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”, “us,” “we,” or “our”), is engaged in the development of communities and the design, construction and sale of new homes in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma and Oregon.
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, 2017
. 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, 2018
, and for the
three
months ended
March 31, 2018
and
2017
, 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 period. Actual results could differ from those estimates, and these differences could have a significant impact on the financial statements.
Recently Adopted Accounting Standards
Effective January 1, 2018, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-15,
“Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”)
, which addresses specific classification issues and is intended to reduce diversity in current practice regarding the manner in which certain cash receipts and cash payments are presented and classified in the consolidated statements of cash flows. The adoption of ASU 2016-15 did not have a material effect on our consolidated statements of cash flows or disclosures.
Effective January 1, 2018, we adopted the FASB ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), which provides guidance for revenue recognition. Topic 606 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” (“Topic 605”) and most industry-specific guidance. Topic 606 also supersedes certain cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts.” Topic 606’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. We adopted Topic 606 using the modified retrospective transition method only with respect to contracts not completed at the date of adoption. We have developed the additional expanded disclosures required; however, the adoption of Topic 606 did not have a material effect on our consolidated statements of operations, balance sheets or cash flows. See
Note 2
for further details.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842)” (“ASU 2016-02”),
which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. ASU 2016-02 will be effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach. As part of our assessment work-to-date, we have formed an implementation work team and we are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and disclosures.
2. REVENUES
Adoption of Topic 606, "Revenue from Contracts with Customers"
On January 1, 2018, we adopted Topic 606 using the modified retrospective method. The results of applying Topic 606 did not affect our contracts as all contracts were completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. We did not record any adjustments or net reductions to opening retained earnings as of January 1, 2018 in relation to the adoption of Topic 606.
Revenue Recognition
Revenues from home sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the customer and we have no significant continuing involvement with the home. Proceeds from home sales are generally received from the title company within a few business days after closing. Home sales discounts and incentives granted to customers, which are related to the customers’ closing costs that we pay on the customer’s behalf
,
are recorded as a reduction of revenue in our consolidated financial statements of operations.
The following table presents our home sales revenues disaggregated by revenue stream (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Retail home sales revenues
|
|
$
|
272,038
|
|
|
$
|
161,495
|
|
Other
|
|
6,986
|
|
|
1,416
|
|
Total home sales revenues
|
|
$
|
279,024
|
|
|
$
|
162,911
|
|
The following table presents our home sales revenues disaggregated by geography, based on our determined operating segments in
Note 13
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Central
|
|
$
|
107,498
|
|
|
$
|
64,918
|
|
Southwest
|
|
54,283
|
|
|
33,126
|
|
Southeast
|
|
45,108
|
|
|
27,847
|
|
Florida
|
|
42,443
|
|
|
24,200
|
|
Northwest
|
|
29,692
|
|
|
12,820
|
|
Midwest
|
|
—
|
|
|
—
|
|
Total home sales revenues
|
|
$
|
279,024
|
|
|
$
|
162,911
|
|
Home Sales Revenues
We generate revenues primarily by delivering move-in ready spec homes with our entry-level and move-up homes sold under our LGI Homes brand and our luxury series homes sold under our Terrata Homes brand.
Retail homes sold under both our LGI Homes brand and Terrata Homes brand focus on providing move-in ready homes with standardized features within favorable markets that meet certain demographic and economic conditions. Our LGI Homes brand primarily markets to entry-level or first-time homebuyers, while our Terrata Homes brand primarily markets to move-up homebuyers.
Our other revenues are composed of our wholesale home sales under our LGI Homes brand in existing communities where we are currently marketing and selling to targeted homebuyers. Wholesale homes are primarily sold under a bulk sales agreement and focus on providing move-in ready homes with standardized features to real estate investors that will ultimately use the single family homes as rental properties.
Performance Obligations
Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms
as customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title company within a few business days after closing.
