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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 March 31, 2020
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                       to                      .
Commission file number 001-36126      

LGI HOMES, INC.

(Exact name of registrant as specified in its charter)

Delaware46-3088013
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1450 Lake Robbins Drive,Suite 430, The Woodlands,Texas77380
(Address of principal executive offices)(Zip code)
(281)
362-8998
(Registrants Telephone Number, Including Area Code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareLGIHNASDAQ Global Select Market
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filerAccelerated filer
Non-accelerated filerSmaller 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  

As of May 1, 2020, there were 25,074,446 shares of the registrant’s common stock, par value $0.01 per share, outstanding.


Table of Contents
TABLE OF CONTENTS
   



Page


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Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LGI HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
 March 31,December 31,
 20202019
ASSETS
Cash and cash equivalents$118,232  $38,345  
Accounts receivable45,006  56,390  
Real estate inventory1,481,833  1,499,624  
Pre-acquisition costs and deposits37,448  37,244  
Property and equipment, net1,888  1,632  
Other assets20,318  16,241  
Deferred tax assets, net2,301  4,621  
Goodwill and intangible assets, net12,018  12,018  
Total assets$1,719,044  $1,666,115  
LIABILITIES AND EQUITY
Accounts payable$19,066  $12,495  
Accrued expenses and other liabilities95,980  117,868  
Notes payable744,393  690,559  
Total liabilities859,439  820,922  
COMMITMENTS AND CONTINGENCIES
EQUITY
Common stock, par value $0.01, 250,000,000 shares authorized, 26,680,474 shares issued and 25,074,446 shares outstanding as of March 31, 2020 and 26,398,409 shares issued and 25,359,409 shares outstanding as of December 31, 2019
266  264  
Additional paid-in capital255,509  252,603  
Retained earnings653,221  610,382  
Treasury stock, at cost, 1,606,028 shares and 1,039,000 shares, respectively
(49,391) (18,056) 
Total equity859,605  845,193  
Total liabilities and equity$1,719,044  $1,666,115  







See accompanying notes to the consolidated financial statements.
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LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)

 
 Three Months Ended March 31,
 20202019
Home sales revenues$454,727  $287,594  
Cost of sales348,163  221,290  
Selling expenses32,763  26,791  
General and administrative19,923  18,438  
   Operating income53,878  21,075  
Other income, net(1,011) (619) 
Net income before income taxes54,889  21,694  
Income tax provision12,050  3,360  
Net income$42,839  $18,334  
Earnings per share:
Basic$1.69  $0.81  
Diluted$1.67  $0.73  
Weighted average shares outstanding:
Basic25,323,119  22,744,726  
Diluted25,592,835  25,086,183  



















See accompanying notes to the consolidated financial statements.
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LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)

 
Common StockAdditional Paid-In CapitalRetained EarningsTreasury StockTotal Equity
SharesAmount
BALANCE—December 31, 201926,398,409  $264  $252,603  $610,382  $(18,056) $845,193  
Net income—  —  —  42,839  —  42,839  
Issuance of restricted stock units in settlement of accrued bonuses—  —  222  —  —  222  
Stock repurchase—  —  —  —  (31,335) (31,335) 
Compensation expense for equity awards—  —  1,853  —  —  1,853  
Stock issued under employee incentive plans282,065  2  831  —  —  833  
BALANCE— March 31, 202026,680,474  $266  $255,509  $653,221  $(49,391) $859,605  


BALANCE—December 31, 201823,746,385  $237  $241,988  $431,774  $(18,056) $655,943  
Net income—  —  —  18,334  —  18,334  
Issuance of restricted stock units in settlement of accrued bonuses—  —  217  —  —  217  
Compensation expense for equity awards—  —  1,783  —  —  1,783  
Stock issued under employee incentive plans218,345  2  647  —  —  649  
BALANCE— March 31, 201923,964,730  $239  $244,635  $450,108  $(18,056) $676,926  


See accompanying notes to the consolidated financial statements.
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Table of Contents

LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 20202019
Cash flows from operating activities:
Net income$42,839  $18,334  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization161  165  
Compensation expense for equity awards1,853  1,783  
Deferred income taxes2,320  1,650  
Changes in assets and liabilities:
Accounts receivable11,385  10,849  
Real estate inventory17,902  (61,254) 
Pre-acquisition costs and deposits(204) 2,054  
Other assets(2,953) 1,112  
Accounts payable6,571  5,449  
Accrued expenses and other liabilities(21,071) (13,320) 
Net cash provided by (used in) operating activities58,803  (33,178) 
Cash flows from investing activities:
Purchases of property and equipment(417) (211) 
Investment in unconsolidated entity(1,125)   
Net cash used in investing activities(1,542) (211) 
Cash flows from financing activities:
Proceeds from notes payable128,128  45,000  
Payments on notes payable(75,000) (23,800) 
Proceeds from sale of stock, net of offering expenses833  649  
Stock repurchase(31,335)   
Net cash provided by financing activities22,626  21,849  
Net increase (decrease) in cash and cash equivalents79,887  (11,540) 
Cash and cash equivalents, beginning of period38,345  46,624  
Cash and cash equivalents, end of period$118,232  $35,084  







