Century Communities, Inc. - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



For the quarterly period ended March 31, 2019



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

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 April 23, 2019, 30,317,457 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 Months ended March 31, 2019



Index





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PART I

ITEM 1.     FINANCIAL STATEMENTS.





Century Communities, Inc.

Condensed Consolidated Balance Sheets

As of March 31, 2019 and December 31, 2018

(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 Months ended March 31, 2019 and 2018

(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 Three Months ended March 31, 2019 and 2018

(in thousands)









See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Stockholders Equity

For the Three Months ended March 31, 2019 and 2018

(in thousands)

















See Notes to Unaudited Condensed Consolidated Financial Statements



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Century Communities, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2019



1. Basis of Presentation

Century Communities, Inc. (which we refer to as “we,” “CCS,” or the “Company”), together with its subsidiaries, is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in the States of Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana, Nevada, North Carolina, Ohio, South Carolina, Tennessee, Texas, Utah, and Washington. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land.  We build and sell homes under our Century Communities and Wade Jurney Homes brands.  Our Century Communities brand targets a wide range of buyer profiles including: first time, 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 selections.  Our Wade Jurney Homes brand solely targets first time homebuyers, sells homes through retail studios and the internet, and provides no option or upgrade selections.  Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Wade Jurney Homes.   Additionally, our indirect wholly-owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title and insurance services, respectively, to our home buyers have been identified as our Financial Services segment.

On June 14, 2018, we acquired the remaining 50% ownership interest in WJH, LLC (which we refer to as “WJH” or “Wade Jurney Homes”) for $37.5 million. WJH specializes in providing single family homes for first time buyers.  On the acquisition date, WJH had operations in Alabama, Florida, Georgia, North Carolina and South Carolina.

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 our 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, 2018, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 that was filed with the SEC on February 13, 2019.

Principles of Consolidation

The condensed 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.  We do not have any variable interest entities in which we are deemed the primary beneficiary.  All intercompany accounts and transactions have been eliminated.

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.

Recently Adopted Accounting Standards

Leases

The Financial Accounting Standards Board (which we refer to as “FASB”) issued ASC 842, Leases (which we refer to as “ASC 842”) which requires the recognition of lease assets and lease liabilities by lessees for most leases.  ASC 842 is effective for the Company beginning January 1, 2019 and interim periods within the annual period.  We adopted ASC 842 under a modified retrospective approach using the option to apply the transition provisions on the effective date January 1, 2019. The modified retrospective approach allows the Company to carryforward our historical lease classification, and to present historical periods under legacy lease accounting guidance.  The Company’s leases primarily consist of leases for office space, and computer and office equipment where we are the lessee.

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ASC 842 includes several practical expedients which we elected upon adoption including to (a) not reassess the lease classification for any expired or existing leases and (b) not reassess whether previously capitalized initial direct costs qualify for capitalization under ASC 842.  Additionally, we elected to utilize hindsight when determining the lease term. 

The adoption of ASC 842 resulted in the establishment of a right of use asset of $17.7 million and a lease liability of $18.7 million on our consolidated balance sheet as of January 1, 2019. The adoption of ASC 842 did not impact stockholders’ equity.  



Recently Issued Accounting Standards



In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (which we refer to as “ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments.  ASU 2016-13 changes the probable threshold for initial recognition of a credit loss in current GAAP to a model that reflects an entity’s current estimate of all expected credit losses. ASU 2016-13 is effective for our interim and annual reporting periods beginning January 1, 2020.  We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements





2. Reporting Segments

Our homebuilding operations are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 15 states.  We build and sell homes under our Century Communities and Wade Jurney Homes brands.  Our Century Communities brand is managed by geographic location, and each of our four geographic regions targets a wide range of buyer profiles including: first time, 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 selections.  Each of our four geographic regions is considered a separate operating segment.  Our Wade Jurney Homes brand solely targets first time homebuyers, sells homes through retail studios and the internet, and provides no option or upgrade selections.  Our Wade Jurney Homes brand currently has operations in ten states and is managed separately from our four geographic regions, accordingly, it is considered a separate operating segment.