Sales and broker commissions are incremental costs incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained. Sales and broker commissions are expensed upon fulfillment of a home closing. Advertising costs are costs to obtain a contract that would have been incurred regardless of whether the contract was obtained and are recognized as an expense when incurred. Sales and broker commissions and advertising costs are recorded within sales and marketing expense presented in our consolidated statements of operations as selling expenses.
3. REAL ESTATE INVENTORY
Our real estate inventory consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Land, land under development and finished lots
|
|
$
|
542,230
|
|
|
$
|
494,552
|
|
Information centers
|
|
19,508
|
|
|
18,327
|
|
Homes in progress
|
|
226,760
|
|
|
191,659
|
|
Completed homes
|
|
251,853
|
|
|
214,395
|
|
Total real estate inventory
|
|
$
|
1,040,351
|
|
|
$
|
918,933
|
|
Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case the affected inventory is written down to fair value.
Land, development and other project costs, including interest and property taxes incurred during development and home construction and net of expected reimbursements of development costs, are capitalized to real estate inventory. Land development and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate. The costs of lots are transferred to homes in progress when home construction begins. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method. Costs that are not specifically identifiable to a home are allocated on a pro rata basis, which we believe approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots or homes within a community are similar in value. Inventory costs for completed homes are expensed to cost of sales as homes are closed. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining unsold lots and homes in the community on a pro rata basis.
The life cycle of a community generally ranges from
two
to
five
years, commencing with the acquisition of land, continuing through the land development phase and concluding with the construction and sale of homes. A constructed home is used as the community information center during the life of the community and then sold. Actual individual community lives will vary based on the size of the community, the sales absorption rate and whether the property was purchased as raw land or finished lots.
Interest and financing costs incurred under our debt obligations, as more fully discussed in
Note 5
, are capitalized to qualifying real estate projects under development and homes under construction.
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Inventory related obligations
|
|
$
|
13,236
|
|
|
$
|
12,906
|
|
Taxes payable
|
|
8,712
|
|
|
48,733
|
|
Retentions and development payable
|
|
9,489
|
|
|
12,025
|
|
Accrued compensation, bonuses and benefits
|
|
8,559
|
|
|
14,462
|
|
Accrued interest
|
|
3,338
|
|
|
2,096
|
|
Warranty reserve
|
|
2,600
|
|
|
2,450
|
|
Other
|
|
8,555
|
|
|
10,159
|
|
Total accrued expenses and other liabilities
|
|
$
|
54,489
|
|
|
$
|
102,831
|
|
Inventory Related Obligations
We own lots in certain communities in Arizona, California, Florida and Texas that have Community Development Districts (“CDD”) 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, is typically payable over a
30
-year period and is ultimately assumed by the homebuyer when home sales are closed. Such obligations represent a non-cash cost of the lots.
Estimated Warranty Reserve
We typically provide homebuyers with a
one
-year warranty on the house and a
ten
-year limited warranty for major defects in structural elements such as framing components and foundation systems.
Changes to our warranty accrual are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Warranty reserves, beginning of period
|
|
$
|
2,450
|
|
|
$
|
1,600
|
|
Warranty provision
|
|
988
|
|
|
352
|
|
Warranty expenditures
|
|
(838
|
)
|
|
(302
|
)
|
Warranty reserves, end of period
|
|
$
|
2,600
|
|
|
$
|
1,650
|
|
5. NOTES PAYABLE
Revolving Credit Agreement
On May 25, 2017, we entered into that certain Second Amended and Restated Credit Agreement (the “Credit Agreement”) with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent. The Credit Agreement provides for a
$600.0 million
revolving credit facility (subject to a borrowing base), which can be increased by our request up to
$650.0 million
, subject to the terms and conditions of the Credit Agreement.
The Credit Agreement matures on
May 31, 2020
. 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 equal to or greater than
$0.5 million
. Prior to nonperformance of certain financial covenants under the Credit Agreement, the revolving credit facility is unsecured. As of
March 31, 2018
, the borrowing base under the Credit Agreement was
$600.0 million
, of which borrowings of
$510.0 million
were outstanding,
$6.0 million
of letters of credit were outstanding and
$84.0 million
was available to borrow.
