SEC Filing | LGI Homes, Inc.

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lgih-20220930

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 001-36126

LGI HOMES, INC.

(Exact name of registrant as specified in its charter)

Delaware

46-3088013

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1450 Lake Robbins Drive,

Suite 430,

The Woodlands,

Texas

77380

(Address of principal executive offices)

(Zip code)

(281)

362-8998

(Registrant’s Telephone Number, Including Area Code)

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

LGIH

NASDAQ 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 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 ☒

As of October 28, 2022, there were 23,290,286 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

Table of Contents

TABLE OF CONTENTS


		Page
PART I - FINANCIAL INFORMATION
Item 1.	LGI Homes, Inc. Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021	4
	Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021	5
	Consolidated Statements of Equity for the three and nine months ended September 30, 2022 and 2021	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021	8
	Notes to the Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38

PART II - OTHER INFORMATION
Item 1A.	Risk Factors	38
Item 6.	Exhibits	39

SIGNATURES		40

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LGI HOMES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)


	September 30,		December 31,
	2022		2021
ASSETS
Cash and cash equivalents	$	52,660	$	50,514
Accounts receivable	37,450		57,909
Real estate inventory	2,871,900		2,085,904
Pre-acquisition costs and deposits	32,109		40,702
Property and equipment, net	26,051		16,944
Other assets	72,976		81,676
Deferred tax assets, net	7,636		6,198
Goodwill	12,018		12,018
Total assets	$	3,112,800	$	2,351,865

LIABILITIES AND EQUITY
Accounts payable	$	55,242	$	14,172
Accrued expenses and other liabilities	220,476		136,609
Notes payable	1,230,101		805,236
Total liabilities	1,505,819		956,017

COMMITMENTS AND CONTINGENCIES
EQUITY
Common stock, par value $0.01, 250,000,000 shares authorized, 27,229,758 shares issued and 23,290,286 shares outstanding as of September 30, 2022 and 26,963,915 shares issued and 23,917,359 shares outstanding as of December 31, 2021	272		269
Additional paid-in capital	305,357		291,577
Retained earnings	1,656,374		1,363,922
Treasury stock, at cost, 3,939,472 shares and 3,046,556 shares, respectively	(355,022)		(259,920)
Total equity	1,606,981		1,395,848
Total liabilities and equity	$	3,112,800	$	2,351,865

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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Home sales revenues	$	547,074	$	751,608	$	1,816,193	$	2,249,073

Cost of sales	391,275		549,319		1,270,628		1,642,756
Selling expenses	33,938		39,871		111,605		127,450
General and administrative	27,284		24,480		84,657		72,479
Operating income	94,577		137,938		349,303		406,388
Loss on extinguishment of debt	—		13,314		—		13,976
Other income, net	(14,124)		(2,370)		(21,960)		(6,979)
Net income before income taxes	108,701		126,994		371,263		399,391
Income tax provision	18,311		26,444		78,811		81,049
Net income	$	90,390	$	100,550	$	292,452	$	318,342
Earnings per share:
Basic	$	3.88	$	4.10	$	12.42	$	12.85
Diluted	$	3.85	$	4.05	$	12.29	$	12.72

Weighted average shares outstanding:
Basic	23,272,811		24,508,134		23,552,211		24,766,260
Diluted	23,488,325		24,824,320		23,805,086		25,030,161

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 Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock		Total Equity
	Shares	Amount
BALANCE—December 31, 2021	26,963,915	$	269	$	291,577	$	1,363,922	$	(259,920)	$	1,395,848
Net income	—	—		—		78,686		—		78,686
Restricted stock units granted for accrued annual bonuses	—	—		294		—		—		294
Stock repurchase	—	—		—		—		(57,659)		(57,659)
Compensation expense for equity awards	—	—		3,570		—		—		3,570
Stock issued under employee incentive plans	223,980	2		2,010		—		—		2,012
BALANCE— March 31, 2022	27,187,895	$	271	$	297,451	$	1,442,608	$	(317,579)	$	1,422,751
Net income	—	—		—		123,376		—		123,376
Stock repurchase	—	—		—		—		(37,443)		(37,443)
Compensation expense for equity awards	—	—		3,545		—		—		3,545
Stock issued under employee incentive plans	24,213	—		1,692		—		—		1,692
BALANCE— June 30, 2022	27,212,108	$	271	$	302,688	$	1,565,984	$	(355,022)	$	1,513,921
Net income	—	—		—		90,390		—		90,390