The management of our four geographic regions and Wade Jurney Homes reports to our chief operating decision makers (which we refer to as “CODMs”), the Co-Chief Executive Officers of our Company.  The CODMs review the results of our operations, including total revenue and income before income tax expense to determine profitability and to allocate resources. Accordingly, we have presented our homebuilding operations as the following five reportable segments:

We have also identified our Financial Services operations, which provide mortgage, title, and insurance services to our homebuyers, as a sixth reportable segment.  Our Corporate operations are a non-operating segment, as it serves to support our homebuilding, and to a lesser extent our financial services operations, through functions, such as our executive, finance, treasury, human resources, accounting and legal departments.  The following table summarizes total revenue and income before income tax expense by segment (in thousands):   



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

Corporate assets primarily include certain cash and cash equivalents, certain property and equipment, prepaid insurance, and deferred financing costs on our revolving line of credit.

3. Business Combinations



WJH, LLC - Wade Jurney Homes

On June 14, 2018, we acquired the remaining 50% ownership interest in WJH for $37.5 million, whereby WJH became a 100% owned subsidiary of the Company.  We initially acquired a 50% ownership interest in WJH in November 2016 as part of a joint venture, which was accounted for under the equity method of accounting.  Our Wade Jurney Homes brand solely targets first time homebuyers in markets which are traditionally underserved by new homebuilders, sells homes through retail studios and the internet, and provides no option or upgrade selections.  The acquired assets primarily include homes under construction that are in various stages of completion and are geographically dispersed.  We determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets.  As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single family residences, we concluded that the acquisition represents a business combination. We incurred $0.4 million in acquisition costs.



Authoritative guidance on accounting for business combinations requires that an acquirer re-measure its previously held equity interest in the acquisition at its acquisition date fair value and recognize the resulting gain or loss in earnings.  As such, we valued our previously held equity interest in WJH at $35.6 million, which was inclusive of an estimated discount for lack of control of $1.9 million, and recognized a gain of $7.2 million during the year ended December 31, 2018. 



The following table outlines the total consideration transferred, inclusive of cash acquired and the fair value of our previously held equity interest (in thousands):





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The following table summarizes our estimates of the assets acquired and liabilities assumed as of the acquisition date (in thousands):  



Acquired inventories consist primarily of work in process inventories. We estimated the fair value of acquired work in process inventories based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts.  The stage of production, as of the acquisition date, ranged from recently started lots to fully completed single family residences.   Amortizable intangible assets include acquired trade names and a non-compete agreement, which were estimated to have fair values of $3.3 million and $0.3  million, respectively, and are amortized over 10 years and 2 years, respectively. 

We determined that WJH’s carrying costs approximated fair value for all other acquired assets and assumed liabilities. 

WJH’s results of operations, which include homebuilding revenues of $89.6 million and income before tax inclusive of purchase price accounting, of $4.0 million are included in our accompanying Consolidated Statement of Operations for the three months ended March 31, 2019.



Pro Forma Financial Information

Pro forma revenue and income before tax expense for the quarter ended March 31, 2018 gives effect to the results of the acquisition of WJH. The effect of the WJH acquisition is reflected as though the acquisition date was as of January 1, 2018.  Unaudited pro forma income before tax expense adjusts the operating results of WJH to reflect the additional costs that would have been recorded assuming the fair value adjustments had been applied as of the beginning of the year preceding the year of the acquisition and excludes acquisition expense incurred related to the transactions. 























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4. Inventories

Inventories included the following (in thousands):







5. Financial Services

 

Our Financial Services are principally comprised of our mortgage lending operations, Inspire Home Loans, Inc. (which we refer to as “Inspire”).  Inspire, is a full-service mortgage lender and primarily originates mortgage loans for our homebuyers. Inspire sells substantially all of the loans it originates and their related servicing rights in the secondary mortgage market within a short period of time after origination, generally within 30 days.  Inspire primarily finances these loans under its mortgage repurchase facilities.  Mortgage loans in process for which interest rates were committed to borrowers totaled approximately $45.2 million and $26.2 million at March 31, 2019 and December 31, 2018, respectively, and carried a weighted average interest rate of approximately 4.4%, and 4.7%, respectively.  As of March 31, 2019 and December 31, 2018, Inspire had mortgage loans held for sale with an aggregate fair value of $98.6 million and $114.1 million, respectively, and an aggregate outstanding principal balance of $93.8 million and $108.0 million, respectively. Interest rate risks related to these obligations are mitigated by the preselling of loans to investors or through our interest rate hedging program.