Interest is paid monthly on borrowings under the Credit Agreement at LIBOR plus
3.15%
. The Credit Agreement applicable margin for LIBOR loans ranges from 3.00% to 3.50% based on our leverage ratio. At
March 31, 2018
, LIBOR was
1.80%
.
The Credit Agreement contains various financial covenants, including a minimum tangible net worth, a leverage ratio, a minimum liquidity amount and an EBITDA to interest expense ratio. The Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At
March 31, 2018
, 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. The Convertible Notes mature on
November 15, 2019
. Interest on the Convertible Notes is payable semiannually in May and November at a rate of
4.25%
. Prior to May 15, 2019, the Convertible Notes are convertible only upon satisfaction of any of the specified conversion events. On or after May 15, 2019, the holders of the 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.
During the fourth quarter of 2017, we received notice from holders of
$15.0 million
principal amount of the Convertible Notes to convert their Convertible Notes. The conversion of such Convertible Notes were settled in the
first
quarter of
2018
,
resulting in the issuance of
486,679
shares of our common stock, a
$0.6 million
reduction to debt discount and additional paid in capital, a
$0.2 million
loss on the extinguishment of debt issuance costs and a cash payment of
$15.0 million
for the principal amount of such Convertible Notes. As of March 31, 2018, we have
$70.0 million
aggregate principal amount of Convertible Notes outstanding.
During the
first
quarter of
2018
, the Convertible Notes were convertible because the closing sale price of our common stock was greater than
130%
of the
$21.52
conversion price on at least 20 trading days during the 30 trading day period ending on December 31, 2017. As a result, the holders of the Convertible Notes could elect to convert some or all of their Convertible Notes in accordance with the terms and provisions of the indenture governing the Convertible Notes during the conversion period of January 1, 2018 through March 31, 2018 (inclusive). The Convertible Notes continue to be convertible during the second quarter of 2018. As of the date of the filing of this Quarterly Report on Form 10-Q, no other conversion notices have been received by us.
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.
Notes payable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Notes payable under the Credit Agreement ($600.0 million revolving credit facility at March 31, 2018) maturing on May 31, 2020; interest paid monthly at LIBOR plus 3.15%; net of debt issuance costs of approximately $4.7 million and $5.3 million at March 31, 2018 and December 31, 2017, respectively.
|
|
$
|
505,277
|
|
|
$
|
394,714
|
|
4.25% Convertible Notes due November 15, 2019; interest paid semi-annually at 4.25%; net of debt issuance costs of approximately $0.7 million and $1.0 million at March 31, 2018 and December 31, 2017, respectively; and approximately $2.8 million and $3.5 million in unamortized discount at March 31, 2018 and December 31, 2017, respectively
|
|
66,441
|
|
|
80,481
|
|
Total notes payable
|
|
$
|
571,718
|
|
|
$
|
475,195
|
|
Capitalized Interest
Interest activity, including other financing costs, for notes payable for the periods presented is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Interest incurred
|
|
$
|
7,193
|
|
|
$
|
5,074
|
|
Less: Amounts capitalized
|
|
(7,193
|
)
|
|
(5,074
|
)
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
5,170
|
|
|
$
|
3,159
|
|
Included in interest incurred was amortization of deferred financing costs for notes payable and amortization of Convertible Notes discount of
$0.8 million
and
$0.9 million
for the
three months ended
March 31, 2018
and
2017
, respectively.
6. INCOME TAXES
We file U.S. federal and state income tax returns. As of
March 31, 2018
, we have no unrecognized tax benefits. We are no longer subject to exam for years before 2014 (2013 for Texas).
For the
three months ended
March 31, 2018
, our effective tax rate of
12.6%
is lower than the statutory rate primarily as a result of the deductions in excess of compensation cost (“windfalls”) for share-based payments, offset by the elimination of a credit for the federal Domestic Production Activity Deduction as a result of the newly enacted tax regulation and an increase in rate for state income taxes, net of the federal benefit.