See accompanying notes to the consolidated financial statements.
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LGI HOMES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.  ORGANIZATION AND BASIS OF PRESENTATION
Organization and Description of the Business
LGI Homes, Inc., a Delaware corporation (the “Company”, “we,” “us,” or “our”), is engaged in the development of communities and the design, construction and sale of new homes in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia and Virginia.
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The accompanying unaudited consolidated financial statements include all adjustments that are of a normal recurring nature and necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.
The accompanying unaudited financial statements as of March 31, 2020, and for the three months ended March 31, 2020 and 2019, include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and these differences could have a significant impact on the financial statements.
COVID-19
On March 11, 2020, the World Health Organization declared the current outbreak of the novel strain of coronavirus (“COVID-19”) to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in certain of our markets. We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations. During the first quarter of 2020, certain markets in which we do business temporarily stopped our construction of homes. As of the date of this Quarterly Report on Form 10-Q, we have resumed construction of homes in those markets. Although we continue to build and sell homes in all of our markets, sales have slowed significantly, and sales contract cancellations have been impacted. The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of COVID-19, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. While we cannot reasonably estimate the length or severity of this pandemic, an extended economic slowdown in the United States could materially impact our consolidated financial statements in 2020 and beyond.
Recently Adopted Accounting Standards
On January 1, 2020, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”), which requires entities that are customers in cloud computing arrangements to defer implementation costs if they would be capitalized by the entity in software licensing arrangements under the internal-use software guidance. The guidance may be applied retrospectively or prospectively to implementation costs incurred after the date of adoption. The adoption of ASU 2018-15 did not have a material effect on our consolidated financial statements or disclosures.
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Table of Contents
On January 1, 2020, we adopted the FASB ASU No. 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements of fair value measurements. ASU 2018-13 is effective for us beginning January 1, 2020. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. The adoption of ASU 2018-13 did not have a material effect on our consolidated financial statements or disclosures.
On January 1, 2020, we adopted the FASB ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment” (“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us beginning January 1, 2020, with early adoption permitted, and applied prospectively. The adoption of ASU 2017-04 did not have a material effect on our consolidated financial statements or disclosures.
On January 1, 2020, we adopted the FASB ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments from an “incurred loss” approach to a new “expected credit loss” methodology. ASU 2016-13 is effective for us beginning January 1, 2020, with early adoption permitted. The adoption of ASU 2016-13 did not have a material effect on our consolidated financial statements or disclosures.
2.  REVENUES
Revenue Recognition
Revenues from home sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the customer and we have no significant continuing involvement with the home. Home sales discounts and incentives granted to customers, which are related to the customers’ closing costs that we pay on the customers’ behalf, are recorded as a reduction of revenue in our consolidated financial statements of operations.
The following table presents our home sales revenues disaggregated by revenue stream (in thousands):
Three Months Ended March 31,
20202019
Retail home sales revenues$410,402  $281,465  
Other44,325  6,129  
Total home sales revenues$454,727  $287,594  
The following table presents our home sales revenues disaggregated by geography, based on our determined reportable segments in Note 13 (in thousands):
Three Months Ended March 31,
20202019
Central$165,775  $124,197  
Southeast88,447  52,414  
Northwest101,948  36,254  
West58,485  45,817  
Florida40,072  28,912  
Total home sales revenues$454,727  $287,594  
Home Sales Revenues
We generate revenues primarily by delivering move-in ready entry-level and move-up spec homes sold under our LGI Homes brand and our luxury series spec homes sold under our Terrata Homes brand.
Retail homes sold under both our LGI Homes brand and Terrata Homes brand focus on providing move-in ready homes with standardized features within favorable markets that meet certain demographic and economic conditions. Our LGI Homes brand primarily markets to entry-level or first-time homebuyers, while our Terrata Homes brand primarily markets to move-up homebuyers.
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Table of Contents
Our other revenues are composed of our wholesale home sales under our LGI Homes brand and Terrata Homes brand in existing markets. Wholesale homes are primarily sold under a bulk sales agreement and focus on providing move-in ready homes with standardized features to real estate investors that will ultimately use the single-family homes as rental properties.
Performance Obligations
Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms as customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title company within a few business days after closing.
Sales and broker commissions are incremental costs incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained. Sales and broker commissions are expensed upon fulfillment of a home closing. Advertising costs are costs to obtain a contract that would have been incurred regardless of whether the contract was obtained and are recognized as an expense when incurred. Sales and broker commissions and advertising costs are recorded within sales and marketing expense presented in our consolidated statements of operations as selling expenses.
3.  REAL ESTATE INVENTORY
Our real estate inventory consists of the following (in thousands):
March 31,December 31,
20202019
Land, land under development and finished lots$916,819  $912,651  
Information centers27,837  26,959  
Homes in progress243,390  234,470  
Completed homes293,787  325,544  
Total real estate inventory$1,481,833  $1,499,624  
Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case the affected inventory is written down to fair value.
Land, development and other project costs, including interest and property taxes incurred during development and home construction, net of expected reimbursable development costs, are capitalized to real estate inventory. Land development and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate. The costs of lots are transferred to homes in progress when home construction begins. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method. Costs that are not specifically identifiable to a home are allocated on a pro rata basis, which we believe approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots or homes within a community are similar in value. Inventory costs for completed homes are expensed to cost of sales as homes are closed. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining unsold lots and homes in the community on a pro rata basis.
The life cycle of a community generally ranges from two to five years, commencing with the acquisition of land, continuing through the land development phase and concluding with the construction and sale of homes. A constructed home is used as the community information center during the life of the community and then sold. Actual individual community lives will vary based on the size of the community, the sales absorption rate and whether the property was purchased as raw land or finished lots.
Interest and financing costs incurred under our debt obligations, as more fully discussed in Note 5, are capitalized to qualifying real estate projects under development and homes under construction.
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4.  ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued and other liabilities consist of the following (in thousands):
March 31,December 31,
20202019
Taxes payable$19,649  $28,679  
Retentions and development payable27,223  26,790  
Accrued compensation, bonuses and benefits12,077  16,748  
Accrued interest5,789  11,361  
Inventory related obligations7,215  7,808  
Lease Liability5,439  5,645  
Warranty reserve3,750  3,500  
Other14,838  17,337  
Total accrued expenses and other liabilities$95,980  $117,868  
Inventory Related Obligations
We own lots in certain communities in Arizona, Florida and Texas that have Community Development Districts or similar utility and infrastructure development special assessment programs that allocate a fixed amount of debt service associated with development activities to each lot. This obligation for infrastructure development is attached to the land, which is typically payable over a 30-year period and is ultimately assumed by the homebuyer when home sales are closed. Such obligations represent a non-cash cost of the lots.
Estimated Warranty Reserve
We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems.
Changes to our warranty accrual are as follows (in thousands):
Three Months Ended March 31,
 20202019
Warranty reserves, beginning of period$3,500  $2,950  
Warranty provision1,420  1,095  
Warranty expenditures(1,170) (1,045) 
Warranty reserves, end of period$3,750  $3,000  

