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 32,000 homes. During the six months ended June 30, 
2019, we had 3,172 home closings, compared to 3,059 home closings during the 
six months ended June 30, 2018. We sell homes under the LGI Homes and Terrata 
Homes brands. Our 93 active communities at June 30, 2019 included four Terrata 
Homes communities.

Recent Developments On May 6, 2019, we entered into that certain Fourth Amended 
and Restated Credit Agreement with several financial institutions, and Wells 
Fargo Bank, National Association, as administrative agent (the “Credit 
Agreement”), which amends and restates and has substantially similar terms and 
provisions to the 2018 Credit Agreement and provides for a $550.0 million 
revolving credit facility, which can be increased at the request of the Company 
by up to $100.0 million, subject to the terms and conditions of the Credit 
Agreement. See Note 5 - Notes Payable for more information regarding the Credit 
Agreement.

Key Results Key financial results as of and for the three months ended June 30, 
2019, as compared to the three months ended June 30, 2018, were as follows:

•

Home sales revenues increased 10.0% to $461.8 million from $419.8 million.

•

Homes closed increased 7.1% to 1,944 homes from 1,815 homes.

•

Average sales price of our homes increased 2.7% to $237,567 from $231,321.

•

Gross margin as a percentage of home sales revenues decreased to 24.1% from 
26.1%.

•

Adjusted gross margin (non-GAAP) as a percentage of home sales revenues 
decreased to 26.3% from 27.7%.

•

Net income before income taxes decreased 3.4% to $60.5 million from $62.7 
million.

•

Net income decreased 3.3% to $46.1 million from $47.6 million.

•

EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 15.1% 
from 16.5%.

•

Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 
14.8% from 16.4%.

•

Total owned and controlled lots increased 6.9% to 54,191 lots at June 30, 2019 
from 50,700 lots at March 31, 2019. For reconciliations of the non-GAAP 
financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the 
most directly comparable GAAP financial measures, please see “—Non-GAAP 
Measures.” Key financial results as of and for the six months ended June 30, 
2019, as compared to the six months ended June 30, 2018, were as follows:

•

Home sales revenues increased 7.2% to $749.4 million from $698.9 million.

•

Homes closed increased 3.7% to 3,172 homes from 3,059 homes.

•

Average sales price of our homes increased 3.4% to $236,262 from $228,464.

•

Gross margin as a percentage of home sales revenues decreased to 23.7% from 
25.6%.

•

Adjusted gross margin (non-GAAP) as a percentage of home sales revenues 
decreased to 25.8% from 27.2%.

•

Net income before income taxes decreased 12.4% to $82.2 million from $93.9 
million.

•

Net income decreased 14.0% to $64.4 million from $74.9 million.

•

EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 12.9% 
from 15.0%.

•

Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 
12.8% from 14.9%.

•

Total owned and controlled lots increased 5.3% to 54,191 lots at June 30, 2019 
from 51,442 lots at December 31, 2018. 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.”

Results of Operations

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.

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 
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.


Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

Home sales revenues for the three months ended June 30, 2019 were $461.8 
million, an increase of $42.0 million, or 10.0%, from $419.8 million for the 
three months ended June 30, 2018. The increase in home sales revenues is 
primarily due to a 7.1% increase in homes closed and an increase in the average 
sales price per home during the three months ended June 30, 2019 as compared to 
the three months ended June 30, 2018. The average sales price per home closed 
during the three months ended June 30, 2019 was $237,567, an increase of 
$6,246, or 2.7%, from the average sales price per home of $231,321 for the 
three months ended June 30, 2018. This increase in the average sales price per 
home is primarily due to changes in product mix, higher price points in new 
markets and a favorable pricing environment. The increase in home closings was 
largely due to increased home closings in our West, Southeast and Central 
reportable segments, partially offset by decreased home closings in our 
Northwest and Florida reportable segments during the three months ended June 
30, 2019 as compared to the three months ended June 30, 2018. The decreased 
home closings in our Northwest and Florida reportable segments were primarily 
due to close out of or transition between, and to a lesser extent available 
inventory in, certain of their respective active communities. Home sales 
revenues in our West reportable segment increased by $29.7 million, or 79.6%, 
primarily due to community count associated with our geographic expansion into 
our California and Nevada markets. Home sales revenues in our Southeast 
reportable segment increased by $17.5 million, or 28.9%, primarily due to 
community count associated with the Wynn Homes acquisition in August 2018. Home 
sales revenues in our Central reportable segment increased by $7.9 million, or 
4.4%, during the three months ended June 30, 2019 as compared to the three 
months ended June 30, 2018, primarily due to a 4.1% increase in the number of 
homes closed in this segment. Home sales revenues in our Northwest and Florida 
reportable segments decreased by $6.2 million and $6.8 million, or 7.3% and 
12.4%, respectively, largely due to close out or transition between certain of 
their respective active communities for the three months ended June 30, 2019 as 
compared to the three months ended June 30, 2018. Our active selling 
communities at June 30, 2019 increased to 93 from 79 at June 30, 2018. All 
reportable segments added communities by expanding into new markets or 
deepening existing markets with the exception of the Florida reportable 
segment, which maintained the same active community count due to close out or 
transition between certain of its active communities. Cost of Sales and Gross 
Margin (home sales revenues less cost of sales). Cost of sales increased for 
the three months ended June 30, 2019 to $350.5 million, an increase of $40.4 
million, or 13.0%, from $310.1 million for the three months ended June 30, 
2018. This overall increase is primarily due to an increase in homes closed, 
higher capitalized interest costs recognized, purchase accounting, and to a 
lesser extent, increased construction costs for homes closed during the three 
months ended June 30, 2019 as compared to the three months ended June 30, 2018. 
Gross margin for the three months ended June 30, 2019 was $111.3 million, an 
increase of $1.5 million, or 1.4%, from $109.8 million for the three months 
ended June 30, 2018. Gross margin as a percentage of home sales revenues was 
24.1% for the three months ended June 30, 2019 and 26.1% for the three months 
ended June 30, 2018. This decrease in gross margin as a percentage of home 
sales revenues is primarily due to higher capitalized interest costs 
recognized, purchase accounting related to our acquisition of Wynn Homes, and 
to a lesser extent, increased construction costs, offset by an increase in 
homes closed for the three months ended June 30, 2019 as compared to the three 
months ended June 30, 2018. Selling Expenses. Selling expenses for the three 
months ended June 30, 2019 were $33.9 million, an increase of $4.6 million, or 
15.7%, from $29.3 million for the three months ended June 30, 2018. Sales 
commissions increased to $18.0 million for the three months ended June 30, 2019 
from $16.3 million for the three months ended June 30, 2018, partially due to a 
10.0% increase in home sales revenues during the three months ended June 30, 
2019 as compared to the three months ended June 30, 2018. Selling expenses as a 
percentage of home sales revenues were 7.3% and 7.0% for the three months ended 
June 30, 2019 and 2018, respectively. The increase in selling expenses as a 
percentage of home sales revenues reflects additional operating expenses 
associated with increased personnel, advertising, and selling expenses 
primarily associated with new communities during the three months ended June 
30, 2019 as compared to the three months ended June 30, 2018. General and 
Administrative. General and administrative expenses for the three months ended 
June 30, 2019 were $19.0 million, an increase of $0.7 million, or 3.7%, from 
$18.3 million for the three months ended June 30, 2018. The increase in the 
amount of general and administrative expenses is primarily due to increased 
personnel associated with an increase of active communities during the three 
months ended June 30, 2019 as compared to the three months ended June 30, 2018. 
General and administrative expenses as a percentage of home sales revenues were 
4.1% and 4.4% for the three months ended June 30, 2019 and 2018, respectively. 
The decrease in general and administrative expenses as a percentage of home 
sales revenues reflects operating leverage realized from the increase in home 
sales revenues during the three months ended June 30, 2019 as compared to the 
three months ended June 30, 2018. Other Income. Other income, net of other 
expenses was $2.3 million for the three months ended June 30, 2019, an increase 
of $1.4 million, from $0.9 million for the three months ended June 30, 2018. 
The increase in other income primarily reflects the gain realized from the sale 
of land not directly associated with our core homebuilding operations. 
Operating Income, Net Income before Taxes and Net Income. Operating income for 
the three months ended June 30, 2019 was $58.4 million, a decrease of $3.7 
million, or 6.0%, from $62.2 million for the three months ended June 30, 2018. 
Net income before income taxes for the three months ended June 30, 2019 was 
$60.5 million, a decrease of $2.1 million, or 3.4%, from $62.7 million for the 
three months ended June 30, 2018. The following reportable segments contributed 
to net income before income taxes during the three months ended June 30, 2019: 
Central - $32.6 million or 53.8%; Northwest - $11.9 million or 19.6%; Southeast 
- $5.7 million or 9.5%; Florida - $4.6 million or 7.5%; and West - $7.2 million 
or 11.9%. Net income for the three months ended June 30, 2019 was $46.1 
million, a decrease of $1.5 million, or 3.3%, from $47.6 million for the three 
months ended June 30, 2018. The decreases in operating income, net income 
before income taxes and net income are primarily attributed to lower gross 
margin percentage, increased advertising and additional costs realized from the 
increase of personnel associated with the increase of community count, higher 
capitalized interest costs recognized and purchase accounting, partially offset 
by a higher average sales price realized for the three months ended June 30, 
2019 as compared to the three months ended June 30, 2018.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018 Homes 
Sales. Our home sales revenues, home closings, average sales price (ASP), 
average community count and average monthly absorption rate by reportable 
segment for the six months ended June 30, 2019 and 2018 were as follows 
(revenues in thousands):