The Securities Exchange Commission (the “SEC”) staff issued Staff Accounting Bulletin 118, which provides guidance on accounting for the tax effects of the U.S. federal income tax legislation signed into law on December 22, 2017, commonly known as the “Tax Cuts and Jobs Act of 2017” (the “Tax Act”) for which the accounting under Accounting Standards Codification (“ASC”) 740 is incomplete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but the
company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before enactment of the Tax Act.
As of March 31, 2018, we have completed the majority of our accounting for the tax effects of the Tax Act. However, as there is some uncertainty around the grandfathering provisions related to performance-based executive compensation, we have estimated a provisional amount for deferred tax assets related to performance-based executive compensation. In addition, we also re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
Income taxes paid were
$42.9 million
and
$0.0 million
for the
three months ended
March 31, 2018
and
2017
, respectively.
7. EQUITY
Convertible Notes
During the forth quarter of
2017
, we received notice from holders of
$15.0 million
principal amount of the Convertible Notes to convert their Convertible Notes. The conversion of such Convertible Notes was settled in the
first
quarter of
2018
, resulting in the issuance of
486,679
shares of our common stock, a
$0.5 million
reduction to additional paid in capital, net of tax and a cash payment of
$15.0 million
for the principal amount of such Convertible Notes. See the “Convertible Notes” section within
Note 5
for further details on this debt obligation.
Shelf Registration Statement and ATM Offering Program
We have an effective shelf registration statement on Form S-3 (the “Registration Statement”), to offer and sell from time to time various securities with a maximum offering price of
$300.0 million
. In November 2017, we concluded our prior
$25.0 million
at-the-market common stock offering program (the “2016 ATM Program”) under the Registration Statement. During the
three months ended
March 31, 2017
, we issued and sold
150,000
shares of our common stock under the 2016 ATM Program and received net proceeds of approximately
$4.7 million
.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Numerator (in thousands):
|
|
|
|
|
Numerator for basic and dilutive earnings per share
|
|
$
|
27,302
|
|
|
$
|
11,780
|
|
Denominator:
|
|
|
|
|
Basic weighted average shares outstanding
|
|
22,188,121
|
|
|
21,360,167
|
|
Effect of dilutive securities:
|
|
|
|
|
Convertible Notes - treasury stock method
|
|
2,217,336
|
|
|
1,161,326
|
|
Stock-based compensation units
|
|
366,570
|
|
|
266,159
|
|
Diluted weighted average shares outstanding
|
|
24,772,027
|
|
|
22,787,652
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.23
|
|
|
$
|
0.55
|
|
Diluted earnings per share
|
|
$
|
1.10
|
|
|
$
|
0.52
|
|
Antidilutive non-vested restricted stock units excluded from calculation of diluted earnings per share
|
|
25,106
|
|
|
49,392
|
|
In accordance with ASC 260-10,
Earnings Per Share
, we calculated the dilutive effect of the Convertible Notes using the treasury stock method, since we have the intent and ability to settle the principal amount of the outstanding Convertible Notes in cash. Under the treasury stock method, the Convertible Notes have a dilutive impact on diluted earnings per share to the extent that the average market price of our common stock for a reporting period exceeds the conversion price of
$21.52
per share.
During the
three
months ended
March 31, 2018
and
2017
, the average market price of our common stock exceeded the conversion price of
$21.52
per share; therefore, the calculation of diluted earnings per share for the
three months ended
March 31, 2018
and
2017
includes the effect of approximately
2.2 million
and
1.2 million
shares, respectively, of our common stock related to the conversion spread of the Convertible Notes.
