Tri Pointe Homes, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________________________________________________

FORM 10-Q

_____________________________________________________________________________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-35796

_____________________________________________________________________________________________

Tri Pointe Homes, Inc.

(Exact Name of Registrant as Specified in Its Charter)

_____________________________________________________________________________________________


Delaware						61-1763235
(State or other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)

_____________________________________________________________________________________________

940 Southwood Blvd, Suite 200

Incline Village, Nevada 89451

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (775) 413-1030

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

____________________________________________________________________________________________________

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

TPH

New York Stock Exchange

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.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

100,913,958 shares of the registrant's common stock were issued and outstanding as of October 14, 2022.

EXPLANATORY NOTE

As used in this quarterly report on Form 10-Q, references to “Tri Pointe”, “the Company”, “we”, “us”, or “our” (including in the consolidated financial statements and related notes thereto in this annual report on Form 10-Q) refer to Tri Pointe Homes, Inc., a Delaware corporation, and its consolidated subsidiaries.

TRI POINTE HOMES, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

September 30, 2022


		Page Number
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	4

	Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 6.	Exhibits	40

SIGNATURES		41

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRI POINTE HOMES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	September 30, 2022		December 31, 2021
	(unaudited)
Assets
Cash and cash equivalents	$	228,137	$	681,528
Receivables	169,496		116,996
Real estate inventories	3,608,305		3,054,743
Investments in unconsolidated entities	132,998		118,095
Goodwill and other intangible assets, net	156,603		156,603
Deferred tax assets, net	57,095		57,096
Other assets	173,404		151,162
Total assets	$	4,526,038	$	4,336,223
Liabilities
Accounts payable	$	64,109	$	84,854
Accrued expenses and other liabilities	494,727		466,013
Loans payable	250,000		250,504
Senior notes, net	1,089,752		1,087,219
Total liabilities	1,898,588		1,888,590

Commitments and contingencies (Note 13)

Equity
Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	—		—
Common stock, $0.01 par value, 500,000,000 shares authorized; 100,913,958 and 109,644,474 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	1,009		1,096
Additional paid-in capital	—		91,077
Retained earnings	2,624,721		2,355,448
Total stockholders’ equity	2,625,730		2,447,621
Noncontrolling interests	1,720		12
Total equity	2,627,450		2,447,633
Total liabilities and equity	$	4,526,038	$	4,336,223

See accompanying condensed notes to the unaudited consolidated financial statements.

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TRI POINTE HOMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Homebuilding:
Home sales revenue	$	1,057,491	$	1,028,950	$	2,787,386	$	2,754,932
Land and lot sales revenue	2,626		581		4,337		7,520
Other operations revenue	674		646		2,021		1,969
Total revenues	1,060,791		1,030,177		2,793,744		2,764,421
Cost of home sales	771,148		758,024		2,033,160		2,064,595
Cost of land and lot sales	1,256		891		2,075		5,918
Other operations expense	670		801		2,020		2,111
Sales and marketing	41,950		44,875		112,712		130,824
General and administrative	54,786		53,490		160,071		146,102

Homebuilding income from operations	190,981		172,096		483,706		414,871
Equity in loss of unconsolidated entities	(122)		(43)		(34)		(72)
Other income, net	463		171		852		428
Homebuilding income before income taxes	191,322		172,224		484,524		415,227
Financial Services:
Revenues	11,005		3,016		31,985		7,802
Expenses	5,827		1,618		17,457		4,510
Equity in income of unconsolidated entities	—		3,946		46		10,586
Financial services income before income taxes	5,178		5,344		14,574		13,878
Income before income taxes	196,500		177,568		499,098		429,105
Provision for income taxes	(45,923)		(44,412)		(122,084)		(107,278)
Net income	150,577		133,156		377,014		321,827
Net income attributable to noncontrolling interests	(1,351)		—		(3,927)		—
Net income available to common stockholders	$	149,226	$	133,156	$	373,087	$	321,827
Earnings per share
Basic	$	1.47	$	1.18	$	3.60	$	2.77
Diluted	$	1.45	$	1.17	$	3.57	$	2.75
Weighted average shares outstanding
Basic	101,242,708		112,781,663		103,555,717		116,296,265
Diluted	102,661,222		113,782,251		104,526,594		117,188,893

See accompanying condensed notes to the unaudited consolidated financial statements.

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TRI POINTE HOMES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

(in thousands, except share amounts)


	Number of Shares of Common Stock (Note 1)	Common Stock		Additional Paid-in Capital		Retained Earnings		Total Stockholders’ Equity		Noncontrolling Interests		Total Equity
Balance at June 30, 2022	101,860,993	$	1,019	$	—	$	2,486,547	$	2,487,566	$	1,053	$	2,488,619
Net income		—		—		149,226		149,226		1,351		150,577
Shares issued under share-based awards	1,876	—		—		—		—		—		—
Tax withholding paid on behalf of employees for share-based awards	—	—		(18)		—		(18)		—		(18)
Stock-based compensation expense	—	—		5,717		—		5,717		—		5,717
Share repurchases	(948,911)	(10)		(16,751)		—		(16,761)		—		(16,761)
Distributions to noncontrolling interests, net	—	—		—		—		—		(684)		(684)

Reclass the negative APIC to retained earnings	—	—		11,052		(11,052)		—		—		—
Balance at September 30, 2022	100,913,958	$	1,009	$	—	$	2,624,721	$	2,625,730	$	1,720	$	2,627,450

	Number of Shares of Common Stock (Note 1)	Common Stock		Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
Balance at December 31, 2021	109,644,474	$	1,096	$	91,077	$	2,355,448	$	2,447,621	$	12	$	2,447,633
Net income	—	—		—		373,087		373,087		3,927		377,014
Shares issued under share-based awards	665,865	7		23		—		30		—		30
Tax withholding paid on behalf of employees for share-based awards	—	—		(9,110)		—		(9,110)		—		(9,110)
Stock-based compensation expense	—	—		16,740		—		16,740		—		16,740
Share repurchases	(9,396,381)	(94)		(202,544)		—		(202,638)		—		(202,638)
Distributions to noncontrolling interests, net	—	—		—		—		—		(2,464)		(2,464)
Net effect of consolidations of VIE's	—	—		—		—		—		245		245
Reclass the negative APIC to retained earnings	—	—		103,814		(103,814)		—		—		—
Balance at September 30, 2022	100,913,958	$	1,009	$	—	$	2,624,721	$	2,625,730	$	1,720	$	2,627,450

	Number of Shares of Common Stock (Note 1)	Common Stock		Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
Balance at June 30, 2021	115,211,206	$	1,150	$	203,288	$	2,074,852	$	2,279,290	$	12	$	2,279,302
Net income	—	—		—		133,156		133,156		—		133,156
Shares issued under share-based awards	149,618	1		2,489		—		2,490		—		2,490

Stock-based compensation expense	—	—		4,410		—		4,410		—		4,410
Share repurchases	(2,974,328)	(27)		(65,183)		—		(65,210)		—		(65,210)

Balance at September 30, 2021	112,386,496	$	1,124	$	145,004	$	2,208,008	$	2,354,136	$	12	$	2,354,148

	Number of Shares of Common Stock (Note 1)	Common Stock		Additional Paid-in Capital		Retained Earnings		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
Balance at December 31, 2020	121,882,778	$	1,219	$	345,137	$	1,886,181	$	2,232,537	$	12	$	2,232,549

Net income	—	—		—		321,827		321,827		—		321,827
Shares issued under share-based awards	804,283	8		5,317		—		5,325		—		5,325
Tax withholding paid on behalf of employees for share-based awards	—	—		(4,636)		—		(4,636)		—		(4,636)
Stock-based compensation expense		—		12,572				12,572				12,572
Share repurchases	(10,300,565)	(103)		(213,386)		—		(213,489)		—		(213,489)

Balance at September 30, 2021	112,386,496	$	1,124	$	145,004	$	2,208,008	$	2,354,136	$	12	$	2,354,148

See accompanying condensed notes to the unaudited consolidated financial statements.

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TRI POINTE HOMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	377,014	$	321,827
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	18,641		24,098
Equity in income of unconsolidated entities, net	(12)		(10,513)
Deferred income taxes, net	1		3,907
Amortization of stock-based compensation	16,740		12,572
Charges for impairments and lot option abandonments	5,174		713
Returns on investments in unconsolidated entities, net	2,253		10,941
Changes in assets and liabilities:
Real estate inventories	(555,262)		(223,972)
Receivables	(52,500)		(23,375)
Other assets	(9,881)		(1,561)
Accounts payable	(20,745)		40,009
Accrued expenses and other liabilities	37,019		49,317

Net cash (used in) provided by operating activities	(181,558)		203,963
Cash flows from investing activities:
Purchases of property and equipment	(37,743)		(19,467)

(Investments in) distributions from unconsolidated entities, net	(17,001)		(418)

Net cash used in investing activities	(54,744)		(19,885)
Cash flows from financing activities:
Borrowings from debt	$	75,000	$	—
Repayment of debt	(75,504)		(1,598)
Debt issuance costs	(2,403)		(3,570)

Distributions to noncontrolling interests	(2,464)		—
Proceeds from issuance of common stock under share-based awards	30		5,325
Tax withholding paid on behalf of employees for share-based awards	(9,110)		(4,636)
Share repurchases	(202,638)		(213,489)
Net cash used in financing activities	(217,089)		(217,968)
Net decrease in cash and cash equivalents	(453,391)		(33,890)
Cash and cash equivalents–beginning of period	681,528		621,295
Cash and cash equivalents–end of period	228,137		587,405

See accompanying condensed notes to the unaudited consolidated financial statements.

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TRI POINTE HOMES, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization, Basis of Presentation and Summary of Significant Accounting Policies

Organization

Tri Pointe is engaged in the design, construction and sale of innovative single-family attached and detached homes across ten states, including Arizona, California, Colorado, Maryland, Nevada, North Carolina, South Carolina, Texas, Virginia and Washington, and the District of Columbia.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They should be read in conjunction with our consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 due to seasonal variations and other factors.

The consolidated financial statements include the accounts of Tri Pointe Homes and its wholly owned subsidiaries, as well as other entities in which Tri Pointe Homes has a controlling interest and variable interest entities (“VIEs”) in which Tri Pointe Homes is the primary beneficiary. The noncontrolling interests as of September 30, 2022 and December 31, 2021 represent the outside owners’ interests in the Company’s consolidated entities. All significant intercompany accounts have been eliminated upon consolidation.

Unless the context otherwise requires, the terms “Tri Pointe”, “the Company”, “we”, “us”, and “our” used herein refer to Tri Pointe Homes, Inc., a Delaware corporation, and its consolidated subsidiaries.

Use of Estimates

The preparation of these financial statements requires our management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from our estimates.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Topic 606 (“ASC 606”), Revenue from Contracts with Customers. Under ASC 606, we apply the following steps to determine the timing and amount of revenue to recognize: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

Home sales revenue

We generate the majority of our total revenues from home sales, which consists of our core business operation of building and delivering completed homes to homebuyers. Home sales revenue and related profit is generally recognized when title to and possession of the home are transferred to the homebuyer at the home closing date. Our performance obligation to deliver the agreed-upon home is generally satisfied in less than one year from the original contract date. Included in home sales revenue are forfeited deposits, which occur when homebuyers cancel home purchase contracts that include a nonrefundable deposit. Both revenue from forfeited deposits and deferred revenue resulting from uncompleted performance obligations existing at the time we deliver new homes to our homebuyers are immaterial.

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Land and lot sales revenue

Historically, we have generated land and lot sales revenue from a small number of transactions, although in some periods we have realized a significant amount of revenue and gross margin. We do not expect our future land and lot sales revenue to be material, but we still consider these sales to be an ordinary part of our business, thus meeting the definition of contracts with customers. Similar to our home sales, revenue from land and lot sales is typically fully recognized when the land and lot sales transactions are consummated, at which time no further performance obligations are left to be satisfied. Some of our historical land and lot sales have included future profit participation rights. We will recognize future land and lot sales revenue in the periods in which all closing conditions are met, subject to the constraint on variable consideration related to profit participation rights, if such rights exist in the sales contract.

Other operations revenue

The majority of our homebuilding other operations revenue relates to a ground lease included in our West segment. We are responsible for making lease payments to the landowner, and we collect sublease payments from the buyers of the buildings. This ground lease is accounted for in accordance with Accounting Standards Topic 842 (“ASC 842”), Leases. We do not recognize a material profit on this ground lease.

Financial services revenues

Tri Pointe Solutions is a reportable segment and is comprised of our Tri Pointe Connect mortgage financing operations, Tri Pointe Assurance title and escrow services operations, and Tri Pointe Advantage property and casualty insurance agency operations.