Home sales revenues for the six months ended June 30, 2019 were $749.4 million, 
an increase of $50.6 million, or 7.2%, from $698.9 million for the six months 
ended June 30, 2018. The increase in home sales revenues is primarily due to a 
3.7% increase in homes closed, and an increase in the average sales price per 
home during the six months ended June 30, 2019 as compared to the six months 
ended June 30, 2018. The average sales price per home closed during the six 
months ended June 30, 2019 was $236,262, an increase of $7,798, or 3.4%, from 
the average sales price per home of $228,464 for the six months ended June 30, 
2018. This increase in the average sales price per home was primarily due to 
changes in product mix, higher price points in certain new markets and 
increases in sales prices in existing communities. The increase in home 
closings was largely due to increased home closings in our West, Central and 
Southeast reportable segments, partially offset by decreased home closings in 
our Northwest and Florida reportable segments during the six months ended June 
30, 2019 as compared to the six months ended June 30, 2018. The decreased home 
closings in our Northwest and Florida reportable segments were largely due to 
close out of or transition between, and to a lesser extent available inventory 
in, certain of their respective active communities. Home sales revenues in our 
West reportable segment increased by $48.7 million, or 76.0%, primarily due to 
community count associated with our geographic expansion into our California 
and Nevada markets. Home sales revenues in our Central reportable segment 
increased by $24.6 million, or 8.5%, during the six months ended June 30, 2019 
as compared to the six months ended June 30, 2018, primarily due to a 6.7% 
increase in the number of homes closed in this reportable segment. Home sales 
revenues in our Southeast reportable segment increased by $24.8 million, or 
23.5%, primarily due to increased community count associated with the Wynn 
Homes acquisition. Home sales revenues in our Northwest and Florida reportable 
segments decreased by $27.2 million and $20.4 million, or 19.1% and 20.9%, 
respectively, largely due to close out or transition between certain of their 
respective active communities. Our active selling communities at June 30, 2019 
increased to 93 from 79 at June 30, 2018. All reportable segments added 
communities by expanding into new markets or deepening existing markets with 
the exception of the Florida reportable segment, which maintained the same 
active community count due to close out or transition between certain of its 
active communities for the six months ended June 30, 2019 as compared to the 
six months ended June 30, 2018. Cost of Sales and Gross Margin (home sales 
revenues less cost of sales). Cost of sales increased for the six months ended 
June 30, 2019 to $571.8 million, an increase of $52.0 million, or 10.0%, from 
$519.8 million for the six months ended June 30, 2018. This overall increase is 
primarily due to an increase in homes closed, higher capitalized interest costs 
recognized, purchase accounting, higher construction costs, product mix and lot 
costs during the six months ended June 30, 2019 as compared to the six months 
ended June 30, 2018. In addition, there was an increase in construction 
overhead due to additional personnel and costs associated with geographic and 
community count expansion during the six months ended June 30, 2019 as compared 
to the six months ended June 30, 2018. Gross margin for the six months ended 
June 30, 2019 was $177.6 million, a decrease of $1.4 million, or 0.8%, from 
$179.0 million for the six months ended June 30, 2018. Gross margin as a 
percentage of home sales revenues was 23.7% for the six months ended June 30, 
2019 and 25.6% for the six months ended June 30, 2018. This decrease in gross 
margin as a percentage of home sales revenues is primarily due to a combination 
of higher construction costs, construction overhead, lot costs, capitalized 
interest and to a lesser degree purchase accounting, partially offset by higher 
average home sales price for the six months ended June 30, 2019 as compared to 
the six months ended June 30, 2018. Selling Expenses. Selling expenses for the 
six months ended June 30, 2019 were $60.7 million, an increase of $8.4 million, 
or 16.1%, from $52.3 million for the six months ended June 30, 2018. Sales 
commissions increased to $29.7 million for the six months ended June 30, 2019 
from $27.4 million for the six months ended June 30, 2018, partially due to a 
7.2% increase in home sales revenues during the six months ended June 30, 2019 
as compared to the six months ended June 30, 2018. Other increases include 
advertising and other personnel costs. Selling expenses as a percentage of home 
sales revenues were 8.1% and 7.5% for the six months ended June 30, 2019 and 
2018, respectively. The increase in selling expenses as a percentage of home 
sales revenues reflects increased personnel, advertising, and selling expenses 
primarily associated with new communities during the six months ended June 30, 
2019 as compared to the six months ended June 30, 2018. General and 
Administrative. General and administrative expenses for the six months ended 
June 30, 2019 were $37.4 million, an increase of $3.7 million, or 10.9%, from 
$33.7 million for the six months ended June 30, 2018. The increase in the 
amount of general and administrative expenses is primarily due to increased 
personnel associated with an increase of active communities during the six 
months ended June 30, 2019 as compared to the six months ended June 30, 2018. 
General and administrative expenses as a percentage of home sales revenues were 
5.0% and 4.8% for the six months ended June 30, 2019 and 2018, respectively. 
The increase in general and administrative expenses as a percentage of home 
sales revenues reflects additional costs realized from the increase of 
personnel associated with the increase of community count during the six months 
ended June 30, 2019 as compared to the six months ended June 30, 2018. Other 
Income. Other income, net of other expenses was $2.9 million for the six months 
ended June 30, 2019, an increase of $1.5 million from $1.4 million for the six 
months ended June 30, 2018. The increase in other income primarily reflects the 
gain realized from the sale of land not directly associated with our core 
homebuilding operations. Operating Income, Net Income before Income Taxes and 
Net Income. Operating income for the six months ended June 30, 2019 was $79.5 
million, a decrease of $13.5 million, or 14.5%, from $93.0 million for the six 
months ended June 30, 2018. Net income before income taxes for the six months 
ended June 30, 2019 was $82.2 million, a decrease of $11.7 million, or 12.4%, 
from $93.9 million for the six months ended June 30, 2018. The following 
reportable segments contributed to net income before income taxes during the 
six months ended June 30, 2019: Central - $47.2 million or 57.4%; Northwest - 
$15.2 million or 18.5%; Southeast - $6.2 million or 7.5%; Florida - $5.8 
million or 7.0%; and West - $10.3 million or 12.6%. Net income for the six 
months ended June 30, 2019 was $64.4 million, a decrease of $10.5 million, or 
14.0%, from $74.9 million for the six months ended June 30, 2018. The decreases 
in operating income, net income before income taxes and net income are 
primarily attributed to lower gross margin percentage, increased advertising 
and additional costs realized from the increase of personnel associated with 
the increase of community count, higher capitalized interest costs recognized, 
purchase accounting and start-up costs in the Southeast reportable segment, 
partially offset by a higher average sales price realized during the six months 
ended June 30, 2019 as compared to the six months ended June 30, 2018. Non-GAAP 
Measures In addition to the results reported in accordance with U.S. 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.