Compensation expense for equity awards	—	—		1,516		—		—		1,516
Stock issued under employee incentive plans	17,650	1		1,153		—		—		1,154
BALANCE— September 30, 2022	27,229,758	$	272	$	305,357	$	1,656,374	$	(355,022)	$	1,606,981

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 Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock		Total Equity
	Shares	Amount
BALANCE—December 31, 2020	26,741,554	$	267	$	270,598	$	934,277	$	(66,137)	$	1,139,005
Net income	—	—		—		99,658		—		99,658
Restricted stock units granted for accrued annual bonuses	—	—		272		—		—		272
Stock repurchase	—	—		—		—		(25,827)		(25,827)
Compensation expense for equity awards	—	—		3,422		—		—		3,422
Stock issued under employee incentive plans	167,089	2		2,106		—		—		2,108
BALANCE— March 31, 2021	26,908,643	$	269	$	276,398	$	1,033,935	$	(91,964)	$	1,218,638
Net income	—	—		—		118,134		—		118,134
Stock repurchase	—	—		—		—		(55,776)		(55,776)
Compensation expense for equity awards	—	—		3,395		—		—		3,395
Stock issued under employee incentive plans	18,050	—		2,015		—		—		2,015
BALANCE— June 30, 2021	26,926,693	$	269	$	281,808	$	1,152,069	$	(147,740)	$	1,286,406
Net income	—	—		—		100,550		—		100,550
Stock repurchase	—	—		—		—		(56,083)		(56,083)
Compensation expense for equity awards	—	—		3,352		—		—		3,352
Stock issued under employee incentive plans	14,529	—		1,549		—		—		1,549
BALANCE— September 30, 2021	26,941,222	$	269	$	286,709	$	1,252,619	$	(203,823)	$	1,335,774

See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Net income	$	292,452	$	318,342
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in income of unconsolidated entities	(3,990)		—
Distributions of earnings from unconsolidated entities	3,202		—
Depreciation and amortization	1,134		832
Loss on extinguishment of debt	—		13,976
Gain on sale of interest rate cap	(7,055)		—
Gain on disposal of assets	(2,206)		(880)
Compensation expense for equity awards	8,631		10,169
Deferred income taxes	(1,439)		(627)

Changes in assets and liabilities:
Accounts receivable	20,459		66,768
Real estate inventory	(791,682)		(286,619)
Pre-acquisition costs and deposits	8,592		(6,328)
Other assets	27,456		(10,702)
Accounts payable	41,070		20,556
Accrued expenses and other liabilities	43,824		(24,400)
Net cash provided by (used in) operating activities	(359,552)		101,087
Cash flows from investing activities:
Purchases of property and equipment	(1,057)		(1,641)
Investment in unconsolidated entities	(1,284)		(3,984)
Return of capital from unconsolidated entities	235		2,660
Payment for business acquisition	—		(66,864)
Net cash used in investing activities	(2,106)		(69,829)
Cash flows from financing activities:
Proceeds from notes payable	534,876		1,076,419
Payments on notes payable	(110,000)		(944,000)
Proceeds from financing arrangements	35,858		—
Payments on financing arrangements	(4,119)		—
Redemption premium	—		(10,314)
Loan issuance costs	(2,567)		(10,572)
Proceeds from sale of stock, net of offering expenses	4,858		5,670
Stock repurchase	(95,102)		(137,686)


Net cash provided by (used in) financing activities	363,804		(20,483)
Net increase in cash and cash equivalents	2,146		10,775
Cash and cash equivalents, beginning of period	50,514		35,942
Cash and cash equivalents, end of period	$	52,660	$	46,717

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, Virginia, Pennsylvania and Maryland.

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, 2021. 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 September 30, 2022, and for the three and nine months ended September 30, 2022 and 2021, 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.

Recent Accounting Pronouncements

Effective April 28, 2022, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform. Effective April 28, 2022, we adopted FASB ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”), which clarified the scope and application of the original guidance. The adoption of both ASU 2020-04 and ASU 2021-01 replaced LIBOR as the benchmark interest rate with the Secured Overnight Financing Rate (“SOFR”) and did not have a material effect on our consolidated financial statements or related disclosures.