Mortgage financing operations

Tri Pointe Connect was formed as a joint venture with an established mortgage lender. The joint venture acts as a preferred mortgage loan broker to our homebuyers in all of the markets in which we operate, generating income from fees paid by third party lenders for the successful funding and closing of loans for homebuyers that originate through Tri Pointe Connect. From inception and through the fiscal year ended December 31, 2021, Tri Pointe Connect was accounted for under the equity method of accounting where we recorded a percentage of income earned by Tri Pointe Connect based on our ownership percentage in this joint venture. Under the equity method of accounting, Tri Pointe Connect activity appeared as equity in income of unconsolidated entities under the Financial Services section of our consolidated statements of operations. Beginning in the fiscal year ending December 31, 2022, Tri Pointe Connect is fully consolidated under the Financial Services section of our consolidated statements of operations, with the noncontrolling interest recorded on the consolidated statements of operations as net income attributable to noncontrolling interests.

Title and escrow services operations

Tri Pointe Assurance provides title examinations for our homebuyers in the Carolinas and Colorado and both title examinations and escrow services for our homebuyers in Arizona, the District of Columbia, Maryland, Nevada, Texas, Washington and Virginia. Tri Pointe Assurance is a wholly owned subsidiary of Tri Pointe and acts as a title agency for First American Title Insurance Company. Revenue from our title and escrow services operations is fully recognized at the time of the consummation of the home sales transaction, at which time no further performance obligations are left to be satisfied. Tri Pointe Assurance revenue is included in the Financial Services section of our consolidated statements of operations.

Property and casualty insurance agency operations

Tri Pointe Advantage is a wholly owned subsidiary of Tri Pointe and provides property and casualty insurance agency services that help facilitate the closing process in all of the markets in which we operate. The total consideration for these services, including renewal options, is estimated upon the issuance of the initial insurance policy, subject to constraint. Tri Pointe Advantage revenue is included in the Financial Services section of our consolidated statements of operations.

Recently Issued Accounting Standards Not Yet Adopted

No recent accounting pronouncements or changes in accounting pronouncements have been issued or adopted since those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 that are of material significance, or have potential material significance, to the Company.

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2. Segment Information

We operate two principal businesses: homebuilding and financial services.

Effective January 15, 2021, we consolidated our six regional homebuilding brands into one unified name, Tri Pointe Homes, under which we continue to acquire and develop land and construct and sell single-family detached and attached homes. In accordance with ASC Topic 280, Segment Reporting, in determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross profits, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply. Based upon these factors and in consideration of the geographical layout of our homebuilding markets, we have identified three homebuilding reporting segments, and as a result of such change, beginning in the quarter ended March 31, 2021, our homebuilding segments are reported under the following hierarchy:

West region: Arizona, California, Nevada and Washington

Central region: Colorado and Texas

East region: District of Columbia, Maryland, North Carolina, South Carolina and Virginia

Our Tri Pointe Solutions financial services operation is a reportable segment and is comprised of our Tri Pointe Connect mortgage financing operations, our Tri Pointe Assurance title and escrow services operations, and our Tri Pointe Advantage property and casualty insurance agency operations. For further details, see Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies.

Corporate is a non-operating segment that develops and implements company-wide strategic initiatives and provides support to our homebuilding reporting segments by centralizing certain administrative functions, such as marketing, legal, accounting, treasury, insurance, internal audit, risk management, information technology and human resources, to benefit from economies of scale. Our Corporate non-operating segment also includes general and administrative expenses related to operating our corporate headquarters. All of the expenses incurred by Corporate are allocated to each of the homebuilding reporting segments based on their respective percentage of revenues.

The reportable segments follow the same accounting policies used for our consolidated financial statements, as described in Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.

Total revenues and income before income taxes for each of our reportable segments were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues
West	$	751,218	$	771,574	$	1,952,406	$	2,096,572
Central	206,861		167,267		558,360		438,005
East	102,712		91,336		282,978		229,844
Total homebuilding revenues	1,060,791		1,030,177		2,793,744		2,764,421
Financial services	11,005		3,016		31,985		7,802
Total	$	1,071,796	$	1,033,193	$	2,825,729	$	2,772,223

Income before income taxes
West	$	150,030	$	146,040	$	380,191	$	355,871
Central	32,109		18,524		78,956		44,074
East	9,183		7,660		25,377		15,282
Total homebuilding income before income taxes	191,322		172,224		484,524		415,227
Financial services	5,178		5,344		14,574		13,878
Total	$	196,500	$	177,568	$	499,098	$	429,105

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Total real estate inventories and total assets for each of our reportable segments, as of the date indicated, were as follows (in thousands):


	September 30, 2022		December 31, 2021
Real estate inventories
West	$	2,558,125	$	2,242,314
Central	682,136		543,097
East	368,044		269,332
Total	$	3,608,305	$	3,054,743

Total assets(1)
West	$	2,866,118	$	2,505,237
Central	840,465		674,862
East	426,457		328,014
Corporate	346,095		781,265
Total homebuilding assets	4,479,135		4,289,378
Financial services	46,903		46,845
Total	$	4,526,038	$	4,336,223

__________

(1) Total assets as of September 30, 2022 and December 31, 2021 includes $139.3 million of goodwill, with $125.4 million included in the West segment, $8.3 million included in the Central segment and $5.6 million included in the East segment. Total Corporate assets as of September 30, 2022 and December 31, 2021 includes our Tri Pointe Homes trade name. For further details on goodwill and our intangible assets, see Note 8, Goodwill and Other Intangible Assets.

3. Earnings Per Share

The following table sets forth the components used in the computation of basic and diluted earnings per share (in thousands, except share and per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net income available to common stockholders	$	149,226	$	133,156	$	373,087	$	321,827
Denominator:
Basic weighted-average shares outstanding	101,242,708		112,781,663		103,555,717		116,296,265
Effect of dilutive shares:
Stock options and unvested restricted stock units	1,418,514		1,000,588		970,877		892,628
Diluted weighted-average shares outstanding	102,661,222		113,782,251		104,526,594		117,188,893
Earnings per share
Basic	$	1.47	$	1.18	$	3.60	$	2.77
Diluted	$	1.45	$	1.17	$	3.57	$	2.75
Antidilutive stock options and unvested restricted stock units not included in diluted earnings per share	1,562,094		1,795,929		1,819,016		1,999,768

4. Receivables

Receivables consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Escrow proceeds and other accounts receivable, net	$	107,690	$	53,096
Warranty insurance receivable (Note 13)	61,806		63,900
Total receivables	$	169,496	$	116,996

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Receivables are evaluated for collectability and allowances for potential losses are established or maintained on applicable receivables based on an expected credit loss approach. Receivables were net of allowances for doubtful accounts of $472,000 as of both September 30, 2022 and December 31, 2021.

5. Real Estate Inventories

Real estate inventories consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Real estate inventories owned:
Homes completed or under construction	$	1,857,632	$	1,222,468
Land under development	1,126,960		1,187,485
Land held for future development	140,411		200,362
Model homes	239,533		202,693
Total real estate inventories owned	3,364,536		2,813,008
Real estate inventories not owned:
Land purchase and land option deposits	243,769		241,735

Total real estate inventories not owned	243,769		241,735
Total real estate inventories	$	3,608,305	$	3,054,743

Homes completed or under construction is comprised of costs associated with homes in various stages of construction and includes direct construction and related land acquisition and land development costs. Land under development primarily consists of land acquisition and land development costs, which include capitalized interest and real estate taxes, associated with land undergoing improvement activity. Land held for future development principally reflects land acquisition and land development costs related to land where development activity has not yet begun or has been suspended, but is expected to occur in the future. The decrease in land held for future development as of September 30, 2022 compared to December 31, 2021 is attributable to a project located in San Jose, California in our West segment that was transferred to land under development.

Real estate inventories not owned represents deposits related to land purchase and land and lot option agreements. For further details, see Note 7, Variable Interest Entities.

Interest incurred, capitalized and expensed were as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest incurred	$	31,893	$	24,280	$	89,235	$	68,017
Interest capitalized	(31,893)		(24,280)		(89,235)		(68,017)
Interest expensed	$	—	$	—	$	—	$	—
Capitalized interest in beginning inventory	$	188,877	$	174,163	$	173,563	$	182,228
Interest capitalized as a cost of inventory	31,893		24,280		89,235		68,017
Interest previously capitalized as a cost of inventory, included in cost of sales	(26,611)		(25,655)		(68,639)		(77,457)
Capitalized interest in ending inventory	$	194,159	$	172,788	$	194,159	$	172,788

Interest is capitalized to real estate inventory during development and other qualifying activities. During all periods presented, we capitalized all interest incurred to real estate inventory in accordance with ASC Topic 835, Interest, as our qualified assets exceeded our debt. Interest that is capitalized to real estate inventory is included in cost of home sales or cost of land and lot sales as related units or lots are delivered. Interest that is expensed as incurred is included in other (expense) income, net.

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Real Estate Inventory Impairments and Land Option Abandonments

Real estate inventory impairments and land and lot option abandonments and pre-acquisition charges consisted of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Real estate inventory impairments	$	—	$	—	$	—	$	—
Land and lot option abandonments and pre-acquisition charges	3,277		268		5,174		713
Total	$	3,277	$	268	$	5,174	$	713

Impairments of real estate inventory, if any, relate primarily to projects or communities that include homes completed or under construction. Within a project or community, there may be individual homes or parcels of land that are currently held for sale. Impairment charges recognized as a result of adjusting individual held-for-sale assets within a community to estimated fair value less cost to sell are also included in the total impairment charges.

In addition to owning land and residential lots, we also have option agreements to purchase land and lots at a future date. We have option deposits and capitalized pre-acquisition costs associated with the optioned land and lots. When the economics of a project no longer support acquisition of the land or lots under option, we may elect not to move forward with the acquisition. Option deposits and capitalized pre-acquisition costs associated with the assets under option may be forfeited at that time.

Real estate inventory impairments and land option abandonments are recorded in cost of home sales and cost of land and lot sales on the consolidated statements of operations.

6. Investments in Unconsolidated Entities

As of September 30, 2022, we held equity investments in twelve active homebuilding partnerships or limited liability companies. Our participation in these entities may be as a developer, a builder, or an investment partner. Our ownership percentage varies from 7% to 50%, depending on the investment, with no controlling interest held in any of these investments. Our Tri Pointe Connect mortgage financing joint venture was accounted for as an equity-method investment as of December 31, 2021. During the first quarter of 2022, a reconsideration event under ASC 810 occurred for Tri Pointe Connect, resulting in the consolidation of this joint venture. For further details, see Note 7, Variable Interest Entities.

Unconsolidated Financial Information

Aggregated assets, liabilities and operating results of the entities we account for as equity-method investments are provided below. Because our ownership interest in these entities varies, a direct relationship does not exist between the information presented below and the amounts that are reflected on our consolidated balance sheets as our investments in unconsolidated entities or on our consolidated statements of operations as equity in income of unconsolidated entities.

Assets and liabilities of unconsolidated entities (in thousands):


	September 30, 2022		December 31, 2021
Assets
Cash	$	29,280	$	35,966
Receivables	28,642		8,359
Real estate inventories	448,214		359,324
Other assets	4,765		534
Total assets	$	510,901	$	404,183
Liabilities and equity
Accounts payable and other liabilities	$	140,557	$	73,675
Company’s equity	132,998		118,095
Outside interests’ equity	237,346		212,413
Total liabilities and equity	$	510,901	$	404,183

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Results of operations from unconsolidated entities (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net sales	$	8,111	$	14,900	$	30,833	$	35,297
Other operating expense	(8,410)		(8,897)		(31,189)		(19,718)
Other income (loss), net	—		—		94		(4)
Net (loss) income	$	(299)	$	6,003	$	(262)	$	15,575
Company’s equity in income of unconsolidated entities	$	(122)	$	3,903	$	12	$	10,514

7. Variable Interest Entities

Land and Lot Option Agreements

In the ordinary course of business, we enter into land and lot option agreements in order to procure land and residential lots for future development and the construction of homes. The use of such land and lot option agreements generally allows us to reduce the risks associated with direct land ownership and development, and reduces our capital and financial commitments. Pursuant to these land and lot option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. These deposits are recorded as land purchase and land option deposits under real estate inventories not owned on the accompanying consolidated balance sheets.

