the three and six months ended June 30, 2017, respectively.  During the three and six months ended June 30, 2017 we received operating distributions from WJH of $3.0 million and $3.9 million, respectively.



Income Tax Expense



Our 2017 estimated annual effective tax rate of 35.6% is driven by our blended federal and state statutory rate of 37.4%, which is partially offset by net estimated benefits of 1.8% primarily from additional deductions for tax related to domestic production activities.  During the six months ended June 30, 2017, we also recorded a discrete item for excess tax benefits related to share based awards that vested in the first and second quarter of 2017.  For the three months ended June 30, 2017 and 2016, we recorded income tax expense of $8.3 million and $6.0 million, respectively.  For the six months ended June 30, 2017 and 2016, we recorded income tax expense of $11.5 million and $10.4 million, respectively



Segment Assets

NM – Not Meaningful

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Of our total lots owned and controlled as of June 30, 2017,  43.0% were owned and 57.0% were controlled, as compared to 47.3% owned and 52.7% controlled as of December 31, 2016.

Total assets increased by $398.0 million, or 39.5%, to $1.4 billion at June 30, 2017. The increase is related to the increase in cash from our $125.0 million and $400.0 million debt offerings completed during 2017 as well as the increased investments in most of our operating segments. 

Other Homebuilding Operating Data









NM – Not Meaningful

Net new home contracts (new home contracts net of cancellations) for the three months ended June 30, 2017 increased by 152 homes, or 17.5%, to 1,021, compared to 869 for the same period in 2016.  Net new home contracts for the six months ended June 30, 2017 increased by 315 homes, or 18.9%, to 1,978, compared to 1,663 for the same period in 2016.  The increase in our net new home contracts was driven by overall positive market conditions in the markets in which we operate.

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Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three and six months ended June 30, 2017 and 2016 by segment are included in the table below:



NM – Not Meaningful

Selling communities at period end



Our absorption rate increased by 19.4% to 3.7 per month and by 20.0% to 3.6 per month, during the three and six months ended June 30, 2017, respectively, as compared to 3.1 per month and 3.0 per month for the same periods in 2016, respectively.  The increase in absorption rate is attributable to the strong homebuilding environment as a result of positive economic trends across our markets.    





NM – Not Meaningful

Our selling communities remained at 91 communities at June 30, 2017 and 2016.    

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NM – Not Meaningful

Backlog reflects the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home.  At June 30, 2017, we had 1,366 homes in backlog with a total value of $522.6 million, which represents an increase of 27.7% and 28.5%, respectively, as compared to June 30, 2016.  The increase in backlog and backlog value is primarily attributable to the increase in the demand for new homes in the communities in which we operate. The increase in average sales price of homes in backlog is driven by increases in most of our markets as a result of pricing strength due to positive market trends as well as product mix towards higher priced communities. 

 

Critical Accounting Policies

Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and the estimates included in our financial statements might be impacted if we used different assumptions or conditions. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on February 15, 2017, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Accounting Policies.”  We have had no significant changes in our critical accounting policies from those described therein, other than those related to our Mortgage loans held for sale, as discussed in “Note 1. Basis of Presentation.”

Liquidity and Capital Resources

Overview

Our principal uses of capital for the three and six months ended June 30, 2017 were land purchases, land development, home construction, and the payment of routine liabilities. We used funds generated by operations, bond offerings, and available borrowings under our Credit Agreement to meet our short-term working capital requirements.

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 statement 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 are currently actively acquiring and developing lots in our markets to maintain and grow our lot supply and active selling communities. As we continue to expand our business, we expect that cash outlays for land purchases and land development to grow our lot inventory could exceed our cash generated by operations. 

Covenant Compliance

On October 21, 2014, we entered into a credit agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders from time to time party thereto (which, as modified as described below, we refer to as the “Credit

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Agreement”). The Credit Agreement provides the Company with a revolving line of credit (which, as modified as described below, we refer to as the “Revolving Credit Facility”) of up to $120 million. Under the terms of the Credit Agreement, we are entitled to request an increase in the size of the Revolving Credit Facility by an amount not exceeding $80 million. If the existing lenders elect not to provide the full amount of a requested increase, we may invite one or more other lender(s) to become a party to the Credit Agreement, subject to the approval of the Administrative Agent and L/C Issuer. The Credit Agreement includes a letter of credit sublimit of $20 million. The obligations under the Revolving Credit Facility are guaranteed by certain of our subsidiaries.

On July 31, 2015, we entered into a First Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which modified the Credit Agreement.  The First Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $120 million to $200 million, (ii) extended the maturity date of the Revolving Credit Facility from October 21, 2017 to October 21, 2018, (iii) admitted Bank of America, N.A. as a new lender under the Revolving Credit Facility, and (iv) increased the amount of the increase in the size of the Revolving Credit Facility that we had the option to request, from time to time, from an amount not exceeding $80 million to an amount not exceeding $100 million, subject to the terms and conditions of the First Modification Agreement and the Credit Agreement.  