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2. REAL ESTATE INVENTORY

Our real estate inventory consists of the following (in thousands):


	September 30,		December 31,
	2022		2021
Land, land under development and finished lots	$	1,882,335	$	1,499,761
Information centers	33,417		28,665
Homes in progress	542,741		449,742
Completed homes	377,549		107,736
Total owned inventory	2,836,042		2,085,904
Real estate not owned	35,858		—
Total real estate inventory	$	2,871,900	$	2,085,904

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. 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. Inventory costs for completed homes are expensed to cost of sales as homes are closed.

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 4, are capitalized to qualifying real estate projects under development and homes under construction.

During the three months ended September 30, 2022, we have entered into several land banking financing arrangements with a third-party land banker to repurchase land that we sold to the land banker as a method of acquiring finished lots in staged takedowns, while limiting risk and minimizing the use of funds from our available cash or other financing sources. In consideration for this repurchase option, we paid a non-refundable commitment fee. Based on our right to control the ultimate economic outcome of these finished lots, these assets will continue to be held within our inventory and a corresponding obligation was established within our accrued liabilities as more fully discussed in Note 3 to recognize this relationship. While we are not legally obligated to purchase the balance of the lots, we will be subject to certain performance obligations, financial and other penalties if the lots are not purchased. We do not have any ownership interest or title to the assets of the land banker and do not guarantee their liabilities.

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3. ACCRUED EXPENSES AND OTHER LIABILITIES

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


	September 30,		December 31,
	2022		2021
Real estate inventory development and construction payable	$	68,881	$	48,656
Land banking financing arrangements	35,858		—
Accrued compensation, bonuses and benefits	11,792		24,914
Taxes payable	35,490		11,604
Contract deposits	12,012		12,182
Inventory related obligations	13,283		8,803
Warranty reserve	10,050		7,850
Accrued interest	6,924		7,431
Lease liability	5,402		5,333
Other	20,784		9,836
Total accrued expenses and other liabilities	$	220,476	$	136,609

Land Banking Financing Arrangements

We have entered into several land banking financing arrangements with a third-party land banker to repurchase land that we sold to the land banker as a method of acquiring finished lots in staged takedowns. Principal payments on these financing arrangements will generally coincide with the repurchase of lot takedowns from the land banker. We expect to complete the repurchase of all lots via takedowns associated with these transactions over the course of approximately two years.

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. The obligations assumed by the homebuyer 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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Warranty reserves, beginning of period	$	9,350	$	6,550	$	7,850	$	5,350
Warranty provision	2,985		2,424		8,092		8,409
Warranty expenditures	(2,285)		(1,824)		(5,892)		(6,609)
Warranty reserves, end of period	$	10,050	$	7,150	$	10,050	$	7,150

4. NOTES PAYABLE

Revolving Credit Agreement

On April 29, 2022, we entered into that certain Lender Addition and Acknowledgement Agreement and Second Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Second Amendment” and, as so amended, “the Credit Agreement”), which amended that certain Fifth Amended and Restated Credit Agreement, dated as of April 28, 2021, with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “2021 Credit Agreement”). The Second Amendment, among other things, (a) increased the commitments under the 2021 Credit Agreement by an additional $250.0 million, bringing the total commitments under the Credit Agreement to $1.1 billion, and (b) replaced LIBOR as the benchmark interest rate with SOFR.

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Borrowings under the Credit Agreement bear interest, payable monthly in arrears, at the Company’s option, at either (1) term SOFR (based on 1, 3 or 6 month interest periods, as selected by the Company) plus a 10, 15 or 25 basis point adjustment, respectively, which rate is subject to a 50 basis point floor, plus an applicable margin (ranging from 145 basis points to 210 basis points (the “Applicable Margin”)) based on the Company’s leverage ratio as determined in accordance with a pricing grid, and (2) term SOFR based on a 1 month interest period plus a 10 basis point adjustment, subject to a 50 basis point floor, plus the Applicable Margin.

The Credit Agreement matures on April 28, 2025. Before each anniversary of the Credit Agreement, we may request a one-year extension of its maturity date. The Credit Agreement is guaranteed by, among others, each of our subsidiaries that have gross assets of at least $0.5 million.