We analyze each of our land and lot option agreements and other similar contracts under the provisions of Accounting Standards Topic 810 (“ASC 810”), Consolidation to determine whether the land seller is a VIE and, if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, if we are determined to be the primary beneficiary of the VIE, we will consolidate the VIE in our financial statements and reflect its assets as real estate inventory not owned included in our real estate inventories, its liabilities as debt (nonrecourse) held by VIEs in accrued expenses and other liabilities and the net equity of the VIE owners as noncontrolling interests on our consolidated balance sheets. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Such activities would include, among other things, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE.

Creditors of the entities with which we have land and lot option agreements have no recourse against us. The maximum exposure to loss under our land and lot option agreements is generally limited to non-refundable option deposits and any capitalized pre-acquisition costs. In some cases, we have also contracted to complete development work at a fixed cost on behalf of the landowner and budget shortfalls and savings will be borne by us. Additionally, we have entered into land banking arrangements which require us to complete development work even if we terminate the option to procure land or lots.

The following provides a summary of our interests in land and lot option agreements (in thousands):


	September 30, 2022						December 31, 2021
	Deposits		Remaining Purchase Price		Consolidated Inventory Held by VIEs		Deposits		Remaining Purchase Price		Consolidated Inventory Held by VIEs

Unconsolidated VIEs	$	225,015	$	1,267,975	N/A		$	211,835	$	1,507,304	N/A
Other land option agreements	18,754		227,326		N/A		29,900		319,646		N/A
Total	$	243,769	$	1,495,301	$	—	$	241,735	$	1,826,950	$	—

Unconsolidated VIEs represent land option agreements that were not consolidated because we were not the primary beneficiary. Other land option agreements were not with VIEs.

In addition to the deposits presented in the table above, our exposure to loss related to our land and lot option contracts consisted of capitalized pre-acquisition costs of $21.0 million and $17.9 million as of September 30, 2022 and December 31, 2021, respectively. These pre-acquisition costs are included in real estate inventories as land under development on our consolidated balance sheets.

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Tri Pointe Connect Joint Venture

During the first quarter of 2022, a reconsideration event under ASC 810 occurred for our Tri Pointe Connect joint venture that gave us the ability to direct the activities of the joint venture that most significantly affect the entity’s economic performance. Based on our reassessment, we concluded that the mortgage financing joint venture is a VIE and we are the primary beneficiary based on our controlling financial interest. As a result, beginning in January 2022, the joint venture is accounted for as a consolidated VIE. As of January 1, 2022, the accompanying consolidated balance sheets include the assets, liabilities and noncontrolling interests of this VIE. As of September 30, 2022, the carrying value of the VIE’s assets was $10.0 million, which was primarily included in other assets, $5.2 million of liabilities was included in accrued expenses and other liabilities and $1.7 million was included in noncontrolling interests in the accompanying consolidated balance sheets.

8. Goodwill and Other Intangible Assets

As of September 30, 2022 and December 31, 2021, $139.3 million of goodwill is included in goodwill and other intangible assets, net on each of the consolidated balance sheets, which was recorded in connection with our merger with Weyerhaeuser Real Estate Company (“WRECO”) in 2014.

We have one intangible asset as of September 30, 2022, comprised of a Tri Pointe Homes trade name resulting from the acquisition of WRECO in 2014, which has an indefinite useful life.

Goodwill and other intangible assets consisted of the following (in thousands):


	September 30, 2022						December 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Goodwill	$	139,304	$	—	$	139,304	$	139,304	$	—	$	139,304
Trade names	27,979		(10,680)		17,299		27,979		(10,680)		17,299
Total	$	167,283	$	(10,680)	$	156,603	$	167,283	$	(10,680)	$	156,603

In October 2020, in conjunction with the announcement of our move to a single brand, Tri Pointe Homes, we modified the useful life of the former Maracay trade name which expired in June 2021. The intangible asset related to the Maracay trade name was fully amortized during 2021. Amortization expense related to this intangible asset was $1.9 million for the nine-month period ended September 30, 2021. Amortization of this intangible was charged to sales and marketing expense. Our $17.3 million indefinite life intangible asset related to the Tri Pointe Homes trade name is not amortizing. All trade names and goodwill are evaluated for impairment on an annual basis or more frequently if indicators of impairment exist.

9. Other Assets

Other assets consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Prepaid expenses	$	23,036	$	11,797
Refundable fees and other deposits	5,354		6,611
Development rights, held for future use or sale	1,192		1,192
Deferred loan costs—loans payable	6,874		5,412
Operating properties and equipment, net	70,591		51,489
Lease right-of-use assets	65,422		73,727

Other	935		934
Total	$	173,404	$	151,162

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10. Accrued Expenses and Other Liabilities

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


	September 30, 2022		December 31, 2021
Accrued payroll and related costs	$	48,256	$	59,419
Warranty reserves (Note 13)	103,717		103,976
Estimated cost for completion of real estate inventories	126,441		107,702
Customer deposits	71,569		55,156
Income tax liability to Weyerhaeuser	199		199
Accrued income taxes payable	20,855		34,894

Accrued interest	22,762		6,189

Other tax liability	1,953		3,306
Lease liabilities	78,890		77,264
Other	20,085		17,908
Total	$	494,727	$	466,013

11. Senior Notes and Loans Payable

Senior Notes

The Company’s outstanding senior notes (together, the “Senior Notes”) consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
5.875% Senior Notes due June 15, 2024	$	450,000	$	450,000
5.250% Senior Notes due June 1, 2027	300,000		300,000
5.700% Senior Notes due June 15, 2028	350,000		350,000
Discount and deferred loan costs	(10,248)		(12,781)
Total	$	1,089,752	$	1,087,219

In June 2020, Tri Pointe issued $350 million aggregate principal amount of 5.700% Senior Notes due 2028 (the “2028 Notes”) at 100.00% of their aggregate principal amount. Net proceeds of this issuance were $345.2 million, after debt issuance costs and discounts. The 2028 Notes mature on June 15, 2028 and interest is paid semiannually in arrears on June 15 and December 15 of each year until maturity.

In June 2017, Tri Pointe issued $300 million aggregate principal amount of 5.250% Senior Notes due 2027 (the “2027 Notes”) at 100.00% of their aggregate principal amount. Net proceeds of this issuance were $296.3 million, after debt issuance costs and discounts. The 2027 Notes mature on June 1, 2027 and interest is paid semiannually in arrears on June 1 and December 1 of each year until maturity.

Tri Pointe and its wholly owned subsidiary, Tri Pointe Homes Holdings, Inc., are co-issuers of the $450 million aggregate principal amount 5.875% Senior Notes due 2024 (the “2024 Notes”). The 2024 Notes were issued at 98.15% of their aggregate principal amount in June of 2014. The net proceeds from the offering of the 2024 Notes was $429.0 million, after debt issuance costs and discounts. The 2024 Notes mature on June 15, 2024, with interest payable semiannually in arrears on June 15 and December 15 of each year until maturity.

As of September 30, 2022, there were $8.4 million of capitalized debt financing costs, included in senior notes, net on our consolidated balance sheet, related to the Senior Notes that will amortize over the lives of the Senior Notes. Accrued interest related to the Senior Notes was $18.8 million and $3.2 million as of September 30, 2022 and December 31, 2021, respectively.

- 15 -

Loans Payable

The Company’s outstanding loans payable consisted of the following (in thousands):


	September 30, 2022		December 31, 2021
Term loan facility	$	250,000	$	250,000
Seller financed loans	—		504
Total	$	250,000	$	250,504

On June 29, 2022, we entered into a Third Modification Agreement (the “Modification”) to our Second Amended and Restated Credit Agreement dated as of March 29, 2019. The Modification, among other things, (i) increased the maximum amount of the revolving credit facility (the “Revolving Facility”) under the Credit Agreement from $650.0 million to $750.0 million, (ii) increased the sublimit for issuance of letters of credit under the Revolving Facility from $100 million to $150 million and (iii) extended the maturity date of both the Revolving Facility and term loan facility (the “Term Facility”) under the Credit Agreement to June 29, 2027. We may increase the Credit Facility to not more than $1.2 billion in the aggregate, at our request, upon satisfaction of specified conditions. We may borrow under the Revolving Facility in the ordinary course of business to repay senior notes and fund our operations, including our land acquisition, land development and homebuilding activities. Borrowings under the Revolving Facility will be governed by, among other things, a borrowing base. Interest rates under the Revolving Facility will be based on the Secured Overnight Financing Rate (“SOFR”), plus a spread ranging from 1.25% to 1.90%, depending on the Company’s leverage ratio. Interest rates under the Term Facility will be based on SOFR, plus a spread ranging from 1.10% to 1.85%, depending on the Company’s leverage ratio.

As of September 30, 2022, we had no outstanding debt under the Revolving Facility and there was $686.2 million of availability after considering the borrowing base provisions and outstanding letters of credit. As of September 30, 2022, we had $250 million outstanding debt under the Term Facility with an interest rate of 4.19%. As of September 30, 2022, there were $6.9 million of capitalized debt financing costs, included in other assets on our consolidated balance sheet, related to the Credit Facility that will amortize over the remaining term of the Credit Facility. Accrued interest, including loan commitment fees, related to the Term Facility was $337,000 and $570,000 as of September 30, 2022 and December 31, 2021, respectively.

At September 30, 2022 and December 31, 2021, we had outstanding letters of credit of $63.8 million and $48.9 million, respectively. These letters of credit were issued to secure various financial obligations. We believe it is not probable that any outstanding letters of credit will be drawn upon.

Interest Incurred

During the three months ended September 30, 2022 and 2021, the Company incurred interest of $31.9 million and $24.3 million, respectively, related to all debt during the period. Included in interest incurred are amortization of deferred financing and Senior Note discount costs of $1.2 million and $1.1 million for the three months ended September 30, 2022 and 2021, respectively. During the nine months ended September 30, 2022 and 2021, the Company incurred interest of $89.2 million and $68.0 million, respectively, related to all debt during the period and amortization of deferred financing and Senior Note discount costs of $3.5 million and $3.3 million for the nine months ended September 30, 2022 and 2021, respectively. Accrued interest related to all outstanding debt at September 30, 2022 and December 31, 2021 was $22.8 million and $6.2 million, respectively.

Covenant Requirements

The Senior Notes contain covenants that restrict our ability to, among other things, create liens or other encumbrances, enter into sale and leaseback transactions, or merge or sell all or substantially all of our assets. These limitations are subject to a number of qualifications and exceptions.

Under the Credit Facility, the Company is required to comply with certain financial covenants, including those relating to consolidated tangible net worth, leverage, liquidity or interest coverage, and a spec unit inventory test. The Credit Facility also requires that at least 95.0% of consolidated tangible net worth must be attributable to the Company and its guarantor subsidiaries, subject to certain grace periods.

The Company was in compliance with all applicable financial covenants as of September 30, 2022 and December 31, 2021.

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12. Fair Value Disclosures

Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, 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

Fair Value of Financial Instruments

A summary of assets and liabilities at September 30, 2022 and December 31, 2021, related to our financial instruments, measured at fair value on a recurring basis, is set forth below (in thousands):


		September 30, 2022				December 31, 2021
	Hierarchy	Book Value		Fair Value		Book Value		Fair Value
Senior Notes(1)	Level 2	$	1,098,170	$	1,025,875	$	1,097,428	$	1,199,825

Term loan(2)	Level 2	$	250,000	$	250,000	$	250,000	$	250,000
Seller financed loans(3)	Level 2	$	—	$	—	$	504	$	504

__________

(1)The book value of the Senior Notes is net of discounts, excluding deferred loan costs of $8.4 million and $10.2 million as of September 30, 2022 and December 31, 2021, respectively. The estimated fair value of the Senior Notes at September 30, 2022 and December 31, 2021 is based on quoted market prices.

(2)The estimated fair value of the Term Loan Facility as of September 30, 2022 and December 31, 2021 approximated book value due to the variable interest rate terms of this loan.

(3)The estimated fair value of our seller financed loan as of December 31, 2021 approximated book value due to the short term nature of these loans.

At September 30, 2022 and December 31, 2021, the carrying value of cash and cash equivalents and receivables approximated fair value due to their short-term nature.

Fair Value of Nonfinancial Assets

Nonfinancial assets include items such as real estate inventories and long-lived assets that are measured at fair value on a nonrecurring basis when events and circumstances indicating the carrying value is not recoverable. The following table presents impairment charges and the remaining net fair value for nonfinancial assets that were measured during the periods presented (in thousands):


		Nine Months Ended September 30, 2022				Year Ended December 31, 2021
	Hierarchy	Impairment Charge		Fair Value Net of Impairment		Impairment Charge		Fair Value Net of Impairment
Real estate inventories(1)	Level 3	$	—	$	—	$	19,600	$	27,300

__________

(1)Fair value of real estate inventories, net of impairment charges represents only those assets whose carrying values were adjusted to fair value in the respective periods presented,

13. Commitments and Contingencies

Legal Matters

Lawsuits, claims and proceedings have been and may be instituted or asserted against us in the normal course of business, including actions brought on behalf of various classes of claimants. We are also subject to local, state and federal laws and regulations related to land development activities, house construction standards, sales practices, employment practices,

- 17 -

environmental protection and financial services. As a result, we are subject to periodic examinations or inquiry by agencies administering these laws and regulations.

