CENTURY COMMUNITIES, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS. (Form 10-K)
The following discussion and analysis of our financial condition and results of operations is intended to help the reader understand our Company, business, operations and present business environment and is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under "Risk Factors" and elsewhere in this Annual Report on Form 10-K. We use certain non-GAAP financial measures that we believe are important for purposes of comparison to prior periods. This information is also used by our management to measure the profitability of our ongoing operations and analyze our business performance and trends. Some of the numbers included herein have been rounded for the convenience of presentation. In
July 2019, the Financial Accounting Standards Board(which we refer to as "FASB") issued Accounting Standards Update 2019-07, "Codification Updates to SECSections-Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification", which changes were meant to simplify certain disclosures in financial condition and results of operations, particularly by eliminating year-to-year comparisons between prior periods previously disclosed. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
We are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 17 states. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land. We build and sell homes under our
Century Communitiesand Century Complete brands. Our Century Communities brand offers a wide range of buyer profiles including: entry-level, first and second time move-up, and lifestyle homebuyers, and provides our homebuyers with the ability to personalize their homes through certain option and upgrade selections. Our Century Complete brand targets entry-level homebuyers, primarily sells homes through retail studios and the internet, and generally provides no option or upgrade opportunities. Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Century Complete. Additionally, our indirect wholly-owned subsidiaries, Inspire Home Loans Inc., Parkway Title, LLC, and IHL Home Insurance Agency, LLC, which provide mortgage, title, and insurance services, respectively, primarily to our home buyers have been identified as our Financial Services segment. While we offer homes that appeal to a broad range of entry-level, move-up, and lifestyle homebuyers, our offerings are heavily weighted towards providing affordable housing options in each of our homebuyer segments. Additionally, we prefer building move-in-ready homes over built-to-order homes, which we believe allows for a faster construction process, advantageous pricing with subcontractors, and shortened time period from home sale to home delivery, thus allowing us to more appropriately price the homes and deploy our capital. Of the 10,805 homes delivered during 2021, approximately 75% of our deliveries were made to entry-level and approximately 87% of homes delivered were built as move-in ready homes.
Impact of the COVID-19 pandemic
The outbreak of COVID-19, which was declared a pandemic by the
World Health Organizationon March 11, 2020, created significant volatility, disruption, and uncertainty across the nation and abroad. After an initial slowing of home sales trends in early spring 2020, due in part to consumer uncertainty, home sales sharply rebounded, aided by historically low interest rates, lack of supply, and renewed desire from customers to move out of urban areas and/or apartments and into new homes in suburban areas, which desire was likely accelerated by the COVID-19 pandemic. These positive trends and market dynamics continued through the year ended December 31, 2021. While these positive trends and market dynamics continued through the year ended December 31, 2021, we recognize that long term macro-economic effects of the pandemic that could ultimately impact the homebuilding industry and our home sales have yet to be known. There is still uncertainty regarding the extent and duration of the COVID-19 pandemic and future increases in COVID-19 45
positive cases and hospitalizations could result in changing plans of numerous state and local municipalities, which may include government restrictions, quarantines, travel advisories and social distancing measures. Despite overall strong demand and sales of our homes during 2021, continued future demand is uncertain as economic conditions are uncertain, in particular with respect to unemployment levels, inflation, interest rates, and the extent to which and how long COVID-19 and related government directives, actions, and economic relief efforts will impact the
U.S.economy, unemployment levels, financial markets, credit and mortgage markets, consumer confidence, interest rates, availability of mortgage loans to homebuyers, wage growth, household formations, levels of new and existing homes for sale, cost of land, labor and construction materials, demographic trends, and housing demand, and other factors, including those described elsewhere in this Form 10-K. A decrease in demand for our homes would adversely affect our operating results in future periods, as well as have a direct effect on the origination volume of and revenues from our Financial Services segment. In addition, because the full magnitude and duration of the COVID-19 pandemic is uncertain and difficult to predict, changes in our cash flow projections may change our conclusions on the recoverability of inventories in the future. Driven by the continued strong demand for our homes through the year ended December 31, 2021, we ended 2021 with no amounts outstanding under our revolving line of credit, $316.3 millionof cash and cash equivalents, $52.3 millionof cash held in escrow, and a net homebuilding debt to net capital ratio of 26.3%. Additionally, we increased our land acquisition and development activities during 2021 to bolster our lot pipeline and support future community growth, which resulted in 79,859 lots owned and controlled at December 31, 2021, a 60.0% increase as compared to December 31, 2020. Although the trajectory and strength of our markets have continued to remain strong and allowed us to pass on increased costs through increases in our selling prices and increase our margins during 2021, we continued to experience shortages of labor, land and raw materials, delays and material and labor supply cost pressures, and elongated construction cycle times to build homes in many of our markets, caused in part by increased demand, global supply chain disruptions and inflation, during 2021 that could negatively impact our margins in future periods. While the impact of the COVID-19 pandemic will continue to evolve and at any given time recovery could be slowed or reversed by a number of factors, including the emergence of new variants of COVID-19, such as Delta and Omicron, we believe we are well positioned from a cash and liquidity standpoint not only to operate in an uncertain environment, but also to continue to grow with the market and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of debt refinancing and/or strategic opportunities as they arise. We anticipate the homebuilding markets in each of our operating segments will continue to be tied to both the local economy and the macro-economic environment. Accordingly, our net sales, home deliveries, and average sales price in future years could be negatively affected by economic conditions, such as decreases in employment and median household incomes, as well as decreases in household formations and increasing supply of inventories. Additionally, our results could be impacted by a decrease in home affordability as a result of price appreciation or increases in mortgage interest rates or tightening of mortgage lending standards.