The borrowings and letters of credit outstanding under the Credit Agreement, together with the outstanding principal balance of our 4.000% Senior Notes due 2029 (the “2029 Senior Notes”), may not exceed the borrowing base under the Credit Agreement. The borrowing base primarily consists of a percentage of commercial land, land held for development, lots under development and finished lots held by the Company and its subsidiaries that guarantee the obligations under the Credit Agreement. As of September 30, 2022, the borrowing base under the Credit Agreement was $1.4 billion, of which borrowings, including the 2029 Senior Notes, of $1.2 billion were outstanding, $29.8 million of letters of credit were outstanding and $127.3 million was available to borrow under the Credit Agreement.

Interest is paid monthly on borrowings under the Credit Agreement at SOFR plus 1.85%. The Credit Agreement applicable margin for SOFR loans ranges from 1.45% to 2.10% based on our leverage ratio. At September 30, 2022, SOFR was 3.03%, subject to the 0.50% SOFR floor as included in the Credit Agreement.

The 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 Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At September 30, 2022, we were in compliance with all of the covenants contained in the Credit Agreement.

Senior Notes Offering

On June 28, 2021, we issued $300.0 million aggregate principal amount of the 2029 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 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each year. The 2029 Senior Notes mature on July 15, 2029. The terms of the 2029 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Third Supplemental Indenture thereto, dated as of June 28, 2021, 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):


	September 30, 2022		December 31, 2021
Notes payable under the Credit Agreement ($1.1 billion revolving credit facility at September 30, 2022) maturing on April 28, 2025; interest paid monthly at SOFR plus 1.85%.	$	942,316	$	517,439
4.000% Senior Notes due July 15, 2029; interest paid semi-annually at 4.000%.	300,000		300,000
Net debt issuance costs	(12,215)		(12,203)
Total notes payable	$	1,230,101	$	805,236

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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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest incurred	$	14,583	$	6,091	$	31,048	$	21,863
Less: Amounts capitalized	(14,583)		(6,091)		(31,048)		(21,863)
Interest expense	$	—	$	—	$	—	$	—

Cash paid for interest	$	14,874	$	11,772	$	29,080	$	26,264

Included in interest incurred was amortization of deferred financing costs and discounts for notes payable of $0.9 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $2.5 million and $2.2 million for the nine months ended September 30, 2022 and 2021, respectively.

5. 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 September 30, 2022, our effective tax rate of 16.8% is lower than the Federal statutory rate primarily as a result of the retroactive extension of the 45L tax credit and the deductions in excess of compensation cost for share-based payments, offset by an increase in the rate for the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended, and for state income taxes, net of the federal benefit.

For the nine months ended September 30, 2022, our effective rate of 21.2% is slightly higher than the Federal statutory rate primarily as a result of an increase in the rate for the state income taxes, net of the federal benefit, and the compensation limitation under Section 162(m) of the Internal Revenue Code, as amended, offset by the retroactive extension of the 45L tax credit and the deductions in excess of compensation cost for share-based payments.

Income taxes paid were $3.8 million and $36.0 million for the three months ended September 30, 2022 and 2021, respectively. Income taxes paid were $56.2 million and $99.7 million for the nine months ended September 30, 2022 and 2021, respectively.

6. EQUITY

Stock Repurchase Program

In February 2022, our Board of Directors (the “Board”) approved a $200.0 million increase to our previously authorized stock repurchase program, pursuant to which we may purchase up to $550.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws. During the three months ended September 30, 2022, we did not repurchase any shares of our common stock. During the nine months ended September 30, 2022, we repurchased 892,916 shares of our common stock for $95.1 million to be held as treasury stock. During the three months ended September 30, 2021, we repurchased 358,817 shares of our common stock for $56.1 million to be held as treasury stock. During the nine months ended September 30, 2021, we repurchased 910,038 shares of our common stock for $137.7 million to be held as treasury stock. A total of 2,939,472 shares of our common stock has been repurchased since our stock repurchase program commenced. As of September 30, 2022, we may purchase up to $211.5 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. Our stock repurchase program may be modified, discontinued or suspended at any time.