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 the 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 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.

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 (generally $1,000). The 
deposits are refundable if the retail homebuyer is unable to obtain mortgage 
financing. 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 the required deposit has been made. 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 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.


Six Months Ended June 30, 2019

Of the 30,976 owned lots as of June 30, 2019, 19,489 were raw/under development 
lots and 11,487 were finished lots. Homes in Inventory When entering a new 
community, we build a sufficient number of move-in ready homes to meet our 
budgets. We base future home starts on closings. As homes are closed, we start 
more homes to maintain our inventory. As of June 30, 2019, we had a total of 
1,360 completed homes, including information centers, and 2,487 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. In addition, the majority of our 
raw materials is supplied to us by our subcontractors, and is 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. 
Substantially all of our construction work is done by third-party 
subcontractors, most of whom are non-unionized. We continue to monitor the 
supply markets to achieve the best prices available. Typically, the price 
changes that most significantly influence our operations are price increases in 
labor, commodities and lumber. 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 revenue 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 
revenue 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 June 30, 2019, we had 
$37.6 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. 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. 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. We generally rely 
on our ability to finance our operations by generating operating cash flows, 
borrowing under our revolving credit facility or the issuance and sale of 
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 also rely 
on our ability to obtain performance, payment and completion surety bonds as 
well as letters of credit to finance our projects. We have an effective shelf 
registration statement on Form S-3 (Registration No. 333-227012), registering 
the offering and sale of an indeterminate amount of debt securities, guarantees 
of debt securities, preferred stock, common stock, warrants, depositary shares, 
purchase contracts and units that include any of these securities, that was 
filed on August 24, 2018 with the Securities and Exchange Commission. Under the 
shelf registration statement, we have the ability to access the debt and equity 
capital markets as needed as part of our ongoing financing strategy. 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 our revolving credit facility 
or through accessing debt or equity capital, as needed. Revolving Credit 
Facility On May 6, 2019, we entered into that certain Fourth Amended and 
Restated Credit Agreement (the “Credit Agreement”) with several financial 
institutions, and Wells Fargo Bank, National Association, as administrative 
agent. The Credit Agreement has substantially similar terms and provisions to 
our third amended and restated credit agreement entered into in May 2018 with 
several financial institutions, and Wells Fargo Bank, National Association, as 
administrative agent (the “2018 Credit Agreement”) but, among other things, 
provides for, a revolving credit facility of $550.0 million, which can be 
increased at our request by up to $100.0 million if the lenders make additional 
commitments, subject to the terms and conditions of the Credit Agreement.

