ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc. and its subsidiaries.
Business Overview
We are engaged in the design, construction and sale of new homes in the following markets:
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West
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Northwest
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Central
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Midwest
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Florida
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Southeast
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Mid-Atlantic
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Phoenix, AZ
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Seattle, WA
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Houston, TX
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Minneapolis, MN
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Tampa, FL
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Atlanta, GA
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Washington, D.C.
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Tucson, AZ
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Portland, OR
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Dallas Ft. Worth, TX
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Orlando, FL
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Charlotte, NC
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Richmond, VA
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Albuquerque, NM
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Denver, CO
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San Antonio, TX
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Fort Myers, FL
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Raleigh, NC
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Baltimore, MD
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Las Vegas, NV
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Austin, TX
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Jacksonville, FL
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Wilmington, NC
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Northern CA
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Oklahoma City, OK
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Fort Pierce, FL
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Winston-Salem, NC
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Southern CA
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Daytona Beach, FL
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Columbia, SC
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Sarasota, FL
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Greenville, SC
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Birmingham, AL
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Nashville, TN
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Our management team has been in the residential land development business since the mid-1990s. Since commencing home building operations in 2003, we have constructed and closed over 50,000 homes. During the six months ended June 30, 2021, we had 5,417 home closings, compared to 3,840 home closings during the six months ended June 30, 2020.
We sell homes under the LGI Homes and Terrata Homes brands. Our 106 active communities at June 30, 2021 included two Terrata Homes communities.
During the three months ended June 30, 2021, we recorded $94.7 million in wholesale revenues as a result of 430 home closings, representing 15.1% of the total homes closed during the three months ended June 30, 2021. During the three months ended June 30, 2020, we recorded $38.1 million in wholesale revenues as a result of 199 home closings, representing 9.9% of the total homes closed during the three months ended June 30, 2020. During the six months ended June 30, 2021, we recorded $157.1 million in wholesale revenues as a result of 713 home closings, representing 13.2% of the total homes closed during the six months ended June 30, 2021. During the six months ended June 30, 2020, we recorded $82.4 million in wholesale revenues as a result of 398 home closings, representing 10.4% of the total homes closed during the six months ended June 30, 2020. We believe our wholesale home closings provide opportunities for us to leverage our systems and processes to meet the needs of companies looking to acquire multiple homes for rental purposes, primarily through bulk sales agreements.
COVID-19
Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, consumer confidence, housing demand, availability of financing for home buyers, availability and prices of new homes compared to existing inventory, and demographic trends. These factors, and in particular consumer confidence, can be significantly adversely affected by a variety of factors beyond our control. The spread of COVID-19 has caused significant volatility in U.S. and international debt and equity markets, which can negatively impact consumer confidence.
In response to COVID-19, we continue to take steps to prioritize the health and safety of our employees, customers, subcontractors and suppliers, including expanded safety policies and practices based on Center for Disease Control guidelines to reduce the spread of COVID-19.
As a homebuilder and developer, we provide an important service to our customers. During the COVID-19 outbreak, our main focus beyond the health and safety mentioned above is to continue our efforts to sell homes and complete our homes under construction.
We cannot predict the full impact that the significant disruption and volatility currently being experienced in the markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous
uncertainties. For additional discussion regarding our operations and COVID-19, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, but not limited to, the duration and geographic spread of COVID-19, the emergence of more infectious strains of the virus, the impact of government actions designed to prevent the spread of COVID-19 or the decrease in such actions, the availability and timely distribution of, and willingness to accept, effective treatments and vaccines, actions taken by customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A. Risk Factors in Part I our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. While we expect COVID-19 to continue to influence our future results, we believe that the desire for single-family homes outside of densely populated urban areas combined with historically low mortgage rates and low availability of existing homes is driving an increase in demand for new homes.
Recent Developments
During the three months ended June 30, 2021, we purchased 335,000 shares of our common stock for $55.8 million under our previously announced stock repurchase program.
On May 6, 2021, we acquired the real estate assets of Minneapolis, Minnesota-based KenRoe, Inc., a privately held homebuilder and land development company, for approximately $27.3 million at closing, subject to certain potential post-closing adjustments. KenRoe is recognized for building quality homes targeted at entry-level buyers. The acquired assets include approximately 85 homes under construction, 130 finished lots, and 390 lots either raw or under development. Additionally, we acquired approximately 2,500 controlled lots in the Minneapolis, Minnesota market.
On June 28, 2021, we completed an offering of $300.0 million aggregate principal amount of our 4.000% Senior Notes due 2029 (the “2029 Senior Notes”). We received net proceeds from the offering of the 2029 Senior Notes of approximately $296.6 million, after deducting the initial purchasers’ discounts and commissions and offering expenses. The net proceeds from the offering were used to temporarily repay borrowings under the Credit Agreement and subsequently in July 2021, to optionally redeem all $300.0 million aggregate principal amount of our outstanding 6.875% Senior Notes due 2026 (the “2026 Senior Notes”).