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7. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator (in thousands):
Net income (Numerator for basic and dilutive earnings per share)	$	90,390	$	100,550	$	292,452	$	318,342
Denominator:
Basic weighted average shares outstanding	23,272,811		24,508,134		23,552,211		24,766,260
Effect of dilutive securities:
Stock-based compensation units	215,514		316,186		252,875		263,901
Diluted weighted average shares outstanding	23,488,325		24,824,320		23,805,086		25,030,161

Basic earnings per share	$	3.88	$	4.10	$	12.42	$	12.85
Diluted earnings per share	$	3.85	$	4.05	$	12.29	$	12.72
Antidilutive non-vested restricted stock units excluded from calculation of diluted earnings per share	2,396		553		10,797		3,629

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8. STOCK-BASED COMPENSATION

Non-performance Based Restricted Stock Units

The following table summarizes the activity of our time-vested restricted stock units (“RSUs”):


	Nine Months Ended September 30,
	2022			2021
	Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Beginning balance	113,782	$	101.42	142,738	$	62.54
Granted	1,664	$	84.39	25,124	$	141.96
Vested	(1,006)	$	79.84	(35,503)	$	63.23
Forfeited	(1,353)	$	92.64	(6,205)	$	73.62
Ending balance	113,087	$	101.47	126,154	$	77.61

We recognized $0.9 million and $0.8 million of stock-based compensation expense related to outstanding RSUs for the three months ended September 30, 2022 and 2021, respectively. We recognized $2.8 million and $2.5 million of stock-based compensation expense related to outstanding RSUs for the nine months ended September 30, 2022 and 2021, 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 September 30, 2022, we had unrecognized compensation cost of $5.4 million related to unvested RSUs, which is expected to be recognized over a weighted average period of 1.9 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 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 nine months ended September 30, 2022:


Period Granted	Performance Period	Target PSUs Outstanding at December 31, 2021	Target PSUs Granted	Target PSUs Forfeited	Target PSUs Vested	Target PSUs Outstanding at September 30, 2022	Weighted Average Grant Date Fair Value
2019	2019 - 2021	81,242	—	(767)	(80,475)	—	$	56.49
2020	2020 - 2022	88,538	—	(1,494)	—	87,044	$	59.81
2021	2021 - 2023	46,027	—	—	—	46,027	$	141.00
2022	2022 - 2024	—	66,909	—	—	66,909	$	118.80
Total		215,807	66,909	(2,261)	(80,475)	199,980

At September 30, 2022, management estimates that the recipients will receive approximately 50%, 153% and 200% of the 2022, 2021 and 2020 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 $0.4 million and $2.3 million of total stock-based compensation expense related to outstanding PSUs for the three months ended September 30, 2022 and 2021, respectively. We recognized $4.9 million and $6.7 million of total stock-based compensation expense related to outstanding PSUs for the nine months ended September 30, 2022 and 2021, respectively. The 2019 - 2021 performance period PSUs vested and issued on March 15, 2022 at 200% of the target number. At September 30, 2022, we had unrecognized compensation cost

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of $9.0 million, based on the probable amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of 1.7 years.

9. FAIR VALUE DISCLOSURES

Accounting Standards Codification (“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 September 30, 2022, the 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 2029 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 September 30, 2022 and December 31, 2021 (in thousands):


		September 30, 2022				December 31, 2021
	Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
2029 Senior Notes (1)	Level 2	$	300,000	$	226,420	$	300,000	$	299,302

(1)See Note 4 for more details regarding the offering of the 2029 Senior Notes.

10. RELATED PARTY TRANSACTIONS

Land Purchases from Affiliates

We did not enter into or complete any land purchase contracts with affiliates during the nine months ended September 30, 2022.

During the nine months ended September 30, 2021, we completed a land purchase contract to purchase a total of 25 finished lots in Burnet County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately $2.5 million. Also during the nine months ended September 30, 2021, we completed a land purchase contract to purchase a total of 110 finished lots in Pasco County, Florida from an affiliate of one of our directors for a total base purchase price of approximately $4.0 million.

11. 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

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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):


	September 30, 2022		December 31, 2021
Land deposits and option payments (1)	$	32,266	$	37,499
Commitments under the land purchase contracts if the purchases are consummated (1)	$	433,934	$	921,345
Lots under land purchase contracts (1)	15,826		36,978

(1)Includes land banking financing arrangements, see Notes 2 and 3 for more details regarding real estate not owned.

As of September 30, 2022 and December 31, 2021, approximately $16.6 million and $19.3 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 right-of-use (“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 $5.0 million and $5.1 million at September 30, 2022 and December 31, 2021, respectively. Lease obligations, as included in accrued expenses and other liabilities on the consolidated balance sheets, were $5.4 million and $5.3 million at September 30, 2022 and December 31, 2021, respectively.