We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. We accrue for these matters based on facts and circumstances specific to each matter and revise these estimates when necessary. In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, we generally cannot predict their ultimate resolution, related timing or eventual loss. Accordingly, it is possible that the ultimate outcome of any matter, if in excess of a related accrual or if no accrual was made, could be material to our financial statements. For matters as to which the Company believes a loss is probable and reasonably estimable, we had zero legal reserves as of September 30, 2022 and December 31, 2021, respectively.

Warranty

Warranty reserves are accrued as home deliveries occur. Our warranty reserves on homes delivered will vary based on product type and geographic area and also depending on state and local laws. The warranty reserve is included in accrued expenses and other liabilities on our consolidated balance sheets and represents expected future costs based on our historical experience over previous years. Estimated warranty costs are charged to cost of home sales in the period in which the related home sales revenue is recognized.

We maintain general liability insurance designed to protect us against a portion of our risk of loss from warranty and construction defect-related claims. We also generally require our subcontractors and design professionals to indemnify us for liabilities arising from their work, subject to various limitations. However, such indemnity is significantly limited with respect to certain subcontractors that are added to our general liability insurance policy.

Our warranty reserve and related estimated insurance recoveries are based on actuarial analysis that uses our historical claim and expense data, as well as industry data to estimate these overall costs and related recoveries. Key assumptions used in developing these estimates include claim frequencies, severities and resolution patterns, which can occur over an extended period of time. Our warranty reserve may also include an estimate of future fit and finish warranty claims to the extent not contemplated in the actuarial analysis. These estimates are subject to variability due to the length of time between the delivery of a home to a homebuyer and when a warranty or construction defect claim is made, and the ultimate resolution of such claim; uncertainties regarding such claims relative to our markets and the types of product we build; and legal or regulatory actions and/or interpretations, among other factors. Due to the degree of judgment involved and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated. There can be no assurance that the terms and limitations of the limited warranty will be effective against claims made by homebuyers, that we will be able to renew our insurance coverage or renew it at reasonable rates, that we will not be liable for damages, cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence or building related claims or that claims will not arise out of uninsurable events or circumstances not covered by insurance and not subject to effective indemnification agreements with certain subcontractors.

We also record expected recoveries from insurance carriers based on actual insurance claims made and actuarially determined amounts that depend on various factors, including the above-described reserve estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated. Outstanding warranty insurance receivables were $61.8 million and $63.9 million as of September 30, 2022 and December 31, 2021, respectively. Warranty insurance receivables are recorded in receivables on the accompanying consolidated balance sheets.

- 18 -

Warranty reserve activity consisted of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Warranty reserves, beginning of period	$	103,454	$	93,522	$	103,976	$	94,475
Warranty reserves accrued	7,065		4,194		18,666		16,487

Warranty expenditures	(6,802)		(5,736)		(18,925)		(18,982)
Warranty reserves, end of period	$	103,717	$	91,980	$	103,717	$	91,980

Performance Bonds

We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. The beneficiaries of the bonds are various municipalities. As of September 30, 2022 and December 31, 2021, the Company had outstanding surety bonds totaling $745.8 million and $693.2 million, respectively. As of September 30, 2022 and December 31, 2021, our estimated cost to complete obligations related to these surety bonds was $560.6 million and $497.5 million, respectively.

Lease Obligations

Under ASC 842 we recognize a right-of-use lease asset and a lease liability for contracts deemed to contain a lease at the inception of the contract. Our lease population is fully comprised of operating leases, which are now recorded at the net present value of future lease obligations existing at each balance sheet date. At the inception of a lease, or if a lease is subsequently modified, we determine whether the lease is an operating or financing lease. Key estimates involved with ASC 842 include the discount rate used to measure our future lease obligations and the lease term, where considerations include renewal options and intent to renew. Lease right-of-use assets are included in other assets and lease liabilities are included in accrued expenses and other liabilities on our consolidated balance sheet.

Operating Leases

We lease certain property and equipment under non-cancelable operating leases. Office leases are for terms of up to ten years and generally provide renewal options. In most cases, we expect that, in the normal course of business, leases that expire will be renewed or replaced by other leases. Equipment leases are typically for terms of three to four years.

Ground Leases

In 1987, we obtained two 55-year ground leases of commercial property that provided for three renewal options of ten years each and one 45-year renewal option. We exercised the three 10-year extensions on one of these ground leases to extend the lease through 2071. The commercial buildings on these properties have been sold and the ground leases have been sublet to the buyers.

For one of these leases, we are responsible for making lease payments to the landowner, and we collect sublease payments from the buyers of the buildings. This ground lease has been subleased through 2041 to the buyers of the commercial buildings. For the second lease, the buyers of the buildings are responsible for making lease payments directly to the landowner, however, we have guaranteed the performance of the buyers/lessees. See below for additional information on leases (dollars in thousands):

- 19 -


	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2022		Nine Months Ended September 30, 2021
Lease Cost
Operating lease cost (included in SG&A expense)	$	2,336	$	2,309	$	7,315	$	7,233
Ground lease cost (included in other operations expense)	663		635		1,990		1,904
Sublease income, operating leases	—		—		—		—
Sublease income, ground leases (included in other operations revenue)	(674)		(644)		(2,020)		(1,932)
Net lease cost	$	2,325	$	2,300	$	7,285	$	7,205

Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating lease cash flows (included in operating cash flows)	$	1,682	$	2,540	$	6,106	$	7,166
Ground lease cash flows (included in operating cash flows)	$	663	$	635	$	1,990	$	1,904
Right-of-use assets obtained in exchange for new operating lease liabilities	$	125	$	5,654	$	1,517	$	8,660


	September 30, 2022		December 31, 2021
Weighted-average discount rate:
Operating leases	4.7	%	4.6	%
Ground leases	10.2	%	10.2	%
Weighted-average remaining lease term (in years):
Operating leases	7.4		7.1
Ground leases	45.5		46.1

The future minimum lease payments under our operating leases are as follows (in thousands):


	Property, Equipment and Other Leases		Ground Leases (1)
Remaining in 2022	$	2,188	$	809
2023	9,074		3,237
2024	8,628		3,237
2025	8,161		3,237
2026	7,338		3,237
Thereafter	24,712		81,878
Total lease payments	$	60,101	$	95,635
Less: Interest	9,642		67,204
Present value of operating lease liabilities	$	50,459	$	28,431

__________

(1) Ground leases are fully subleased through 2041, representing $61.8 million of the $95.6 million future ground lease obligations.

14. Stock-Based Compensation

2022 Long-Term Incentive Plan

On April 20, 2022, our stockholders approved the Tri Pointe Homes, Inc. 2022 Long-Term Incentive Plan (the “2022 Plan”), which had been previously approved by our board of directors. The 2022 Plan replaced the Company’s prior stock compensation plan, the TRI Pointe Group, Inc. Amended and Restated 2013 Long-Term Incentive Plan (the “2013 Plan”). The 2022 Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, restricted stock, restricted stock units, bonus stock and performance awards. The 2022 Plan will

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automatically expire on the tenth anniversary of its effective date. Our board of directors may terminate or amend the 2022 Plan at any time, subject to any requirement of stockholder approval required by applicable law, rule or regulation.

The number of shares of our common stock that may be issued under the 2022 Plan is 7,500,000 shares. No new awards have been or will be granted under the 2013 Plan from and after February 23, 2022. Any awards outstanding under the 2013 Plan will remain subject to and be paid under the 2013 Plan, and any shares subject to outstanding awards under the 2013 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2022 Plan.

To the extent that shares of our common stock subject to an outstanding option, stock appreciation right, stock award or performance award granted under the 2022 Plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of our common stock generally will again be available under the 2022 Plan. However, the 2022 Plan prohibits us from re-using shares that are tendered or surrendered to pay the exercise cost or tax obligation for stock options and SARs.

As of September 30, 2022, there were 7,498,078 shares available for future grant under the 2022 Plan.

The following table presents compensation expense recognized related to all stock-based awards (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Total stock-based compensation	$	5,717	$	4,410	$	16,740	$	12,572

Stock-based compensation is charged to general and administrative expense on the accompanying consolidated statements of operations. As of September 30, 2022, total unrecognized stock-based compensation expense related to all stock-based awards was $28.1 million and the weighted average term over which the expense was expected to be recognized was 1.8 years.

Summary of Stock Option Activity

The following table presents a summary of stock option awards for the nine months ended September 30, 2022:


	Options	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Options outstanding at December 31, 2021	284,225	$	15.58	1.6	$	3,430
Granted	—	—		—	—
Exercised	(3,000)	$	9.68	—	—
Forfeited	—	$	—	—	—
Options outstanding at September 30, 2022	281,225	$	15.65	0.9	$	131
Options exercisable at September 30, 2022	281,225	$	15.65	0.9	$	131

The intrinsic value of each stock option award outstanding or exercisable is the difference between the fair market value of the Company’s common stock at the end of the period and the exercise price of each stock option award to the extent it is considered “in-the-money”. A stock option award is considered to be “in-the-money” if the fair market value of the Company’s stock is greater than the exercise price of the stock option award. The aggregate intrinsic value of options outstanding and options exercisable represents the value that would have been received by the holders of stock option awards had they exercised their stock option award on the last trading day of the period and sold the underlying shares at the closing price on that day.

Summary of Restricted Stock Unit Activity

The following table presents a summary of RSUs for the nine months ended September 30, 2022:

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	Restricted Stock Units	Weighted Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value (in thousands)
Nonvested RSUs at December 31, 2021	3,345,091	$	17.16	$	92,492
Granted	1,574,137	$	21.53	—
Vested	(1,069,331)	$	14.60	—
Forfeited	(145,714)	$	12.56	—
Nonvested RSUs at September 30, 2022	3,704,183	$	19.93	$	56,859

RSUs that vested, as reflected in the table above, during the nine months ended September 30, 2022 include previously granted time-based RSUs. RSUs that were forfeited, as reflected in the table above, during the nine months ended September 30, 2022 include performance-based RSUs and time-based RSUs that were forfeited for no consideration.

On February 22, 2022, the Company granted an aggregate of 629,520 time-based RSUs to certain employees and officers. The RSUs granted vest in equal installments annually on the anniversary of the grant date over a three-year period. The fair value of each RSU granted on February 22, 2022 was measured using a price of $21.00 per share per share, which was the closing stock price on the date of grant. Each award will be expensed on a straight-line basis over the vesting period.

On February 22, 2022, the Company granted an aggregate of 668,150 performance-based RSUs to the Company’s Chief Executive Officer, Chief Operating Officer and President, Chief Financial Officer, General Counsel, Chief Marketing Officer and Chief Human Resources Officer. These performance-based RSUs are allocated to two separate performance metrics, as follows: (i) 50% to homebuilding revenue, and (ii) 50% to pre-tax earnings. The vesting, if at all, of these performance-based RSUs may range from 0% to 100% and will be based on the Company’s percentage attainment of specified threshold, target and maximum performance goals. Any award earned based on performance achieved may be increased or decreased by 25% based on the Company’s total stockholder return (“TSR”) relative to its peer-group homebuilders. The performance period for these performance-based RSUs is January 1, 2022 to December 31, 2024. The fair value of these performance-based RSUs was determined to be $22.30 per share based on a Monte Carlo simulation. Each award will be expensed over the requisite service period.

On February 22, 2022, the Company granted an aggregate of 235,078 performance-based RSUs to the Company’s division presidents. These performance-based RSUs are allocated to two separate performance metrics, as follows: (i) 50% to homebuilding revenue of the applicable Company division, and (ii) 50% to pre-tax earnings of the applicable Company division. The vesting, if at all, of these performance-based RSUs may range from 0% to 100% and will be based on the applicable Company division’s percentage attainment of specified threshold, target and maximum performance goals. The performance period for these performance-based RSUs is January 1, 2022 to December 31, 2024. The fair value of these performance-based RSUs was measured using a price of $21.00, which was the closing stock price on the date of grant. Each award will be expensed over the requisite service period.