9. STOCK-BASED COMPENSATION
Non-performance Based Restricted Stock Units
The following table summarizes the activity of our time-vested restricted stock units (“RSUs”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Beginning balance
|
|
175,100
|
|
|
$
|
27.66
|
|
|
133,853
|
|
|
$
|
20.13
|
|
Granted
|
|
35,048
|
|
|
$
|
64.60
|
|
|
61,986
|
|
|
$
|
31.64
|
|
Vested
|
|
(31,021
|
)
|
|
$
|
30.68
|
|
|
(10,719
|
)
|
|
$
|
15.17
|
|
Forfeited
|
|
(2,611
|
)
|
|
$
|
14.75
|
|
|
(406
|
)
|
|
$
|
24.71
|
|
Ending balance
|
|
176,516
|
|
|
$
|
37.22
|
|
|
184,714
|
|
|
$
|
24.27
|
|
During the
three months ended
March 31, 2018
, we issued
15,867
RSUs to senior management for the time based portion of our 2018 long-term incentive compensation program,
11,780
RSUs for 2017 bonuses to managers under our Annual Bonus Plan and
7,401
RSUs to other employees. Generally, the RSUs cliff vest on the third anniversary of the grant date and can only be settled in shares of our common stock.
We recognized
$0.4 million
and
$0.3 million
of stock-based compensation expense related to outstanding RSUs for the
three months ended
March 31, 2018
and
2017
, respectively. At
March 31, 2018
, we had unrecognized compensation cost of
$4.5 million
related to unvested RSUs, which is expected to be recognized over a weighted average period of
2.4
years.
Performance-Based Restricted Stock Units
The Compensation Committee of our Board of Directors 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 the three-year performance cycles. The PSUs provide for shares of our common stock to be issued based on the attainment of certain performance metrics over the applicable
three
-year periods. The number of shares of our common stock that may be issued to the recipients for the PSUs range from
0%
to
200%
of the target amount depending on actual results as compared to the target performance metrics. The terms of the PSUs provide that the payouts will be capped at 100% of the target number of PSUs granted if absolute total stockholder return is negative during the performance period, regardless of EPS performance; this market condition applies for amounts recorded above target. The compensation expense associated with the PSU grants is determined using the derived grant date fair value, based on a third party valuation analysis, and expensed over the applicable period. The PSUs vest upon the determination date for the actual results at the end of the
three
-year period and require that the recipients continue to be employed by us through the determination date. The PSUs can only be settled in shares of our common stock.
The following table summarizes the activity of our PSUs for the
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Granted
|
|
Performance Period
|
|
Target PSUs Outstanding at December 31, 2017
|
|
Target PSUs Granted
|
|
Target PSUs Vested
|
|
Target PSUs Forfeited
|
|
Target PSUs Outstanding at March 31, 2018
|
|
Weighted Average Grant Date Fair Value
|
2015
|
|
2015 - 2017
|
|
120,971
|
|
|
—
|
|
|
(120,971
|
)
|
|
—
|
|
|
—
|
|
|
$
|
13.34
|
|
2016
|
|
2016 - 2018
|
|
87,605
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
87,605
|
|
|
$
|
21.79
|
|
2017
|
|
2017 - 2019
|
|
111,035
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
111,035
|
|
|
$
|
31.64
|
|
2018
|
|
2018 - 2020
|
|
—
|
|
|
61,898
|
|
|
—
|
|
|
—
|
|
|
61,898
|
|
|
$
|
64.60
|
|
Total
|
|
|
|
319,611
|
|
|
61,898
|
|
|
(120,971
|
)
|
|
—
|
|
|
260,538
|
|
|
|
At
March 31, 2018
, management estimates that the recipients will receive approximately
141%
,
167%
and
200%
of the 2018, 2017 and 2016 target number of PSUs, respectively, at the end of the applicable
three
-year performance cycle based on projected performance compared to the target performance metrics. We recognized
$0.9 million
and
$1.0 million
of total stock-based compensation expense related to outstanding PSUs for the
three months ended
March 31, 2018
and
2017
, respectively. PSUs granted in 2015 vested on March 15, 2018 at
200%
of the target amount, and
241,942
shares of our common stock were issued upon such vesting. At
March 31, 2018
, we had unrecognized compensation cost of
$9.1 million
, based on the target amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of
1.2
years.
10. FAIR VALUE DISCLOSURES
ASC Topic 820,
Fair Value Measurements
(“ASC 820”)
,
defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that differs from the transaction price or market price of the asset or liability.