Results of operations – Years ended
During the year ended
December 31, 2021, we generated record revenues of $4.2 billion, with home sales revenues of $4.0 billion, an increase of 33.2% over 2020, and financial services revenue of $123.7 million, an increase of 19.8% over 2020. The increase in home sales revenue was fueled by a 14.3% increase in the number of homes delivered to 10,805 and a 16.6% increase in the average sales price per home to $373,300. This increase in home sales revenue combined with a 580 basis point increase in homebuilding gross margin percent and a 160 basis point decrease in the percentage of selling, general and administrative expense as a percent of home sales revenues, resulted in a record $641.1 millionin income before income tax expense for the year ended December 31, 2021. Our financial results for the year ended December 31, 2021were driven by continued favorable market dynamics across our markets. These conditions included an increase in demand for new housing, particularly entry-level housing, impacted by the COVID-19 pandemic, which accelerated the trend of migration out of high-density urban areas and into suburban areas, historically low interest rates on mortgage products, including rates on 30-year fixed mortgages, a low supply of available inventories and positive demographic trends. These conditions, coupled with our strategy to focus on entry-level housing (approximately 75% of our home deliveries in 2021 qualified for FHA mortgages) resulted in a positive sales environment, which we leveraged in 2021 to increase net new home contracts to 12,017, an 11.0% increase over prior period. As of December 31, 2021, we had a backlog of 4,651 homes, a 35.2% increase as compared to December 31, 2020, representing approximately $1.9 billionin sales value, a 44.5% increase as compared to December 31, 2020. The increase in demand has also resulted in increased prices for and shortages of labor, land and raw materials, as well as elongated construction cycle times to build homes in many of our markets. During 2021, we successfully offset most of the cost increases through increases in our selling prices. Our results of operations resulted in net income of $498.5 million, or $14.47per diluted share, compared to $206.2 million, or $6.13per diluted share in the prior year, and driving our return on equity to 33% for 2021. In May 2021, our Board of Directors initiated a quarterly cash dividend, which paid our stockholders of record $0.15per share during the last nine months of 2021. 46
Our net homebuilding debt to net capital was 26.3% as of
December 31, 2021, down from 27.2% as of December 31, 2020. We believe our current net homebuilding debt to net capital position allows us the flexibility to increase our debt levels if necessary to continue to grow our operations and our approximately 80,000 lots owned and controlled in future periods. While in early 2022 rates on 30-year fixed mortgages have risen modestly and the Federal reserve has indicated that it may raise interest rates in March 2022, we believe housing demographics and buyer demand will remain strong at least in the short term and we believe we are well-positioned to benefit from the ongoing shortage of both new and resale homes available for purchase. Subject to deteriorating market conditions, we believe our operations are well positioned for future growth as a result of the markets in which we operate, our product offerings which span the home buying segment, but focus on affordable price points, as well as current and future inventories of attractive land positions. As we have grown, we have continued to focus on maintaining prudent leverage, and, as a result, we believe we are well positioned to execute on our growth strategy in order to optimize stockholder returns. In August 2021, we completed a private offering of $500.0 millionaggregate principal amount of our 3.875% senior notes due 2029 (which we refer to as the "2029 Notes"), which were issued at 100% of their principal amount, and we received net proceeds of $493.8 million. The indenture covering these notes contains certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the 3.875% senior notes due 2029 is due August 2029, with interest only payments due semi-annually in February and August of each year, beginning on February 15, 2022. In addition, in August 2021, we redeemed $400.0 millionin outstanding principal of our 5.875% senior notes due 2025 at a redemption price equal to 102.938% of the principal amount, plus accrued and unpaid interest, totaling $414.8 million. The redemption was conditioned upon our prior consummation of the offering and issuance of the 2029 Notes. The redemption transaction resulted in a loss of $14.5 million, which is presented in loss on debt extinguishment in the consolidated statement of operations.
Our strategy is focused on increasing returns from our inventory while generating strong profitability. In general, we focus on the following initiatives:
?Maintain a strong balance sheet and prudent use of leverage;
“While we offer homes that appeal to a wide range of entry-level, upper-level and lifestyle buyers, our offerings are strongly focused on providing affordable housing options in each of our buyer segments;
?Preferring building move-in-ready homes over built-to-order homes, which we believe allows for a faster construction process, advantageous pricing with subcontractors, and shortened time period from home sale to home delivery, thus allowing us to more appropriately price the home;
?Maintain a strong pipeline of future landholdings, including promoting lot option contracts to manage our landholding risk;
? Increase our market share in our existing markets through organic growth and/or acquisitions of other homebuilders already operating in the market;
“Expanding into new markets that meet our underwriting criteria either through organic start-up transactions or by acquiring existing homebuilders;
?Evaluation of opportunistic strategies for the construction of single-family and multi-family rental units; and
?Controlling costs, including costs of home sales revenue and selling, general and administrative expenses, and generating further efficiencies, including through the increased reliance on digital marketing and direct outreach to potential customers through our website and digital tools, such as the introduction of the ability to buy a home via our website, to achieve increased profitability. Our operating strategy has resulted in significant growth in revenue and income before income taxes over the last five years, and we believe it will continue to produce positive results. We expect our operating strategy will continue to adapt to market changes, and we cannot provide any assurance that our strategies will continue to be successful. 47
The following table summarizes our results of operations for the years ended
December 31, 2021and 2020. (in thousands, except per share amounts) Year Ended December 31, Increase (Decrease) 2021 2020 Amount % Consolidated Statements of Operations: Revenue Home sales revenues $ 4,032,969 $ 3,027,167 $ 1,005,80233.2 % Land sales and other revenues 59,607 30,717 28,890 94.1 % Total homebuilding revenues 4,092,576 3,057,884 1,034,692 33.8 % Financial services revenues 123,738 103,308 20,430 19.8 % Total revenues 4,216,314 3,161,192 1,055,122 33.4 % Homebuilding cost of revenues Cost of home sales revenues (3,056,048) (2,468,133) (587,915) 23.8 % Cost of land sales and other revenues (39,315) (21,929) (17,386) 79.3 % (3,095,363) (2,490,062) (605,301) 24.3 % Financial services costs (72,578) (54,797) (17,781) 32.4 % Selling, general, and administrative (389,610) (341,710) (47,900) 14.0 % Loss on debt extinguishment (14,458) - (14,458) (100.0) % Inventory impairment and other (41) (2,172) 2,131 (98.1) % Other income (expense) (3,142) (2,211) (931) 42.1 % Income before income tax expense 641,122 270,240 370,882 137.2 % Income tax expense (142,618) (64,083) (78,535) 122.6 % Net income $ 498,504 $ 206,157 $ 292,347141.8 % Earnings per share: Basic $ 14.79 $ 6.19 $ 8.60138.9 % Diluted $ 14.47 $ 6.13 $ 8.34136.1 % Adjusted diluted earnings per share(1) $ 14.80 $ 6.22 $ 8.58137.9 % Other Operating Information (dollars in thousands): Number of homes delivered 10,805 9,453 1,352 14.3 % Average sales price of homes delivered $ 373.3 $ 320.2 $ 53.116.6 % Homebuilding gross margin percentage(2) 24.2 % 18.4 % 5.8 % 31.5 % Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1) 25.9 % 20.8 % 5.1 % 24.5 % Backlog at end of period, number of homes 4,651 3,439 1,212 35.2 % Backlog at end of period, aggregate sales value $ 1,869,772 $ 1,294,202 $ 575,57044.5 % Average sales price of homes in backlog $ 402.0 $ 376.3 $ 25.76.8 % Net new home contracts 12,017 10,822 1,195 11.0 % Selling communities at period end 202 198 (4) (2.0) % Average selling communities 189 217 (31) (14.3) % Total owned and controlled lot inventory 79,859 49,965 29,894 59.8 % Adjusted EBITDA(1) $ 732,718 $ 356,414 $ 376,304105.6 % Adjusted income before income tax expense(1) $ 655,621 $ 273,996 $ 381,625139.3 % Adjusted net income(1) $ 509,778 $ 209,022 $ 300,756143.9 % Net homebuilding debt to net capital (1) 26.3 % 27.2 %
(1)This is a non-GAAP financial measure and should not be used as a substitute for the Company's operating results prepared in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information within our "Homebuilding Gross Margin" and "Non-GAAP Financial Measures" sections in this Management's Discussion and Analysis of Financial Condition and Results of Operations. An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. (2)Homebuilding gross margin percentage is inclusive of nominal impairment charges and
$2.2 millionin impairment charges for the years ended December 31, 2021and 2020, respectively, in inventory impairment included within inventory impairment and other on our consolidated statements of operations. See Note 12 - Fair Value Disclosures in the Notes to the Consolidated Financial Statements for further detail. ? 48
Operating results by segment
(dollars in thousands) Average Sales Price of Income before Income Tax New Homes Delivered Homes Delivered Home Sales Revenues Expense Year Ended December Year Ended December 31, 31, Year Ended
2021 2020 2021 2020 2021 2020 2021 2020 West 1,602 1,242
$ 629.4 $ 545.7 $ 1,008,274 $ 677,755 $ 213,301 $ 71,417Mountain 2,315 1,973 481.2 424.8 1,114,078 838,055 212,335 114,722 Texas 1,615 1,338 295.1 251.8 476,664 336,882 68,565 34,694 Southeast 1,683 1,903 394.1 353.1 663,224 672,034 92,420 57,181 Century Complete 3,590 2,997 214.7 167.6 770,729 502,441 109,213 33,449 Financial Services - - - - - - 51,160 48,511 Corporate - - - - - - (105,872) (89,734) Total 10,805 9,453 $ 373.3 $ 320.2 $ 4,032,969 $ 3,027,167 $ 641,122 $ 270,240West During the year ended December 31, 2021, our West segment generated income before income tax expense of $213.3 million, a 198.7% increase over the prior year period. This increase was driven by an increase in home sales revenue of $330.5 millionand an increase of 1,062 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margin on home sales. The revenue increase during the year ended December 31, 2021was primarily generated by a 29.0% increase in the number of homes delivered, as well as a 15.3% increase in the average sales price per home. During the year ended December 31, 2021, the increase in the number of homes delivered was driven by favorable market dynamics across our markets. The average sales price increase was driven by the mix of deliveries within individual communities, as well as increased pricing power as a result of strong market dynamics.