Operating lease cost, as included in general and administrative expense in our consolidated statements of operations, was $0.5 million for each of the three months ended September 30, 2022 and 2021. Operating lease cost, as included in general and administrative expense in our consolidated statements of operations, was $1.6 million and $1.3 million for the nine months ended September 30, 2022 and 2021, respectively. Cash paid for amounts included in the measurement of lease liabilities for operating leases during the nine months ended September 30, 2022 and 2021 was $1.3 million and $1.2 million, respectively. As of September 30, 2022, the weighted-average discount rate was 5.3% and our weighted-average remaining life was 3.0 years. We do not have any significant lease contracts that have not yet commenced at September 30, 2022.

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The table below shows the future minimum payments under non-cancelable operating leases at September 30, 2022 (in thousands):


Year Ending December 31,	Operating leases
2022	383
2023	1,438
2024	1,171
2025	936
2026	799
Thereafter	1,055
Total	5,782
Lease amount representing interest	(380)
Present value of lease liabilities	$	5,402

Bonding and Letters of Credit

We have outstanding letters of credit and performance and surety bonds totaling $338.7 million (including $29.8 million of letters of credit issued under the Credit Agreement) and $206.8 million at September 30, 2022 and December 31, 2021, 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 Entities

In 2019, we entered as a limited partner into 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. Additionally, in 2021, we entered into a joint venture with a mortgage lender. As of September 30, 2022 and December 31, 2021, we have a total of $6.9 million and $5.6 million, respectively, within other assets on the balance sheet relating to our investment in this real estate investment fund and the mortgage joint venture. Contributions into the unconsolidated entities are for the use of investing in certain real estate transactions and residential mortgage services, respectively. Income associated with our investment in unconsolidated entities during the three and nine months ended September 30, 2022, was $2.2 million and $4.0 million, respectively. We did not have any income recognized for our investment in unconsolidated entities during each of the three and nine months ended September 30, 2021.

12. REVENUES

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.

The following table presents our home sales revenues disaggregated by revenue stream (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Retail home sales revenues	$	419,213	$	650,041	$	1,599,570	$	1,990,439
Wholesale home sales revenues	127,861		101,567		216,623		258,634
Total home sales revenues	$	547,074	$	751,608	$	1,816,193	$	2,249,073

Our home sales revenues are disaggregated by geography, based on our determined reportable segments. See Note 13 for tabular presentation of this information.

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

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qualifying reportable segments at September 30, 2022: our Central, Southeast, Northwest, West, and Florida divisions. These segments reflect the way the Company evaluates its business performance and manages its operations.

In accordance with ASC 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 per home closed.

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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Central	$	228,448	$	287,878	$	807,400	$	924,591
Southeast	138,478		146,166		328,510		442,431
Northwest	46,774		148,515		220,440		372,903
West	65,064		90,592		244,603		252,553
Florida	68,310		78,457		215,240		256,595
Total home sales revenues	$	547,074	$	751,608	$	1,816,193	$	2,249,073

Net income (loss) before income taxes:
Central	$	46,413	$	55,793	$	189,004	$	180,467
Southeast	31,593		27,142		70,358		77,644
Northwest	6,379		34,124		49,693		83,773
West	8,342		13,279		27,282		38,598
Florida	9,770		11,937		30,914		37,518
Corporate (1)	6,204		(15,281)		4,012		(18,609)
Total net income before income taxes	$	108,701	$	126,994	$	371,263	$	399,391

(1)The Corporate balance consists of general and administration unallocated costs for various shared service functions and non-strategic other income, as well as our warranty reserve. Actual warranty expenses are reflected within the reportable segments. Additionally, for the three and nine months ended September 30, 2022, the balance includes the $7.1 million gain on the sale of the three-year interest rate cap of LIBOR prior to its expiration.


	September 30, 2022		December 31, 2021
Assets:
Central	$	1,032,017	$	857,174
Southeast	632,586		438,423
Northwest	469,193		349,752
West	573,867		384,548
Florida	304,724		221,763
Corporate (1)	100,413		100,205
Total assets	$	3,112,800	$	2,351,865

(1)The Corporate balance consists primarily of cash, investments in unconsolidated entities and tax receivables.

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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: