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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, 2023
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 April 28, 2023, there were 23,532,734 shares of the registrant’s common stock, par value $0.01 per share, outstanding.


Table of Contents
TABLE OF CONTENTS
   


Page


3

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,
 20232022
ASSETS
Cash and cash equivalents$42,966 $31,998 
Accounts receivable21,870 25,143 
Real estate inventory2,880,520 2,898,296 
Pre-acquisition costs and deposits26,425 25,031 
Property and equipment, net35,273 32,997 
Other assets76,724 93,159 
Deferred tax assets, net5,127 6,186 
Goodwill12,018 12,018 
Total assets$3,100,923 $3,124,828 
LIABILITIES AND EQUITY
Accounts payable$39,940 $25,287 
Accrued expenses and other liabilities340,917 340,128 
Notes payable1,045,837 1,117,001 
Total liabilities1,426,694 1,482,416 
COMMITMENTS AND CONTINGENCIES
EQUITY
Common stock, par value $0.01, 250,000,000 shares authorized, 27,472,206 shares issued and 23,532,734 shares outstanding as of March 31, 2023 and 27,245,278 shares issued and 23,305,806 shares outstanding as of December 31, 2022
275 272 
Additional paid-in capital311,525 306,673 
Retained earnings1,717,451 1,690,489 
Treasury stock, at cost, 3,939,472 shares as of March 31, 2023 and December 31, 2022
(355,022)(355,022)
Total equity1,674,229 1,642,412 
Total liabilities and equity$3,100,923 $3,124,828 








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,
 20232022
Home sales revenues$487,357 $546,050 
Cost of sales388,541 387,643 
Selling expenses42,805 34,398 
General and administrative29,960 28,289 
   Operating income26,051 95,720 
Other income, net(6,297)(3,830)
Net income before income taxes32,348 99,550 
Income tax provision 5,386 20,864 
Net income$26,962 $78,686 
Earnings per share:
Basic$1.15 $3.30 
Diluted$1.14 $3.25 
Weighted average shares outstanding:
Basic23,381,294 23,837,170 
Diluted23,629,779 24,194,321 
























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, 202227,245,278 $272 $306,673 $1,690,489 $(355,022)$1,642,412 
Net income— — — 26,962 — 26,962 
Restricted stock units granted for accrued annual bonuses— — 206 — — 206 
Compensation expense for equity awards— — 3,103 — — 3,103 
Stock issued under employee incentive plans226,928 3 1,543 — — 1,546 
BALANCE— March 31, 202327,472,206 $275 $311,525 $1,717,451 $(355,022)$1,674,229 


Common StockAdditional Paid-In CapitalRetained EarningsTreasury StockTotal Equity
SharesAmount
BALANCE—December 31, 202126,963,915 $269 $291,577 $1,363,922 $(259,920)$1,395,848 
Net income— — — 78,686 — 78,686 
Stock repurchase— — — — (57,659)(57,659)
Restricted stock units granted for accrued annual bonuses— — 294 — — 294 
Compensation expense for equity awards— — 3,570 — — 3,570 
Stock issued under employee incentive plans223,980 2 2,010 — — 2,012 
BALANCE— March 31, 202227,187,895 $271 $297,451 $1,442,608 $(317,579)$1,422,751 














See accompanying notes to the consolidated financial statements.
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LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 20232022
Cash flows from operating activities:
Net income$26,962 $78,686 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in income of unconsolidated entities(2,245)(178)
Distributions of earnings from unconsolidated entities2,425 129 
Depreciation and amortization482 348 
Gain on disposal of assets (1,564)
Compensation expense for equity awards3,103 3,570 
Deferred income taxes1,059 3,264 
Changes in assets and liabilities:
Accounts receivable3,273 9,420 
Real estate inventory15,945 (251,612)
Pre-acquisition costs and deposits(1,394)1,531 
Other assets22,290 362 
Accounts payable14,653 7,793 
Accrued expenses and other liabilities(8,953)10,464 
Net cash provided by (used in) operating activities77,600 (137,787)
Cash flows from investing activities:
Purchases of property and equipment(76)(993)
Investment in unconsolidated entities(5,919)(380)
Return of capital from unconsolidated entities1,140  
Net cash used in investing activities(4,855)(1,373)
Cash flows from financing activities:
Proceeds from notes payable32,890 197,617 
Payments on notes payable(105,000) 
Proceeds from financing arrangements26,885  
Payments on financing arrangements(17,886) 
Loan issuance costs(212) 
Proceeds from sale of stock, net of offering expenses1,546 2,013 
Stock repurchase (57,659)
Net cash provided by (used in) financing activities(61,777)141,971 
Net increase in cash and cash equivalents10,968 2,811 
Cash and cash equivalents, beginning of period31,998 50,514 
Cash and cash equivalents, end of period$42,966 $53,325 


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 headquartered in The Woodlands, Texas. We engage in the development of communities and the design, construction and sale of new homes in markets 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, 2022. 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, 2023, and for the three months ended March 31, 2023 and 2022, 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.
2.     REAL ESTATE INVENTORY
Our real estate inventory consists of the following (in thousands):
March 31,December 31,
20232022
Land, land under development and finished lots$1,922,275 $1,911,307 
Information centers36,636 35,074 
Homes in progress350,098 287,069 
Completed homes417,575 523,054 
Total owned inventory2,726,584 2,756,504 
Real estate not owned153,936 141,792 
Total real estate inventory$2,880,520 $2,898,296 
We have 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 as real estate not owned within our inventory and a corresponding obligation was established within our accrued liabilities as discussed in Note 3 to recognize this relationship. While we are not legally obligated to repurchase 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 that we have sold to the land banker and we do not guarantee any of the land banker’s liabilities.
During the three months ended March 31, 2023, we transferred $2.7 million of home assets from real estate inventory to
rental properties within property and equipment, net. We are lessors of the homes representing these home assets. Our leasing contracts are typically for terms of one year or less.
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3.    ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued and other liabilities consist of the following (in thousands):
March 31,December 31,
20232022
Land banking financing arrangements$153,936 $141,792 
Real estate inventory development and construction payable68,239 73,678 
Taxes payable51,071 47,037 
Inventory related obligations12,618 13,039 
Accrued compensation, bonuses and benefits8,873 12,900 
Warranty reserve11,350 10,750 
Accrued interest7,689 10,906 
Contract deposits6,261 5,545 
Lease liability5,669 5,182 
Other15,211 19,299 
Total accrued expenses and other liabilities$340,917 $340,128 
Land Banking Financing Arrangements
We have 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 one to three 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 March 31,
 20232022
Warranty reserves, beginning of period$10,750 $7,850 
Warranty provision1,852 2,465 
Warranty expenditures(1,252)(1,965)
Warranty reserves, end of period$11,350 $8,350 
4.     NOTES PAYABLE
Revolving Credit Agreement
On April 29, 2022, we entered into an amendment to 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” and, as so amended by such amendment, the “2022 Credit Agreement”). The 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 2022 Credit Agreement to $1.1 billion, and (b) replaced the London Interbank Offered Rate (“LIBOR”) as the benchmark interest rate with the Secured Overnight Financing Rate (“SOFR”).
Borrowings under the 2022 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
9

Table of Contents
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 2022 Credit Agreement matures on April 28, 2025. Before each anniversary of the 2022 Credit Agreement, we may request a one-year extension of its maturity date. The 2022 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 2022 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 2022 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 2022 Credit Agreement. As of March 31, 2023, the borrowing base under the 2022 Credit Agreement was $1.4 billion, of which borrowings, including the 2029 Senior Notes, of $1.1 billion were outstanding, $26.4 million of letters of credit were outstanding and $315.8 million was available to borrow under the 2022 Credit Agreement.
Interest is paid monthly on borrowings under the 2022 Credit Agreement at SOFR plus an applicable margin. The 2022 Credit Agreement applicable margin for SOFR loans ranges from 1.45% to 2.10% based on our leverage ratio. The applicable margin was 1.85% during the three months ended March 31, 2023. At March 31, 2023, SOFR was 4.81%, subject to the 0.50% SOFR floor as included in the 2022 Credit Agreement.
The 2022 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 2022 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, 2023, we were in compliance with all of the covenants contained in the 2022 Credit Agreement.
On April 28, 2023, we entered into a Third Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Third Amendment”), which amends the 2022 Credit Agreement (as so amended by the Third Amendment, the “Credit Agreement”). The Credit Agreement provides for a $1.13 billion revolving credit facility, which can be increased at the request of the Company by up to $170.0 million, subject to the terms and conditions of the Credit Agreement. Lenders with $775.0 million, or 68.6%, of the $1.13 billion of commitments under the Credit Agreement, agreed to extend the maturity of their commitments to April 28, 2027, with the remaining lenders retaining their existing maturity of April 28, 2025. The Credit Agreement also permits our subsidiaries that solely own and operate single family rental homes to incur secured indebtedness not to exceed 6% of our tangible net worth, and allows such subsidiaries to not guarantee the obligations under the Credit Agreement. The Credit Agreement otherwise has substantially similar terms and provisions to the 2022 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 2022 Credit Agreement and Wilmington Trust, National Association, as trustee.
Notes payable consist of the following (in thousands):
March 31, 2023December 31, 2022
Notes payable under the 2022 Credit Agreement ($1.1 billion revolving credit facility at March 31, 2023) maturing on April 28, 2025; interest paid monthly at SOFR plus 1.85%
$756,241 $828,350 
4.000% Senior Notes due July 15, 2029; interest paid semi-annually at 4.000%
300,000 300,000 
Net debt issuance costs(10,404)(11,349)
Total notes payable$1,045,837 $1,117,001 
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Capitalized Interest
Interest activity, including other financing costs, for notes payable and financing arrangements for the periods presented is as follows (in thousands):
Three Months Ended March 31,
20232022
Interest incurred$19,169 $7,027 
Less: Amounts capitalized(19,169)(7,027)
Interest expense$ $ 
Cash paid for interest$25,500 $9,668 
Included in interest incurred was amortization of deferred financing costs and applicable discounts for notes payable and financing arrangements of $3.1 million and $0.7 million for the three months ended March 31, 2023 and 2022, 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 March 31, 2023, our effective tax rate of 16.7% is lower than the Federal statutory rate primarily as a result of the deductions in excess of compensation cost for share-based payments and the extension of federal energy efficient homes tax credits, 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.
Income taxes paid were $0.1 million and $0.4 million for the three months ended March 31, 2023 and 2022, 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 March 31, 2023, we did not repurchase any shares of our common stock. During the three months ended March 31, 2022, we repurchased 475,055 shares of our common stock for $57.7 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 March 31, 2023, 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 months ended March 31, 2023 and 2022:
Three Months Ended March 31,
20232022
Numerator (in thousands):
Net income (Numerator for basic and dilutive earnings per share)$26,962 $78,686 
Denominator:
       Basic weighted average shares outstanding23,381,294 23,837,170 
       Effect of dilutive securities:
         Stock-based compensation units248,485 357,151 
       Diluted weighted average shares outstanding23,629,779 24,194,321 
Basic earnings per share$1.15 $3.30 
Diluted earnings per share$1.14 $3.25 
Antidilutive non-vested restricted stock units excluded from calculation of diluted earnings per share24,288 27,001 
8.    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,
20232022
SharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair Value
Beginning balance 146,239 $100.93 117,874 $80.85 
   Granted36,760 $104.36 36,675 $118.80 
   Vested(42,124)$63.47 (38,791)$56.49 
   Forfeited(2,647)$113.57 (1,151)$87.20 
Ending balance138,228 $113.02 114,607 $101.18 
We recognized $1.1 million and $0.8 million of stock-based compensation expense related to outstanding RSUs for the three months ended March 31, 2023 and 2022, 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, 2023, we had unrecognized compensation cost of $10.7 million related to unvested RSUs, which is expected to be recognized over a weighted average period of 2.3 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
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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, 2023:
Period GrantedPerformance PeriodTarget PSUs Outstanding at December 31, 2022Target PSUs GrantedTarget PSUs ForfeitedTarget PSUs VestedTarget PSUs Outstanding at March 31, 2023Weighted Average Grant Date Fair Value
20202020 - 202284,435 — — (84,435)— $59.81 
2021 2021 - 202344,011 — (852)— 43,159 $141.00 
20222022 - 202464,382 — (1,078)— 63,304 $118.80 
20232023 - 2025— 72,443 — — 72,443 $104.36 
Total192,828 72,443 (1,930)(84,435)178,906 
At March 31, 2023, management estimates that the recipients will receive approximately 134.4%, 50.0% and 85.5% of the 2023, 2022 and 2021 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 $1.6 million and $2.3 million of total stock-based compensation expense related to outstanding PSUs for the three months ended March 31, 2023 and 2022, respectively. The 2020 - 2022 performance period PSUs vested and issued on February 27, 2023 at 200% of the target number. At March 31, 2023, we had unrecognized compensation cost of $13.5 million, based on the probable amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.5 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 most significant 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, 2023, the 2022 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 March 31, 2023 and December 31, 2022 (in thousands):
March 31, 2023December 31, 2022
Fair Value HierarchyCarrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value
2029 Senior Notes (1)
Level 2$300,000 $259,334 $300,000 $246,969 
(1)See Note 4 for more details regarding the offering of the 2029 Senior Notes.
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10.     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, 2023December 31, 2022
Land deposits and option payments (1)
$24,139 $22,406 
Commitments under the land purchase contracts if the purchases are consummated (1)
$439,666 $411,776 
Lots under land purchase contracts (1)
12,088 13,184 
(1)Includes land banking financing arrangements, see Notes 2 and 3 for more details regarding real estate not owned.
As of both March 31, 2023 and December 31, 2022, approximately $12.8 million 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 $5.4 million and $4.9 million at March 31, 2023 and December 31, 2022, respectively. Lease obligations, as included in accrued expenses and other liabilities on the consolidated balance sheets, were $5.7 million and $5.2 million at March 31, 2023 and December 31, 2022, respectively.
Operating lease cost, as included in general and administrative expense in our consolidated statements of operations, was $0.6 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively. Cash paid for amounts included in the measurement of lease liabilities for operating leases during the three months ended March 31, 2023 and 2022 was $0.5 million and $0.4 million, respectively. As of March 31, 2023, the weighted-average discount rate was 5.7% and our weighted-average remaining life was 2.6 years. We do not have any significant lease contracts that have not yet commenced at March 31, 2023.