The Credit Agreement matures on May 31, 2022. Before each anniversary of the 
Credit Agreement, we may request a one-year extension of the maturity date. The 
Credit Agreement is guaranteed by each of our subsidiaries that have gross 
assets of $0.5 million or more. As of June 30, 2019, the borrowing base under 
the Credit Agreement was $852.7 million, of which borrowings, including the 
Convertible Notes (as defined below) and the Senior Notes (as defined below), 
of $675.0 million were outstanding, $9.2 million of letters of credit were 
outstanding and $167.1 million was available to borrow under the 2018 Credit 
Agreement, net of deferred purchase price obligations. Interest is paid monthly 
on borrowings under the Credit Agreement at LIBOR plus 2.75%. The Credit 
Agreement applicable margin for LIBOR loans ranges from 2.35% to 2.75% based on 
our leverage ratio. At June 30, 2019, LIBOR was 2.40%. The Credit Agreement 
requires us to maintain (i) a tangible net worth of not less than $486.9 
million plus 75% of the net proceeds of all equity issuances plus 50.0% of the 
amount of our positive net income in any fiscal quarter after December 31, 
2018, (ii) a leverage ratio of not greater than 60.0%, (iii) liquidity of at 
least $50.0 million and (iv) a ratio of EBITDA to interest expense for the most 
recent four quarters of at least 2.50 to 1.00. 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 June 30, 2019, 
we were in compliance with all of the covenants contained in the Credit 
Agreement. Convertible Notes We issued $85.0 million aggregate principal amount 
of our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) in November 
2014 pursuant to an exemption from the registration requirements afforded by 
Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities 
Act”). The Convertible Notes mature on November 15, 2019. Interest on the 
Convertible Notes is payable semi-annually in arrears on May 15 and November 15 
of each year at a rate of 4.25%. When the Convertible Notes were issued, the 
fair value of $76.5 million was recorded to notes payable. $5.5 million of the 
remaining proceeds was recorded to additional paid in capital to reflect the 
equity component and the remaining $3.0 million was recorded as a deferred tax 
liability. The carrying amount of the Convertible Notes is being accreted to 
face value over the term to maturity. As of June 30, 2019, we have $70.0 
million aggregate principal amount of Convertible Notes outstanding. Prior to 
May 15, 2019, the Convertible Notes were convertible only upon satisfaction of 
any of the specified conversion events. On or after May 15, 2019 and until the 
close of business on November 14, 2019 (the business day immediately preceding 
the stated maturity date of the Convertible Notes), the holders of Convertible 
Notes can convert their Convertible Notes at any time at their option. Upon the 
election of a holder of Convertible Notes to convert their Convertible Notes, 
we may settle the conversion of the Convertible Notes using any combination of 
cash and shares of our common stock. It is our intent, and belief that we have 
the ability, to settle in cash the conversion of any Convertible Notes that the 
holders elect to convert. The initial conversion rate of the Convertible Notes 
is 46.4792 shares of our common stock for each $1,000 principal amount of 
Convertible Notes, which represents an initial conversion price of 
approximately $21.52 per share of our common stock. The conversion rate is 
subject to adjustments upon the occurrence of certain specified events. On July 
6, 2018, concurrently with the offering of the Senior Notes, we entered into 
that certain First Supplemental Indenture, dated as of July 6, 2018, among us, 
our subsidiaries that guarantee our obligations under the 2018 Credit Agreement 
(the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as 
trustee, which supplements the indenture governing the Convertible Notes, 
pursuant to which (i) the subordination provisions in the indenture governing 
the Convertible Notes were eliminated, (ii) each Subsidiary Guarantor agreed 
(A) to, concurrently with the issuance of the Senior Notes, fully and 
unconditionally guarantee the Convertible Notes to the same extent that such 
Subsidiary Guarantor is guaranteeing the Senior Notes and (B) that such 
Subsidiary Guarantor’s guarantee of the Convertible Notes ranks equally with 
such Subsidiary Guarantor’s guarantee of the Senior Notes and (iii) the Company 
agreed to not, directly or indirectly, incur any indebtedness in the form of, 
or otherwise become liable in respect of, any notes or other debt securities 
issued pursuant to an indenture or note purchase agreement (including the 
Senior Notes) unless such indebtedness is equal with or contractually 
subordinated to the Convertible Notes in right of payment. Senior Notes 
Offering On July 6, 2018, we issued $300.0 million aggregate principal amount 
of the Senior Notes in an offering to persons reasonably believed to be 
qualified institutional buyers in the United States pursuant to Rule 144A under 
the Securities Act and to certain non-U.S. persons in transactions outside the 
United States pursuant to Regulation S under the Securities Act. Interest on 
the Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually 
in arrears on January 15 and July 15 of each year, commencing on January 15, 
2019, and the Senior Notes mature on July 15, 2026. Terms of the Senior Notes 
are governed by an indenture and supplemental indenture, each dated as of July 
6, 2018, among us, the Subsidiary Guarantors and Wilmington Trust, National 
Association, as trustee. We received net proceeds from the offering of the 
Senior Notes of approximately $296.2 million, after deducting the initial 
purchasers’ discounts of $2.3 million and commissions and offering expenses of 
$1.5 million. The net proceeds from the offering were used to repay a portion 
of the borrowings under the 2018 Credit Agreement.