On June 14, 2021, the Company delivered a notice of conditional full redemption for all of the outstanding 2026 Senior Notes. On July 15, 2021, we redeemed all of the outstanding 2026 Senior Notes, which resulted in the principal payment of $300.0 million and a redemption premium of $10.3 million. Additionally, we expensed $3.0 million of deferred financing costs and discounts that were being previously amortized in association with the 2026 Senior Notes.
On July 14, 2021, we acquired the real estate assets of Buffington Homebuilding Group, Ltd., one of the largest privately held homebuilders in Austin, Texas, for approximately $40.0 million in cash at closing, subject to certain potential post-closing adjustments. This acquisition further expands our land position in the Austin, Texas market. The acquired assets include over 100 homes under construction, over 350 finished lots and control of approximately 150 additional finished lots that will be available for future sales. The acquired communities introduce the Terrata Homes brand to the Austin, Texas market.
Key Results
Key financial results as of and for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020, were as follows:
•Home sales revenues increased 64.3% to $791.5 million from $481.6 million.
•Homes closed increased 42.4% to 2,856 homes from 2,005 homes.
•Average sales price per home closed increased 15.4% to $277,140 from $240,200.
•Gross margin as a percentage of home sales revenues increased to 27.0% from 24.5%.
•Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 28.5% from 26.6%.
•Net income before income taxes increased 117.4% to $149.1 million from $68.6 million.
•Net income increased 112.4% to $118.1 million from $55.6 million.
•EBITDA (non-GAAP) as a percentage of home sales revenues increased to 20.2% from 16.1%.
•Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 20.0% from 16.2%.
•Total owned and controlled lots increased 12.8% to 75,910 lots at June 30, 2021 from 67,286 lots at March 31, 2021.
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, 2021, as compared to the six months ended June 30, 2020, were as follows:
•Home sales revenues increased 59.9% to $1.5 billion from $936.3 million.
•Homes closed increased 41.1% to 5,417 homes from 3,840 homes.
•Average sales price per home closed increased 13.4% to $276,438 from $243,836.
•Gross margin as a percentage of home sales revenues increased to 27.0% from 24.0%.
•Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 28.5% from 26.1%.
•Net income before income taxes increased 120.6% to $272.4 million from $123.5 million.
•Net income increased 121.2% to $217.8 million from $98.5 million.
•EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.6% from 15.1%.
•Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues increased to 19.5% from 15.1%.
•Total owned and controlled lots increased 23.4% to 75,910 lots at June 30, 2021 from 61,504 lots at December 31, 2020.
For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “—Non-GAAP Measures.”
Results of Operations
The following table sets forth our results of operations for the three and six months ended June 30, 2021 and 2020:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2021
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2020
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2021
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2020
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(dollars in thousands, except per share data and average home sales price)
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Statement of Income Data:
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Home sales revenues
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$
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791,512
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$
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481,602
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$
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1,497,465
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$
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936,329
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Expenses:
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Cost of sales
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577,433
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363,629
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1,093,437
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711,792
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Selling expenses
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44,796
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29,960
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87,579
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62,723
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General and administrative
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23,276
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20,179
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47,999
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40,102
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Operating income
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146,007
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67,834
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268,450
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121,712
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Loss on extinguishment of debt
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662
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—
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662
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—
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Other income, net
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(3,776)
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(763)
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(4,609)
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(1,774)
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Net income before income taxes
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149,121
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68,597
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272,397
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123,486
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Income tax provision
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30,987
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12,973
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54,605
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25,023
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Net income
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$
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118,134
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$
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55,624
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$
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217,792
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$
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98,463
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Basic earnings per share
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$
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4.75
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$
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2.22
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$
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8.75
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$
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3.91
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Diluted earnings per share
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$
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4.71
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$
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2.21
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$
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8.66
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$
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3.88
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Other Financial and Operating Data:
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Average community count
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105.0
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116.0
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105.7
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112.3
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Community count at end of period
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106
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117
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106
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117
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Home closings
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2,856
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2,005
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5,417
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3,840
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Average sales price per home closed
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$
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277,140
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$
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240,200
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$
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276,438
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$
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243,836
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Gross margin (1)
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$
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214,079
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$
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117,973
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$
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404,028
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$
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224,537
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Gross margin % (2)
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27.0
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%
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24.5
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%
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27.0
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%
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24.0
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%
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Adjusted gross margin (3)
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$
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225,967
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$
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127,909
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$
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427,401
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$
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244,026
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Adjusted gross margin % (2)(3)
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28.5
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%
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26.6
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%
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28.5
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%
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26.1
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%
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EBITDA (4)
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$
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159,812
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$
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77,437
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$
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294,049
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$
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141,417
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EBITDA margin % (2)(4)
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20.2
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%
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16.1
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%
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19.6
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%
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15.1
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%
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Adjusted EBITDA (4)
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$
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158,144
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$
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77,926
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$
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292,360
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$
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141,518
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Adjusted EBITDA margin % (2)(4)
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20.0
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%
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16.2
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%
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19.5
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%
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15.1
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%
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(1)Gross margin is home sales revenues less cost of sales.
(2)Calculated as a percentage of home sales revenues.
(3)Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. Please see “—Non-GAAP Measures” for a reconciliation of adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable.