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The table below shows the future minimum payments under non-cancelable operating leases at March 31, 2023 (in thousands):
Year Ending December 31,Operating leases
20231,297 
20241,434 
20251,198 
20261,069 
2027962 
Thereafter526 
Total6,486 
Lease amount representing interest(817)
Present value of lease liabilities$5,669 
Bonding and Letters of Credit    
We have outstanding letters of credit and performance and surety bonds totaling $361.1 million (including $26.4 million of letters of credit issued under the 2022 Credit Agreement) and $368.1 million at March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022, we have a total of $16.0 million and $11.2 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 months ended March 31, 2023, and 2022 was $2.2 million and $0.2 million respectively.
11.     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 March 31,
20232022
Retail home sales revenues$456,177 $494,206 
Wholesale home sales revenues31,180 51,844 
Total home sales revenues$487,357 $546,050 
Our home sales revenues are disaggregated by geography, based on our determined reportable segments. See Note 12 for tabular presentation of this information.







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12.     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 qualifying reportable segments at March 31, 2023: 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 is as follows (in thousands):
Three Months Ended March 31,
20232022
Revenues:
Central$150,380 $262,298 
Southeast104,376 72,463 
Northwest74,815 102,874 
West78,886 55,583 
Florida78,900 52,832 
Total home sales revenues$487,357 $546,050 
Net income (loss) before income taxes:
Central$9,064 $57,740 
Southeast6,924 10,129 
Northwest7,651 27,584 
West2,383 (231)
Florida7,487 5,360 
Corporate (1)
(1,161)(1,032)
Total net income before income taxes$32,348 $99,550 
(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.
March 31, 2023December 31, 2022
Assets:
Central$978,876 $986,779 
Southeast626,121 633,542 
Northwest470,002 485,086 
West591,826 599,714 
Florida355,619 334,824 
Corporate (1)
78,479 84,883 
Total assets$3,100,923 $3,124,828 
(1)The Corporate balance consists primarily of cash and investments in unconsolidated entities.
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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
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 50,000 homes.
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, NCNorfolk, VA
Albuquerque, NMDenver, COSan Antonio, TXFort Myers, FLRaleigh, NCRichmond, VA
Las Vegas, NVAustin, TXJacksonville, FLWilmington, NCBaltimore, MD
Northern CAOklahoma City, OKFort Pierce, FLWinston-Salem, NC
Southern CADaytona Beach, FLColumbia, SC
Sarasota, FLGreenville, SC
Birmingham, AL
Nashville, TN
We continued to adapt our business to respond to current market conditions and the uncertainty caused by the Federal Reserve’s ongoing actions to slow inflation. We remained focused on targeted advertising spending to connect with more potential homebuyers and continued offering mortgage buy-down programs and other sales incentives to offset some of the affordability pressures resulting from higher mortgage rates.
During the three months ended March 31, 2023, we saw a measurable increase in the demand for our homes when compared to the three months ended December 31, 2022. We believe this was due to several factors including our success at driving leads to our information centers through targeted marketing, our ability to move completed inventory through a combination of incentives and lower prices, our ongoing pivot to offering smaller, more affordable homes and the incremental decline of interest rates during the first quarter. As a result of increased community count, the increased demand from qualified buyers, and our decision to meet that demand by selling homes earlier in the construction process, we experienced a higher number of net orders during the first quarter. In response to these positive trends, we selectively increased construction starts in certain markets to align with the increased sales pace. Although we are encouraged by these recent trends, we are closely monitoring demand trends at each active community and remain focused on balancing levels of vertical and completed inventory with current sales activity.
During the three months ended March 31, 2023, we had 1,366 home closings, compared to 1,599 home closings during the three months ended March 31, 2022. The decline in home closings for the three months ended March 31, 2023 was primarily due to the slowdown in demand experienced during the second half of 2022. We continued to experience supply chain disruptions that extended development cycles and delayed the opening of new communities. We believe these supply shortages will continue to impact our operations for the remainder of the year.
At March 31, 2023, we had 99 active communities, including ten Terrata Homes communities. At March 31, 2022, we had 88 active communities, including seven Terrata Homes communities.
Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, mortgage rates, inflation, financial market stability, consumer confidence, housing demand, availability of financing for homebuyers, availability and prices of new homes compared to existing inventory, and demographic trends. These factors, and in particular consumer confidence, can be significantly adversely affected by a variety of factors beyond our control.
We believe the long-term outlook for new homes remains strong, driven by solid fundamentals, including a historically low inventory of new and existing homes for sale, an aging housing stock, rising rents, strong household formations and low unemployment. However, the housing market is currently in a state of transition and we expect affordability constraints to continue to impact demand for the foreseeable future.
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For additional discussion regarding our business and operations, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. For additional discussion regarding risks associated with our business and operations, see Item 1A. Risk Factors in Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and in Item 1A. Risk Factors in Part II of this Quarterly Report on Form 10-Q for the three months ended March 31, 2023.
Recent Developments
On April 28, 2023, we entered into the Third Amendment (as defined herein), which amends the 2022 Credit Agreement (as defined herein). The Credit Agreement (as defined herein) provides for a $1.13 billion revolving credit facility, which can be increased at the request of the Company by up to $170.0 million, subject to the terms and conditions of the Credit Agreement. For a further description of the Credit Agreement, please refer to Note 4, “Notes Payable” to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Key Results
Key financial results as of and for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, were as follows:
Home sales revenues decreased 10.7% to $487.4 million from $546.1 million.