5.  NOTES PAYABLE
Revolving Credit Agreement
On May 6, 2019, we entered into that certain Fourth Amended and Restated Credit Agreement (as amended by the First Amendment (as defined below), the “2019 Credit Agreement”) with several financial institutions and Wells Fargo Bank, National Association, as administrative agent. The 2019 Credit Agreement has substantially similar terms and provisions to our third amended and restated credit agreement entered into in May 2018 with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “2018 Credit Agreement”), but among other things, provides for a revolving credit facility of $550.0 million, which could be increased at our request by up to $100.0 million if the lenders make additional commitments, subject to the terms and conditions of the 2019 Credit Agreement (which was requested in December 2019). On December 6, 2019, we entered into a Lender Addition and Acknowledgement Agreement and First Amendment to Fourth Amended and Restated Credit Agreement (the “First Amendment”) with certain lenders and Wells Fargo Bank, National Association, as an increasing lender and administrative agent, whereby the aggregate revolving commitments under the 2019 Credit Agreement increased by $100.0 million from $550.0 million to $650.0 million in accordance with the relevant provisions of the 2019 Credit Agreement.
The 2019 Credit Agreement matures on May 31, 2022. Before each anniversary of the 2019 Credit Agreement, we may request a one-year extension of its maturity date. The 2019 Credit Agreement is guaranteed by each of our subsidiaries that have gross assets equal to or greater than $0.5 million. The borrowings and letters of credit outstanding under the 2019 Credit Agreement, together with the outstanding principal balance of our 6.875% Senior Notes due 2026 (the “Senior Notes”), may
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not exceed the borrowing base under the 2019 Credit Agreement. As of March 31, 2020, the borrowing base under the 2019 Credit Agreement was $904.8 million, of which borrowings, including the Senior Notes, of $752.7 million were outstanding, $15.0 million of letters of credit were outstanding and $137.1 million was available to borrow under the 2019 Credit Agreement.
Interest is paid monthly on borrowings under the 2019 Credit Agreement at the London Interbank Offered Rate (“LIBOR”) plus 2.50%. The 2019 Credit Agreement applicable margin for LIBOR loans ranges from 2.35% to 2.75% based on our leverage ratio. At March 31, 2020, LIBOR was 0.92%.
The 2019 Credit Agreement contains various financial covenants, including a minimum tangible net worth, a leverage ratio, a minimum liquidity amount and an EBITDA to interest expense ratio. The 2019 Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At March 31, 2020, we were in compliance with all of the covenants contained in the 2019 Credit Agreement.
On April 30, 2020, we entered into a Second Amendment to Fourth Amended and Restated Credit Agreement (the “Second Amendment”), which amends the 2019 Credit Agreement (as so amended, the “Credit Agreement”). In the Second Amendment, lenders with $520.0 million, or 80.0%, of the $650.0 million of commitments under the Credit Agreement, agreed to extend the maturity of their commitments to May 31, 2023, with the remaining lenders retaining their existing maturity. The Second Amendment also reduced the minimum EBITDA to interest expense ratio from 2.50 to 1.75, increased the sublimit for letters of credit to $40.0 million and established a LIBOR floor of 0.70%. The Credit Agreement otherwise has substantially similar terms and provisions to the 2019 Credit Agreement and continues to provide for a $650.0 million revolving credit facility, which can be increased at the request of the Company by up to $100.0 million, subject to the terms and conditions of the Credit Agreement.
Convertible Notes
On November 15, 2019, our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) matured, which resulted in the principal payment of $70.0 million and the issuance of 2,381,751 shares of our common stock for the premium associated with the Convertible Notes.
Senior Notes Offering
On July 6, 2018, we issued $300.0 million aggregate principal amount of the Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act. Interest on the Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019, and the Senior Notes mature on July 15, 2026. Terms of the Senior Notes are governed by an Indenture and First Supplemental Indenture thereto, each dated as of July 6, 2018, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.
Notes payable consist of the following (in thousands):
March 31, 2020December 31, 2019
Notes payable under the 2019 Credit Agreement ($650.0 million revolving credit facility at March 31, 2020) maturing on May 31, 2022; interest paid monthly at LIBOR plus 2.50%; net of debt issuance costs of approximately $4.5 million and $5.0 million at March 31, 2020 and December 31, 2019, respectively
$448,199  $394,531  
6.875% Senior Notes due July 15, 2026; interest paid semi-annually at 6.875%; net of debt issuance costs of approximately $2.1 million and $2.2 million at March 31, 2020 and December 31, 2019, respectively; and approximately $1.7 million and $1.8 million in unamortized discount at March 31, 2020 and December 31, 2019, respectively
296,194  296,028  
Total notes payable$744,393  $690,559  