On April 25, 2022, the Company granted an aggregate of 38,385 time-based RSUs to the non-employee members of its board of directors. The RSUs granted to the non-employee directors vest in their entirety on the day immediately prior to the Company’s 2023 annual meeting of stockholders. The fair value of each RSU granted on April 25, 2022 was measured using a price of $20.19 per share, which was the closing stock price on the date of grant. Each award will be expensed on a straight-line basis over the vesting period.

For the nine months ended September 30, 2022, the Company granted an aggregate of 3,004 time-based RSUs to certain employees not described above. The RSUs granted vest in equal installments annually beginning on the anniversary of the grant date over a three-year period. The fair value of the RSUs granted were measured using the closing stock prices on the applicable date of each grant. Each award will be expensed on a straight-line basis over the vesting period.

As RSUs vest for employees, a portion of the shares awarded is generally withheld to cover employee tax withholdings. As a result, the number of RSUs vested and the number of shares of Tri Pointe common stock issued will differ.

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15. Income Taxes

We account for income taxes in accordance with ASC Topic 740, Income Taxes (“ASC 740”), which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates for the years in which taxes are expected to be paid or recovered. Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not to be unrealizable. Our assessment considers, among other things, the nature, frequency and severity of our current and cumulative losses, forecasts of our future taxable income, the duration of statutory carryforward periods and tax planning alternatives.

We had net deferred tax assets of $57.1 million as of both September 30, 2022 and December 31, 2021. We had a valuation allowance related to those net deferred tax assets of $3.4 million as of both September 30, 2022 and December 31, 2021. The Company will continue to evaluate both positive and negative evidence in determining the need for a valuation allowance against its deferred tax assets. Changes in positive and negative evidence, including differences between the Company’s future operating results and the estimates utilized in the determination of the valuation allowance, could result in changes in the Company’s estimate of the valuation allowance against its deferred tax assets. The accounting for deferred taxes is based upon estimates of future results. Differences between the anticipated and actual outcomes of these future results could have a material impact on the Company’s consolidated results of operations or financial position. Also, changes in existing federal and state tax laws and tax rates could affect future tax results and the valuation allowance against the Company’s deferred tax assets.

Tri Pointe has certain liabilities to Weyerhaeuser Company (“Weyerhaeuser”) related to a tax sharing agreement. As of September 30, 2022 and December 31, 2021, we had an income tax liability to Weyerhaeuser of $199,000. The income tax liability to Weyerhaeuser is recorded in accrued expenses and other liabilities on the accompanying consolidated balance sheets.

Our provision for income taxes totaled $45.9 million and $44.4 million for the three months ended September 30, 2022 and 2021, respectively and $122.1 million and $107.3 million for the nine months ended September 30, 2022 and 2021, respectively. The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax expense. The Company did not have any uncertain tax positions recorded as of September 30, 2022 and December 31, 2021. The Company has not been assessed interest or penalties by any major tax jurisdictions related to prior years.

16. Related Party Transactions

We had no related party transactions for the nine months ended September 30, 2022 and 2021.

17. Supplemental Disclosure to Consolidated Statements of Cash Flows

The following are supplemental disclosures to the consolidated statements of cash flows (in thousands):


	Nine Months Ended September 30,
	2022		2021
Supplemental disclosure of cash flow information:
Interest paid (capitalized), net	$	(20,047)	$	(20,114)
Income taxes paid, net	$	136,122	$	108,642
Supplemental disclosures of noncash activities:
Amortization of senior note discount capitalized to real estate inventory	$	742	$	695
Amortization of deferred loan costs capitalized to real estate inventory	$	2,732	$	2,614

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on our current intentions, beliefs, expectations and predictions for the future, and you should not place undue reliance on these statements. These statements use forward-looking terminology, are based on various assumptions made by us, and may not be accurate because of risks and uncertainties surrounding the assumptions that are made.

Factors listed in this section—as well as other factors not included—may cause actual results to differ significantly from the forward-looking statements included in this Quarterly Report on Form 10-Q. There is no guarantee that any of the events anticipated by the forward-looking statements in this Quarterly Report on Form 10-Q will occur, or if any of the events occurs, there is no guarantee what effect it will have on our operations, financial condition, or share price.

We undertake no, and hereby disclaim any, obligation to update or revise any forward-looking statements, unless required by law. However, we reserve the right to make such updates or revisions from time to time by press release, periodic report, or other method of public disclosure without the need for specific reference to this Quarterly Report on Form 10-Q. No such update or revision shall be deemed to indicate that other statements not addressed by such update or revision remain correct or create an obligation to provide any other updates or revisions.

Forward-Looking Statements

Forward-looking statements that are included in this Quarterly Report on Form 10-Q are generally accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “goal,” “intend,” “likely,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would,” or other words that convey the uncertainty of future events or outcomes. These forward-looking statements may include, but are not limited to, statements regarding our strategy, projections and estimates concerning the timing and success of specific projects and our future production, land and lot sales, the outcome of legal proceedings, the anticipated impact of natural disasters or contagious diseases on our operations, operational and financial results, including our estimates for growth, financial condition, sales prices, prospects and capital spending.

Risks, Uncertainties and Assumptions

The major risks and uncertainties—and assumptions that are made—that affect our business and may cause actual results to differ from these forward-looking statements include, but are not limited to:

•the effects of the ongoing COVID-19 pandemic, which are highly uncertain and subject to rapid change, cannot be predicted and will depend upon future developments, including the emergence and spread of new strains or variants of COVID-19, the severity and duration of the outbreak, the duration of existing and future social distancing and shelter-in-place orders, further mitigation strategies taken by applicable government authorities, the availability and acceptance of effective vaccines, adequate testing and treatments and the prevalence of widespread immunity to COVID-19;

•the impacts on our supply chain, the health of our employees, service providers and trade partners, and the reactions of U.S. and global markets and their effects on consumer confidence and spending;

•the effects of general economic conditions, including employment rates, housing starts, inflation, interest rate levels, availability of financing for home mortgages and strength of the U.S. dollar;

•market demand for our products, which is related to the strength of the various U.S. business segments and U.S. and international economic conditions;

•the availability of desirable and reasonably priced land and our ability to control, purchase, hold and develop such parcels;

•access to adequate capital on acceptable terms;

•geographic concentration of our operations, particularly within California;

•levels of competition;

•the successful execution of our internal performance plans, including restructuring and cost reduction initiatives;

•the prices and availability of supply chain inputs, including raw materials, and labor;

•oil and other energy prices;

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•the effects of U.S. trade policies, including the imposition of tariffs and duties on homebuilding products and retaliatory measures taken by other countries;

•the effects of weather, including the occurrence of drought conditions in parts of the western United States;

•the risk of loss from earthquakes, volcanoes, fires, floods, droughts, windstorms, hurricanes, pest infestations and other natural disasters, and the risk of delays, reduced consumer demand, and shortages and price increases in labor or materials associated with such natural disasters;

•the risk of loss from acts of war, terrorism, civil unrest or outbreaks of contagious diseases, such as COVID-19;

•transportation costs;

•federal and state tax policies;

•the effects of land use, environment and other governmental laws and regulations;

•legal proceedings or disputes and the adequacy of reserves;

•risks relating to any unforeseen changes to or effects on liabilities, future capital expenditures, revenues, expenses, earnings, synergies, indebtedness, financial condition, losses and future prospects;

•changes in accounting principles;

•risks related to unauthorized access to our computer systems, theft of our homebuyers’ confidential information or other forms of cyber-attack; and

•other factors described in “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021 and in other filings we make with the Securities and Exchange Commission (“SEC”).

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related condensed notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our securities. We urge investors to review and consider carefully the various disclosures made by us in this report and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2021 and subsequent reports on Form 8-K, which discuss our business in greater detail. The section entitled “Risk Factors” set forth in Item 1A of our Annual Report on Form 10-K, and similar disclosures in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. Investors should carefully consider those risks, in addition to the information in this report and in our other filings with the SEC, before deciding to invest in, or maintain an investment in, our common stock.

Overview and Outlook

Our net new home order activity for the third quarter was significantly and negatively impacted by the sharp increase in mortgage interest rates, which dampened both consumer sentiment and affordability. We believe that until inflation stabilizes, the near-term macroeconomic outlook is likely to remain uncertain. As a result, until we begin to see signs of mortgage rate stability, we expect there will be further headwinds to consumer demand, which would require us to moderate pricing in order to achieve a more typical sales pace. Further, supply chain bottlenecks and production inefficiencies persist, particularly among the trades responsible for the latter stages of home construction, and continue to apply pressure to our construction cycle times, and the current inflationary environment continues to drive up costs. We also continue to monitor the potential impacts on our business of the ongoing geopolitical risks stemming from the war in Ukraine.

Due to the aforementioned headwinds, which have slowed the order pace in all of our markets, we believe the homebuilding industry is entering a period of uncertainty and that it may take some time for the market to stabilize. Despite such risks, however, we believe that long-term housing fundamentals remain favorable, and that the undersupplied nature of our markets, underlying demographics that support the need for new housing and divergence of supply and demand dynamics in the near-term will continue to fuel a positive longer-term outlook.

Highlights of the quarter include an increase in homebuilding gross margin percentage to 27.1% and a reduction in sales and marketing and general and administrative (“SG&A”) expense as a percentage of home sales revenue to 9.1%. These factors, along with an average sales price of homes delivered of $723,000, allowed us to achieve net income available to common stockholders of $149.2 million, or diluted earnings per share of $1.45. Our backlog dollar value is $2.4 billion, on an average sales price in backlog of $797,000. In addition, we ended the quarter with total liquidity of $914.3 million, including cash and cash equivalents of $228.1 million and $686.2 million of availability under our Credit Facility.

Our results for the three months ended September 30, 2022 may not be indicative of trends that will persist, as uncertainty caused by COVID-19, government responses to the pandemic, increasing inflation, the war in Ukraine and supply chain disruptions have impacted, and will continue to impact, our business and operations. See “Cautionary Note Concerning Forward-Looking Statements” above.

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Consolidated Financial Data (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Homebuilding:
Home sales revenue	$	1,057,491	$	1,028,950	$	2,787,386	$	2,754,932
Land and lot sales revenue	2,626		581		4,337		7,520
Other operations revenue	674		646		2,021		1,969
Total revenues	1,060,791		1,030,177		2,793,744		2,764,421
Cost of home sales	771,148		758,024		2,033,160		2,064,595
Cost of land and lot sales	1,256		891		2,075		5,918
Other operations expense	670		801		2,020		2,111
Sales and marketing	41,950		44,875		112,712		130,824
General and administrative	54,786		53,490		160,071		146,102

Homebuilding income from operations	190,981		172,096		483,706		414,871
Equity in loss of unconsolidated entities	(122)		(43)		(34)		(72)
Other income, net	463		171		852		428
Homebuilding income before income taxes	191,322		172,224		484,524		415,227
Financial Services:
Revenues	11,005		3,016		31,985		7,802
Expenses	5,827		1,618		17,457		4,510
Equity in income of unconsolidated entities	—		3,946		46		10,586
Financial services income before income taxes	5,178		5,344		14,574		13,878
Income before income taxes	196,500		177,568		499,098		429,105
Provision for income taxes	(45,923)		(44,412)		(122,084)		(107,278)
Net income	150,577		133,156		377,014		321,827
Net income attributable to noncontrolling interests	(1,351)		—		(3,927)		—
Net income available to common stockholders	$	149,226	$	133,156	$	373,087	$	321,827
Earnings per share
Basic	$	1.47	$	1.18	$	3.60	$	2.77
Diluted	$	1.45	$	1.17	$	3.57	$	2.75

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Net New Home Orders, Average Selling Communities and Monthly Absorption Rates by Segment


	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021			Percentage Change
	Net New Home Orders	Average Selling Communities	Monthly Absorption Rates	Net New Home Orders	Average Selling Communities	Monthly Absorption Rates	Net New Home Orders		Average Selling Communities		Monthly Absorption Rates
West	439	77.0	1.9	928	68.2	4.5	(53)	%	13	%	(58)	%
Central	138	30.8	1.5	293	28.0	3.5	(53)	%	10	%	(57)	%
East	104	20.5	1.7	128	12.8	3.3	(19)	%	60	%	(49)	%
Total	681	128.3	1.8	1,349	109.0	4.1	(50)	%	18	%	(57)	%

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Net new home orders for the three months ended September 30, 2022 decreased by 668, or 50%, to 681, compared to 1,349 during the prior-year period. The decrease in net new home orders was due to a 57% decrease in monthly absorption rates, offset by an 18% increase in average selling communities. New home order demand slowed significantly during the quarter due largely to the steep increase in mortgage interest rates, which negatively impacted both consumer confidence and affordability. Due to the fact that housing prices have increased significantly over past couple of years, we believe the housing industry is contending with an affordability shock caused by recent increases in borrowing costs. While ebbs and flows in housing demand due to evolving interest rates are typical, the magnitude and breadth of recent rate increases, coupled with a recent surge in new home prices, has resulted in materially challenging price dynamics. As the housing industry continues to seek equilibrium, we expect demand to remain challenged for the remainder of 2022.