Homes closed decreased 14.6% to 1,366 homes from 1,599 homes.
Average sales price per home closed increased 4.5% to $356,777 from $341,495.
Gross margin as a percentage of home sales revenues decreased to 20.3% from 29.0%.
Adjusted gross margin (non-GAAP) as a percentage of home sales revenues decreased to 22.1% from 30.3%.
Net income before income taxes decreased 67.5% to $32.3 million from $99.6 million.
Net income decreased 65.7% to $27.0 million from $78.7 million.
EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 8.1% from 19.1%.
Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 7.2% from 18.8%.
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.”
We owned and controlled 69,724 lots at March 31, 2023 and 71,904 lots at December 31, 2022.
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Results of Operations
The following table sets forth our results of operations for the three months ended March 31, 2023 and 2022:
 Three Months Ended March 31,
 20232022
(dollars in thousands, except per share data and average home sales price)
Statement of Income Data:
Home sales revenues$487,357 $546,050 
Expenses:
Cost of sales388,541 387,643 
Selling expenses42,805 34,398 
General and administrative29,960 28,289 
     Operating income26,051 95,720 
Other income, net(6,297)(3,830)
     Net income before income taxes32,348 99,550 
Income tax provision5,386 20,864 
     Net income$26,962 $78,686 
Basic earnings per share$1.15 $3.30 
Diluted earnings per share$1.14 $3.25 
Other Financial and Operating Data:
Average community count97.7 89.0 
Community count at end of period99 88 
Home closings1,366 1,599 
Average sales price per home closed$356,777 $341,495 
Gross margin (1)
$98,816 $158,407 
Gross margin % (2)
20.3 %29.0 %
Adjusted gross margin (3)
$107,609 $165,202 
Adjusted gross margin % (2)(3)
22.1 %30.3 %
EBITDA (4)
$39,587 $104,411 
EBITDA margin % (2)(4)
8.1 %19.1 %
Adjusted EBITDA (4)
$35,326 $102,863 
Adjusted EBITDA margin % (2)(4)
7.2 %18.8 %
(1)Gross margin is home sales revenues less cost of sales.
(2)Calculated as a percentage of home sales revenues.
(3)Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. Please see “—Non-GAAP Measures” for a reconciliation of adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable.
(4)EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our
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results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Please see “—Non-GAAP Measures” for reconciliations of EBITDA and adjusted EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable.
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Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Homes Sales. Our home sales revenues, home closings, average sales price per home closed (ASP), average community count and average monthly absorption rate by reportable segment for the three months ended March 31, 2023 and 2022, and our community count as of March 31, 2023 and 2022, were as follows (revenues in thousands):
Three Months Ended March 31, 2023As of March 31, 2023
RevenuesHome ClosingsASPAverage Community CountAverage
Monthly
Absorption Rate
Community Count at End of Period
Central$150,380 453 $331,965 35.0 4.3 35 
Southeast104,376 316 330,304 24.0 4.4 24 
Northwest74,815 159 470,535 9.3 5.7 10 
West78,886 209 377,445 13.4 5.2 14 
Florida78,900 229 344,541 16.0 4.8 16 
Total$487,357 1,366 $356,777 97.7 4.7 99 
Three Months Ended March 31, 2022As of March 31, 2022
RevenuesHome ClosingsASPAverage Community CountAverage Monthly
Absorption Rate
Community Count at End of Period
Central$262,298 844 $310,780 30.0 9.4 29 
Southeast72,463 238 304,466 20.0 4.0 21 
Northwest102,874 201 511,811 10.3 6.5 
West55,583 142 391,430 10.0 4.7 10 
Florida52,832 174 303,632 18.7 3.1 19 
Total$546,050 1,599 $341,495 89.0 6.0 88 
Home sales revenues for the three months ended March 31, 2023 were $487.4 million, a decrease of $58.7 million, or 10.7%, from $546.1 million for the three months ended March 31, 2022. The decrease in home sales revenues is primarily due to a 14.6% decrease in homes closed, partially offset by an increase in the average sales price per home closed during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The overall decrease in home closings is a result of an overall lower absorption pace, partially offset by a higher average community count, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The overall decrease in absorption pace relates to the normalization of demand resulting from increased mortgage rates and longer cycle times stemming from varying degrees of supply chain constraints in the markets we serve. The average sales price per home closed during the three months ended March 31, 2023 was $356,777, an increase of $15,282, or 4.5%, from the average sales price per home closed of $341,495 for the three months ended March 31, 2022. The increase in the average sales price per home closed is primarily due to geographic mix, the impact of lower home closings from our wholesale channel and favorable pricing environments that allowed us to pass through cost increases associated with the construction of our homes in some of our markets.