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Capitalized Interest
Interest activity, including other financing costs, for notes payable for the periods presented is as follows (in thousands):
Three Months Ended March 31,
20202019
Interest incurred$10,156  $11,417  
Less: Amounts capitalized(10,156) (11,417) 
Interest expense$  $  
Cash paid for interest$15,024  $14,833  
Included in interest incurred was amortization of deferred financing costs and discounts for notes payable of $0.7 million and $1.1 million for the three months ended March 31, 2020 and 2019, respectively.
6.  INCOME TAXES
We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The statute of limitations with regards to our federal income tax filings is three years. The statute of limitations for our state tax jurisdictions is three to four years depending on the jurisdiction. In the normal course of business, we are subject to tax audits in various jurisdictions, and such jurisdictions may assess additional income taxes. We do not expect the outcome of any audit to have a material effect on our consolidated financial statements; however, audit outcomes and the timing of audit adjustments are subject to significant uncertainty.
For the three months ended March 31, 2020, our effective tax rate of 22.0% is higher than the Federal statutory rate primarily as a result of an increase in the rate for state income taxes and expenses related to non-deductible salaries related to Section 162(m) of the Internal Revenue Code of 1986, as amended, offset by the net of the federal benefit payments, deductions in excess of compensation cost (“windfalls”) for share-based payments.
Income taxes paid were $18.4 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.
7.  EQUITY
Shelf Registration Statement
We have an effective shelf registration statement on Form S-3 (Registration No. 333-227012) that was filed on August 24, 2018 with the Securities and Exchange Commission, registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these securities.
Stock Repurchase Program
In November 2018, we announced that our Board of Directors (the “Board”) authorized a stock repurchase program, pursuant to which we may purchase up to $50.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws. For the three months ended March 31, 2020, we repurchased 567,028 shares of our common stock for $31.3 million to be held as treasury stock. A total of 606,028 shares have been repurchased since the stock repurchase program commenced. As of March 31, 2020, we may purchase up to $17.2 million of shares of our common stock under our stock repurchase program. The timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase program will be determined by our management at its discretion based on a variety of factors, including the market price of our common stock, corporate considerations, general market and economic conditions and legal requirements. The stock repurchase program may be modified, discontinued or suspended at any time.