ASC 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows:
Level 1
- Fair value is based on quoted prices in active markets for identical assets or liabilities.
Level 2
- Fair value is determined using significant observable inputs, generally either quoted prices in active markets for
similar assets or liabilities, or quoted prices in markets that are not active.
Level 3
- Fair value is determined using one or more significant inputs that are unobservable in active markets at the
measurement date, such as a pricing model, discounted cash flow or similar technique.
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets. The fair value of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate their carrying amounts due to the short term nature of these instruments. As of
March 31, 2018
, our revolving credit facility’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 Convertible Notes listed below, 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 convertible notes within the homebuilding industry (Level 2 measurement).
The following table below shows the level and measurement of liabilities at
March 31, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
Fair Value Hierarchy
|
|
Carrying Value
|
|
Estimated Fair Value
(1)
|
|
Carrying Value
|
|
Estimated Fair Value
(1)
|
Convertible Notes
|
|
Level 2
|
|
$
|
66,441
|
|
|
$
|
67,137
|
|
|
$
|
80,481
|
|
|
$
|
81,523
|
|
|
|
(1)
|
Excludes the fair value of the equity component of the Convertible Notes. See the “Convertible Notes” section within
Note 5
for further details.
|
11. RELATED PARTY TRANSACTIONS
Land Purchases from Affiliates
We have a land purchase contract to purchase
106
finished lots in Montgomery County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately
$8.0 million
. The lots are being purchased in takedowns of at least
21
lots during successive six-month periods, subject to
5%
annual price escalation and certain price protection terms. We have a
$100,000
non-refundable deposit at
March 31, 2018
related to this land purchase contract. During the three months ended March 31, 2018 and 2017, the land purchase contract did not have any takedown activity. As of
March 31, 2018
, we have
22
finished lots remaining under the land purchase contract for a total base purchase price of approximately
$1.6 million
. The final takedown of
22
lots under this land purchase contract occurred on April 27, 2018 for
$1.6 million
.
As of
March 31, 2018
, we have two land purchase contracts to purchase a total of
194
finished lots in Pasco County and Manatee County, Florida from affiliates of one of our directors for a total base purchase price of approximately
$6.8 million
. The lots will be purchased in takedowns, subject to annual price escalation ranging from
3%
to
6%
per annum, and may provide for additional payments to the seller at the time of sale to the homebuyer. We have a
$0.7 million
non-refundable deposit at
March 31, 2018
related to these land purchase contracts. We anticipate closing on these contracts in the fourth quarter of 2018.
Home Sales to Affiliates
We had
no
home closings to affiliates during the three months ended
March 31, 2018
. During the
three months ended
March 31, 2017
, we closed on
three
homes sold to an affiliate of one of our directors for approximately
$0.7 million
.
12. COMMITMENTS AND CONTINGENCIES
Contingencies
In the ordinary course of doing business, we are subject to claims or proceedings from time to time relating to the purchase, development and sale of real estate and homes and other aspects of our homebuilding operations. Management believes that these claims include usual obligations incurred by real estate developers and residential home builders in the normal course of business. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.
We have provided unsecured environmental indemnities to certain lenders and other counterparties. In each case, we have performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, we may have recourse against other previous owners. In the ordinary course of doing business, we are subject to regulatory proceedings from time to time related to environmental and other matters. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.
Land Deposits
We have land purchase contracts, generally through cash deposits, for the right to purchase land or lots at a future point in time with predetermined terms. We do not have title to the property, and obligations with respect to the land purchase contracts
are generally limited to the forfeiture of the related nonrefundable cash deposits. The following is a summary of our land purchase deposits included in pre-acquisition costs and deposits (in thousands, except for lot count):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Land deposits and option payments
|
|
$
|
23,007
|
|
|
$
|
17,761
|
|
Commitments under the land purchase contracts if the purchases are consummated
|
|
$
|
596,770
|
|
|
$
|
460,714
|
|
Lots under land purchase contracts
|
|
22,063
|
|
|
18,758
|
|
As of
March 31, 2018
and
December 31, 2017
, approximately
$11.1 million
and
$8.4 million
of the land deposits are related to purchase contracts to deliver finished lots that are refundable under certain circumstances and secured by mortgages, or letters of credit or guaranteed by the seller or its affiliates.