Letters of Credit, Surety Bonds and Financial Guarantees We are often required 
to provide letters of credit and surety bonds to secure our performance under 
construction contracts, development agreements and other arrangements. The 
amount of such obligations outstanding at any time varies in accordance with 
our pending development activities. In the event any such bonds or letters of 
credit are drawn upon, we would be obligated to reimburse the issuer of such 
bonds or letters of credit. Under these letters of credit, surety bonds and 
financial guarantees, we are committed to perform certain development and 
construction activities and provide certain guarantees in the normal course of 
business. Outstanding letters of credit, surety bonds and financial guarantees 
under these arrangements, totaled $91.5 million as of June 30, 2019. Although 
significant development and construction activities have been completed related 
to the improvements at these sites, the letters of credit and surety bonds are 
not generally released until all development and construction activities are 
completed. We do not believe that it is probable that any outstanding letters 
of credit, surety bonds or financial guarantees as of June 30, 2019 will be 
drawn upon. Cash Flows Operating Activities Net cash used in operating 
activities was $18.9 million for the six months ended June 30, 2019. The 
primary drivers of operating cash flows are typically cash earnings and changes 
in inventory levels, including land acquisition and development. Net cash used 
in operating activities during the six months ended June 30, 2019 was primarily 
driven by net income of $64.4 million, and included cash outlays for the $99.7 
million increase in the net change in real estate inventory, which was 
primarily related to our homes under construction and land acquisitions and 
development level of activity offset by changes in non-inventory working 
capital balances of $16.4 million. Net cash used in operating activities was 
$95.7 million for the six months ended June 30, 2018, primarily driven by net 
income of $74.9 million, and included cash outlays for the $143.4 million 
increase in the net change in real estate inventory, which was primarily 
related to our homes under construction and land acquisitions and development 
level of activity and additional cash outlays due to changes in non-inventory 
working capital balances of $27.2 million. Investing Activities Net cash used 
in investing activities for the six months ended June 30, 2019 and June 30, 
2018, was $0.3 million and $0.4 million, respectively, primarily due to the 
purchase of property and equipment. Financing Activities Net cash provided by 
financing activities for the six months ended June 30, 2019 and June 30, 2018, 
was $10.1 million and $77.4 million, respectively, primarily driven by net 
borrowings under the Credit Agreement and to a lesser extent proceeds from the 
issuance of stock, partially offset by loan issuance costs. Off-Balance Sheet 
Arrangements In the ordinary course of business, we enter into land purchase 
contracts in order to procure land and lots for the construction of our homes. 
We are subject to customary obligations associated with entering into contracts 
for the purchase of land and improved lots. These contracts typically require 
cash deposits and the purchase of properties under these contracts is generally 
contingent upon satisfaction of certain requirements by the sellers, which may 
include obtaining applicable property and development entitlements or the 
completion of development activities and the delivery of finished lots. We also 
utilize contracts with land sellers as a method of acquiring lots and land in 
staged takedowns, which helps us manage the financial and market risk 
associated with land holdings and minimize the use of funds from our corporate 
financing sources. Such contracts generally require a non-refundable deposit 
for the right to acquire land or lots over a specified period of time at 
pre-determined prices. We generally have the right at our discretion to 
terminate our obligations under purchase contracts during the initial 
feasibility period and receive a refund of our deposit, or we may terminate the 
contracts after the end of the feasibility period by forfeiting our cash 
deposit with no further financial obligations to the land seller. In addition, 
our deposit may also be refundable if the land seller does not satisfy all 
conditions precedent in the respective contract. As of June 30, 2019, we had 
$42.7 million of cash deposits pertaining to land purchase contracts for 23,215 
lots with an aggregate purchase price of $745.5 million. Approximately $30.3 
million of the cash deposits as of June 30, 2019 are secured by third-party 
guarantees or indemnity mortgages on the related property. Our utilization of 
land purchase contracts is dependent on, among other things, the availability 
of land sellers willing to enter into contracts at acceptable terms, which may 
include option takedown arrangements, the availability of capital to financial 
intermediaries to finance the development of optioned lots, general housing 
conditions and local market dynamics. Land purchase contracts may be more 
difficult to procure from land sellers in strong housing markets and are more 
prevalent in certain markets. Inflation

Our business can be adversely impacted by inflation, primarily from higher 
land, financing, labor, material and construction costs. In addition, inflation 
can lead to higher mortgage rates, which can significantly affect the 
affordability of mortgage financing to homebuyers.

Contractual Obligations As of June 30, 2019, there have been no material 
changes to our contractual obligations appearing in the “Contractual 
Obligations” section of Management’s Discussion and Analysis of Financial 
Condition and Results of Operations included in our Annual Report on Form 10-K 
for the fiscal year ended December 31, 2018.

The following are some of the factors that could cause actual results to differ 
materially from those expressed or implied in forward-looking statements:

•

adverse economic changes either nationally or in the markets in which we 
operate, including, among other things, increases in unemployment, volatility 
of mortgage interest rates and inflation and decreases in housing prices;

•

a slowdown in the homebuilding industry;

•

volatility and uncertainty in the credit markets and broader financial markets;

•

the cyclical and seasonal nature of our business;

•

our future operating results and financial condition;

•

our business operations;

•

changes in our business and investment strategy;

•

the success of our operations in recently opened new markets and our ability to 
expand into additional new markets;

•

our ability to successfully extend our business model to building homes with 
higher price points, developing larger communities and producing and selling 
multi-unit products, townhouses, wholesale products, and acreage home sites;

•

our ability to develop our projects successfully or within expected timeframes;

•

our ability to identify potential acquisition targets and close such 
acquisitions;

•

our ability to successfully integrate any acquisitions, including the Wynn 
Homes acquisition, with our existing operations;

•

availability of land to acquire and our ability to acquire such land on 
favorable terms or at all;

•

availability, terms and deployment of capital;