Mortgage loans held-for-sale, including the rights to service the mortgage loans, as well as the derivative instrument used to economically hedge our interest rate risk, which are typically forward commitments on mortgage backed securities, are carried at fair value and changes in fair value are reflected in Financial Services Revenue on the Consolidated Statement of Operations. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them.



6. Prepaid Expenses and Other Assets

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





 



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7. Accrued Expenses and Other Liabilities

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





 



8. 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. We increased our warranty reserve by $22 thousand during the three months ended March 31, 2019, compared to a $45 thousand decrease during the same period in 2018. This adjustment is included as a reduction to Cost of home sales revenues on our Consolidated Statements of Operations.   Changes in our warranty accrual are detailed in the table below (in thousands):



 



9. Debt



Our outstanding debt obligations included the following as of March 31, 2019 and December 31, 2018 (in thousands):  









(1)    The carrying value of 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.

 

Revolving Line of Credit

We are party to an Amended and Restated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, the lenders party thereto and certain of our subsidiaries, which, as amended most recently on February 12, 2019, provides us with a revolving line of credit of up to $640.0 million, and unless terminated earlier, will mature on April 30, 2022.  Under the terms of the Amended and Restated Credit Agreement, we may request a twelve-month extension of the maturity date.  Our obligations under

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the Amended and Restated Credit Agreement are guaranteed by certain of our subsidiaries. The Amended and Restated 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.  These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly.  Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum.  As of March 31, 2019, we had $287.0 million outstanding under the credit facility, leaving $353.0 million in availability and were in compliance with all covenants.



Mortgage Repurchase Facilities – Financial Services 

On May 4, 2018 and September 14, 2018, Inspire entered into mortgage warehouse facilities, with Comerica Bank, and J.P. Morgan, respectively. The mortgage warehouse lines of credit (which we refer to as the “Repurchase Facilities”) provide Inspire with uncommitted repurchase facilities of up to $140 million, secured by the mortgage loans financed thereunder. 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 March 31, 2019, we had $90.9 million outstanding under these Repurchase Facilities and were in compliance with all covenants thereunder. No assurance can be provided, however, that we will remain in compliance with the covenants or have continued access to these facilities or substitute or replacement facilities in an amount sufficient to fund our mortgage lending business.  During the three months ended March 31, 2019 and 2018, we incurred interest expense on our Repurchase Facilities of $0.6 million and $0.2 million, respectively, which are included in financial services costs on our Consolidated Statements of Operations.



10. 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 months ended March 31, 2019 and 2018, we capitalized all interest costs incurred during these periods, except for interest incurred on our Mortgage repurchase facilities.

Our interest costs are as follows (in thousands):





















11. 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 2019 estimated annual effective tax rate of 26.7% is driven by our blended federal and state statutory rate of 24.9%, and certain other permanent differences between GAAP and tax which increased our rate by 1.8%. 

For the three months ended March 31, 2019 our estimated annual rate of 26.7% was impacted by discrete items which had a net impact of decreasing our rate by 1.2%, including excess tax benefits for vested stock-based compensation.



For the three months ended March 31, 2019 and 2018, we recorded income tax expense of $5.9 million and $3.1 million, respectively.



12. 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 the 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.

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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.

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 are measured at fair value when acquired in a business combination.  Long-lived assets determined to be impaired are measured at fair value.

13. Stock-Based Compensation

During the three months ended March 31, 2019, we granted performance share units (which we refer to as “PSUs”) covering up to 0.3 million shares of common stock, assuming maximum level of performance, with a grant date fair value of $22.01 per share that are subject to both service and performance vesting conditions.  The quantity of shares that will vest under the PSUs ranges from 0% to 250% of a targeted number of shares for each participant and will be determined based on an achievement of a three-year pre-tax income performance goal. During the three months ended March 31, 2019, we also granted restricted stock units (which we refer to as “RSUs”) covering 0.5 million shares of common stock with a grant date fair value of $23.76 per share that vest over a three-year period.  As of March 31, 2019, we had no remaining unvested restricted stock awards (which we refer to as “RSAs”) outstanding. 