During the year ended
December 31, 2021, our Mountain segment generated income before income tax expense of $212.3 million, an 85.1% increase over the prior year period. This increase was driven by an increase in home sales revenue of $276.0 millionand an increase of 537 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margin on home sales. The revenue increase during the year ended December 31, 2021was primarily generated by a 17.3% increase in the number of homes delivered, as well as a 13.3% increase in the average sales price per home. During the year ended December 31, 2021, the increase in the number of homes delivered was driven by favorable market dynamics across our markets. The average sales price increase was driven by the mix of deliveries within individual communities, as well as increased pricing power as a result of strong market dynamics.
During the year ended
December 31, 2021, our Texassegment generated income before income tax expense of $68.6 milliona 97.6% increase over the prior year period. This increase was driven by an increase in home sales revenue of $139.8 millionand an increase of 409 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margin on home sales. The revenue increase during the year ended December 31, 2021was primarily generated by a 20.7% increase in the number of homes delivered, as well as a 17.2% increase in the average sales price per home. During the year ended December 31, 2021, the increase in the number of homes delivered was driven by favorable market dynamics across our markets. The average sales price increase was driven by the mix of deliveries within individual communities, as well as increased pricing power as a result of strong market dynamics.
During the year ended
December 31, 2021, our Southeast segment generated income before income tax expense of $92.4 milliona 61.6% increase over the prior year period. This increase was primarily driven by an increase of 543 basis points in the percentage of income before income tax expense to home sales revenues, as a result of increased gross margin on home sales. Homes sales revenue decreased during the year ended December 31, 2021, primarily generated by a decrease in the number of homes delivered due to a 49
decrease in the number of communities opened, and partially offset by an 11.6% increase in the average sales price per home. The average sales price increase was driven by the mix of deliveries within individual communities, as well as increased pricing power as a result of strong market dynamics.
During the year ended
December 31, 2021, our Century Complete segment generated income before income tax expense of $109.2 million, a 226.5% increase over the prior year period. This increase was driven by an increase in home sales revenue of $268.3 millionand an increase of 751 basis points in the percentage of income before income tax expense to home sales revenues, as a result of (1) increased revenue on a partially fixed cost base and (2) increased gross margin on home sales. The revenue increase during the year ended December 31, 2021was primarily generated by a 19.8% increase in the number of homes delivered, as well as a 28.1% increase in the average sales price per home. During the year ended December 31, 2021, the increase in the number of homes delivered was driven by favorable market dynamics across our markets. The average sales price increase was driven by the mix of deliveries within markets between years, as well as increased pricing power as a result of strong market dynamics.
Our Financial Services segment generated income before income tax of
$51.2 millionfor the year ended December 31, 2021, a 5.5% increase over the prior year. This increase was primarily the result of a $20.4 millionincrease in financial services revenue during the year ended December 31, 2021compared to the prior year period. This increase was due to (1) a 21.1% increase to 8,375 in the number of mortgages originated during the year ended December 31, 2021, due to our increased capture rate of 76% as of December 31, 2021as compared to 64% for the prior year period and the increase in the number of homes delivered by our Century Communitiesand Century Complete brands year over year, and (2) a 25.2% increase in the number of loans sold to third parties during the year ended December 31, 2021as compared to the prior year period. These increases were partially offset by (1) lower fair value of our mortgage loans held for sale and our mortgage loans in process for which interest rates were locked by borrowers, (2) reduced gain on sale margin from loans sold and (3) increased headcount to support continued growth.
The following table presents selected operational data for our Financial Services segment (in thousands of dollars):
Year Ended December 31, 2021 2020 Total originations: Number of loans 8,375 6,918 Principal
$ 2,714,764 $ 2,045,871Capture rate of Century homebuyers 76 % 64 % Century Communities 81 % 74 % Century Complete 63 % 40 % Average FICO score 737 735 Century Communities 743 739 Century Complete 712 713 Loans sold to third parties: Number of loans sold 8,245 6,587 Principal $ 2,629,808 $ 1,945,113Corporate During the year ended December 31, 2021, our Corporate segment generated a loss of $105.9 million, as compared to a loss of $89.7 millionduring 2020. This increase in loss is primarily attributed to a $14.5 millionloss on debt extinguishment during the year ended December 31, 2021related to the redemption of our 5.75% senior notes due 2025, as described above, as well as increased compensation and bonus costs for our Corporate segment of approximately $6.4 million, partially offset by a decrease in stock-based compensation expense of $4.7 millionprimarily due to accelerated expense recognized during 2020 for the updated estimates related to our performance-based share awards. 50
Residential Construction Gross Margin
Homebuilding gross margin represents home sales revenue less cost of home sales revenues and inventory impairment and other. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, increased to 24.2% for the year ended
December 31, 2021, as compared to 18.4% for the year ended December 31, 2020. This increase was primarily driven by (1) the positive homebuilding sales environment across our markets, which resulted in increased demand, (2) our ability to increase sales price in excess of an increase in our labor and direct costs year over year, (3) benefits from our increased scale driving building efficiencies and streamlined production processes, and (4) the realization of less interest in cost of home sales revenue over the prior period. In the following table, we calculate our homebuilding gross margin adjusted to exclude inventory impairment and other and interest in cost of home sales revenues. (dollars in thousands) Year Ended December 31, 2021 % 2020 % Home sales revenues $ 4,032,969100.0 % $ 3,027,167100.0 % Cost of home sales revenues (3,056,048) (75.8) % (2,468,133) (81.5) % Inventory impairment and other (41) (0.0) % (2,172) (0.1) % Gross margin from home sales 976,880 24.2 % 556,862 18.4 % Add: Inventory impairment and other 41 0.0 % 2,172 0.1 % Add: Interest in cost of home sales revenues 66,846 1.7 % 72,002 2.4 % Adjusted homebuilding gross margin excluding interest and inventory impairment and other (1) $ 1,043,76725.9 % $
(1)This non-GAAP financial measure should not be used as a substitute for the Company's operating results in accordance with GAAP. See the reconciliations to the most comparable GAAP measure and other information under "-Non-GAAP Financial Measures." An analysis of any non-GAAP financial measure should be used in conjunction with results presented in accordance with GAAP. For the year ended
December 31, 2021, excluding inventory impairment and other, and interest in cost of home sales revenues, our adjusted homebuilding gross margin percentage was 25.9% as compared to 20.8% for 2020. We believe the above information is meaningful as it isolates the impact that inventory impairment, indebtedness and acquisitions (if applicable) have on our homebuilding gross margin and allows for comparability of our homebuilding gross margins to previous periods and our competitors.