On December 22, 2015, we entered into a Second Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement.  The Second Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $200 million to $300 million, and (ii) admitted Compass Bank, an Alabama Banking Corporation, and U.S. Bank National Association as new lenders under the Revolving Credit Facility.

On August 19, 2016, we entered into a Third Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement.  The Third Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $300 million to $380 million, (ii) admitted Citibank, N.A. and Flagstar Bank, FSB as new lenders under the Revolving Credit Facility, (iii) increased certain lenders’ respective commitments to the Revolving Credit Facility, and (iv) extended the term of the Revolving Credit Facility by one year to mature in October 2019.

On February 24, 2017, we entered into a Commitment Increase Agreement with Texas Capital Bank, National Association, as Administrative Agent, Flagstar Bank, FSB (which we refer to as “Flagstar”), and our subsidiary guarantors party thereto. The Commitment Increase Agreement supplements the Credit Agreement, and (i) increased the Credit Facility from $380 million to $400 million through our exercise of the remaining $20 million of the accordion feature of the Credit Agreement, and (ii) increased Flagstar’s commitment to the Credit Facility.

The Credit Agreement contains customary affirmative and negative covenants (including limitations on the Company’s ability to grant liens, incur additional debt, pay dividends, redeem its common stock, make certain investments, and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. The Credit Agreement also requires the Company to maintain (i) a leverage ratio of not more than 1.50 to 1.0 as of the last day of any fiscal quarter, based upon the ratio of debt to tangible net worth of the Company and its subsidiaries on a consolidated basis, (ii) an interest coverage ratio of not less than 1.50 to 1.0 for any four fiscal quarter period, based upon the ratio of EBITDA to cash interest expense of the Company and its subsidiaries on a consolidated basis, (iii) a consolidated tangible net worth of not less than the sum of $250 million, plus 50% of the net proceeds of any issuances of equity interests of the Company and the guarantors of the Revolving Credit Facility, plus 50% of the amount of consolidated net income of the Company and its subsidiaries, (iv) liquidity of not less than $25 million, and (v) a risk asset ratio of not more than 1.25 to 1.0, based upon the ratio of the book value of all risk assets owned by the Company and its subsidiaries on a consolidated basis to the Company’s tangible net worth.

As a result of the issuance of our 5.875% senior notes, our leverage ratio was 1.58 to 1.0 as of June 30, 2017.  We have received a waiver from the Administrative Agent and the Required Lenders (as defined in the Credit Agreement) regarding the leverage ratio exceeding the 1.50 to 1.0 requirement under the Credit Agreement as of June 30, 2017.  The waiver is applicable until our Compliance Certificate is due for the fiscal quarter ended September 30, 2017.  However, we anticipate our leverage ratio will be under 1.50 to 1.0 upon the consummation of our merger transaction with UCP, Inc. on August 4, 2017. 



ATM Program

On November 7, 2016, we entered into a Distribution Agreement (which we refer to as the “Distribution Agreement”) with J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Citigroup Global Markets Inc. (which we refer to collectively as the “Sales Agents”), relating to our common stock.  Under the Distribution Agreement we are authorized to offer and sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time through any of our Sales Agents in “at the market” offerings.   As of June 30, 2017, we had $12.5 million of shares remaining to be sold.  During the three and

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six months ended June 30, 2017, we sold and issued 0.4 million and 1.2 million shares of our common stock under the Distribution Agreement, respectively, which provided net proceeds of $9.6 million and $24.6 million, respectively and in connection with such sales, paid total commissions and fees to the Sales Agents of $0.2 million and $0.5 million, respectively.

Mortgage Repurchase Facility – Financial Services

On April 10, 2017, Inspire Home Loans Inc. (which we refer to as “Inspire”), an indirect wholly-owned subsidiary of ours, entered into a Master Repurchase Agreement (which we refer to as the “Master Repurchase Agreement”) with Branch Banking and Trust Company, as the buyer thereunder (which we refer to as the “Buyer”). The Master Repurchase Agreement provides Inspire with a revolving mortgage loan repurchase facility of up to $25 million (which we refer to as the “Repurchase Facility”). The primary purpose of the Repurchase Facility is to provide financing and liquidity to Inspire by facilitating purchase transactions in which Inspire transfers eligible loans to the Buyer, against the transfer of funds by the Buyer, subject to a simultaneous agreement by the Seller to repurchase from the Buyer such eligible loans (i) upon written notice to the Buyer by Inspire, (ii) on a prescribed date in the future, (iii) upon the occurrence of prescribed events, or (iv) on the Termination Date (as defined below). The purchase transactions are based on and subject to the terms and conditions set forth in the Master Repurchase Agreement. The maximum aggregate amount of the Buyer’s commitment to fund purchase transactions under the Repurchase Facility is $25 million (which we refer to as the “Commitment”), subject to certain sublimits. The Repurchase Facility and the Buyer’s Commitment thereunder expires on the earlier of (i) April 9, 2018, and (ii) the date when the Buyer’s Commitment is terminated pursuant to the Master Repurchase Agreement or by operation of law (which we refer to as the “Termination Date”). Amounts outstanding under the Repurchase Facility are not guaranteed by us or any of our subsidiaries.  The Master Repurchase Agreement contains various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of June 30, 2017, we were in compliance with all covenants under the Master Repurchase Agreement.