A summary of our outstanding RSUs and PSUs, assuming maximum level of performance, are as follows (in thousands, except years):



During the three months ended March 31, 2019 and 2018, we recognized stock-based compensation expense of $3.5 million and $2.5 million, respectively. Stock-based compensation expense is included in selling, general, and administrative on our Consolidated Statements of Operations.

14. 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 March 31, 2019 and December 31, 2018, there were 30.3 million and 30.2 million shares of common stock issued and outstanding, respectively.

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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. We issued 0.4 million shares of common stock related to the vesting of RSUs during the three months ended March 31, 2019.  As of March 31, 2019, approximately 0.2 million shares remained available for issuance under the 2017 Incentive Plan.  

On July 3, 2018, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, Citigroup Global Markets Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings.  This Distribution Agreement, which superseded and replaced a prior similar Distribution Agreement, had $72.7 million available for sale as of March 31, 2019. We did not sell or issue any shares of our common stock during the three months ended March 31, 2019. During the three months ended March 31, 2018, we sold and issued an aggregate of 0.2 million shares of our common stock under a prior Distribution Agreement, which provided net proceeds of $5.0 million, and in connection with such sales, paid total commissions and fees to the Sales Agents of $0.1 million. The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement.



15.  Earnings Per Share

We use the two-class method of calculating EPS as our non-vested RSAs 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 RSUs and PSUs as these awards do not have participating rights.

The following table sets forth the computation of basic and diluted EPS for the three months ended March 31, 2019 and 2018 (in thousands, except share and per share information):



Stock-based awards are excluded from the calculation of diluted EPS in the event they are subject to unsatisfied performance conditions or are antidilutive.  We excluded 0.3 million common unit equivalents from diluted earnings per share during the three months ended March 31, 2019 related to the PSUs granted during the periods.  We did not have any common unit equivalents to exclude from diluted earnings per share during the three months ended March 31, 2018.













16. Commitments and Contingencies

Letters of Credit and Performance Bonds

In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of March 31, 2019, and December 31, 2018, we had $298.0 million and $289.8  million, respectively, in letters of credit and performance bonds issued and outstanding.

Litigation

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We are 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.

Under various insurance policies, we have the ability to recoup costs in excess of applicable self-insured retentions.  Estimates of such amounts are recorded in other assets when recovery is probable.  As of December 31, 2018, substantially all of the amounts reflected in Insurance receivable and other were related to construction claims, which were settled and amounts collected under the applicable insurance policies during the quarter ended March 31, 2019.

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 flows.

17. Leases



Under ASC 842, the Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.



We primarily enter into operating leases for the right to use office space, and computer and office equipment, which have lease terms that generally range from 1 to 7 years and often include one or more options to renew.  We include renewal terms in the lease term when it is reasonably certain that we will exercise the option.  For leases entered into after January 1, 2019, we establish a right of use asset and a lease liability at the commencement date of the lease based on the present value of future minimum lease payments.  As the rate implicit in each lease is not readily determinable, we utilize our incremental borrowing rate in determining the present value of future minimum payments.  Our incremental borrowing rate is determined based on information available at the commencement date.  We account for the lease components and non-lease components as a single lease component. As of March 31, 2019, the Company had $17.3 million and $18.2 million recognized as a right of use asset and lease liability, respectively, which are presented on the consolidated balance sheet within Prepaid expenses and other assets and Accrued expenses and other liabilities, respectively.  The Company has entered into various short-term operating leases, primarily for marketing billboards, with an initial term of twelve months or less.  These leases are not recorded on the Company's balance sheet.



Under both ASC 840 and ASC 842, operating lease expense is recognized on a straight-line basis over the lease term and was $1.4 million and $0.9 million for the quarters ended March 31, 2019 and 2018, respectively.

Information related to the Company’s right of use asset and lease liability were as follows (in thousands):

Maturities of lease liabilities as of March 31, 2019 were as follows (in thousands):

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18. Supplemental Guarantor Information

Our 6.875% senior notes due 2022 and 5.875% senior notes due 2025 (which we collectively refer to as our “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”).