Selling, general and administrative expenses
(dollars in thousands) Year Ended December 31, Increase 2021 2020 Amount % Selling, general and administrative
$ 389,610 $ 341,710 $ 47,90014.0 % As a percentage of home sales revenue 9.7 % 11.3 % Our selling, general and administrative expense increased $47.9 millionfor the year ended December 31, 2021as compared to the year ended December 31, 2020. This increase was primarily attributable to an increase of $34.4 millionin salaries and wages expense as compared to 2020, as well as an increase of $13.8 millionin internal and external commission expense, which is directly related to the increases in home sales revenues. The increase for the year ended December 31, 2021was partially offset by a decrease in expenses in numerous areas, including advertising and legal expenses. During the year ended December 31, 2021, our selling, general and administrative expense decreased 160 basis points as a percentage of home sales revenue as compared to the year ended December 31, 2020, as a result of increased revenues on a partially fixed cost base. Income Tax Expense Our income tax expense for the year ended December 31, 2021was $142.6 million, or 22.2% of income before income tax expense, as compared to $64.1 million, or 23.7% of income before income tax expense, for the year ended December 31, 2020. Our effective tax 51
rates for the years ended
December 31, 2021and 2020 were benefited by a $16.5 millionand $8.5 millionbenefit, respectively, related to the Energy Efficient Home Credit. Our effective tax rate of 22.2% for the year ended December 31, 2021is comprised of our statutory federal and blended state rate of 24.8%, partially offset by certain permanent differences between taxable income and GAAP income before tax expense. These differences include certain compensation paid to executive officers, which is not deductible for federal income tax purposes and increased our effective tax rate by 0.6%, and the Energy Efficient Home Credit, which benefited our effective tax rate by 2.6%. The Energy Efficient Home Credit provides eligible contractors a federal income tax credit of $2,000for each home delivered that meets the energy saving and certification requirements under the statute. On December 27, 2020, an extension of the Federal Energy Credit was enacted which extended the current provisions through December 31, 2021. Of the $16.5 millionbenefit recognized during the year ended December 31, 2021, approximately $2.6 millionand $1.6 millionwere related to homes closed during the years ended 2019 and 2018 and prior, respectively. Proposed legislation included in the pending "Build Back Better Act" would extend the Federal Energy Credits through December 31, 2031but would modify the current qualification requirements and provide a $2,500or $5,000tiered credit for new single-family homes meeting designated "Energy Star" or "Zero Energy" program requirements, respectively. Neither the Build Back Better Act nor any similar legislation has been enacted as of the date of this Form 10-K, and it is uncertain whether an extension or similar tax credit will be adopted or available in the future or the scope of any modified program requirements. Segment Assets (dollars in thousands)
December 31, December 31, Increase (Decrease) 2021 2020 Amount Change West
$ 668,830 $ 536,907 $ 131,92324.6 % Mountain 1,008,481 778,198 230,283 29.6 % Texas 322,302 207,746 114,556 55.1 % Southeast 360,644 329,930 30,714 9.3 % Century Complete 371,096 218,604 152,492 69.8 % Financial Services 533,159 421,153 112,006 26.6 % Corporate 232,364 352,555 (120,191) (34.1) % Total assets $ 3,496,876 $ 2,845,093 $ 651,78322.9 % Total assets increased by $651.8 million, or 22.9%, to $3.5 billionat December 31, 2021, as compared to $2.8 billionat December 31, 2020, as a result of the overall growth of the Company, and the increase in the number of owned lots year over year. Lots owned and controlled December 31, 2021 December 31, 2020 % Change Owned Controlled Total Owned Controlled Total Owned Controlled Total West 4,440 4,877 9,317 3,266 3,392 6,658 35.9 % 43.8 % 39.9 % Mountain 11,860 8,039 19,899 7,951 5,910 13,861 49.2 % 36.0 % 43.6 % Texas 5,340 8,159 13,499 3,035 5,873 8,908 75.9 % 38.9 % 51.5 % Southeast 5,928 14,195 20,123 3,076 6,389 9,465 92.7 % 122.2 % 112.6 % Century Complete 5,287 11,734 17,021 3,473 7,600 11,073 52.2 % 54.4 % 53.7 % Total 32,855 47,004 79,859 20,801 29,164 49,965 57.9 % 61.2 % 59.8 % Of our total lots owned and controlled as of December 31, 2021, 41.1% were owned and 58.9% were controlled, as compared to 41.6% owned and 58.4% controlled as of December 31, 2020. 52
Other residential construction operating data
Net new home contracts Year Ended December 31, Increase (Decrease) 2021 2020 Amount % Change West 1,640 1,526 114 7.5 % Mountain 2,571 2,389 182 7.6 % Texas 1,616 1,448 168 11.6 % Southeast 1,595 2,191 (596) (27.2) % Century Complete 4,595 3,268 1,327 40.6 % Total 12,017 10,822 1,195 11.0 % Net new home contracts (new home contracts net of cancellations) for the year ended
December 31, 2021increased by 1,195 homes, or 11.0%, to 12,017, as compared to 10,822 for the year ended December 31, 2020. The increase in our net new home contracts was primarily driven by stronger sales across all of our segments as the homebuilding industry continued to experience positive trends during 2021, partially offset by a decrease in net new home contracts in the Southeast region. This decrease in our Southeast segment is driven by a 42.7% decrease in average selling communities opened during the year as compared to the prior year period. Monthly Absorption Rate
Our overall monthly “burn rate” (the rate at which stay-at-home orders are contracted, net of cancellations) for years ended
Year Ended December 31, Increase (Decrease) 2021 2020 Amount % Change West 7.2 7.5 (0.3) (4.0) % Mountain 6.0 5.2 0.8 15.4 % Texas 8.4 8.0 0.4 5.0 % Southeast 6.0 7.0 (1.0) (14.3) % Century Complete 3.5 2.7 0.8 29.6 % Total 5.0 4.6 0.4 8.7 %
During the year ended
Selling communities at period end As of December 31, Increase/(Decrease) 2021 2020 Amount % Change West 19 17 2 11.8 % Mountain 36 38 (2) (5.3) % Texas 16 15 1 6.7 % Southeast 22 26 (4) (15.4) % Century Complete 109 102 7 6.9 % Total 202 198 4 2.0 %
Our sales communities grew by 4 communities to reach 202 communities at
Table of Contents Backlog (dollars in thousands) As of December 31, 2021 2020 % Change Average Average Sales Sales Average Homes Dollar Value Price Homes Dollar Value Price Homes Dollar Value Sales Price West 524
$ 371,848 $ 709.6486 $ 294,113 $ 605.27.8 % 26.4 % 17.3 % Mountain 1,045 574,085 549.4 789 365,328 463.0 32.4 % 57.1 % 18.7 % Texas 386 136,893 354.6 385 134,023 348.1 0.3 % 2.1 % 1.9 % Southeast 713 308,663 432.9 801 306,644 382.8 (11.0) % 0.7 % 13.1 % Century Complete 1,983 478,283 241.2 978 194,094 198.5 102.8 % 146.4 % 21.5 % Total / Weighted Average 4,651 $ 1,869,772 $ 402.03,439 $ 1,294,202 $ 376.335.2 % 44.5 % 6.8 % Backlog reflects the number of homes, net of cancellations, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home. At December 31, 2021, we had 4,651 homes in backlog with a total value of $1.9 billion, which represents increases of 35.2% and 44.5%, respectively, as compared to 3,439 homes in backlog with a total value of $1.3 billionat December 31, 2020. The increase in backlog dollar value is primarily attributable to the increase in backlog units and a 6.8% increase in the average sales price of homes in backlog, partially offset by a decrease in backlog units for our Southeast segment which correlates directly with the decrease in selling communities.