8.  EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2020 and 2019:
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Three Months Ended March 31,
20202019
Numerator (in thousands):
Net Income (Numerator for basic and dilutive earnings per share)$42,839  $18,334  
Denominator:
       Basic weighted average shares outstanding25,323,119  22,744,726  
       Effect of dilutive securities:
Convertible Notes - treasury stock method  2,043,494  
         Stock-based compensation units269,716  297,963  
       Diluted weighted average shares outstanding25,592,835  25,086,183  
Basic earnings per share$1.69  $0.81  
Diluted earnings per share$1.67  $0.73  
Antidilutive non-vested restricted stock units excluded from calculation of diluted earnings per share26,893  35,157  
In accordance with Accounting Standards Codification (“ASC”) 260-10, Earnings Per Share, we calculated the dilutive effect of the Convertible Notes using the treasury stock method, since we had the intent and ability to settle the principal amount of the outstanding Convertible Notes in cash. The Convertible Notes matured and were repaid in full on November 15, 2019. Prior to the maturity of the Convertible Notes, we included the effect of the additional potential dilutive shares if our common stock price exceeded the conversion price of $21.52 per share under the treasury stock method. During the three months ended March 31, 2019, the average market price of our common stock exceeded the conversion price of $21.52 per share.
9. STOCK-BASED COMPENSATION
Non-performance Based Restricted Stock Units
The following table summarizes the activity of our time-vested restricted stock units (“RSUs”):
Three Months Ended March 31,
20202019
SharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair Value
Beginning balance 162,686  $50.84  171,055  $39.04  
   Granted46,701  $59.81  47,245  $56.49  
   Vested(51,531) $31.95  (40,265) $21.82  
   Forfeited(982) $51.03  (2,026) $48.61  
Ending balance156,874  $59.71  176,009  $47.59  
We recognized $0.8 million and $0.5 million of stock-based compensation expense related to outstanding RSUs for the three months ended March 31, 2020 and 2019, respectively. Generally, the RSUs cliff vest on the third anniversary of the grant date and can only be settled in shares of our common stock. At March 31, 2020, we had unrecognized compensation cost of $5.9 million related to unvested RSUs, which is expected to be recognized over a weighted average period of 2.1 years.
Performance-Based Restricted Stock Units
The Compensation Committee of the Board has granted awards of performance-based RSUs (“PSUs”) under the Amended and Restated LGI Homes, Inc. 2013 Equity Incentive Plan to certain members of senior management based on three-year performance cycles. The PSUs provide for shares of our common stock to be issued based on the attainment of certain performance metrics over the applicable three-year periods. The number of shares of our common stock that may be issued to the recipients for the PSUs range from 0% to 200% of the target amount depending on actual results as compared to the target performance metrics. The terms of the PSUs provide that the payouts will be capped at 100% of the target number of PSUs
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granted if absolute total stockholder return is negative during the performance period, regardless of EPS performance; this market condition applies for amounts recorded above target. The compensation expense associated with the PSU grants is determined using the derived grant date fair value, based on a third-party valuation analysis, and expensed over the applicable period. The PSUs vest upon the determination date for the actual results at the end of the three-year period and require that the recipients continue to be employed by us through the determination date. The PSUs can only be settled in shares of our common stock.
The following table summarizes the activity of our PSUs for the three months ended March 31, 2020:
Period GrantedPerformance PeriodTarget PSUs Outstanding at December 31, 2019Target PSUs GrantedTarget PSUs VestedTarget PSUs ForfeitedTarget PSUs Outstanding at March 31, 2020Weighted Average Grant Date Fair Value
20172017 - 2019104,770  —  (104,770) —    $31.64  
20182018 - 202060,040  —  —  —  60,040  $64.60  
20192019 - 202181,242  —  —  —  81,242  $56.49  
20202020-202288,538  —  —  88,538  $59.81  
Total246,052  88,538  (104,770)   229,820  
At March 31, 2020, management estimates that the recipients will receive approximately 100%, 89% and 113% of the 2020, 2019 and 2018 target number of PSUs, respectively, at the end of the applicable three-year performance cycle based on projected performance compared to the target performance metrics. We recognized $0.9 million and $1.2 million of total stock-based compensation expense related to outstanding PSUs for the three months ended March 31, 2020 and 2019, respectively. PSUs granted in 2017 vested on March 15, 2020 at 199% of the target amount, and 208,867 shares of our common stock were issued upon such vesting. At March 31, 2020, we had unrecognized compensation cost of $9.3 million, based on the probable amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.4 years.
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10. FAIR VALUE DISCLOSURES
ASC Topic 820, Fair Value Measurements (“ASC 820”), defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that differs from the transaction price or market price of the asset or liability.
ASC 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows:
Level 1 - Fair value is based on quoted prices in active markets for identical assets or liabilities.
Level 2 - Fair value is determined using significant observable inputs, generally either quoted prices in active markets for
similar assets or liabilities, or quoted prices in markets that are not active.
Level 3 - Fair value is determined using one or more significant inputs that are unobservable in active markets at the
measurement date, such as a pricing model, discounted cash flow or similar technique.
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets. The fair value of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. As of March 31, 2020, the 2019 Credit Agreement’s carrying value approximates market value since it has a floating interest rate, which increases or decreases with market interest rates and our leverage ratio.
In order to determine the fair value of the Senior Notes, the future contractual cash flows are discounted at our estimate of current market rates of interest, which were determined based upon the average interest rates of similar senior notes within the homebuilding industry (Level 2 measurement).
The following table below shows the level and measurement of liabilities at March 31, 2020 and December 31, 2019 (in thousands):
March 31, 2020December 31, 2019
Fair Value HierarchyCarrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value
Senior Notes
Level 2
$296,194  $263,362  $296,028  $337,853  