Included within our home sales revenues for the three months ended March 31, 2023 was $31.2 million in wholesale revenues as a result of 103 home closings, representing 7.5% of the 1,366 total homes closed during the three months ended March 31, 2023. Included within our home sales revenues for the three months ended March 31, 2022 was $51.8 million in wholesale revenues as a result of 213 home closings, representing 13.3% of the 1,599 total homes closed during the three months ended March 31, 2022. The decrease in home closings as a percentage of revenues through our wholesale channel was primarily related to lower demand from our wholesale channel partners along with our decision to allocate less inventory available for sale through the wholesale channel during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Home sales revenues in our Central reportable segment decreased by $111.9 million, or 42.7%, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to a 46.3%
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decrease in the number of homes closed at a lower absorption rate, partially offset by an increase in average community count and an increase in the average sales price per home closed.
Home sales revenues in our Southeast reportable segment increased by $31.9 million, or 44.0%, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to a 32.8% increase in the number of homes closed driven by an increase in the average sales price per home closed and an increase in the average community count and higher absorption rate.
Home sales revenues in our Northwest reportable segment decreased by $28.1 million, or 27.3%, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to a 20.9% decrease in the number of homes closed, as well as a decrease in the average sales price per home closed, a decrease in the average community count and a lower absorption rate.
Home sales revenues in our West reportable segment increased by $23.3 million, or 41.9%, during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to a 47.2% increase in the number of homes closed, as well as an increase in the average community count and a higher absorption rate, partially offset by a decrease in the average sales price per home closed.
Home sales revenues in our Florida reportable segment increased by $26.1 million, or 49.3%, during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, primarily due to a 31.6% increase in the number of homes closed, as well as a higher absorption rate and an increase in the average sales price per home closed, partially offset by a decrease in the average community count.
Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the three months ended March 31, 2023 to $388.5 million, an increase of $0.9 million, or 0.2%, from $387.6 million for the three months ended March 31, 2022. This overall increase is primarily due to higher construction costs and capitalized interest, partially offset by a 14.6% decrease in homes closed. Gross margin for the three months ended March 31, 2023 was $98.8 million, a decrease of $59.6 million, or 37.6%, from $158.4 million for the three months ended March 31, 2022. Gross margin as a percentage of home sales revenues was 20.3% for the three months ended March 31, 2023 and 29.0% for the three months ended March 31, 2022. The decrease in gross margin as a percentage of home sales revenues during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily due to a combination of higher construction costs, capitalized interest and the impact of sales incentives offered during the three months ended March 31, 2023.
Selling Expenses. Selling expenses for the three months ended March 31, 2023 were $42.8 million, an increase of $8.4 million, or 24.4%, from $34.4 million for the three months ended March 31, 2022. Sales commissions decreased to $20.3 million for the three months ended March 31, 2023 from $21.0 million for the three months ended March 31, 2022. Selling expenses as a percentage of home sales revenues were 8.8% and 6.3% for the three months ended March 31, 2023 and 2022, respectively. The increase in selling expenses as a percentage of home sales revenues was driven primarily by higher advertising spending and personnel costs, and in-house commissions due to lower home closings from our wholesale channel during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
General and Administrative. General and administrative expenses for the three months ended March 31, 2023 were $30.0 million, an increase of $1.7 million, or 5.9%, from $28.3 million for the three months ended March 31, 2022. The increase in the amount of general and administrative expenses is primarily due to increased personnel and associated costs, as well as professional fees and terminated land purchase agreements incurred during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. General and administrative expenses as a percentage of home sales revenues were 6.1% and 5.2% for the three months ended March 31, 2023 and 2022, respectively. The increase in general and administrative expenses as a percentage of home sales revenues is primarily due to lower home sales revenues during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Other Income. Other income, net of other expenses was $6.3 million for the three months ended March 31, 2023, an increase of $2.5 million from $3.8 million for the three months ended March 31, 2022. The increase in other income primarily reflects income associated with our investment in unconsolidated entities and gains realized from the sale of land and lots not directly associated with our core homebuilding operations.
Operating Income and Net Income before Income Taxes. Operating income for the three months ended March 31, 2023 was $26.1 million, a decrease of $69.7 million, or 72.8%, from $95.7 million for the three months ended March 31, 2022. Net income before income taxes for the three months ended March 31, 2023 was $32.3 million, a decrease of $67.2 million, or 67.5%, from $99.6 million for the three months ended March 31, 2022. The following reportable segments contributed to net income before income taxes during the three months ended March 31, 2023 as follows: Central - $9.1 million or 28.0%; Southeast - $6.9 million or 21.4%; Northwest - $7.7 million or 23.7%; West - $2.4 million or 7.4%; and Florida - $7.5 million or 23.1%. The decreases in operating income and net income before income taxes are primarily attributed to lower gross margin, increased advertising spending and additional costs resulting from the increase of personnel associated with the
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increase in community count, partially offset by higher average sales price per home closed during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Income Taxes. Income tax provision for the three months ended March 31, 2023 was $5.4 million, a decrease of $15.5 million, or 74.2%, from income tax provision of $20.9 million for the three months ended March 31, 2022. The decrease in our effective tax rate to 16.7% from 21.0% was primarily due to deductions in excess of compensation cost for share-based payments and the extension of federal energy efficient homes tax credits, 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.