Cash and capital resources
Our liquidity, consisting of our cash and cash equivalents and our cash held in escrow and the availability of our credit facilities, was
Our principal uses of capital for the year ended
December 31, 2021were our land purchases, land development, home construction, and the payment of routine liabilities. We increased our land acquisition and development activities during 2021, which resulted in 79,859 lots owned and controlled at December 31, 2021, a 59.8% increase as compared to December 31, 2020. Cash flows for each of our communities depend on the stage in the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and not recognized in our consolidated statements of operations until a home closes, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are actively acquiring and developing lots in our markets to maintain and grow our lot supply and active selling communities. As we continue to expand our business, our cash outlays for land purchases and land development to grow our lot inventory may exceed our cash generated by operations. Under our shelf registration statement, which we filed with the SECon July 1, 2021and was automatically effective upon filing, we have the ability to access the debt and equity capital markets in registered transactions from time to time and as needed as part of our ongoing financing strategy and subject to market conditions. In August 2021, we filed a prospectus supplement to offer up to $100.0 millionunder the shelf registration statement under our at-the-market facility described below.
Short-term liquidity and capital resources
We use funds generated by operations, available borrowings under our revolving credit facility, and proceeds from issuances of debt or equity, including our current at-the-market facility, to fund our short term working capital obligations and fund our purchases of land, as well as land development, home construction activities, and other cash needs. 54
Our financial services operations use cash generated from operations and the availability of our mortgage buyout facilities to fund its operations, including origination of mortgage loans to our homebuyers.
We believe that we will be able to fund our current liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations, and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available or on acceptable terms, especially in light of the current COVID-19 pandemic, its impact on the macro-economy, and market conditions at the time. While the impact of the COVID-19 pandemic will continue to evolve, we believe we are well positioned from a cash and liquidity standpoint to not only operate in an uncertain environment, but also continue to grow with the market and pursue other ways to properly deploy capital to enhance returns, which may include taking advantage of strategic opportunities as they arise.
Long-term liquidity and capital resources
Beyond the next twelve months, we believe that our principal uses of capital will be land and inventory purchases and other expenditures to invest in our future growth, as well as principal and interest payments on our long-term debt obligations. We believe that we will be able to fund our long-term liquidity needs with cash generated from operations and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed or appropriate, although no assurance can be provided that such additional debt or equity capital will be available. To the extent these sources of capital are insufficient to meet our needs, we may also conduct additional public or private offerings of our securities, refinance debt, or dispose of certain assets to fund our operating activities and capital needs.
Material cash needs
In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. These obligations impact our short-term and long-term liquidity and capital resource needs. Our contractual obligations as of
December 31, 2021were as follows (in thousands): Payments due by period Total Less than 1 - 3 years 3 - 5 years More than 5 years 1 year
Maturities of long-term debt, including
571,354 interest (1) Operating leases (2) 18,688 5,989 10,320 2,362 17 Total contractual
$ 1,702,428 $ 405,875 $ 116,570 $ 608,612$ 571,371 obligations (1)Principal payments in accordance with our revolving line of credit, mortgage repurchase facilities and long-term debt agreements, and interest payments for outstanding long-term debt obligations. Interest on variable rate debt was calculated using the interest rate as of December 31, 2021. See Note 9 - Debt in the Notes to the Consolidated Financial Statements for further detail.
(2)Operating lease obligations do not include payments to landlords covering property taxes and maintenance of common areas. See Note 13 – Leases in the Notes to the consolidated financial statements for more details.
In the ordinary course of business, we enter into land purchase contracts in order to procure 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. Purchase and option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties until we have determined whether to exercise our option, which may serve to reduce our financial risks associated with long-term land holdings. These purchase contracts typically require a cash deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and others as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Option contracts generally require payment by us of a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. Our obligations with respect to purchase contracts and option contracts are generally limited to the forfeiture of the related non-refundable cash deposits. As of
December 31, 2021, we had outstanding purchase contracts and option contracts for 47,004 lots totaling approximately $2.0 billionand we had $61.6 millionof deposits for land contracts, of which $38.1 millionwere non-refundable cash deposits pertaining to land contracts. While our performance, including the timing and amount of purchase, if any, under these outstanding purchase and option contracts is subject to change, we currently anticipate performing on the majority of the purchase and option contracts during the next twelve to eighteen months, with performance on the remaining purchase and option contacts occurring in future periods.
Our use of land option contracts depends, among other things, on the availability of land sellers willing to enter into option contracts
takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.
Outstanding debt obligations and debt service requirements
One of our principal liquidity needs is the payment of principal and interest on outstanding indebtedness. Our outstanding indebtedness is described in detail in Note 9 - Debt to our Notes to the Consolidated Financial Statements. We are required to meet certain covenants, and as of
December 31, 2021, we were in compliance with all such covenants and requirements on our revolving line of credit and mortgage repurchase facilities. See Note 9 - Debt in the Notes to the Consolidated Financial Statements for further detail. Our outstanding debt obligations included the following as of December 31, 2021and 2020 (in thousands): December 31, December 31, 2021 2020 3.875% senior notes, due August 2029(1) $ 494,117$ - 6.750% senior notes, due May 2027(1) 495,581 494,768 5.875% senior notes, due July 2025(1) - 396,821 Other financing obligations 9,238 3,286 Notes payable 998,936 894,875 Revolving line of credit - - Mortgage repurchase facilities 331,876 259,050 Total debt $ 1,330,812 $ 1,153,925
(1) The carrying value of senior notes reflects the effect of premiums, discounts and issue costs which are amortized to interest expense over the respective term of the senior notes.
During the year ended
December 31, 2021, we completed a private offering of $500.0 millionaggregate principal amount of our 3.875% senior notes due 2029, and used a portion of the net proceeds from the offering to redeem all $400.0 millionaggregate principal amount of our 5.875% senior notes due 2025, with the remaining net proceeds from the offering to be used for general corporate purposes. We may from time to time seek to refinance or increase our outstanding debt or retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may or may not be material during any particular reporting period.
Letters of credit and performance guarantees
In the normal course of business, we post letters of credit and performance and other bonds primarily related to our land development performance obligations with local municipalities. As of
December 31, 2021and December 31, 2020, we had $492.5 millionand $402.7 million, respectively, in letters of credit and performance and other bonds issued and outstanding. Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and performance and other bonds are not generally released until all development and construction activities are completed. We anticipate that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business.