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.  

As the guarantees were made in connection with exchange offers effected in February 2015, October 2015 and April 2017 and the issuance of the 5.875% senior notes due 2025, 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. 

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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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 and subject to risks and uncertainties including among others:





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 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

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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.

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, 2018. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Cautionary Note About Forward-Looking Statements” and the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. 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. Some of the numbers included herein have been rounded for the convenience of presentation. 

Overview

Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in the States of Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana, Nevada, North Carolina, Ohio, South Carolina, Tennessee, Texas, Utah, and Washington.  In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land.  We build and sell homes under our Century Communities and Wade Jurney Homes brands.  Our Century Communities brand targets a wide range of buyer profiles including: first time, 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 selections.  Our Wade Jurney Homes brand solely targets first time homebuyers, sells homes through retail studios and over the internet, and provides no option or upgrade selections.  Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Wade Jurney Homes.   Additionally, our indirect wholly-owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title and insurance services, respectively, to our home buyers have been identified as our Financial Services segment.  



We build and sell an extensive range of home types across a variety of price points.  



Results of Operations

During the three months ended March 31, 2019, we delivered 1,663 homes, with an average sales price of $314.7 thousand, a 76.7% increase and a 25.0% decrease, respectively, as compared to the three months ended March 31, 2018. During the same period, we generated approximately $523.3 million in home sales revenues, approximately $23.0 million in income before income tax expense, and approximately $17.1 million in net income which represented a 32.5% increase, 0.5% decrease, and 14.5% decrease, respectively, as compared to the same period in 2018.

For the three months ended March 31, 2019, our new home contracts, net of cancelations, totaled 1,858, a 34.8% increase over the same respective period in 2018. As of March 31, 2019, we had a backlog of 2,376, a 35.3% increase as compared to March 31, 2018, representing approximately $718.4 million in sales value, a 2.7% decrease as compared to March 31, 2018.

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The following table summarizes our results of operations for the three months ended March 31, 2019 and 2018. 



(1) This is a non-GAAP financial measure and should not be used as a substitute for the Company’s 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.

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Results of Operations by Segment

(dollars in thousands)







West 



In our West segment, for the three months ended March 31, 2019, our income before income tax decreased by $1.2 million to $8.6 million. No purchase accounting adjustments were made for our West segment for the three months ended March 31, 2019. Our income before income tax is inclusive of $6.8 million of purchase accounting adjustments for the three months ended March 31, 2018. During the three months ended March 31, 2019, we delivered 200 homes with an average sales price of $560.3 thousand and generated $112.1 million in home sales revenue in the West. Our operating margins in the West were impacted during the three months ended March 31, 2019 by the geographic mix of deliveries that occurred as compared to the three months ended March 31, 2018.

  

Mountain 



In our Mountain segment, for the three months ended March 31, 2019, our income before income tax increased by $1.4 million to $19.3 million, as compared to $17.9 million for the same period in 2018.  This increase is primarily related to an increase in the number of homes delivered of 7% and an increase in the average selling price of those homes of 3% as compared to the same period in 2018.  

 

Texas 



In our Texas segment, for the three months ended March 31, 2019, our income before income tax increased by $1.9 million to $3.7 million as compared $1.8 million for the same period in 2018.  The increase in income before income tax is primarily related to an increase in the number of homes delivered in 2019, of 54%, which was partially offset by a decrease in the average sales price as we shifted our focus towards first time homebuyers.  

  

Southeast 



In our Southeast segment, for the three months ended March 31, 2019, our income before income tax increased by $1.0 million to $5.7 million as compared to $4.7 million for the same period in 2018. No purchase accounting adjustments were made for our Southeast segment for the three months ended March 31, 2019. Our income before income tax is inclusive of $0.4 million of purchase accounting adjustments for the three months ended March 31, 2018. This increase is primarily related to an increase in the number of homes delivered of 16% as well as an increase in the average selling price of those homes in 2019.  



Wade Jurney Homes



On June 14, 2018, we acquired the remaining 50% ownership interest in WJH for $37.5 million. For the three months ended March 31, 2019, we delivered 595 new homes with an average price of $150.5 thousand and generated $89.6 million in home sales revenues in our WJH segment. Our income before income tax of $4.0 million is inclusive of the remaining $1.7 million of purchase accounting adjustment.