Net Income. Net income for the three months ended March 31, 2023 was $27.0 million, a decrease of $51.7 million, or 65.7%, from $78.7 million for the three months ended March 31, 2022. The decrease in net income is primarily attributed to overall lower homes closed at lower gross margins and higher selling expenses during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Non-GAAP Measures
In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin, EBITDA and adjusted EBITDA.
Adjusted Gross Margin
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.
The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands):
Three Months Ended March 31,
20232022
Home sales revenues$487,357 $546,050 
Cost of sales388,541 387,643 
Gross margin98,816 158,407 
Capitalized interest charged to cost of sales6,757 4,513 
Purchase accounting adjustments (1)
2,036 2,282 
Adjusted gross margin$107,609 $165,202 
Gross margin % (2)
20.3 %29.0 %
Adjusted gross margin % (2)
22.1 %30.3 %
(1)Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.
(2)Calculated as a percentage of home sales revenues.
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting included in cost of sales. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and
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management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
(i) they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments, including for purchase of land;
(ii) they do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;
(iii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and EBITDA and adjusted EBITDA do not reflect any cash requirements for such replacements or improvements;
(iv) they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
(v) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and
(vi) other companies in our industry may calculate them differently than we do, limiting their usefulness as a comparative measure.
Because of these limitations, our EBITDA and adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using our EBITDA and adjusted EBITDA along with other comparative tools, together with GAAP measures, to assist in the evaluation of operating performance. These GAAP measures include operating income, net income and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments and other non-recurring charges, which are not reflected in our EBITDA or adjusted EBITDA. EBITDA and adjusted EBITDA are not intended as alternatives to net income as indicators of our operating performance, as alternatives to any other measure of performance in conformity with GAAP or as alternatives to cash flows as a measure of liquidity. You should therefore not place undue reliance on our EBITDA or adjusted EBITDA calculated using these measures.

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The following table reconciles EBITDA and adjusted EBITDA to net income, which is the GAAP measure that our management believes to be most directly comparable (dollars in thousands):
Three Months Ended March 31,
20232022
Net income$26,962 $78,686 
Income tax provision (benefit)5,386 20,864 
Depreciation and amortization482 348 
Capitalized interest charged to cost of sales6,757 4,513 
EBITDA39,587 104,411 
Purchase accounting adjustments(1)
2,036 2,282 
Other income, net(6,297)(3,830)
Adjusted EBITDA$35,326 $102,863 
EBITDA margin %(2)
8.1 %19.1 %
Adjusted EBITDA margin %(2)
7.2 %18.8 %
(1)Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.
(2)Calculated as a percentage of home sales revenues.
Backlog
We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase contract. The amount of the required deposit is minimal (typically $1,000 to $10,000). We permit our retail homebuyers to cancel the purchase contract and obtain a refund of their deposit in the event mortgage financing cannot be obtained within a certain period of time, as specified in their purchase contract. Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is signed. If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract. If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the preliminary criteria to obtain mortgage financing. Only purchase contracts that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing are included in new (gross) orders.
Our “backlog” consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve months. Since our business model is generally based on building move-in ready homes before a purchase contract is signed, the majority of our homes in backlog are currently under construction or complete. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes closed during the current period. Our backlog at any given time will be affected by cancellations, the number of our active communities and the timing of home closings. Homes in backlog are generally closed within one to two months, although home closings have been, and may continue to be delayed. In addition, we may experience cancellations of purchase contracts at any time prior to closing. It is important to note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract.
Our net orders increased for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to an increase in community count.
The number of homes in our backlog at March 31, 2023 decreased 36.0% compared to March 31, 2022. The decrease in ending backlog relates to demand for home sales earlier in the first half of 2022 as compared to the first quarter of 2023 as a result of the increase in mortgage rates for our homebuyers. We believe that, over time, our inventory levels and sales pace will return to our pre-pandemic levels as demand normalizes and mortgage rates decrease from current levels.


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As of the dates set forth below, our net orders, cancellation rate and ending backlog homes and value were as follows (dollars in thousands):
Backlog DataThree Months Ended March 31,
2023 (4)
2022 (5)
Net orders (1)
2,219 1,973 
Cancellation rate (2)
15.9 %15.6 %
Ending backlog – homes (3)
1,555 2,429 
Ending backlog – value (3)
$561,422 $849,117 
(1)Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period.
(2)Cancellation rate for a period is the total number of purchase contracts cancelled during the period divided by the total new (gross) orders for the purchase of homes during the period.
(3)Ending backlog consists of retail homes at the end of the period that are under a purchase contract that has been signed by homebuyers who have met our preliminary financing criteria but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve months. Ending backlog is valued at the contract amount.
(4)As of March 31, 2023, we had 130 units related to bulk sales agreements associated with our wholesale business.
(5)As of March 31, 2022, we had 374 units related to bulk sales agreements associated with our wholesale business.
Land Acquisition Policies and Development
We had 99 active communities as of both March 31, 2023 and December 31, 2022. Generally, it takes us two to three years to turn raw or undeveloped land into an active community. To mitigate our exposure to real estate inventory risks, we utilize, on a limited and strategic basis, land banking financing arrangements.