(4)EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest
expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our 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, 2021 Compared to Three Months Ended June 30, 2020
Homes Sales. Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the three months ended June 30, 2021 and 2020 were as follows (revenues in thousands):
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Three Months Ended June 30, 2021
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As of June 30, 2021
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Revenues
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Home Closings
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ASP
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Average Community Count
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Average
Monthly
Absorption Rate
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Community Count at End of Period
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Central
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$
|
347,963
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|
|
1,348
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|
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$
|
258,133
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|
|
38.0
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|
|
11.8
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|
|
40
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|
Southeast
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|
159,714
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|
|
632
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|
|
252,712
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|
|
25.7
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|
|
8.2
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|
|
25
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|
Northwest
|
|
106,197
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|
|
255
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|
|
416,459
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|
|
10.3
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|
|
8.3
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|
|
11
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West
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|
80,813
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|
|
232
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|
|
348,332
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|
|
10.7
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|
|
7.2
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|
10
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Florida
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|
96,825
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|
|
389
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|
|
248,907
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20.3
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|
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6.4
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|
|
20
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|
Total
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$
|
791,512
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|
|
2,856
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|
|
$
|
277,140
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|
|
105.0
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|
|
9.1
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|
|
106
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|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
As of June 30, 2020
|
|
|
Revenues
|
|
Home Closings
|
|
ASP
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|
Average Community Count
|
|
Average
Monthly
Absorption Rate
|
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Community Count at End of Period
|
Central
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|
$
|
167,924
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|
|
747
|
|
|
$
|
224,798
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|
|
34.0
|
|
|
7.3
|
|
|
34
|
|
Southeast
|
|
128,577
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|
|
559
|
|
|
230,013
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|
|
37.3
|
|
|
5.0
|
|
|
38
|
|
Northwest
|
|
56,369
|
|
|
153
|
|
|
368,425
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|
|
11.3
|
|
|
4.5
|
|
|
12
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|
West
|
|
60,592
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|
|
236
|
|
|
256,746
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|
|
15.3
|
|
|
5.1
|
|
|
15
|
|
Florida
|
|
68,140
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|
|
310
|
|
|
219,806
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|
|
18.0
|
|
|
5.7
|
|
|
18
|
|
Total
|
|
$
|
481,602
|
|
|
2,005
|
|
|
$
|
240,200
|
|
|
116.0
|
|
|
5.8
|
|
|
117
|
|
Our results of operations for the three months ended June 30, 2021 reflect a significant rebound following the slowdown related to the COVID-19 pandemic that occurred during March and April 2020. Increase in the demand for our homes driven by benefits of homeownership, low interest rates and an undersupply of new and existing homes available for sale have resulted in a 53.2% increase to our backlog net orders at June 30, 2021 as compared to June 30, 2020.
Home sales revenues for the three months ended June 30, 2021 were $791.5 million, an increase of $309.9 million, or 64.3%, from $481.6 million for the three months ended June 30, 2020. The increase in home sales revenues is primarily due to a 42.4% increase in homes closed and an increase in the average sales price per home closed during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. The average sales price per home closed during the three months ended June 30, 2021 was $277,140, an increase of $36,940, or 15.4%, from the average sales price per home closed of $240,200 for the three months ended June 30, 2020. This increase in the average sales price per home closed is primarily due to a favorable pricing environment, increased closings at higher price points in certain markets and changes in product mix. The overall increase in home closings was largely due to a strong demand environment leading to higher average monthly absorption rates within certain markets in all reportable segments during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. Our community count at June 30, 2021 decreased to 106 from 117 at June 30, 2020. The decrease in community count is due to close out of or transition between certain active communities for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.
Home sales revenues in our Central reportable segment increased by $180.0 million, or 107.2%, during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, primarily due to an 80.5% increase in the number of homes closed, increased community count at a higher absorption rate and an increase in the average sales price per home closed. Home sales revenues in our Southeast reportable segment increased by $31.1 million, or 24.2%, primarily due to increased home closings at higher average sales price, as well as continued expansion into certain Mid-Atlantic geographic markets. Home sales revenues in our Northwest reportable segment increased by $49.8 million, or 88.4%, primarily due to increased demand and an increase in the number of homes closed, partially offset by the close out of or transition between, and to a lesser extent available inventory in, certain active communities for the three months ended June 30, 2021. Home sales
revenues in our West reportable segment increased by $20.2 million, or 33.4%, during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, primarily due to a 35.7% increase in average sales price per home closed, and the close out of or transition between, and to a lesser extent available inventory in, certain active communities for the three months ended June 30, 2021. Home sales revenues in our Florida reportable segment increased by $28.7 million, or 42.1%, largely due to an increase in the number of homes closed resulting from an increase in community count and a higher absorption rate for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.
Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the three months ended June 30, 2021 to $577.4 million, an increase of $213.8 million, or 58.8%, from $363.6 million for the three months ended June 30, 2020, primarily due to the increase in homes closed. Gross margin for the three months ended June 30, 2021 was $214.1 million, an increase of $96.1 million, or 81.5%, from $118.0 million for the three months ended June 30, 2020. Gross margin as a percentage of home sales revenues was 27.0% for the three months ended June 30, 2021 and 24.5% for the three months ended June 30, 2020. This increase in gross margin as a percentage of home sales revenues was primarily due to raising prices higher than increases in input costs for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.