Our West segment reported a 53% decrease in net new home orders due to a 58% decrease in monthly absorption rates offset by a 13% increase in average selling communities. The 13% increase in average selling communities was due to growth in each of our California markets and in Arizona. Our Central segment reported a 53% decrease in net new home orders due to a 57% decrease in monthly absorption rates offset by a 10% increase in average selling communities. The 10% increase in average selling communities was due to growth in Austin, Houston and Colorado. Our East segment reported a 19% decrease in net new home orders due to a 49% decrease in monthly absorption rates, offset by a 60% increase in average selling communities. Growth in average selling communities in our East segment was due largely to accelerated operations in both Charlotte and Raleigh, where average selling communities for the current-year period increased by 6.0 and 4.8, respectively, compared to the prior-year period.

Backlog Units, Dollar Value and Average Sales Price by Segment (dollars in thousands)


	As of September 30, 2022					As of September 30, 2021					Percentage Change
	Backlog Units	Backlog Dollar Value		Average Sales Price		Backlog Units	Backlog Dollar Value		Average Sales Price		Backlog Units		Backlog Dollar Value		Average Sales Price
West	1,865	$	1,648,692	$	884	2,313	$	1,663,294	$	719	(19)	%	(1)	%	23	%
Central	702	475,263		677		912	500,388		549		(23)	%	(5)	%	23	%
East	477	303,346		636		394	264,730		672		21	%	15	%	(5)	%
Total	3,044	$	2,427,301	$	797	3,619	$	2,428,412	$	671	(16)	%	—	%	19	%

Backlog units reflect the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a homebuyer but for which we have not yet delivered the home. Homes in backlog are generally delivered within seven to ten months from the time the sales contract is entered into, although we may experience cancellations of sales contracts prior to delivery. Our cancellation rate of homebuyers who contracted to buy a home but cancelled prior to delivery of the home (as a percentage of overall orders) was 27% and 9% during the three months ended September 30, 2022 and 2021, respectively. Our cancellation rate for the current-year period increased due largely to adverse sentiment and affordability issues stemming primarily from higher interest rates. The dollar value of backlog was $2.4 billion as of both September 30, 2022 and September 30, 2021. The flat dollar value of backlog was due to an increase in the average sales price of backlog units of $126,000, or 19%, to $797,000 as of September 30, 2022, compared to $671,000 at September 30, 2021, offset by a decrease in backlog units of 575, or 16%, to 3,044 as of September 30, 2022, compared to 3,619 at September 30, 2021.

Backlog dollar value in our West segment decreased 1% due to a 19% decrease in backlog units, offset by a 23% increase in average sales price. The increase in average sales price is a reflection of the strong pricing power we possessed in 2021 and early 2022. The decrease in backlog units is due to a decrease in net new home order activity in the current-year period. Backlog dollar value in our Central segment decreased by 5% due to a 23% decrease in backlog units, offset by a 23% increase in average sales price. The increase in average sales price during the current-year period is due primarily to the strong pricing power we experienced in 2021 in Texas and Colorado, a trend which continued through the first quarter of 2022 before gradually slowing during the second and third quarters. The decrease in backlog units is due to a decrease in net new home order activity in the current year. Backlog dollar value in our East segment increased by 15% due to a 21% increase in backlog units offset by a 5% decrease in average sales price. The increase in backlog units during the current-year period is largely due to our accelerated operations in both Charlotte and Raleigh, where we began selling homes in the second half of 2020. Backlog units in our Charlotte market increased to 273 units during the current-year period as compared to 64 units during the prior-year period. The lower average sales price in backlog is due to the higher proportion of backlog units from Charlotte and Raleigh, where average sales price is significantly lower compared to DC Metro, which comprised a larger percentage of backlog units in the prior-year period.

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New Homes Delivered, Homes Sales Revenue and Average Sales Price by Segment (dollars in thousands)


	Three Months Ended September 30, 2022					Three Months Ended September 30, 2021					Percentage Change
	New Homes Delivered	Home Sales Revenue		Average Sales Price		New Homes Delivered	Home Sales Revenue		Average Sales Price		New Homes Delivered		Home Sales Revenue		Average Sales Price
West	970	$	750,152	$	773	1,151	$	770,346	$	669	(16)	%	(3)	%	16	%
Central	332	204,627		616		329	167,267		508		1	%	22	%	21	%
East	161	102,712		638		152	91,337		601		6	%	12	%	6	%
Total	1,463	$	1,057,491	$	723	1,632	$	1,028,950	$	630	(10)	%	3	%	15	%

Home sales revenue increased $28.5 million to $1.1 billion for the three months ended September 30, 2022 compared to the prior-year period. The increase was comprised of $135.1 million related to a $93,000 increase in average sales price of homes delivered in the three months ended September 30, 2022 compared to the prior-year period, offset by $106.6 million related to a 169 decrease in new homes delivered in the three months ended September 30, 2022 compared to the prior-year period.

Home sales revenue in our West segment decreased 3% due to an 16% decrease in new homes delivered, offset by a 16% increase in average sales price during the current-year period. The decrease in new homes delivered was due a decrease in backlog units to start the current-year period compared to the prior-year period, along with a decrease in backlog conversion rate, as labor and supply chain constraints continue to negatively impact the timing of our new home deliveries. The increase in average sales price was due to stronger pricing power reflected in our backlog entering into the current-year period compared to the prior-year period. Home sales revenue in our Central segment increased 22% due to a 21% increase in average sales price and a 1% increase in new homes delivered. The increase in average sales price is a reflection of the strong pricing power we realized in 2021 and early 2022. The increase in new homes delivered was due to a slightly higher backlog conversion rate in the current-year period compared to the prior-year period. Home sales revenue in our East segment increased by 12% due to a 6% increase in new homes delivered and a 6% increase in average sales price. The increase in new homes delivered was due to higher backlog units to start the current-year period compared to the prior-year period. The increase in average sales price was due to the strong pricing power we experienced throughout 2021 and early 2022, as each of our markets in our East segment experienced significant growth in average sales price compared to the prior-year period.

Homebuilding Gross Margins (dollars in thousands)


	Three Months Ended September 30,
	2022			%		2021			%
Home sales revenue	$	1,057,491		100.0	%	$	1,028,950		100.0	%
Cost of home sales	771,148			72.9	%	758,024			73.7	%
Homebuilding gross margin	286,343			27.1	%	270,926			26.3	%
Add: interest in cost of home sales	26,531			2.5	%	25,656			2.5	%
Add: impairments and lot option abandonments	3,034			0.3	%	268			0.0	%
Adjusted homebuilding gross margin(1)	$	315,908		29.9	%	$	296,850		28.8	%
Homebuilding gross margin percentage	27.1		%			26.3		%
Adjusted homebuilding gross margin percentage(1)	29.9		%			28.8		%

__________

(1)Non-GAAP financial measure (as discussed below).

Our homebuilding gross margin percentage increased to 27.1% for the three months ended September 30, 2022 as compared to 26.3% for the prior-year period. The increase in gross margin percentage was due to a combination of product mix and revenues generated through orders attained during the strong demand environment of 2021 and the first quarter of 2022, which allowed us to reduce incentives and raise prices in all of our markets. As our homes are generally delivered within seven to ten months from the time we enter into a sales contract, in the current environment—in which we are facing extended construction cycles compared to historical norms—the demand slowdown has not materially impacted our current-year period gross margins. Excluding interest, impairments and lot option abandonments in cost of home sales, adjusted homebuilding gross margin percentage was 29.9% for the three months ended September 30, 2022, compared to 28.8% for the prior-year period.

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Adjusted homebuilding gross margin is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that leverage and noncash charges have on homebuilding gross margin and permits investors to make better comparisons with our competitors, who adjust gross margins in a similar fashion. Because adjusted homebuilding gross margin is not calculated in accordance with GAAP, it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP. See the table above reconciling this non-GAAP financial measure to homebuilding gross margin, the most directly comparable GAAP measure.

Sales and Marketing, General and Administrative Expense (dollars in thousands)


	Three Months Ended September 30,				As a Percentage of Home Sales Revenue
	2022		2021		2022		2021
Sales and marketing	$	41,950	$	44,875	4.0	%	4.4	%
General and administrative (G&A)	54,786		53,490		5.2	%	5.2	%
Total sales and marketing and G&A	$	96,736	$	98,365	9.1	%	9.6	%

Total SG&A expense as a percentage of home sales revenue decreased to 9.1% for the three months ended September 30, 2022, compared to 9.6% in the prior-year period. Total SG&A expense decreased $1.6 million to $96.7 million for the three months ended September 30, 2022 from $98.4 million in the prior-year period.

Sales and marketing expense as a percentage of home sales revenue decreased to 4.0% for the three months ended September 30, 2022, compared to 4.4% for the prior-year period. The decrease was due primarily to lower broker commissions.

General and administrative (“G&A”) expense as a percentage of home sales revenue was flat at 5.2% of home sales revenue for both the three months ended September 30, 2022 and the prior-year period. G&A expense increased to $54.8 million for the three months ended September 30, 2022 compared to $53.5 million for the prior-year period, largely due to higher employee costs as we continued to grow our headcount.

Interest

Interest, which we incurred principally to finance land acquisitions, land development and home construction, totaled $31.9 million and $24.3 million for the three months ended September 30, 2022 and 2021, respectively. All interest incurred in both periods was capitalized.

Income Tax

For the three months ended September 30, 2022, we recorded a tax provision of $45.9 million based on an effective tax rate of 23.4%. For the three months ended September 30, 2021, we recorded a tax provision of $44.4 million based on an effective tax rate of 25.0%. The increase in provision for income taxes is due to a $18.9 million increase in income before income taxes to $196.5 million for the three months ended September 30, 2022, compared to $177.6 million for the prior-year period.

The decrease in our effective tax rate compared to the prior-year period was primarily due to the impact of the Inflation Reduction Act of 2022 (“IRA”), which was enacted into law on August 16, 2022. The IRA, among other things, extends the federal tax credit for building new energy-efficient homes for homes delivered retroactive from January 1, 2022 through December 31, 2032, and modifies and increases the credit beginning in 2023. Previously, this federal tax credit was set to expire for homes delivered after December 31, 2021. Our effective tax rate for the three months ended September 30, 2022, included the benefit of the energy tax credits retroactive to January 1, 2022. In addition to the energy tax credit, the IRA implemented a 15% corporate minimum tax effective in 2024 for applicable corporations, and a 1% excise tax on stock repurchases after December 31, 2022. We are currently evaluating the other potential effects of the IRA on our consolidated financial statements.

Financial Services Segment

Income before income taxes from our financial services operations increased to $5.2 million for the three months ended September 30, 2022 compared to $5.3 million for the prior-year period. During the current fiscal year we consolidated our mortgage financing operations, which was previously accounted for as an unconsolidated joint venture. This new accounting

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treatment has resulted in net income attributable to noncontrolling interests from our mortgage financing operations, which is presented below net income on our consolidated statements of operations.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Net New Home Orders, Average Selling Communities and Monthly Absorption Rates by Segment


	Nine Months Ended September 30, 2022			Nine Months Ended September 30, 2021			Percentage Change
	Net New Home Orders	Average Selling Communities	Monthly Absorption Rates	Net New Home Orders	Average Selling Communities	Monthly Absorption Rates	Net New Home Orders		Average Selling Communities		Monthly Absorption Rates
West	2,481	71.4	3.9	3,338	70.1	5.3	(26)	%	2	%	(26)	%
Central	871	30.5	3.2	1,163	28.3	4.6	(25)	%	8	%	(30)	%
East	581	18.8	3.4	457	13.7	3.7	27	%	37	%	(8)	%
Total	3,933	120.7	3.6	4,958	112.1	4.9	(21)	%	8	%	(27)	%

Net new home orders for the nine months ended September 30, 2022 decreased by 1,025, or 21%, to 3,933, compared to 4,958 during the prior-year period. The decrease in net new home orders was due to a 27% decrease in monthly absorption rates offset by a 8% increase in average selling communities. While new home order demand was strong during the beginning of the current-year period, it has sharply declined during the second half of the nine months ended September 30, 2022. The decrease has been largely due to the steep increase in mortgage interest rates, which negatively impacted both consumer confidence and affordability. Due to the fact that housing prices have increased significantly over past couple of years, we believe the housing industry is contending with an affordability shock caused by recent increases in borrowing costs. While ebbs and flows in housing demand due to evolving interest rates are typical, the magnitude and breadth of recent rate increases, coupled with a recent surge in new home prices, has resulted in materially challenging price dynamics. As the housing industry continues to seek equilibrium, we expect demand to remain challenged for the remainder of 2022.