Revolving line of credit
May 21, 2021, we entered into a Second Amended and Restated Credit Agreement (which we refer to as the "Second A&R Credit Agreement") with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders party thereto. The Second A&R Credit Agreement, which amended and restated our prior Amended and Restated Credit Agreement, provides us with a senior unsecured revolving line of credit (which we refer to as the "Credit Facility") of up to $800.0 million, and unless terminated earlier, will mature on April 30, 2026. The Credit Facility includes a $250.0 millionsublimit for standby letters of credit. Under the terms of the Second A&R Credit Agreement, we are entitled to request an increase in the size of the Credit Facility by an amount not exceeding $200 million. Our obligations under the Second A&R Credit Agreement are guaranteed by certain of our subsidiaries. The Second A&R Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. Borrowings under the Second A&R Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.05% and 2.65% per annum, 56
and if made available in the Administrative Agent's discretion, a base rate plus an applicable margin between 1.05% and 1.65% per annum. As of
December 31, 2021, no amounts were outstanding under the Credit Facility and we were in compliance with all covenants. At-the-Market Offerings On November 27, 2019, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, BofA Securities, Inc., Citigroup Global Markets Inc., and Fifth Third Securities, Inc.(which we refer to as the "Distribution Agreement"), as sales agents pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 millionfrom time to time through any of the sales agents party thereto in "at-the-market" offerings, in accordance with the terms and conditions set forth in the Distribution Agreement. This Distribution Agreement, which superseded and replaced a prior similar distribution agreement, and was amended in July 2021to acknowledge our filing of a new registration statement on Form S-3 registering the issuance and sale of shares of our common stock under the Distribution Agreement and replace Citigroup Global Markets Inc.with Wells Fargo Securities, LLCas a sales agent, had all $100 millionavailable for sale as of December 31, 2021. The Distribution Agreement will remain in full force and effect until terminated by either party pursuant to the terms of the agreement or such date that the maximum offering amount has been sold in accordance with the terms of the agreement. We did not sell or issue any shares of our common stock during the years ended December 31, 2021and 2020, respectively.
Share buyback program
November 6, 2018, our Board of Directors authorized a stock repurchase program, under which we may repurchase up to 4,500,000 shares of our outstanding common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws. The actual manner, timing, amount and value of repurchases under the stock repurchase program will be determined by management at its discretion and will depend on a number of factors, including the market price of our common stock, trading volume, other capital management objectives and opportunities, applicable legal requirements, and general market and economic conditions. We intend to finance any stock repurchases through available cash and our revolving credit facility. Repurchases also may be made under a trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, which would permit shares to be repurchased when we otherwise may be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The stock repurchase program has no expiration date and may be extended, suspended or discontinued by our Board of Directors at any time without notice at our discretion. All shares of common stock repurchased under the program will be cancelled and returned to the status of authorized but unissued shares of common stock. During the years ended December 31, 2021and 2020, no shares were repurchased under our stock share repurchase program. The maximum number of shares that may yet be purchased under the stock repurchase program as of December 31, 2021is 3,812,939. Dividends On May 19, 2021, our Board of Directors approved the initiation of a quarterly cash dividend. The following table sets forth cash dividends declared by our Board of Directors to holders of record of our common stock during the year ended December 31, 2021(in thousands, except per share information): Cash Dividends Declared Declaration Date Record Date Payable Date Per Share Amount May 19, 2021 June 2, 2021 June 16, 2021 $ 0.15 $ 5,064
November 10, 2021
The declaration and payment of future cash dividends on our common stock, whether at current levels or at all, are at the discretion of our Board of Directors and depend upon, among other things, our expected future earnings, cash flows, capital requirements, access to external financing, debt structure and any adjustments thereto, operational and financial investment strategy and general financial condition, as well as general business conditions. 57
Cash Flow – Year Ended
For the years ended
?Our primary sources of cash flows from operations are from the sale of single-family attached and detached homes and mortgages. Our primary uses of cash flows from operations are the acquisition of land and expenditures associated with the construction of our single-family attached and detached homes and the origination of mortgages held for sale. Net cash used in operating activities was
$201.2 millionduring the year ended December 31, 2021as compared to net cash provided by operating activities of $340.6 millionduring 2020. The increase in cash used in operations is primarily a result of increased investment in our homebuilding inventories for the year ended December 31, 2021as compared to the year ended December 31, 2020, partially offset by a $292.3 millionincrease in net income during year ended December 31, 2021as compared to the year ended December 31, 2020. ?Net cash used in investing activities was $6.5 millionduring the year ended December 31, 2021, compared to $8.4 millionused during 2020. The decrease was primarily related to the proceeds from a secured note receivable during the year ended December 31, 2021. ?Net cash provided by financing activities was $131.8 millionduring the year ended December 31, 2021, compared to $7.4 millionduring the year ended December 31, 2020. The increase was primarily attributable to 1) the issuance of $500.0 millionin senior notes due 2029, offset by the extinguishment of our former senior notes due 2025 resulting in a payment of $411.8 million, net of interest and 2) a decrease of $68.7 millionin net payments under our revolving line of credit. The increase was partially offset by a $12.1 milliondecrease in net proceeds on our mortgage repurchase facilities and $15.2 millionin dividend payments during the year ended December 31, 2021.
Additional Guarantor Information
Our 6.750% senior notes due 2027 (which we collectively refer to as our "2027 Notes") and our 3.875% senior notes due 2029 (which we collectively refer to as our "2029 Notes" and together with the 2027 Notes, the "Senior Notes") are our unsecured senior obligations and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our direct and indirect wholly-owned operating subsidiaries (which we refer to collectively as "Guarantors"). In addition, our former 5.875% senior notes due 2025 (which we collectively refer to as our "2025 Notes"), which were extinguished during the year ended
December 31, 2021, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors. Our subsidiaries associated with our Financial Services operations (referred to as "Non-Guarantors") do not guarantee the Senior Notes. The guarantees are senior unsecured obligations of the Guarantors that rank equal with all existing and future senior debt of the Guarantors and senior to all subordinated debt of the Guarantors. The guarantees are effectively subordinated to any secured debt of the Guarantors. As of December 31, 2021, Century Communities, Inc.had outstanding $1.0 billionin total principal amount of Senior Notes. Each of the indentures governing our Senior Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a "Restricted Subsidiary" (as defined in the respective indentures), which sale, transfer, exchange or other disposition does not constitute an "Asset Sale" (as defined in the respective indentures) or is made in compliance with applicable provisions of the applicable indenture; (2) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the assets of such Guarantor, which sale, transfer, exchange or other disposition does not constitute an Asset Sale or is made in compliance with applicable provisions of the applicable indenture; provided, that after such sale, transfer, exchange or other disposition, such Guarantor is an "Immaterial Subsidiary" (as defined in the respective indentures); (3) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the applicable indenture; provided that if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the applicable Indenture, such Guarantor's obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the applicable Indenture; (4) upon the designation of such Guarantor as an "Unrestricted Subsidiary" (as defined in the respective Indentures), in accordance with the applicable indenture; (5) if the Company exercises its legal defeasance option or covenant defeasance option under the applicable indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the applicable indenture, upon such exercise or discharge; or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the applicable indenture. The indenture governing our former 2025 Notes contained a similar provision. 58
If a guarantor were to become a debtor in a case under the US Bankruptcy Code, a court may decline to enforce its guarantee of the Senior Notes. This may occur when, among other factors, it is found that the guarantor originally received less than fair consideration for the guarantee and the guarantor would be rendered insolvent by enforcement of the guarantee. On the basis of historical financial information, operating history and other factors, we believe that each of the guarantors, after giving effect to the issuance of its guarantee of the Senior Notes when the guarantee was issued, was not insolvent and did not and has not incurred debts beyond its ability to pay such debts as they mature. The Company cannot predict, however, what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard. Only the 2027 Notes and the related guarantees are, and the former 2025 Notes and the related guarantees were, registered securities under the Securities Act of 1933, as amended (the "Securities Act"). The offer and sale of the 2029 Notes and the related guarantees were not and will not be registered under the Securities Act or the securities laws of any other jurisdiction and instead were issued in reliance upon an exemption from such registration. Unless they are subsequently registered under the Securities Act, neither the 2029 Notes nor the related guarantees may be offered and sold only in transactions that are exempt from the registration requirements under the Securities Act and the applicable securities laws of any other jurisdiction.