11. RELATED PARTY TRANSACTIONS
Land Purchases from Affiliates
As of March 31, 2020, we have two land purchase contracts to purchase a total of 198 finished lots in Pasco County and Manatee County, Florida from affiliates of one of our directors for a total base purchase price of approximately $6.9 million. The lots will be purchased in takedowns, subject to annual price escalation ranging from 3% to 6% per annum, and may provide for additional payments to the seller at the time of sale to the homebuyer. We have a $0.5 million non-refundable deposit at March 31, 2020 related to these land purchase contracts. In August 2019, we purchased our first takedown of 58 lots on the Pasco County contract for a base purchase price of approximately $2.1 million. We did not experience any takedowns concerning these two land purchase contracts during the three months ended March 31, 2020 and 2019. We anticipate the first closing on the Manatee County contract to occur in the second half of 2020.
During the three months ended March 31, 2020, we entered into a land purchase contract to purchase 25 finished lots in Montgomery County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately $2.0 million. We anticipate the closing on the Montgomery County contract to occur in the second quarter of 2020.
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12.  COMMITMENTS AND CONTINGENCIES
Contingencies
In the ordinary course of doing business, we are subject to claims or proceedings from time to time relating to the purchase, development and sale of real estate and homes and other aspects of our homebuilding operations. Management believes that these claims include usual obligations incurred by real estate developers and residential home builders in the normal course of business. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.
We have provided unsecured environmental indemnities to certain lenders and other counterparties. In each case, we have performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, we may have recourse against other previous owners. In the ordinary course of doing business, we are subject to regulatory proceedings from time to time related to environmental and other matters. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.
Land Deposits
We have land purchase contracts, generally through cash deposits, for the right to purchase land or lots at a future point in time with predetermined terms. We do not have title to the property, and obligations with respect to the land purchase contracts are generally limited to the forfeiture of the related nonrefundable cash deposits. The following is a summary of our land purchase deposits included in pre-acquisition costs and deposits (in thousands, except for lot count):
March 31, 2020December 31, 2019
Land deposits and option payments$34,829  $35,111  
Commitments under the land purchase contracts if the purchases are consummated$560,730  $539,122  
Lots under land purchase contracts18,855  16,205  
As of March 31, 2020 and December 31, 2019, approximately $25.1 million and $26.3 million, respectively, of the land deposits are related to purchase contracts to deliver finished lots that are refundable under certain circumstances, such as feasibility or specific performance, and secured by mortgages or letters of credit or guaranteed by the seller or its affiliates.
Lease Obligations
We recognize lease obligations and associated ROU assets for our existing non-cancelable leases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have non-cancelable operating leases primarily associated with our corporate and regional office facilities.  Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets, as included in other assets on the consolidated balance sheets, were $5.2 million and $5.3 million at March 31, 2020 and December 31, 2019, respectively. Lease obligations, as included in accrued expenses and other liabilities on the consolidated balance sheets, were $5.4 million and $5.6 million at March 31, 2020 and December 31, 2019, respectively.
Operating lease cost, as included in general and administrative expense in our consolidated statements of operations, for the three months ended March 31, 2020 and 2019 was $0.4 million and $0.3 million, respectively. Cash paid for amounts included in the measurement of lease liabilities for operating leases during the three months ended March 31, 2020 and 2019 was $0.4 million and $0.3 million, respectively. As of March 31, 2020, the weighted-average discount rate was 5.47% and our weighted-average remaining life was 7.0 years. We do not have any significant lease contracts that have not yet commenced at March 31, 2020.
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The table below shows the future minimum payments under non-cancelable operating leases at March 31, 2020 (in thousands):
Year Ending December 31,Operating leases
2020$857  
20211,099  
2022944  
2023819  
2024674  
Thereafter2,237  
Total6,630  
Lease amount representing interest(1,191) 
Present value of lease liabilities$5,439  
Bonding and Letters of Credit 
We have outstanding letters of credit and performance and surety bonds totaling $118.5 million (including $15.0 million of letters of credit issued under the 2019 Credit Agreement) and $108.7 million at March 31, 2020 and December 31, 2019, respectively, related to our obligations for site improvements at various projects. Management does not believe that draws upon the letters of credit, surety bonds or financial guarantees if any, will have a material effect on our consolidated financial position, results of operations or cash flows.