•

decisions of the lender group of our revolving credit facility;

34 Table of Contents


•

decline in the market value of our land portfolio;

•

disruption in the terms or availability of mortgage financing or increase in 
the number of foreclosures in our markets;

•

shortages of or increased prices for labor, land, or raw materials used in land 
development and housing construction;

•

delays in land development or home construction resulting from natural 
disasters, adverse weather conditions or other events outside our control;

•

uninsured losses in excess of insurance limits;

•

the cost and availability of insurance and surety bonds;

•

changes in, liabilities under, or the failure or inability to comply with, 
governmental laws and regulations;

•

the timing of receipt of regulatory approvals and the opening of projects;

•

the degree and nature of our competition;

•

increases in taxes or government fees;

•

poor relations with the residents of our projects;

•

existing and future litigation, arbitration or other claims;

•

availability of qualified personnel and third-party contractors and 
subcontractors;

•

information system interruptions or breaches in security;

•

our ability to retain our key personnel;

•

our leverage and future debt service obligations;

•

the impact on our business of any future government shutdown;

•

other risks and uncertainties inherent in our business;

•

other factors we discuss under the section entitled “Management’s Discussion 
and Analysis of Financial Condition and Results of Operations”; and

•

the risk factors set forth in our Annual Report on Form 10-K for the fiscal 
year ended December 31, 2018. You should not place undue reliance on 
forward-looking statements. Each forward-looking statement speaks only as of 
the date of the particular statement. We expressly disclaim any intent, 
obligation or undertaking to update or revise any forward-looking statements to 
reflect any change in our expectations with regard thereto or any change in 
events, conditions or circumstances on which any such statements are based. All 
subsequent written and oral forward-looking statements attributable to us or 
persons acting on our behalf are expressly qualified in their entirety by the 
cautionary statements contained in this Quarterly Report on Form 10-Q.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our operations are 
interest rate sensitive. As overall housing demand is adversely affected by 
increases in interest rates, a significant increase in mortgage interest rates 
may negatively affect the ability of homebuyers to secure adequate financing. 
Higher interest rates could adversely affect our revenues, gross margin and net 
income. We do not enter into, or intend to enter into, derivative financial 
instruments for trading or speculative purposes. Quantitative and Qualitative 
Disclosures About Interest Rate Risk We currently utilize both fixed-rate debt 
($70.0 million aggregate principal amount of the Convertible Notes, $300.0 
million aggregate principal amount of the Senior Notes and certain inventory 
related obligations) and variable-rate debt (our $550.0 million revolving 
credit facility) as part of financing our operations. Upon the election of a 
holder of Convertible Notes to convert their Convertible Notes, we may settle 
the conversion of the Convertible Notes using any combination of cash and 
shares of our common stock. Other than as a result of an election of a holder 
of Convertible Notes to convert their Convertible Notes, we do not have the 
obligation to prepay the Convertible Notes, the Senior Notes or our fixed-rate 
inventory related obligations prior to maturity, and, as a result, interest 
rate risk and changes in fair market value should not have a significant impact 
on our fixed-rate debt. The Convertible Notes mature on November 15, 2019. We 
are exposed to market risks related to fluctuations in interest rates on our 
outstanding variable rate indebtedness. We did not utilize swaps, forward or 
option contracts on interest rates or commodities, or other types of derivative 
financial instruments as of or during the six months ended June 30, 2019. We 
have not entered into and currently do not hold derivatives for trading or 
speculative purposes, but we may do so in the future. Many of the statements 
contained in this section are forward looking and should be read in conjunction 
with our disclosures under the heading “Cautionary Statement about 
Forward-Looking Statements” above. As of June 30, 2019, we had $305.0 million 
of variable rate indebtedness outstanding under the Credit Agreement. All of 
the outstanding borrowings under the Credit Agreement are at variable rates 
based on LIBOR. The interest rate for our variable rate indebtedness as of June 
30, 2019 was LIBOR plus 2.75%. At June 30, 2019, LIBOR was 2.40%. A 
hypothetical 100 basis point increase in the average interest rate on our 
variable rate indebtedness would increase our annual interest cost by 
approximately $3.1 million. Based on the current interest rate management 
policies we have in place with respect to our outstanding indebtedness, we do 
not believe that the future interest rate risks related to our existing 
indebtedness will have a material adverse impact on our financial position, 
results of operations or liquidity.