As the guarantees for the 2027 Bonds and the guarantees for the old 2025 Bonds were made as part of the issuance of the
2027 Notes and former 2025 Notes and exchange offers effected under the Securities Act in
February 2015, October 2015and April 2017, the Guarantors' condensed supplemental financial information is presented in this report as if the guarantees existed during the periods presented pursuant to applicable SECrules and guidance. If any Guarantors are released from the guarantees in future periods, the changes are reflected prospectively. We have determined that separate, full financial statements of the Guarantors would not be material to investors, and accordingly, supplemental financial information is presented below. On March 2, 2020, the SECadopted amendments to Rules 3-10 and 3-16 of Regulation S-X, under Rule Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securitiesand Affiliates Whose SecuritiesCollateralize a Registrant's Securities ("Rule 33-10762"), that reduce and simplify the financial disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities (which we previously included within the notes to our consolidated financial statements in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q). The amendments under Rule 33-10762 were effective January 4, 2021, but voluntary compliance was permitted in advance of the effective date. We adopted the new disclosure requirements permitted under Rule 33-10762, beginning with the three and six month period ended June 30, 2020. The following summarized financial information is presented for Century Communities, Inc.and the Guarantor Subsidiaries on a combined basis after eliminating intercompany transactions and balances among Century Communities, Inc.and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from Non-Guarantor Subsidiaries.
Summarized balance sheet data (in thousands)
Assets Cash and cash equivalents $ 180,843 Cash held in escrow 52,297 Accounts receivable 39,492 Inventories 2,456,614 Prepaid expenses and other assets 160,999 Property and equipment, net 24,220 Deferred tax assets, net 21,239 Goodwill 30,395 Total assets $ 2,966,099 Liabilities and stockholders' equity Liabilities: Accounts payable $ 82,734 Accrued expenses and other liabilities 288,229 Notes payable 998,936 Revolving line of credit - Total liabilities 1,369,899 Stockholders' equity: 1,596,200
Total liabilities and equity $2,966,099
Summary income statement data (in thousands) End of year
Total homebuilding revenues $
Total homebuilding cost of revenues
Selling, general and administrative
Loss on debt extinguishment
Inventory impairment and other
Other income (expense)
Income before income tax expense 589,797 Income tax expense (131,201) Net income $ 458,596
Critical accounting policies
Critical accounting estimates are those that we believe are both significant and that require us to make difficult, subjective or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, and the estimates included in our financial statements might be impacted if we used different assumptions or conditions. Our management believes that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require among the most difficult, subjective or complex judgments:
Under Accounting Standards Codification (which we refer to as "ASC") 606, revenues from home sales and the related profit are recorded when our performance obligations are satisfied, which generally occurs when the respective homes are closed and title has passed to our homebuyers. We generally satisfy our performance obligations in less than one year from the contract date. Proceeds from home closings that are held for our benefit in escrow, are presented as cash held in escrow on our consolidated balance sheets. Cash held for our benefit in escrow is typically held by the escrow agent for less than a few days. When it is determined that the earnings process is not complete and we have remaining performance obligations that are material in the context of the contract, the related revenue and costs are deferred for recognition in future periods until those performance obligations have been satisfied. Prior to satisfying our performance obligations, we typically receive deposits from customers related to sold but undelivered homes. These deposits are classified as earnest money deposits and are included in accrued expenses and other liabilities on our consolidated balance sheets. Earnest money deposits totaled
$56.8 millionand $30.6 millionat December 31, 2021and December 31, 2020, respectively.
Inventory and cost of sales
We capitalize pre-acquisition, land, development and other allocated costs, including interest, during the qualifying, development and home construction periods.
Land, development, and other common costs are allocated to inventory using the relative-sales-value method; however, as lots within a project typically have comparable market values, we generally allocate land, development, and common costs equally to each lot within the project. Home construction costs are recorded using the specific-identification method. Cost of sales for homes closed includes the allocation of construction costs of each home and all applicable land acquisition, land development, and related common costs, both incurred and estimated to be incurred. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining homes in the community. When a home is closed, the Company generally has not paid all incurred costs necessary to complete the home, and a liability and a charge to cost of home sales revenues are recorded for the amount that is estimated will ultimately be paid related to completed homes.
We review all of our communities for an indicator of impairment and record an impairment loss when conditions exist where the carrying amount of inventory is not recoverable and exceeds its fair value. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases to gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses. We prepare and analyze cash flows at the lowest level for which there is identifiable cash flows that are independent of the cash flows of other groups of assets, which we have determined as the community level. If events or circumstances indicate that the carrying amount may be impaired, such impairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated future discounted cash flows, 60
excluding interest charges, generated from the use and ultimate disposition of the respective inventories. Such losses, if any, are reported within costs of sales. The discount rate used in determining each asset's fair value reflects inherent risks associated with the related estimated cash flows, as well as current risk-free rates available in the market and estimated market risk premiums. We have utilized a discount rate of approximately 12% in our valuations. When estimating undiscounted cash flows, we make various assumptions, including the following: the expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives offered by us or other builders in other communities, and future sales price adjustments based on market and economic trends; the costs incurred to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction, and selling and marketing costs; any alternative product offerings that may be offered that could have an impact on sales, sales prices and/or building costs; and alternative uses for the property. For the years ended
December 31, 2021and 2020, the following table shows the number of communities for which we identified an indicator of impairment and therefore tested for whether an impairment existed, compared to the total number of communities that existed during such period. Number of Communities Total Number of Tested for Impairment Existing Communities Year ended December 31, 2021 7 202 Year ended December 31, 2020 13 198 For the year ended December 31, 2021, we recorded nominal impairment charges on one community. During the year ended December 31, 2020, we recorded impairment charges on four communities totaling $2.2 million. The impairment charges are included in inventory impairment and other in our consolidated statement of operations.
Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the consolidated balance sheet, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an analysis that incorporates historical payment trends and adjust the amounts recorded if necessary.
Mortgages held for sale and revenue recognition
Mortgage loans held for sale, including the rights to service the mortgage loans, mortgage loans in process for which interest rates were committed to the borrowers (referred to as "interest rate lock commitments"), as well as the derivative instruments used to economically hedge our interest rate risk, which are typically forward commitments on mortgage-backed securities and interest rate lock commitments, are carried at fair value. Changes in fair value are reflected in financial services revenue on the consolidated statement of operations. Management believes carrying loans held for sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them. Also included in financial services revenue are gains and losses from the sale of mortgage loans held for sale, that are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale, and loan origination fees. Loan origination fees represent revenue earned from originating mortgage loans which generally represent a flat per loan fee based on a percentage of the original principal loan balance and are recognized at the time the mortgage loans are funded.
We estimate the grant date fair value of stock-based compensation awards and recognize the fair value as compensation costs over the requisite service period, which is generally three years, for all awards that vest. We value the fair value of our restricted stock units and awards in the form of unrestricted shares of common stock equal to the closing price of our common stock on the
New York Stock Exchangeon the date of grant. Stock-based compensation expense associated with outstanding performance share units is measured using the grant date fair value and is based on the estimated achievement of the established performance criteria at the end of each reporting period until the performance period ends, recognized on a straight-line basis over the performance period. Stock-based compensation expense is only recognized for performance share units that we expect to vest, which we estimate based upon an assessment of the probability that the performance criteria will be achieved. The performance share units granted during the fiscal years ended December 31, 2021and 2020 have three-year performance-based metrics measured over performance periods ending on December 31for each three-year period. Stock-based compensation expense associated with outstanding performance share units is 61
updated for actual forfeitures.