  

Financial Services 



Our indirect wholly-owned subsidiaries, Inspire Home Loans, Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title and insurance services, respectively, to our home buyers have been identified as our Financial Services 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.  The increase in our

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income before income tax of $0.4 million is a result of an increase in the number of mortgages originated of 75.1% as compared to 2018. During the three months ended March 31, 2019, we originated and closed 585 loans with a total principal amount of $181.2 million, as compared to 334 loans for a total principal of $104.9 million during the same period in 2018. The results of Parkway Title, LLC and IHL Home Insurance Agency, LLC for the three months ended March 31, 2019 and 2018 were not material to our Financial Services segment.

  

Corporate 



During the three months ended March 31, 2019, our Corporate segment generated losses of $20.0 million, as compared to losses of $12.3 million for the same period in 2018.  The increase in expenses during the three months ended March 31, 2019 was primarily attributed to the following: (1)  an increase of $2.0 million in compensation related expenses, including non-cash expenses for share based payments, driven by an increase in our number of employees as a result of growth and our acquisition of WJH, (2) an increase of $1.2 million in legal costs, and (3) nominal increases in numerous items associated with our increased scale including rent, insurance, consulting, travel, and depreciation. These increases were partially offset by a $3.2 million reduction in equity in earnings on unconsolidated subsidiaries.



Homebuilding Gross Margin

(dollars in thousands)



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 months ended March 31, 2019 to 17.1%,  as compared to 19.1% for the same period in 2018. The decrease was primarily related to the geographic mix of closings between periods, continued cost pressure, and higher incentives throughout our markets.



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





 For the three months ended March 31, 2019, 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 19.8%, as compared to 23.2%, for the same period in 2018.  The decrease was primarily related to the geographic mix of closings between periods, continued cost pressure, and higher incentives throughout our markets. We believe the above information is meaningful as it isolates the impact that indebtedness and acquisitions 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



Our selling, general and administrative costs increased $12.4 million for the three months ended March 31, 2019 as compared to the same period in 2018. The increase was primarily attributable to the following: (1) an increase of $4.6 million in commission expense

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resulting from a 32.5% increase in home sales revenues and our acquisition of WJH, (2) an increase of $6.0 million in our compensation-related expenses, including incentive compensation associated with higher headcount to support our growth, and (3) an increase of $0.9 million in litigation expenses.  Our selling, general and administrative costs as a percentage of home sales revenue improved 110-basis points primarily due to process enhancements, tighter cost controls and scale benefits derived from our expanded homebuilding platform.

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 2019 estimated annual effective tax rate of 26.7% is driven by our blended federal and state statutory rate of 24.9%, and certain other permanent differences between GAAP and tax which increased our rate by 1.8%. 



For the three months ended March 31, 2019, our estimated annual rate of 26.7% was impacted by discrete items which had a net impact of decreasing our rate by 1.2%, including excess tax benefits for vested stock-based compensation.



For the three months ended March 31, 2019 and 2018, we recorded income tax expense of $5.9 million and $3.1 million, respectively.



Segment Assets



(Dollars in thousands)









NM – Not Meaningful

Of our total lots owned and controlled as of March 31, 2019, 54.3% were owned and 45.7% were controlled, as compared to 55.4% owned and 44.6% controlled as of December 31, 2018.

Total assets increased by $68.8 million, or 3.1%, to $2.3 billion at March 31, 2019.

Other Homebuilding Operating Data

NM – Not Meaningful



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Net new home contracts (new home contracts net of cancellations) for the three months ended March 31, 2019 increased by 480 homes, or 34.8%, to 1,858, compared to 1,378 for the same period in 2018. The increase in our net new home contracts was primarily driven by our acquisition of WJH.

Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three months ended March 31, 2019 by segment are included in the tables below:

N/A – Not Applicable



Our absorption rates decreased by 10.8% to 3.3 per month during the three months ended March 31, 2019, as compared to the same periods in 2018.   Our absorptions for our Century Communities brand moderated slightly during the three months ended March 31, 2019 as compared to 2018.  The moderation was a result of muted sales early in the quarter due to general uncertainty in the macroeconomic environment.