Selling Expenses. Selling expenses for the three months ended June 30, 2021 were $44.8 million, an increase of $14.8 million, or 49.5%, from $30.0 million for the three months ended June 30, 2020. Sales commissions increased to $30.4 million for the three months ended June 30, 2021 from $18.0 million for the three months ended June 30, 2020, primarily due to a 64.3% increase in home sales revenues during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. Selling expenses as a percentage of home sales revenues were 5.7% and 6.2% for the three months ended June 30, 2021 and 2020, respectively. The decrease in selling 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, 2021 as compared to the three months ended June 30, 2020.
General and Administrative. General and administrative expenses for the three months ended June 30, 2021 were $23.3 million, an increase of $3.1 million, or 15.3%, from $20.2 million for the three months ended June 30, 2020. The increase in the amount of general and administrative expenses is primarily due to increased personnel and related costs during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. General and administrative expenses as a percentage of home sales revenues were 2.9% and 4.2% for the three months ended June 30, 2021 and 2020, 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, 2021 as compared to the three months ended June 30, 2020.
Other Income. Other income, net of other expenses was $3.8 million for the three months ended June 30, 2021, an increase of $3.0 million from $0.8 million for the three months ended June 30, 2020. The increase in other income primarily reflects the gain realized from the sale of lots and land not directly associated with our core homebuilding operations.
Operating Income and Net Income before Income Taxes. Operating income for the three months ended June 30, 2021 was $146.0 million, an increase of $78.2 million, or 115.2%, from $67.8 million for the three months ended June 30, 2020. Net income before income taxes for the three months ended June 30, 2021 was $149.1 million, an increase of $80.5 million, or 117.4%, from $68.6 million for the three months ended June 30, 2020. All reportable segments contributed to net income before income taxes during the three months ended June 30, 2021 as follows: Central - $69.0 million or 46.3%; Southeast - $30.7 million or 20.6%; Northwest - $23.7 million or 15.9%; West - $12.7 million or 8.5%; and Florida - $14.8 million or 9.9%. The increases in operating income and net income before income taxes are primarily attributed to higher gross margins, operating leverage realized from the increase in home sales revenues and higher average sales price per home closed during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.
Income Taxes. Income tax provision for the three months ended June 30, 2021 was $31.0 million, an increase of $18.0 million, or 138.9%, from income tax provision of $13.0 million for the three months ended June 30, 2020. The increase in the amount of income tax provision is primarily due to the 117.4% increase in net income before taxes, partially offset by tax benefits relating to the federal energy efficient homes tax credits we recognized during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.
Net Income. Net income for the three months ended June 30, 2021 was $118.1 million, an increase of $62.5 million, or 112.4%, from $55.6 million for the three months ended June 30, 2020. The increase in net income is primarily attributed to higher gross margins, operating leverage realized from the increase in home sales revenues and higher average sales price per home closed recognized during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Homes Sales. Our home sales revenues, home closings, average sales price per home closed (ASP), average community count and average monthly absorption rate by reportable segment for the six months ended June 30, 2021 and 2020 were as follows (revenues in thousands):
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Six Months Ended June 30, 2021
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Revenues
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Home Closings
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ASP
|
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Average Community Count
|
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Average
Monthly
Absorption Rate
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Central
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$
|
636,713
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|
|
2,475
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|
|
$
|
257,258
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|
|
37.6
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|
|
11.0
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Southeast
|
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296,265
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1,180
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251,072
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26.7
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7.4
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Northwest
|
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224,388
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|
551
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407,238
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10.5
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|
8.7
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West
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161,961
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481
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336,717
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10.7
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7.5
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Florida
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178,138
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730
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244,025
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20.2
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6.0
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Total
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$
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1,497,465
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5,417
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$
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276,438
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105.7
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8.5
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Six Months Ended June 30, 2020
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Revenues
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Home Closings
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ASP
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Average Community Count
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Average Monthly
Absorption Rate
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Central
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$
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333,699
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1,488
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$
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224,260
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34.0
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7.3
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Southeast
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217,024
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962
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225,597
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34.2
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4.7
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Northwest
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158,317
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|
|
426
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371,636
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11.8
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6.0
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West
|
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119,077