Investment in Unconsolidated Entity
In July 2019, we became a limited partner in a real estate investment fund with a maximum $30.0 million commitment. The term of the commitment is eight years and includes renewals of up to two additional years. As of March 31, 2020 and December 31, 2019, we have a total of $2.1 million and $1.1 million, respectively, within other assets on the balance sheet. Contributions into the unconsolidated entity are for the use of investing in certain real estate transactions.
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13.  SEGMENT INFORMATION
We operate one principal homebuilding business that is organized and reports by division. We have seven operating segments (our Central, Midwest, Southeast, Mid-Atlantic, Northwest, West, and Florida divisions) that we aggregate into five reportable segments at March 31, 2020: our Central, Southeast, Northwest, West, and Florida divisions. These segments reflect the way the Company evaluates its business performance and manages its operations. The Central division is our largest division and comprised approximately 36% of total home sales revenues for the three months ended March 31, 2020.
In accordance with ASC Topic 280, Segment Reporting, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in deciding how to allocate resources and in assessing performance. The CODMs primarily evaluate performance based on the number of homes closed, gross margin and average sales price.
The seven operating segments qualify as our five reportable segments. In determining the most appropriate reportable segments, we consider operating segments’ economic and other characteristics, including home floor plans, average selling prices, gross margin percentage, geographical proximity, production construction processes, suppliers, subcontractors, regulatory environments, customer type and underlying demand and supply. Each operating segment follows the same accounting policies and is managed by our management team. We have no inter-segment sales, as all sales are to external customers. Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.
Financial information relating to our reportable segments was as follows (in thousands):
Three Months Ended March 31,
20202019
Revenues:
Central$165,775  $124,197  
Southeast88,447  52,414  
Northwest101,948  36,254  
West58,485  45,817  
Florida40,072  28,912  
Total home sales revenues$454,727  $287,594  
Net income (loss) before income taxes:
Central$24,234  $14,647  
Southeast7,908  415  
Northwest16,527  3,376  
West5,272  3,107  
Florida2,525  1,215  
Corporate (1)
(1,577) (1,066) 
Total net income (loss) before income taxes$54,889  $21,694  
(1)The Corporate balance consists primarily of general and administration unallocated costs for various shared service functions, as well as our warranty reserve. Actual warranty expenses are reflected within the reportable segments.
March 31, 2020December 31, 2019
Assets:
Central$635,106  $637,083  
Southeast419,068  410,944  
Northwest195,660  221,132  
West186,546  193,545  
Florida149,126  149,877  
Corporate (1)
133,538  53,534  
Total assets$1,719,044  $1,666,115  
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(1)As of March 31, 2020 and December 31, 2019 , the Corporate balance consists primarily of cash, prepaid insurance, ROU assets and prepaid expenses.
14. SUBSEQUENT EVENTS
Amendment to 2019 Credit Agreement. On April 30, 2020, we entered into the Second Amendment, which amended the 2019 Credit Agreement, as more fully discussed in Note 5.
Additional Subsidiary Guarantors. On April 30, 2020, we and our subsidiaries that guarantee our obligations under the Credit Agreement entered into a Second Supplemental Indenture to that certain Indenture, dated as of July 6, 2018, with Wilmington Trust, National Association, as trustee, pursuant to which the Company’s wholly owned subsidiaries, LGI Homes – Pennsylvania, LLC and LGI Homes – Utah, LLC, issued a full and unconditional guarantee of the Senior Notes.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc. and its subsidiaries.
Business Overview
We are engaged in the design, construction and sale of new homes in the following markets:
WestNorthwestCentralMidwestFloridaSoutheastMid-Atlantic
Phoenix, AZSeattle, WAHouston, TXMinneapolis, MNTampa, FLAtlanta, GAWashington, D.C.
Tucson, AZPortland, ORDallas Ft. Worth, TXOrlando, FLCharlotte, NCRichmond, VA
Albuquerque, NMDenver, COSan Antonio, TXFort Myers, FLRaleigh, NC
Las Vegas, NVColorado Springs, COAustin, TXJacksonville, FLWilmington, NC
Sacramento, CAOklahoma City, OKFort Pierce, FLWinston-Salem, NC
Riverside, CADaytona Beach, FLColumbia, SC
Sarasota, FLGreenville, SC
Birmingham, AL
Nashville, TN
Our management team has been in the residential land development business since the mid-1990s. Since commencing home building operations in 2003, we have constructed and closed over 35,000 homes. During the three months ended March 31, 2020, we had 1,835 home closings, compared to 1,228 home closings during the three months ended March 31, 2019.
We sell homes under the LGI Homes and Terrata Homes brands. Our 113 active communities at March 31, 2020 included two Terrata Homes communities.