As of June 30, 2017, there was $10.6 million outstanding under the Master Repurchase Agreement, which is presented as Mortgage Repurchase Facility in our Condensed Consolidated Balance Sheets. The amount outstanding under the Master Repurchase Agreement was collateralized by $11.2 million of mortgage loans held for sale.





Cash Flows—Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016

For the six months ended June 30, 2017 and 2016, the comparison of cash flows is as follows:

As of June 30, 2017, our cash balance was $336.8 million. 

Off-Balance Sheet Arrangements

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. These purchase

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contracts typically require a cash deposit, and the purchase of land 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. These contracts generally require payment by us of a non-refundable deposit for the right to acquire lots over a specified period of time, or in bulk at a point in time, at pre-determined prices. We generally have the right at our discretion to terminate our obligations under both purchase contracts and these contracts by forfeiting our cash deposit with no further financial responsibility to the land seller. Our obligations with respect to the option contracts are generally limited to the forfeiture of the related non-refundable cash deposits. As of June 30, 2017, we had outstanding contracts for 12,859 lots totaling $442.5 million, and had $9.4 million of non-refundable cash deposits pertaining to land contracts. While our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change, we currently anticipate performing on 60% to 70% of the purchase and option contracts during the next twelve months, with performance on the remaining purchase and option contacts occurring in future periods. 

Our utilization of land option contracts is dependent on, among other things, the availability of land sellers and others 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.

We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities. As of June 30, 2017 and December 31, 2016, we had $72.1 million and $70.1 million, respectively, in letters of credit and performance bonds issued and outstanding. We anticipate that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business.

Adjusted EBITDA

The following table presents adjusted EBITDA for the three and six months ended June 30, 2017 and 2016. Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance. We define adjusted EBITDA as consolidated net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense, (iv) depreciation and amortization expense, and (v) adjustments resulting from the application of purchase accounting for acquired work in process inventory related to business combinations. We believe adjusted EBITDA provides an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization, and items considered to be non-recurring. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Adjusted EBITDA should be considered in addition to, and not as a substitute for, consolidated net income in accordance with GAAP as a measure of performance. Our presentation of adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our adjusted EBITDA is limited as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.

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Net Debt to Net Capital



The following table presents our ratio of net debt to net capital, which is a non-GAAP financial measure.  We calculate this by dividing net debt (notes payable and revolving line of credit less cash held in escrow and cash and cash equivalents) by net capital (net debt plus total stockholders’ equity). The most directly comparable GAAP measure is the ratio of debt to total capital. We believe the ratio of net 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.























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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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 Credit Agreement, which was entered into on October 21, 2014. Future borrowings under the Credit Agreement bear interest at a floating rate equal to the London Interbank Offered Rate plus an applicable margin between 2.75% and 3.25% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.75% and 2.25% per annum. The “applicable margins” described above are determined by a schedule based on the leverage ratio of the Company, as defined in the Credit Agreement. The Credit Agreement also provides for fronting fees and letter of credit fees payable to the L/C Issuer and commitment fees payable to the Administrative Agent equal to 0.20% of the unused portion of the Revolving Credit Facility. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to changes in interest rates.

Inflation

Our homebuilding operations 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. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices.

ITEM 4.     CONTROLS AND PROCEDURES.

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 June 30, 2017, 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 June 30, 2017 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or furnish 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

None.





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PART II



ITEM 1.     LEGAL PROCEEDINGS.

Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business.  In the opinion of our management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.



ITEM 1A.     RISK FACTORS.

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, 2016 that was filed with the SEC on February 15, 2017.



ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the three months ended June 30, 2017, certain of our employees surrendered approximately 29.0 thousand shares of our common stock owned by them to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted shares of common stock issued under our First Amended & Restated 2013 Long-Term Incentive Plan. The following table summarizes the repurchases that occurred during the three months ended June 30, 2017:





ITEM 3.     DEFAULTS UPON SENIOR SECURITIES.

None.



ITEM 4.     MINE SAFETY DISCLOSURES.

Not applicable.



ITEM 5.     OTHER INFORMATION.

None.

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ITEM 6.     EXHIBITS.

The following exhibits are either filed herewith or incorporated herein by reference:

*Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K.  The Company hereby undertakes to supplementally furnish copies of any of the omitted schedules upon request by the SEC.

†Management contract or compensatory plan or arrangement.





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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.





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