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472
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252,282
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15.0
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5.2
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Florida
|
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108,212
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492
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219,943
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17.3
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4.7
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Total
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$
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936,329
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3,840
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$
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243,836
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112.3
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|
|
5.7
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|
Home sales revenues for the six months ended June 30, 2021 were $1.5 billion, an increase of $561.1 million, or 59.9%, from $0.9 billion for the six months ended June 30, 2020. The increase in home sales revenues is primarily due to a 41.1% increase in homes closed and an increase in the average sales price per home closed during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. The average sales price per home closed during the six months ended June 30, 2021 was $276,438, an increase of $32,602, or 13.4%, from the average sales price per home closed of $243,836 for the six months ended June 30, 2020. This increase in the average sales price per home closed was primarily due to changes in product mix and higher price points in certain markets, partially offset by additional wholesale home closings. The overall increase in home closings was primarily driven by strong demand in all reportable segments during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
Home sales revenues in our Central reportable segment increased by $303.0 million, or 90.8%, during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to a 66.3% increase in the number of homes closed at a higher average sales price per home closed and increased average community count at a higher absorption rate in this reportable segment. Home sales revenues in our Southeast reportable segment increased by $79.2 million, or 36.5%, during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased demand in certain markets in North Carolina and South Carolina during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. Home sales revenues in our Northwest reportable segment increased by $66.1 million, or 41.7%, during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to a 29.3% increase in the number of homes closed in this reportable segment, as a result of increased demand during the six months ended June 30, 2021. Home sales revenues in our West reportable segment increased by $42.9 million, or 36.0%, during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased demand in certain markets in this reportable segment. Home sales revenues in our Florida reportable segment increased by $69.9 million, or 64.6%, largely due to an increase of 10.9% in the average sales price
per home closed as a result of strong demand and complemented by increased average community count at an improved absorption rate during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the six months ended June 30, 2021 to $1.1 billion, an increase of $381.6 million, or 53.6%, from $711.8 million for the six months ended June 30, 2020. This overall increase is primarily due to a 41.1% increase in homes closed and product mix. As a percentage of home sales revenues, cost of sales decreased as a result of the increase in home sales revenues, lower capitalized interest and lower overhead, partially offset by higher lot costs during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. Gross margin for the six months ended June 30, 2021 was $404.0 million, an increase of $179.5 million, or 79.9%, from $224.5 million for the six months ended June 30, 2020. Gross margin as a percentage of home sales revenues was 27.0% for the six months ended June 30, 2021 and 24.0% for the six months ended June 30, 2020. This increase in gross margin as a percentage of home sales revenues was primarily due to raising prices higher than increases in input costs for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
Selling Expenses. Selling expenses for the six months ended June 30, 2021 were $87.6 million, an increase of $24.9 million, or 39.6%, from $62.7 million for the six months ended June 30, 2020. Sales commissions increased to $56.7 million for the six months ended June 30, 2021 from $34.5 million for the six months ended June 30, 2020, partially due to a 59.9% increase in home sales revenues during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. Selling expenses as a percentage of home sales revenues were 5.8% and 6.7% for the six months ended June 30, 2021 and 2020, respectively. The decrease in selling expenses as a percentage of home sales revenues was driven primarily by operating leverage obtained from the increase in home sales revenues and to a lesser extent lower advertising expenses during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
General and Administrative. General and administrative expenses for the six months ended June 30, 2021 were $48.0 million, an increase of $7.9 million, or 19.7%, from $40.1 million for the six months ended June 30, 2020. The increase in the amount of general and administrative expenses is primarily due to increased compensation during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. General and administrative expenses as a percentage of home sales revenues were 3.2% and 4.3% for the six months ended June 30, 2021 and 2020, 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 six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
Other Income. Other income, net of other expenses was $4.6 million for the six months ended June 30, 2021, an increase of $2.8 million from $1.8 million for the six months ended June 30, 2020. 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 and Net Income before Income Taxes. Operating income for the six months ended June 30, 2021 was $268.5 million, an increase of $146.7 million, or 120.6%, from $121.7 million for the six months ended June 30, 2020. Net income before income taxes for the six months ended June 30, 2021 was $272.4 million, an increase of $148.9 million, or 120.6%, from $123.5 million for the six months ended June 30, 2020. All reportable segments contributed to net income before income taxes during the six months ended June 30, 2021 as follows: Central - $124.7 million or 45.8%; Southeast - $50.5 million or 18.5%; Northwest - $49.6 million or 18.2%; West - $25.3 million or 9.3%; and Florida - $25.6 million or 9.4%. The increases in operating income and net income before income taxes are primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
Income Taxes. Income tax provision for the six months ended June 30, 2021 was $54.6 million, an increase of $29.6 million, or 118.2%, from income tax provision of $25.0 million for the six months ended June 30, 2020. The increase in the amount of income tax provision is primarily due to the 120.6% increase in net income before taxes, partially offset by tax benefits relating to the federal energy efficient homes tax credits we recognized during the six months ended June 30, 2021, that resulted in a decrease in our effective tax rate to 20.0% from 20.3%.
Net Income. Net income for the six months ended June 30, 2021 was $217.8 million, an increase of $119.3 million, or 121.2%, from $98.5 million for the six months ended June 30, 2020. The increase in net income is primarily attributed to operating leverage realized from the increase in home sales revenues, higher average sales price per home closed and benefits relating to the federal energy efficient homes tax credits recognized during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
Non-GAAP Measures
In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin, EBITDA and adjusted EBITDA.
Adjusted Gross Margin
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.