Our lot inventory decreased to 69,724 owned or controlled lots as of March 31, 2023 from 71,904 owned or controlled lots as of December 31, 2022, primarily related to our discipline in the evaluation of and selective approval of new land deals.
We have 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 as real estate not owned within our inventory and a corresponding obligation was established within our accrued liabilities, as discussed in Note 3, “Accrued Expenses and Other Liabilities” to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, to recognize this relationship. While we are not legally obligated to repurchase 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 that we have sold to the land banker and we do not guarantee any of the land banker’s liabilities.
The table below shows (i) home closings by reportable segment for the three months ended March 31, 2023 and (ii) our owned or controlled lots by reportable segment as of March 31, 2023.
Three Months Ended March 31, 2023As of March 31, 2023
Reportable SegmentHome Closings
Owned (1)
ControlledTotal
Central453 21,471 3,413 24,884 
Southeast316 14,761 2,750 17,511 
Northwest159 6,553 2,010 8,563 
West209 9,669 1,255 10,924 
Florida229 5,182 2,660 7,842 
Total1,366 57,636 12,088 69,724 
(1)Of the 57,636 owned lots as of March 31, 2023, 46,633 were raw/under development lots and 11,003 were finished lots.


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Homes in Inventory
When entering a new community, we intend to build a sufficient number of move-in ready homes to meet our budgets. We base future home starts on home closings. As homes are closed, we start more homes to maintain our inventory. As of March 31, 2023, we had a total of 1,628 completed homes, including information centers, and 2,026 homes in progress.
Raw Materials and Labor
When constructing homes, we use various materials and components. We generally contract for our materials and labor at a fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Typically, the raw materials and most of the components used in our business are readily available in the United States. We purchase some components and materials centrally to achieve volume discounts, reducing costs and helping to ensure timely deliveries. We typically do not store significant inventories of construction materials, except for work in progress materials for homes under construction. In addition, the majority of our raw materials are supplied to us by our subcontractors, and are included in the price of our contract with such subcontractors. Most of the raw materials necessary for our subcontractors are standard items carried by major suppliers. Our construction work is performed by third-party subcontractors, most of whom are non-unionized. We continue to monitor the supply markets to achieve the best prices possible. Typically, the price changes that most significantly influence our operations are price increases in labor, commodities and lumber. For the three months ended March 31, 2023, we have experienced delays and cost increases, to varying degrees, in our building materials and other construction costs.
Seasonality
In all of our reportable segments, we have historically experienced similar variability in our results of operations and in capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in our second, third and fourth quarters. Thus, our revenues may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels. Our revenues and capital requirements are generally similar across our second, third and fourth quarters.
As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular quarter, especially the first quarter, are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to continue in the long term.
Liquidity and Capital Resources
Overview
As of March 31, 2023, we had $43.0 million of cash and cash equivalents. Cash flows for each of our active communities depend on the status of the development cycle and can differ substantially from reported earnings.
Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness and the payment of various liabilities. In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition and repurchase shares of our common stock. Early stages of development or expansion require significant cash outlays for land acquisitions, land development, plats, vertical development, construction of information centers, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of home sales revenues. In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement purposes, as the costs associated with home and land construction were previously incurred.
Short-term Liquidity and Capital Resources
We generally rely on our ability to finance our operations by generating operating cash flows and borrowing under the Credit Agreement to adequately fund our short-term working capital obligations and to purchase land and other assets, develop lots and homes and repurchase shares of our common stock. As needed, we will consider accessing the debt and equity capital markets as part of our ongoing financing strategy. We rely on our ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects. Furthermore, we utilize, on a limited and strategic basis, land banking financing arrangements to access short-term liquidity.
As of the date of this Quarterly Report on Form 10-Q, we believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from the Credit Agreement or through accessing debt or equity capital, as needed. However, our ability to engage in the transactions described above may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as moderated investor or lender interest or capacity and our liquidity, leverage and net worth, and we can
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provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.
Long-term Liquidity and Capital Resources
We believe that our long-term principal uses of liquidity and capital resources will be inventory related purchases concerning land, lot development, repurchases of shares of our common stock, other capital expenditures, and principal and interest payments on our debt obligations maturing in 2025 and 2029. We believe that we will be able to fund our long-term liquidity needs with cash generated from operations and cash expected to be available to borrow under the Credit Agreement or through accessing debt or equity capital, as needed, although no assurance can be provided that such additional debt or equity capital will be available when needed or on terms that we find attractive. Additionally, we plan to further utilize, on a limited and strategic basis, land banking financing arrangements to maximize long-term liquidity for lot development projects where we have sufficient finished lot availability in certain markets. To the extent these sources of capital are insufficient to meet our needs, we may also conduct additional public or private offerings of our securities, refinance our indebtedness, or dispose of certain assets to fund our operating activities and capital needs.
Revolving Credit Facility
On April 28, 2023, we entered into a Third Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Third Amendment”), which amends the 2