Our West segment reported a 26% decrease in net new home orders due to a 26% decrease in monthly absorption rates. While demand in our West segment remained strong during the first four months of the current-year period, the impact of sharply rising interest rates slowed the trajectory of monthly absorption rates throughout the second quarter and into the third quarter. While our monthly absorption rate of 3.9 in our West segment represents a sales pace above historical trends, we expect this rate to decline under current market conditions, in which affordability has become of increasing concern. Our Central segment reported a 25% decrease in net new home orders due to a 30% decrease in monthly absorption rates, offset by an 8% increase in average selling communities. Monthly absorption rates in our Central segment remained strong in both Colorado and Texas during the first quarter, but experienced a significant slowdown during the second and third quarters as mortgage interest rates increased. Our East segment reported a 27% increase in net new home orders due to a 37% increase in average selling communities, offset by an 8% decrease in monthly absorption rates. Growth in average selling communities in our East segment was due largely to accelerated operations in Charlotte, where average selling communities for the current-year period increased by 5.6 compared to the prior-year period.

New Homes Delivered, Homes Sales Revenue and Average Sales Price by Segment (dollars in thousands)


	Nine Months Ended September 30, 2022					Nine Months Ended September 30, 2021					Percentage Change
	New Homes Delivered	Home Sales Revenue		Average Sales Price		New Homes Delivered	Home Sales Revenue		Average Sales Price		New Homes Delivered		Home Sales Revenue		Average Sales Price
West	2,627	$	1,948,282	$	742	3,037	$	2,087,115	$	687	(14)	%	(7)	%	8	%
Central	989	556,126		562		875	438,005		501		13	%	27	%	12	%
East	431	282,978		657		391	229,812		588		10	%	23	%	12	%
Total	4,047	$	2,787,386	$	689	4,303	$	2,754,932	$	640	(6)	%	1	%	8	%

Home sales revenue increased $32.5 million to $2.8 billion for the nine months ended September 30, 2022 compared to the prior-year period. The increase was comprised of $196.4 million related to an increase in average sales price of homes delivered in the nine months ended September 30, 2022 compared to the prior-year period, offset by $163.9 million related to a decrease of 256 new homes delivered in the nine months ended September 30, 2022 compared to the prior-year period.

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Home sales revenue in our West segment decreased 7% due to a 14% decrease in new homes delivered, offset by a 8% increase in average sales price during the current-year period. The decrease in new homes delivered was due a decrease in the current-year period backlog conversion rate, as labor and supply chain constraints continue to negatively impact the timing of our new home deliveries. The increase in average sales prices was due to stronger pricing power reflected in our backlog entering into the current-year period compared to the prior-year period. Home sales revenue in our Central segment increased 27% due to a 13% increase in new homes delivered in addition to a 12% increase in average sales price. The increase in new homes delivered was due to higher backlog units to start the current-year period compared to the prior-year period, in addition to a higher backlog conversion rate. The increase in average sales price is a reflection of the strong pricing power we realized in 2021. Home sales revenue in our East segment increased by 23% due to a 12% increase in average sales price in addition to a 10% increase in new homes delivered. The increase in average sales price was due to the strong pricing power we experienced throughout 2021, as each of our markets in our East segment experienced significant growth in average sales price compared to the prior-year period. The increase in new homes delivered was due primarily to activity in our Charlotte market, in which new homes delivered for the current-year period increased by 128 units compared to the prior-year period.

Homebuilding Gross Margins (dollars in thousands)


	Nine Months Ended September 30,
	2022			%		2021			%
Home sales revenue	$	2,787,386		100.0	%	$	2,754,932		100.0	%
Cost of home sales	2,033,160			72.9	%	2,064,595			74.9	%
Homebuilding gross margin	754,226			27.1	%	690,337			25.1	%
Add: interest in cost of home sales	68,559			2.5	%	77,185			2.8	%
Add: impairments and lot option abandonments	4,495			0.2	%	713			0.0	%
Adjusted homebuilding gross margin(1)	$	827,280		29.7	%	$	768,235		27.9	%
Homebuilding gross margin percentage	27.1		%			25.1		%
Adjusted homebuilding gross margin percentage(1)	29.7		%			27.9		%

__________

(1)Non-GAAP financial measure (as discussed below).

Our homebuilding gross margin percentage increased to 27.1% for the nine months ended September 30, 2022 as compared to 25.1% for the prior-year period. The increase in gross margin percentage was due to a combination of product mix and the lagging effect of deliveries resulting from homes sold during the strong demand environment during fiscal year 2021 and the first several months of 2022, which allowed us to reduce incentives and raise prices in all of our markets. Excluding interest, impairments and lot option abandonments in cost of home sales, adjusted homebuilding gross margin percentage was 29.7% for the nine months ended September 30, 2022, compared to 27.9% for the prior-year period.

Sales and Marketing, General and Administrative Expense (dollars in thousands)


	Nine Months Ended September 30,				As a Percentage of Home Sales Revenue
	2022		2021		2022		2021
Sales and marketing	$	112,712	$	130,824	4.0	%	4.7	%
General and administrative (G&A)	160,071		146,102		5.7	%	5.3	%
Total sales and marketing and G&A	$	272,783	$	276,926	9.8	%	10.1	%

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Total SG&A expense as a percentage of home sales revenue decreased to 9.8% for the nine months ended September 30, 2022, compared to 10.1% in the prior-year period. Total SG&A expense decreased $4.1 million to $272.8 million for the nine months ended September 30, 2022 from $276.9 million in the prior-year period.

Sales and marketing expense as a percentage of home sales revenue decreased to 4.0% for the nine months ended September 30, 2022, compared to 4.7% for the prior-year period. The decrease was due primarily to lower broker commissions.

G&A expense as a percentage of home sales revenue increased to 5.7% of home sales revenue for the nine months ended September 30, 2022 compared to 5.3% for the prior-year period. G&A expense increased to $160.1 million for the nine months ended September 30, 2022 compared to $146.1 million for the prior-year period, largely due to higher employee costs as we continued to grow our headcount.

Interest

Interest, which we incurred principally to finance land acquisitions, land development and home construction, totaled $89.2 million and $68.0 million for the nine months ended September 30, 2022 and 2021, respectively. All interest incurred in both periods was capitalized.

Income Tax

For the nine months ended September 30, 2022, we recorded a tax provision of $122.1 million based on an effective tax rate of 24.5%. For the nine months ended September 30, 2022, we recorded a tax provision of $107.3 million based on an effective tax rate of 25.0%. The increase in provision for income taxes is due to a $70.0 million increase in income before income taxes to $499.1 million for the nine months ended September 30, 2022, compared to $429.1 million for the prior-year period.

Financial Services Segment

Income before income taxes from our financial services operations increased to $14.6 million for the nine months ended September 30, 2022 compared to $13.9 million for the prior-year period. During the current fiscal year, we consolidated our mortgage financing operations, which was previously accounted for as an unconsolidated joint venture. This new accounting treatment has resulted in net income attributable to noncontrolling interests from our mortgage financing operations, which is presented below net income on our consolidated statements of operations.

Lots Owned or Controlled by Segment

Lots owned or controlled include our share of lots controlled by our unconsolidated land development joint ventures. Investments in joint ventures are described in Note 6, Investments in Unconsolidated Entities, of the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. The table below summarizes our lots owned or controlled by segment as of the dates presented:


	September 30,		Increase (Decrease)
	2022	2021	Amount	%
Lots Owned
West	13,879	15,360	(1,481)	(10)	%
Central	5,137	5,436	(299)	(6)	%
East	1,682	1,537	145	9	%
Total	20,698	22,333	(1,635)	(7)	%
Lots Controlled(1)
West	5,045	6,241	(1,196)	(19)	%
Central	7,830	7,083	747	11	%
East	3,696	3,120	576	18	%
Total	16,571	16,444	127	1	%
Total Lots Owned or Controlled(1)	37,269	38,777	(1,508)	(4)	%

__________

(1)As of September 30, 2022 and 2021, lots controlled represented lots that were under land or lot option contracts or purchase contracts. As of September 30, 2022 and 2021, lots controlled for Central include 3,388 and 2,114 lots,

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respectively, and East include 154 and 184 lots, respectively, which represent our expected share of lots owned by our unconsolidated land development joint ventures.

Liquidity and Capital Resources

Overview

Our principal uses of capital for the nine months ended September 30, 2022 were operating expenses, land purchases, land development, home construction and repurchases of our common stock. We used funds generated by our operations to meet our short-term working capital requirements. We monitor financing requirements to evaluate potential financing sources, including bank credit facilities and note offerings. We also continue to monitor the credit markets as we remain focused on generating positive margins in our homebuilding operations and acquiring desirable land positions in order to maintain a strong balance sheet and keep us poised for growth. As of September 30, 2022, we had total liquidity of $914.3 million, including cash and cash equivalents of $228.1 million and $686.2 million of availability under our Credit Facility, as described below, after considering the borrowing base provisions and outstanding letters of credit.

Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the availability of particular assets, and our Company as a whole, to generate cash flow to cover the expected debt service.

Senior Notes

Our outstanding senior notes (the “Senior Notes”) contain covenants that restrict our ability to, among other things, create liens or other encumbrances, enter into sale and leaseback transactions, or merge or sell all or substantially all of our assets. These limitations are subject to a number of qualifications and exceptions. As of September 30, 2022, we were in compliance with the covenants required by our Senior Notes.

Loans Payable

On June 29, 2022, we entered into a Third Modification Agreement (the “Modification”) to our Second Amended and Restated Credit Agreement dated as of March 29, 2019. The Modification, among other things, (i) increases the maximum amount of the revolving credit facility (the “Revolving Facility”) under the Credit Agreement from $650.0 million to $750.0 million, (ii) increases the sublimit for issuance of letters of credit under the Revolving Facility from $100 million to $150 million and (iii) extends the maturity date of both the Revolving Facility and term loan facility (the “Term Facility”) under the Credit Agreement to June 29, 2027. We may borrow under the Revolving Facility in the ordinary course of business to repay senior notes and fund our operations, including our land acquisition, land development and homebuilding activities. Borrowings under the Revolving Facility will be governed by, among other things, a borrowing base. Interest rates under the Revolving Facility will be based on the Secured Overnight Financing Rate (“SOFR”), plus a spread ranging from 1.25% to 1.90%, depending on the Company’s leverage ratio. Interest rates under the Term Facility will be based on SOFR, plus a spread ranging from 1.10% to 1.85%, depending on the Company’s leverage ratio.

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$250 million outstanding debt under the Term Facility with an interest rate of 4.19%. As of September 30, 2022, there were $6.9 million of capitalized debt financing costs, included in other assets on our consolidated balance sheet, related to the Credit Facility that will amortize over the remaining term of the Credit Facility. Accrued interest, including loan commitment fees, related to the Term Facility was $337,000 and $570,000 as of September 30, 2022 and December 31, 2021, respectively.

Under the Credit Facility, we are required to comply with certain financial covenants, including, but not limited to, those set forth in the table below (dollars in thousands):


	Actual at September 30,			Covenant Requirement at September 30,
Financial Covenants	2022			2022
Consolidated Tangible Net Worth	$	2,463,871		$	1,722,804
(Not less than $1.58 billion plus 50% of net income and 50% of the net proceeds from equity offerings after March 31, 2022)
Leverage Test	32.0		%	≤60%
(Not to exceed 60%)
Interest Coverage Test	7.6			≥1.5
(Not less than 1.5:1.0)

In addition, the Credit Facility limits the aggregate number of single family dwellings (where construction has commenced) owned by the Company or any guarantor that are not presold or model units to no more than the greater of (i) 50% of the number of housing unit closings (as defined) during the preceding 12 months; or (ii) 100% of the number of housing unit closings during the preceding 6 months. However, a failure to comply with this “Spec Unit Inventory Test” will not be an event of default or default, but will be excluded from the borrowing base as of the last day of the quarter in which the non-compliance occurs. The Credit Facility further requires that at least 95.0% of consolidated tangible net worth must be attributable to the Company and its guarantor subsidiaries, subject to certain grace periods.

As of September 30, 2022, we were in compliance with all of these financial covenants.