The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands):
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Three Months Ended June 30,
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Six Months Ended June 30,
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2021
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2020
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2021
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2020
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Home sales revenues
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$
|
791,512
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|
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$
|
481,602
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|
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$
|
1,497,465
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|
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$
|
936,329
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Cost of sales
|
|
577,433
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|
|
363,629
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|
|
1,093,437
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|
|
711,792
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Gross margin
|
|
214,079
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|
|
117,973
|
|
|
404,028
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|
|
224,537
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Capitalized interest charged to cost of sales
|
|
10,442
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|
|
8,684
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|
|
21,115
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|
|
17,614
|
|
Purchase accounting adjustments (1)
|
|
1,446
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|
|
1,252
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|
|
2,258
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|
|
1,875
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|
Adjusted gross margin
|
|
$
|
225,967
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|
|
$
|
127,909
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|
|
$
|
427,401
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|
|
$
|
244,026
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|
Gross margin % (2)
|
|
27.0
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%
|
|
24.5
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%
|
|
27.0
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%
|
|
24.0
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%
|
Adjusted gross margin % (2)
|
|
28.5
|
%
|
|
26.6
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%
|
|
28.5
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%
|
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26.1
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%
|
(1)Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.
(2)Calculated as a percentage of home sales revenues.
EBITDA and Adjusted EBITDA
EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting included in cost of sales. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and 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.
The following table reconciles EBITDA and adjusted EBITDA to net income, which is the GAAP measure that our management believes to be most directly comparable (dollars in thousands):
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Three Months Ended June 30,
|
|
Six Months Ended June 30,
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|
|
2021
|
|
2020
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|
2021
|
|
2020
|
Net income
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$
|
118,134
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|
|
$
|
55,624
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|
|
$
|
217,792
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|
|
$
|
98,463
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|
Income tax provision (benefit)
|
|
30,987
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|
|
12,973
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|
|
54,605
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|
|
25,023
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|
Depreciation and amortization
|
|
249
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|
|
156
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|
|
537
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|
|
317
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|
Capitalized interest charged to cost of sales
|
|
10,442
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|
|
8,684
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|
|
21,115
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|
|
17,614
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|
EBITDA
|
|
159,812
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|
|
77,437
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|
|
294,049
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|
|
141,417
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|
Purchase accounting adjustments(1)
|
|
1,446
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|
|
1,252
|
|
|
2,258
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|
|
1,875
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|
Loss on extinguishment of debt
|
|
662
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|
|
—
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|
|
662
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|
|
—
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|
Other income, net
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|
(3,776)
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|
|
(763)
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|
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(4,609)
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|
|
(1,774)
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|
Adjusted EBITDA
|
|
$
|
158,144
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|
|
$
|
77,926
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|
|
$
|
292,360
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|
|
$
|
141,518
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EBITDA margin %(2)
|
|
20.2
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%
|
|
16.1
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%
|
|
19.6
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%
|
|
15.1
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%
|
Adjusted EBITDA margin %(2)
|
|
20.0
|
%
|
|
16.2
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%
|
|
19.5
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%
|
|
15.1
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%
|
(1)Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.
(2)Calculated as a percentage of home sales revenues.
Backlog
We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase contract. The amount of the required deposit is minimal (typically $1,000 to $5,000). We permit our retail homebuyers to cancel the purchase contract and obtain a refund of their deposit in the event mortgage financing cannot be obtained within a certain period of time, as specified in their purchase contract. Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is signed. If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract. If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the preliminary criteria to obtain mortgage financing. Only purchase contracts that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing are included in new (gross) orders.
Our “backlog” consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve months. Since our business model is generally based on
building move-in ready homes before a purchase contract is signed, the majority of our homes in backlog are currently under construction or complete. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes closed during the current period. Our backlog at any given time will be affected by cancellations, the number of our active communities and the timing of home closings. Homes in backlog are generally closed within one to two months, although home closings have been, and may continue to be, delayed during the COVID-19 pandemic. In addition, we may experience cancellations of purchase contracts at any time prior to closing. It is important to note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract.
As of the dates set forth below, our net orders, cancellation rate and ending backlog homes and value were as follows (dollars in thousands):
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Backlog Data
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Six Months Ended June 30,
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2021 (4)
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2020 (5)
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Net orders (1)
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7,254
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4,734
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Cancellation rate (2)
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14.8
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%
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21.8
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%
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Ending backlog – homes (3)
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4,801
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2,127
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Ending backlog – value (3)
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$
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1,434,382
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$
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558,007
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(1)Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period.
(2)Cancellation rate for a period is the total number of purchase contracts cancelled during the period divided by the total new (gross) orders for the purchase of homes during the period.
(3)Ending backlog consists of retail homes at the end of the period that are under a purchase contract that has been signed by homebuyers who have met our preliminary financing criteria but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve months. Ending backlog is valued at the contract amount.
(4)As of June 30, 2021, we have 940 units related to bulk sales agreements associated with our wholesale business.
(5)As of June 30, 2020, we have 208 units related to bulk sales agreements associated with our wholesale business.
Land Acquisition Policies and Development
We had 106 and 116 active communities as of June 30, 2021 and December 31, 2020, respectively. Our lot inventory increased to 75,910 owned or controlled lots as of June 30, 2021 from 61,504 owned or controlled lots as of December 31, 2020 due to an overall increased lot count within all reportable segments.
The table below shows (i) home closings by reportable segment for the six months ended June 30, 2021 and (ii) our owned or controlled lots by reportable segment as of June 30, 2021.