Bonding and Letters of Credit
We have outstanding letters of credit and performance and surety bonds totaling
$52.4 million
(including
$6.0 million
of letters of credit issued under our revolving credit facility) and
$49.7 million
at
March 31, 2018
and
December 31, 2017
, 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.
13. SEGMENT INFORMATION
Beginning in the fourth quarter of 2017, we changed our reportable segment to Central, Southwest, Southeast, Florida, Northwest and Midwest. These segments reflect the way the Company evaluates its business performance and manages its operations. Prior year information has been restated for corresponding items of our segment information.
We operate one principal homebuilding business that is organized and reports by division. We have
six
operating segments at
March 31, 2018
: our Central, Southwest, Southeast, Florida, Northwest and Midwest divisions. The Central division is our largest division and comprised approximately
39%
and
40%
of total home sales revenues for the
three months ended
March 31, 2018
and
2017
, respectively.
In accordance with ASC Topic 280,
Segment Reporting
, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in deciding how to allocate resources and in assessing performance. The CODMs primarily evaluate performance based on the number of homes closed, gross margin and average sales price.
The operating segments qualify as our
six
reportable segments. In determining the most appropriate reportable segments, we consider operating segments’ economic and other characteristics, including home floor plans, average selling prices, gross margin percentage, geographical proximity, production construction processes, suppliers, subcontractors, regulatory environments, customer type and underlying demand and supply. Each operating segment follows the same accounting policies and is managed by our management team. We have
no
inter-segment sales, as all sales are to external customers. Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.
Financial information relating to our reportable segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
Central
|
|
$
|
107,498
|
|
|
$
|
64,918
|
|
Southwest
|
|
54,283
|
|
|
33,126
|
|
Southeast
|
|
45,108
|
|
|
27,847
|
|
Florida
|
|
42,443
|
|
|
24,200
|
|
Northwest
|
|
29,692
|
|
|
12,820
|
|
Midwest
|
|
—
|
|
|
—
|
|
Total home sales revenues
|
|
$
|
279,024
|
|
|
$
|
162,911
|
|
|
|
|
|
|
Net income (loss) before income taxes:
|
|
|
|
|
Central
|
|
$
|
15,818
|
|
|
$
|
8,421
|
|
Southwest
|
|
4,986
|
|
|
2,565
|
|
Southeast
|
|
4,327
|
|
|
2,314
|
|
Florida
|
|
3,972
|
|
|
2,298
|
|
Northwest
|
|
3,057
|
|
|
1,368
|
|
Midwest
|
|
(512
|
)
|
|
(104
|
)
|
Corporate
(1)
|
|
(421
|
)
|
|
(20
|
)
|
Total net income (loss) before income taxes
|
|
$
|
31,227
|
|
|
$
|
16,842
|
|
|
|
(1)
|
Balance consists primarily of general and administration unallocated costs for various shared service functions, as well as our warranty reserve. Actual warranty expenses are reflected within the reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Assets:
|
|
|
|
|
Central
|
|
$
|
474,294
|
|
|
$
|
439,833
|
|
Southwest
|
|
190,401
|
|
|
175,786
|
|
Southeast
|
|
185,559
|
|
|
155,928
|
|
Florida
|
|
115,015
|
|
|
119,257
|
|
Northwest
|
|
114,806
|
|
|
80,350
|
|
Midwest
|
|
18,679
|
|
|
15,066
|
|
Corporate
(1)
|
|
72,100
|
|
|
93,672
|
|
Total assets
|
|
$
|
1,170,854
|
|
|
$
|
1,079,892
|
|
|
|
(1)
|
Balance consists primarily of cash, pre-acquisition costs, prepaid insurance, security deposits and prepaid expenses.
|