During the three months ended March 31, 2020, we recorded $44.3 million in wholesale revenues as a result of 199 homes closings, representing 10.8% of the total homes closed during the three months ended March 31, 2020. During the three months ended March 31, 2019, we recorded $6.1 million in wholesale revenues as a result of 30 wholesale home closings, representing 2.4% of the total homes closed during the three months ended March 31, 2019. We believe our wholesale home closings provide opportunities for us to leverage our systems and processes to meet the needs of companies looking to acquire multiple homes for rental purposes, primarily through bulk sales agreements.
COVID-19
On March 11, 2020, the World Health Organization declared the current outbreak of the novel strain of coronavirus (“COVID-19”) to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in certain of our markets. We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations. During the first quarter of 2020, certain markets in which we do business temporarily stopped our construction of homes. As of the date of this Quarterly Report on Form 10-Q, we have resumed construction of homes in those markets. Although we continue to build and sell homes in all of our markets, sales have slowed significantly, and sales contract cancellations have been impacted. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of COVID-19, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us, our subcontractors, suppliers and other business counterparties to experience operational delays.
Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, consumer confidence, housing demand, availability of financing for home buyers, availability and prices of new homes compared to existing inventory, and demographic trends. These factors, and in particular
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consumer confidence, can be significantly adversely affected by a variety of factors beyond our control. The outbreak of COVID-19 has caused the shutdown of large portions of our national economy. The spread of COVID-19 has also caused significant volatility in U.S. and international debt and equity markets, which can negatively impact consumer confidence.
In response to COVID-19, we have taken steps to prioritize the health and safety of our employees, customers, subcontractors and suppliers, including enhancing sales office procedures and reducing information center hours for employee protection, adjusting staffing in the field, requiring corporate personnel to work remotely and following Center for Disease Control guidelines. We are continuing to protect the health and safety of our employees and those of our subcontractors, customers and other business counterparties, and this includes changes to comply with health-related guidelines as they are modified and supplemented.
As a homebuilder and developer, we provide an important service to our customers. During the COVID-19 outbreak, our main focus beyond the health and safety mentioned above, will be to continue our efforts to sell homes and complete our homes under construction. In addition to the measures discussed above, we have implemented certain cash management policies, including eliminating business air travel, cancelling group meetings, delaying or canceling land acquisitions, deferring new starts to reduce our overall inventory, significantly reducing marketing expenditures and delaying major expenditures.
While we continue to assess the COVID-19 situation, at this time we cannot estimate with any degree of certainty the full impact of the COVID-19 outbreak on our financial condition and future results of operations, although we expect the COVID-19 situation to adversely impact future quarters. We also cannot predict the full impact that the significant disruption and volatility currently being experienced in the markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of COVID-19, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A. Risk Factors in Part II of this Quarterly Report on Form 10-Q.
Recent Developments
During the three months ended March 31, 2020, we continued our previously announced stock repurchase program with the purchase of 567,028 shares of our common stock for $31.3 million through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws.
During the three months ended March 31, 2020, we increased our market presence in two of our operating segments with the entry into the Sarasota, Florida and Greenville, South Carolina markets.
Key Results
Key financial results as of and for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, were as follows:
Home sales revenues increased 58.1% to $454.7 million from $287.6 million.
Homes closed increased 49.4% to 1,835 homes from 1,228 homes.
Average sales price of our homes increased 5.8% to $247,808 from $234,197.
Gross margin as a percentage of home sales revenues increased to 23.4% from 23.1%.
Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 25.5% from 25.1%.
Net income before income taxes increased 153.0% to $54.9 million from $21.7 million.
Net income increased 133.7% to $42.8 million from $18.3 million.
EBITDA (non-GAAP) as a percentage of home sales revenues increased to 14.1% from 9.5%.
Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 14.0% from 9.5%.
Total owned and controlled lots increased 4.6% to 50,273 lots at March 31, 2020 from 48,062 lots at December 31, 2019.
For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “—Non-GAAP Measures.”