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Six Months Ended June 30, 2021
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As of June 30, 2021
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Reportable Segment
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Home Closings
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Owned (1)
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Controlled
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Total
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Central
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2,475
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19,110
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13,529
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32,639
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Southeast
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1,180
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11,944
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7,201
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19,145
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Northwest
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551
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3,685
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4,899
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8,584
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West
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481
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4,942
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4,776
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9,718
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Florida
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730
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2,811
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3,013
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5,824
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Total
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5,417
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42,492
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33,418
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75,910
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(1)Of the 42,492 owned lots as of June 30, 2021, 29,885 were raw/under development lots and 12,607 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 home closings. As homes are closed, we start more homes to maintain our inventory. As of June 30, 2021, we had a total of 481 completed homes, including information centers, and 4,267 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. We could see additional cost pressures associated with lumber in future quarters.
Seasonality
In all of our reportable segments, we have historically experienced similar variability in our results of operations and in capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in our second, third and fourth quarters. Thus, our revenues may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels. Our revenues and capital requirements are generally similar across our second, third and fourth quarters.
As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular quarter, especially the first quarter, are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to continue in the long term.
Liquidity and Capital Resources
Overview
As of June 30, 2021, we had $111.7 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 the Credit Agreement (as defined below) 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) that was filed on August 24, 2018 with the Securities and Exchange Commission, registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these securities. 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.
As of the date of this Quarterly Report on Form 10-Q, we believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from the Credit Agreement or through accessing debt or equity capital, as needed. However, with the uncertainty surrounding COVID-19, our ability to engage in the transactions described above may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as moderated investor or lender interest or capacity and our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.
Revolving Credit Facility
On April 28, 2021, we entered into that certain Fifth 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 that certain Fourth Amended and Restated Credit Agreement, dated as of May 6, 2019 (as amended, the “2020 Credit Agreement”). The Credit Agreement (a) increases the commitments to $850.0 million, (b) allows the Company to increase the commitments by up to $100.0 million, subject to terms and conditions, (c) extends the maturity to April 28, 2025 for all lenders, (d) increases the sublimit for letters of credit to $50.0 million, (e) adds unrestricted cash in excess of $10.0 million as a component of the borrowing base and removes certain exclusions from the borrowing base, (f) reduces the applicable margin for LIBOR loans to a range of 1.45% to 2.10%, based on our leverage ratio, (g) reduces the LIBOR floor to 0.50%, (h) increases the minimum tangible net worth requirement to $850.0 million plus 75% of the net proceeds of equity issuances after December 31, 2020 and 50% of consolidated earnings for each quarter ending after March 31, 2021 and (i) provides for a “hardwired” transition from LIBOR loan pricing that is intended to be economically neutral to the Company; otherwise, the Credit Agreement is on substantially the same terms as the 2020 Credit Agreement.
The Credit Agreement matures on April 28, 2025. Before each anniversary of the Credit Agreement, we may request a one-year extension of its maturity date. The Credit Agreement is guaranteed by each of our subsidiaries that have gross assets of at least $0.5 million. The borrowings and letters of credit outstanding under the Credit Agreement, together with the outstanding principal balance of the 2026 Senior Notes and the 2029 Senior Notes, may not exceed the borrowing base under the Credit Agreement. As of June 30, 2021, the borrowing base under the Credit Agreement was $1.3 billion, of which borrowings, including the 2026 Senior Notes and the 2029 Senior Notes, of $600.3 million were outstanding, $10.3 million of letters of credit were outstanding and $714.5 million was available to borrow under the Credit Agreement.
Interest is paid monthly on borrowings at LIBOR plus 1.45%. The Credit Agreement applicable margin for LIBOR loans ranges from 1.45% to 2.10% based on our leverage ratio. At June 30, 2021, LIBOR was 0.09%; however, the Credit Agreement has a 0.50% LIBOR floor.
The Credit Agreement requires us to maintain (i) a tangible net worth of not less than $850.0 million plus 75% of the net proceeds of all equity issuances after December 31, 2020 plus 50.0% of the amount of our positive net income in each fiscal quarter ending after March 31, 2021, (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 1.75 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, 2021, we were in compliance with all of the covenants contained in the Credit Agreement.
Senior Notes Offerings
On June 28, 2021, we issued $300.0 million aggregate principal amount of the 2029 Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A (“Rule 144A”) under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S (“Regulation S”) under the Securities Act. Interest on the 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2022, and the 2029 Senior Notes mature on July 15, 2029. Terms of the 2029 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Third Supplemental Indenture thereto, dated as of June 28, 2021, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.
On July 6, 2018, we issued $300.0 million aggregate principal amount of the 2026 Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S. Interest on the 2026 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 2026 Senior Notes mature on July 15, 2026. Terms of the 2026 Senior Notes are governed by an Indenture and First Supplemental Indenture thereto, each dated as of July 6, 2018, and a Second Supplemental Indenture thereto, dated as of April 30, 2020, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the 2020 Credit Agreement and Wilmington Trust, National Association, as trustee.