N/A – Not Applicable

Our selling communities remained at 125 communities at March 31, 2019 as compared to March 31, 2018.  As WJH does not sell homes by community, but through studios, there is no community or absorptions presented for that segment.

Backlog

(Dollars in thousands)

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 March 31, 2019, we had 2,376 homes in backlog with a total value of $718.4 million, which represents an increase of 35.2% and decrease of 2.7%, respectively, as compared to March 31, 2018.  The increase in backlog is primarily attributable to our acquisition of WJH, partially offset by decreases in the other segments. The

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decrease in average sales price of homes in backlog and the overall dollar value of backlog is driven by our acquisition of WJH, which sells homes at lower average sales prices. 



Supplemental Pro Forma Information



The supplemental pro forma information below presents pro forma combined financial and operating data reflecting the WJH acquisition as if it had occurred on January 1, 2018.  The selected condensed combined pro forma data combines the historical home sales revenues, net new home contracts, new homes delivered and average sales price of homes delivered of Century and WJH.  The pro forma information is for informational purposes only and supplements our Condensed Consolidated Financial Statements prepared in accordance with US GAAP. We believe that the pro forma information is useful as it provides additional information given the significant impact of the acquisition, and a reflection of how the combined business performed year over year that is not readily discernible from the actual year over year comparison. The pro forma information below does not purport to reflect the results of operations that would have occurred if WJH had been acquired on January 1, 2018, nor does the pro forma information purport to represent the results of operations of the Company for any future dates or periods.







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, 2018, filed with the SEC on February 13, 2019, 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 principal uses of capital for the three months ended March 31, 2019 were our land purchases, land development, home construction, and the payment of routine liabilities. We use funds generated by operations, available borrowings under our revolving credit facility, and from time to time proceeds from sales of common stock, including our current at-the-market facility, to fund our short term working capital obligations and fund our purchases of land, as well as land development and home construction activities. 

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 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 are actively acquiring and developing lots in our markets to maintain and grow our lot supply and active

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selling communities. As we continue to expand our business, we expect that our cash outlays for land purchases and land development to grow our lot inventory will continue to exceed our cash generated by operations. 

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

Under our shelf registration statement, which we filed with the SEC in July 2018 and was automatically effective upon filing, we have the ability to access the debt and equity capital markets in an aggregate offering amount of up to $869 million, as needed as part of our ongoing financing strategy and subject to market conditions.

We believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, and cash expected to be available from our revolving credit facility or through accessing debt or equity capital, as needed.

Revolving Credit Facility 

We are party to an Amended and Restated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, the lenders party thereto and certain of our subsidiaries, which, as amended most recently on February 12, 2019, provides us with a revolving line of credit of up to $640.0 million, and unless terminated earlier, will mature on April 30, 2022.  Under the terms of the Amended and Restated Credit Agreement, we may request a twelve-month extension of the maturity date.  Our obligations under the Amended and Restated Credit Agreement are guaranteed by certain of our subsidiaries. The Amended and Restated 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.  These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly.  Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum.  As of March 31, 2019, we had $287.0 million outstanding under the credit facility, leaving $353.0 million in availability and were in compliance with all covenants.

At the Market Offerings

On July 3, 2018, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, Citigroup Global Markets Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through any of the sales agents party thereto in “at-the-market” offerings.  This Distribution Agreement, which superseded and replaced a prior similar Distribution Agreement, had $72.7 million available for sale as of March 31, 2019.  We did not sell or issue any shares of our common stock during the three months ended March 31, 2019. During the three months ended March 31, 2018, we sold and issued an aggregate of 0.2 million shares of our common stock under a prior Distribution Agreement, which provided net proceeds of $5.0 million, and in connection with such sales, paid total commissions and fees to the Sales Agents of $0.1 million. The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement.