Stock Repurchase Program

On November 11, 2020, we announced the approval of our new Repurchase Program authorizing the repurchase of up to $250 million of common stock through December 31, 2021. On July 21, 2021, our board of directors authorized the repurchase of up to an additional $250 million of common stock and extended the term of the Repurchase Program through December 31, 2022, increasing the aggregate value of shares of common stock authorized to be repurchased under the Repurchase Program from $250 million to $500 million. On February 16, 2022, our board of directors authorized the repurchase of up to an additional $250 million of common stock pursuant to the Repurchase Program, increasing the aggregate value of shares of common stock authorized to be repurchased under the Repurchase Program from $500 million to $750 million. Purchases of common stock pursuant to the Repurchase Program may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We are not obligated under the Repurchase Program to repurchase any specific number or amount of shares of common stock, and we may modify, suspend or discontinue the program at any time. Company management will determine the timing and amount of any repurchases in its discretion based on a variety of factors, such as the market price of our common stock, corporate requirements, general market economic conditions and legal requirements. During the three months ended September 30, 2022, we repurchased and retired an aggregate of 948,911 shares of our common stock under the Repurchase Program for $16.8 million. For the nine months ended September 30, 2022, we repurchased and retired an aggregate of 9,396,381 shares of our common stock under the Repurchase Program for a total of $202.6 million.

Leverage Ratios

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We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. The ratio of debt-to-capital and the ratio of net debt-to-net capital are calculated as follows (dollars in thousands):


	September 30, 2022			December 31, 2021
Loans Payable	$	250,000		$	250,504
Senior Notes	1,089,752			1,087,219
Total debt	1,339,752			1,337,723
Stockholders’ equity	2,625,730			2,447,621
Total capital	$	3,965,482		$	3,785,344
Ratio of debt-to-capital(1)	33.8		%	35.3		%

Total debt	$	1,339,752		$	1,337,723
Less: Cash and cash equivalents	(228,137)			(681,528)
Net debt	1,111,615			656,195
Stockholders’ equity	2,625,730			2,447,621
Net capital	$	3,737,345		$	3,103,816
Ratio of net debt-to-net capital(2)	29.7		%	21.1		%

__________

(1)The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt by the sum of total debt plus stockholders’ equity.

(2)The ratio of net debt-to-net capital is a non-GAAP financial measure and is computed as the quotient obtained by dividing net debt (which is total debt less cash and cash equivalents) by the sum of net debt plus stockholders’ equity. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-net capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. See the table above reconciling this non-GAAP financial measure to the ratio of debt-to-capital. Because the ratio of net debt-to-net capital is not calculated in accordance with GAAP, it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.

Cash Flows—Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

For the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021:

•Net cash used in operating activities decreased by $385.5 million to net cash used of $181.6 million for the nine months ended September 30, 2022 compared to net cash provided by operating activities of $204.0 million for the prior-year period. The change was comprised of offsetting activity, including (i) an increase in cash used for real estate inventory purchases of $331.3 million, offset by (ii) an increase in net income to $377.0 million for the nine months ended September 30, 2022 compared to $321.8 million in the prior-year period, and (iii) other offsetting changes in other assets, receivables, accounts payable, accrued expenses and other liabilities, deferred income taxes and returns on investments in unconsolidated entities.

•Net cash used in investing activities was $54.7 million for the nine months ended September 30, 2022, compared to $19.9 million for the prior-year period. The change in net cash used in investing activities was due to the net change in cash flows related to investments in unconsolidated entities, along with an increase in purchases of property and equipment.

•Net cash used in financing activities was $217.1 million for the nine months ended September 30, 2022, compared to net cash used in financing activities of $218.0 million for the prior-year period. Net cash used in financing activities in the current-year period was primarily comprised of $202.6 million of cash used for share repurchases.

Off-Balance Sheet Arrangements and Contractual Obligations

In the ordinary course of business, we enter into 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 by the sellers, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and land banking arrangements as a method of acquiring land in

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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 option contracts and land banking arrangements generally require a non-refundable deposit for the right to acquire land and lots over a specified period of time at pre-determined prices. We generally have the right, at our discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash deposit with no further financial responsibility to the land seller. In some cases, however, we may be contractually obligated to complete development work even if we terminate the option to procure land or lots. As of September 30, 2022, we had $243.8 million of cash deposits, the majority of which are non-refundable, pertaining to land and lot option contracts and purchase contracts with an aggregate remaining purchase price of $1.5 billion (net of deposits). See Note 7, Variable Interest Entities, to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Our utilization of land and lot option contracts and land banking arrangements is dependent on, among other things, the availability of land sellers or land banking firms willing to enter into such arrangements, the availability of capital to finance the development of optioned land and 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.

As of September 30, 2022, we held equity investments in twelve active homebuilding partnerships or limited liability companies. Our participation in these entities may be as a developer, a builder, or an investment partner. See Note 6, Investments in Unconsolidated Entities, to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Supplemental Guarantor Financial Information

2027 Notes and 2028 Notes

On June 5, 2017, Tri Pointe issued the 2027 Notes and on June 10, 2020, Tri Pointe issued the 2028 Notes. All of Tri Pointe’s 100% owned subsidiaries that are guarantors (each a “Guarantor” and, collectively, the “Guarantors”) of the Credit Facility, including Tri Pointe Homes Holdings, are party to supplemental indentures pursuant to which they jointly and severally guarantee Tri Pointe’s obligations with respect to these Notes. Each Guarantor of the 2027 Notes and the 2028 Notes is 100% owned by Tri Pointe, and all guarantees are full and unconditional, subject to customary exceptions pursuant to the indentures governing the 2027 Notes and the 2028 Notes, as described in the following paragraph. All of our non-Guarantor subsidiaries have nominal assets and operations and are considered minor, as defined in Rule 3-10(h) of Regulation S-X. In addition, Tri Pointe has no independent assets or operations, as defined in Rule 3-10(h) of Regulation S-X. There are no significant restrictions upon the ability of Tri Pointe or any Guarantor to obtain funds from any of their respective wholly owned subsidiaries by dividend or loan. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X.

A Guarantor of the 2027 Notes and the 2028 Notes shall be released from all of its obligations under its guarantee if (i) all of the assets of the Guarantor have been sold; (ii) all of the equity interests of the Guarantor held by Tri Pointe or a subsidiary thereof have been sold; (iii) the Guarantor merges with and into Tri Pointe or another Guarantor, with Tri Pointe or such other Guarantor surviving the merger; (iv) the Guarantor is designated “unrestricted” for covenant purposes; (v) the Guarantor ceases to guarantee any indebtedness of Tri Pointe or any other Guarantor which gave rise to such Guarantor guaranteeing the 2027 Notes or the 2028 Notes; (vi) Tri Pointe exercises its legal defeasance or covenant defeasance options; or (vii) all obligations under the applicable supplemental indenture are discharged.

2024 Notes

Tri Pointe and Tri Pointe Homes Holdings are co-issuers of the 2024 Notes. All of the Guarantors (other than Tri Pointe Homes Holdings) have entered into supplemental indentures pursuant to which they jointly and severally guarantee the obligations of Tri Pointe and Tri Pointe Homes Holdings with respect to the 2024 Notes. Each Guarantor of the 2024 Notes is 100% owned by Tri Pointe and Tri Pointe Homes Holdings, and all guarantees are full and unconditional, subject to customary exceptions pursuant to the indentures governing the 2024 Notes, as described below.

A Guarantor of the 2024 Notes shall be released from all of its obligations under its guarantee if (i) all of the assets of the Guarantor have been sold; (ii) all of the equity interests of the Guarantor held by Tri Pointe or a subsidiary thereof have been sold; (iii) the Guarantor merges with and into Tri Pointe or another Guarantor, with Tri Pointe or such other Guarantor surviving the merger; (iv) the Guarantor is designated “unrestricted” for covenant purposes; (v) the Guarantor ceases to guarantee any indebtedness of Tri Pointe or any other Guarantor which gave rise to such Guarantor guaranteeing the 2024

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Notes; (vi) Tri Pointe exercises its legal defeasance or covenant defeasance options; or (vii) all obligations under the applicable indenture are discharged.

Tri Pointe’s non-Guarantor subsidiaries are considered minor, as defined in Rule 3-10(h) of Regulation S-X, therefore the consolidated financial statements represent the full issuer and guarantor subsidiary results.

Inflation

In 2021, the inflation rate in the U.S. increased significantly, and the inflation rate during the three months ended September 30, 2022 remained historically high. Our 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.

Seasonality

We have experienced seasonal variations in our quarterly operating results and capital requirements. We typically take orders for more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy the deliveries in the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry (including developments and volatility resulting from COVID-19 and the war in Ukraine). In addition to the overall volume of orders and deliveries, our operating results in a given quarter are significantly affected by the number and characteristics of our active selling communities; timing of new community openings; the timing of land and lot sales; and the mix of product types, geographic locations and average selling prices of the homes delivered during the quarter. Therefore, our operating results in any given quarter will fluctuate compared to prior periods based on these factors.

Critical Accounting Estimates

The preparation of our consolidated financial statements requires the use of judgment in the application of accounting policies and estimates of uncertain matters. There have been no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 2022 from those disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2021.

Recently Issued Accounting Standards

See Note 1, Organization, Basis of Presentation and Summary of Significant Accounting Policies, to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks related to fluctuations in interest rates on our outstanding debt. We did not utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivative financial instruments as of or during the nine months ended September 30, 2022. We did not enter into during the nine months ended September 30, 2022, and currently do not hold, derivatives for trading or speculative purposes.

Item 4. Controls and Procedures

We have established disclosure controls and procedures to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and accumulated and communicated to management, including the Chief Executive Officer (the “Principal Executive Officer”) and Chief Financial Officer (the “Principal Financial Officer”), as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of senior management, including our Principal Executive Officer and Principal Financial Officer, we evaluated our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022.

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Our management, including our Principal Executive Officer and Principal Financial Officer, has evaluated our internal control over financial reporting to determine whether any change occurred during the three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the three months ended September 30, 2022.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information required with respect to this item can be found under Note 13, Commitments and Contingencies—Legal Matters, to the accompanying condensed notes to unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and is incorporated by reference into this Item 1.

Item 1A. Risk Factors

There have been no material changes to the risk factors in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021. If any of the risks discussed in our Annual Report on Form 10-K occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the trading price of our common stock could decline significantly and you could lose all or a part of your investment. Some statements in this Quarterly Report on Form 10-Q constitute forward-looking statements. Please refer to Part I, Item 2 of this Quarterly Report on Form 10-Q entitled “Cautionary Note Concerning Forward-Looking Statements.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2022, we repurchased and retired the following shares pursuant to our repurchase programs:


	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced program	Approximate dollar value of shares that may yet be purchased under the program
July 1, 2022 to July 31, 2022	637,802	$	18.43	637,802	$	227,297,496
August 1, 2022 to August 31, 2022	—	$	—	—	$	227,297,496
September 1, 2022 to September 30, 2022	311,109	$	16.09	311,109	$	222,291,228
Total	948,911	$	17.66	948,911

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Item 6. Exhibits


Exhibit Number						Exhibit Description

3.1						Amended and Restated Certificate of Incorporation of Tri Pointe Homes, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (filed July 7, 2015))

3.2						Certificate of Amendment to Amended and Restated Certificate of Incorporation of Tri Pointe Homes, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8‑K (filed January 21, 2021))

3.3						Amended and Restated Bylaws of Tri Pointe Homes, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (filed October 27, 2016))

22.1						List of guarantor subsidiaries of Tri Pointe Homes, Inc. (incorporated by reference to Exhibit 22.1 to the Company’s Annual Report on Form 10-K (filed February 18, 2022))

31.1						Chief Executive Officer Section 302 Certification of the Sarbanes-Oxley Act of 2002

31.2						Chief Financial Officer Section 302 Certification of the Sarbanes-Oxley Act of 2002

32.1						Chief Executive Officer Section 906 Certification of the Sarbanes-Oxley Act of 2002

32.2						Chief Financial Officer Section 906 Certification of the Sarbanes-Oxley Act of 2002

101						The following materials from Tri Pointe Homes, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Cash Flows, and (iv) Condensed Notes to Consolidated Financial Statement.

104						Cover page from Tri Pointe Homes, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (and contained in Exhibit 101).

†						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 report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Tri Pointe Homes, Inc.

Date: October 27, 2022	By:	/s/ Douglas F. Bauer
		Douglas F. Bauer
		Chief Executive Officer
		(Principal Executive Officer)
Date: October 27, 2022	By:	/s/ Glenn J. Keeler
		Glenn J. Keeler
		Chief Financial Officer
		(Principal Financial Officer)

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