On June 14, 2021, the Company delivered a notice of conditional full redemption for all of the outstanding 2026 Senior Notes. The redemption price for the 2026 Senior Notes was equal to 103.438% (expressed as a percentage of the principal amount of the 2026 Senior Notes redeemed), plus accrued and unpaid interest, if any, on the 2026 Senior Notes to be redeemed. The Company financed the redemption of the 2026 Senior Notes with a portion of the net proceeds from the offering of the 2029 Senior Notes, together with cash on hand. The Company’s obligation to redeem the 2026 Senior Notes was conditioned upon the prior consummation of the issuance of the 2029 Senior Notes.
On July 15, 2021, we redeemed all of the outstanding 2026 Senior Notes, which resulted in the principal payment of $300.0 million and a redemption premium of $10.3 million. Additionally, we expensed $3.0 million of deferred financing costs and discounts that were being previously amortized in association with the 2026 Senior Notes.
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 $182.3 million as of June 30, 2021. 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, 2021 will be drawn upon.
Stock Repurchase Program
In November 2018, we announced that our Board of Directors (the “Board”) authorized a stock repurchase program, pursuant to which we may purchase up to $50.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws. In October 2020, the Board approved an increase in our stock repurchase program by an additional $300.0 million. During the three months ended June 30, 2021, we repurchased 335,000 shares of our common stock for $55.8 million to be held as treasury stock. During the six months ended June 30, 2021, we repurchased 551,221 shares of our common stock for $81.6 million to be held as treasury stock. A total of 1,309,214 shares of our common stock has been repurchased since our stock repurchase program commenced. As of June 30, 2021, we may purchase up to $218.8 million of shares of our common stock under our stock repurchase program. The timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase program will be determined by our management at its discretion based on a variety of factors, including the market price of our common stock, corporate considerations, general market and economic conditions and legal requirements. Our stock repurchase program may be modified, discontinued or suspended at any time.
Cash Flows
Operating Activities
Net cash provided by operating activities was $139.9 million for the six months ended June 30, 2021. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash provided by operating activities during the six months ended June 30, 2021 was primarily driven by net income of $217.8 million, and included cash outflow from the $158.7 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 and increases of $46.4 million and $43.9 million in the net change in accounts receivable and accounts payable, respectively.
Net cash provided by operating activities was $146.1 million for the six months ended June 30, 2020. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash provided by operating activities during the six months ended June 30, 2020 was primarily driven by net income of $98.5 million, and included cash inflow from the $41.7 million decrease 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 in addition to changes in non-inventory balances of $5.9 million.
Investing Activities
Net cash used in investing activities was $29.8 million for the six months ended June 30, 2021, primarily due to the payment for business acquisition, additional investment in unconsolidated entities and purchase of property and equipment.
Net cash used in investing activities was $1.7 million for the six months ended June 30, 2020, primarily due to the additional investment in an unconsolidated entity and purchase of property and equipment.
Financing Activities
Net cash used in financing activities was $34.3 million for the six months ended June 30, 2021, primarily driven by $564.0 million of payments on the 2020 Credit Agreement and the Credit Agreement and by the $81.6 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by $617.7
million related to the proceeds received for the 2029 Senior Notes, and borrowings under the 2020 Credit Agreement and the Credit Agreement.
Net cash used in financing activities was $133.6 million for the six months ended June 30, 2020, primarily driven by $235.0 million of payments on the 2020 Credit Agreement and by the $31.3 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $133.0 million under the 2020 Credit Agreement.
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, 2021, we had $36.1 million of cash deposits pertaining to land purchase contracts for 33,418 lots with an aggregate purchase price of $781.3 million. Approximately $21.0 million of the cash deposits as of June 30, 2021 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, 2021, 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, 2020.
Critical Accounting Policies
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 the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and judgments and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future.
We believe that there have been no significant changes to our critical accounting policies during the six months ended June 30, 2021 as compared to those disclosed in 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, 2020.
Cautionary Statement about Forward-Looking Statements
From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words.
We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may, and often do, vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements.
The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:
•the impact of the COVID-19 pandemic and its effect on us, our business, customers, subcontractors and suppliers, and the markets in which we operate, U.S. and world financial markets, mortgage availability, potential regulatory actions, changes in customer and stakeholder behaviors and impacts on and modifications to our operations, business and financial condition relating to COVID-19;
•adverse economic changes either nationally or in the markets in which we operate, including, among other things, potential impacts from political uncertainty, civil unrest, increases in unemployment, volatility of mortgage interest rates and inflation and decreases in housing prices;
•a slowdown in the homebuilding industry or changes in population growth rates in our markets;
•volatility and uncertainty in the credit markets and broader financial markets;
•disruption in the terms or availability of mortgage financing or increase in the number of foreclosures in our 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, close such acquisitions and realize the benefits of such acquisitions;
•our ability to successfully integrate any acquisitions 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 and ability to meet our ongoing liquidity needs;
•decisions of the Credit Agreement lender group;
•decline in the market value of our land portfolio;
•shortages of or increased prices for labor, land, or raw materials used in land development and housing construction, including due to changes in trade policies;
•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 (including as a result of the change in the U.S. presidential administration), liabilities under, or the failure or inability to comply with, governmental laws and regulations, including environmental 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;
•our continued ability to qualify for additional federal energy efficient homes tax credits and the extension of the availability of such tax credits beyond December 31, 2021;
•negative publicity or 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 failures, cyber incidents 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;
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.