We account for income taxes in accordance with ASC 740, Income Taxes, which requires recognition of deferred tax assets and liabilities at enacted income tax rates for the temporary differences between the financial reporting bases and the tax bases of its assets and liabilities. Any effects of changes in income tax rates or tax laws are included in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. In addition, when it is more likely than not that a tax position will be sustained upon examination by a tax authority that has full knowledge of all relevant information, we measure the amount of tax benefit from the position and record the largest amount of tax benefit that is more likely than not of being realized after settlement with a tax authority. Our policy is to recognize interest to be paid on an underpayment of income taxes in interest expense and any related statutory penalties in the provision for income taxes on our consolidated statements of operations.
We evaluate goodwill for possible impairment in accordance with ASC 350, Intangibles-Goodwill and Other, on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use a two step process to assess whether or not goodwill can be realized. The first step is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. If the qualitative assessment indicates a stable or improved fair value, no further testing is required. If a qualitative assessment indicates that a significant decline to fair value of a reporting unit is more likely than not, we will proceed to the second step where we calculate the fair value of a reporting unit based on discounted future cash flows. If this step indicates that the carrying value of a reporting unit is in excess of its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Business Combinations We account for business combinations in accordance with ASC Topic 850, Business Combinations, if the acquired assets assumed and liabilities incurred constitute a business. We consider acquired companies to constitute a business if the acquired net assets and processes have the ability to create outputs in the form of revenue. For acquired companies constituting a business, we recognize the identifiable assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid over the fair value of the identifiable assets as goodwill. The fair value of acquired inventories largely depends on the stage of production of the acquired land and work in process inventory. For acquired land inventory, we typically utilize, with the assistance of a third party appraiser, a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimates include future per lot development costs, construction and overhead costs, mix of products sold in each community, as well as average sales price. For work in process inventories, we estimate the fair value based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts.
Non-GAAP Financial Measures
In this Form 10-K, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net homebuilding debt to net capital, and adjusted net income and adjusted earnings per diluted share. These non-GAAP financial measures are presented to provide investors additional information to facilitate the comparison of our past and present operations. We believe these non-GAAP financial measures provide useful information to investors because they are used to evaluate our performance on a comparable year-over-year basis. These non-GAAP financial measures are not in accordance with, or an alternative for, GAAP measures and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive or standard set of accounting rules or principles. Accordingly, the calculation of our non-GAAP financial measures may differ from the definitions of other companies using the same or similar names limiting, to some extent, the usefulness of such measures for comparison purposes. Non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with our financial results as determined in accordance with GAAP. These measures should only be used to evaluate our financial results in conjunction with the corresponding GAAP measures. Accordingly, we qualify our use of non-GAAP financial information in a statement when non-GAAP financial information is presented. 62
EBITDA and Adjusted EBITDA
The following table presents EBITDA and Adjusted EBITDA for the years ended
December 31, 2021and 2020. Adjusted EBITDA is a non-GAAP financial measure we use as a supplemental measure in evaluating operating performance. We define Adjusted EBITDA as consolidated net income before (i) income tax expense, (ii) interest in cost of home sales revenues, (iii) other interest expense, (iv) depreciation and amortization expense, (v) loss on debt extinguishment, and (vi) inventory impairment and other. We believe Adjusted EBITDA provides an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization, and items considered to be non-recurring. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Adjusted EBITDA should be considered in addition to, and not as a substitute for, consolidated net income in accordance with GAAP as a measure of performance. Our presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our Adjusted EBITDA is limited as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. (dollars in thousands) Year Ended December 31, 2021 2020 % Change Net income $ 498,504 $ 206,157141.8 % Income tax expense 142,618 64,083 122.6 %
Interest on cost of home sales 66,846 72,002 (7.2)% Interest expense (income)
(661) (1,141) (42.1) %
Depreciation and amortization 10,912 13,141 (17.0)% EBITDA
718,219 354,242 102.7 % Loss on debt extinguishment 14,458 - NM Inventory impairment and other 41 2,172 (98.1) % Adjusted EBITDA
$ 732,718 $ 356,414105.6 %
Net residential construction debt at
The following table presents our ratio of net homebuilding debt to net capital, which is a non-GAAP financial measure. We calculate this by dividing net homebuilding debt (notes payable and borrowings under our revolving line of credit less cash and cash equivalents and cash held in escrow) by net capital (net homebuilding debt plus total stockholders' equity). Homebuilding debt is our total debt minus outstanding borrowings under our mortgage repurchase facilities. The most directly comparable GAAP measure is the ratio of debt to total capital. We believe the ratio of net homebuilding debt to net capital is a relevant and useful financial measure to investors in understanding the leverage employed in our operations and as an indicator of our ability to obtain external financing. (dollars in thousands) December 31, December 31, 2021 2020 Total homebuilding debt
$ 998,936 $ 894,875Total stockholders' equity 1,764,508 1,280,705 Total capital $ 2,763,444 $ 2,175,580Homebuilding debt to capital 36.1% 41.1% Total homebuilding debt $ 998,936 $ 894,875Cash and cash equivalents (316,310) (394,001) Cash held in escrow (52,297) (23,149) Net homebuilding debt 630,329 477,725 Total stockholders' equity 1,764,508 1,280,705 Net capital $ 2,394,837 $ 1,758,430Net homebuilding debt to net capital 26.3% 27.2% 63
Adjusted net earnings and adjusted diluted earnings per share
Adjusted Net Income and Adjusted Diluted Earnings per Share (which we refer to as "Adjusted EPS") are non-GAAP financial measures that we believe are useful to management, investors and other users of our financial information in evaluating our operating results and understanding our operating trends without the effect of certain non-recurring items. We believe excluding certain non-recurring items provides more comparable assessment of our financial results from period to period. We define Adjusted Net Income as consolidated net income before (i) income tax expense, (ii) inventory impairment and other (iii) restructuring costs, and (iv) loss on debt extinguishment, less adjusted income tax expense, calculated using the Company's estimated annual effective tax rate after discrete items for the applicable period. Adjusted Diluted EPS is calculated by excluding the effect of loss on inventory impairment and other, restructuring costs and loss on debt extinguishment from the calculation of reported EPS.
(in thousands of dollars, except share and per share information)
Year Ended December 31, 2021 2020 Numerator Net income
$ 498,504 $ 206,157Denominator
Weighted average common shares outstanding – basic 33,706,782 33,312,554 Dilutive effect of restricted share units
Weighted average common shares outstanding - diluted 34,444,918 33,610,098 Earnings per share: Basic
$ 14.79 $ 6.19Diluted $ 14.47 $ 6.13Adjusted earnings per share Numerator Net income $ 498,504 $ 206,157Income tax expense 142,618 64,083 Income before income tax expense 641,122
Inventory impairment and other 41 2,172 Restructuring costs - 1,584 Loss on debt extinguishment 14,458 - Adjusted income before income tax expense 655,621
Adjusted income tax expense(1) (145,843) (64,974) Adjusted net income
$ 509,778 $ 209,022Denominator - Diluted 34,444,918 33,610,098 Adjusted diluted earnings per share $ 14.80$
(1)The tax rates used in calculating adjusted net income for the years ended
December 31, 2021and 2020 were 22.2% and 23.7%, respectively, which reflect of the Company's GAAP tax rates for the applicable periods.
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