Mortgage Repurchase Facility and Mortgage Warehouse Line of Credit – Financial Services 

On May 4, 2018 and September 14, 2018 Inspire entered into mortgage warehouse facilities, with Comerica Bank, and J.P. Morgan, respectively.  The mortgage warehouse lines of credit (which we refer to as the “Repurchase Facilities”) provides Inspire with uncommitted repurchase facilities of up to $140 million, secured by the mortgage loans financed thereunder.  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 March 31, 2019, we had $90.9 million outstanding under these Repurchase Facilities and were in compliance with all covenants thereunder. No assurance can be provided, however, that we will remain in compliance with the covenants or have continued access to these facilities or substitute or replacement facilities in an amount sufficient to fund our mortgage lending business.

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Letters of Credit and Performance Bonds

In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of March 31, 2019 and December 31, 2018, we had $298.0 million and $289.8 million, respectively, in letters of credit and performance 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 bonds are not generally released until all development and construction activities are completed.

Debt

Our outstanding debt obligations included the following as of March 31, 2019 and December 31, 2018 (in thousands):  





(1)    The carrying value of 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.

A summary of our debt obligations is included in Note 12 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 13, 2019. 



Stock Repurchase Program

On November 6, 2018, our Board of Directors authorized a stock repurchase program, under which we may repurchase up to 4,500,000 shares of our outstanding common stock.  The 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 will be determined by management at its discretion and will depend on a number of factors, including the market price of our common stock, trading volume, other capital management objectives and opportunities, applicable legal requirements, and general market and economic conditions.



We intend to finance any stock repurchases through available cash and our revolving credit facility. 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. There is no guarantee as to the number of shares that will be repurchased, and the stock repurchase program may be extended, suspended or discontinued at any time without notice at our discretion. All shares of common stock repurchased under the program will be cancelled and returned to the status of authorized but unissued shares of common stock.



During the three months ended March 31, 2018, an aggregate of 83,000 shares were repurchased for a total purchase price of approximately $1.4 million or an average of $17.14 per share.





Cash Flows—Three months ended March 31, 2019 Compared to the Three months ended March 31, 2018

For the three months ended March 31, 2019 and 2018, the comparison of cash flows is as follows:

As of March 31, 2019, our cash and cash equivalents and restricted cash balance was $41.5 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 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 March 31, 2019, we had outstanding purchase contracts and option contracts for 17,332 lots totaling $397.8 million and had $37.4 million of non-refundable cash deposits pertaining to land option 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 50% to 60% of the purchase and option contracts during the next twelve months, with performance on the remaining purchase and option contacts occurring in future periods, if at all. 

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.

We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities.  As of March 31, 2019 and December 31, 2018, we had $298.0 million and $289.8 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.

Non-GAAP Financial Measures

In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net debt to net capital, and adjusted net earnings per diluted common shares. 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 months ended March 31, 2019 and 2018. 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

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process inventory related to business combinations and purchase price accounting for investment in unconsolidated subsidiaries, and (vi) acquisition expense. 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.

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 (senior notes payable and borrowing under our revolving line of credit less cash and cash equivalents and cash held in escrow) by net capital (net homebuilding 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 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.

















Adjusted Diluted Earnings per Share



Adjusted diluted earnings per share (which we refer to as “Adjusted Diluted EPS”) is a non-GAAP financial measure that we believe is 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

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comparable assessment of our financial results from period to period. Adjusted Diluted EPS is calculated by excluding the effect of acquisition costs and purchase price accounting for acquired work in process from the calculation of reported earnings per share.















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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 Amended and Restated Credit Agreement Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. The “applicable margins” described above are determined by a schedule based on the leverage ratio of the Company, as defined in the Amended and Restated Credit Agreement. The Amended and Restated 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 line of credit.

For fixed rate debt, such as our senior notes, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows.

In our Financial Services business, we utilize mortgage-backed securities, forward commitments, option contracts and investor commitments to protect the value of rate-locked commitments and loans held-for-sale from fluctuations in mortgage-related interest rates. To mitigate interest risk associated with loans held-for-sale, we use derivative financial instruments to hedge our exposure to risk from the time a borrower locks a loan until the time the loan is securitized. We also hedge our interest rate exposure through entering into interest rate swap futures.

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 March 31, 2019, 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 March 31, 2019 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

There were no changes during the first quarter of 2019 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.







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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, 2018 that was filed with the SEC on February 13, 2019.

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

None.



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:





















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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





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