UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-36491
Century Communities, Inc.
(Exact name of registrant as specified in its charter)
Delaware
68-0521411
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
8390 East Crescent Parkway, Suite 650Greenwood Village, CO
80111
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code): (303) 770-8300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common stock, par value $0.01 per share
CCS
NYSE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
On October 25, 2019, 31,347,379 shares of common stock, par value $0.01 per share, were outstanding.
Table of Contents
CENTURY COMMUNITIES, INC.
For the Three and Nine Months Ended September 30, 2019
Index
Page No.
PART I
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
3
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018
4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
5
Unaudited Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2019 and 2018
6
Notes to the Unaudited Condensed Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
38
Item 4. Controls and Procedures
PART II
Item 1. Legal Proceedings
39
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
40
Signatures
41
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets
As of September 30, 2019 and December 31, 2018
(in thousands, except share amounts)
September 30,
December 31,
2019
2018
Assets
(unaudited)
Cash and cash equivalents
$
38,508
32,902
Cash held in escrow
30,362
24,344
Accounts receivable
17,929
13,464
Inventories
2,093,493
1,848,243
Mortgage loans held for sale
95,321
112,394
Prepaid expenses and other assets
129,925
140,397
Property and equipment, net
35,258
33,258
Deferred tax assets, net
14,277
13,763
Amortizable intangible assets, net
4,094
5,095
Goodwill
30,395
Total assets
2,489,562
2,254,255
Liabilities and stockholders' equity
Liabilities:
Accounts payable
78,695
89,907
Accrued expenses and other liabilities
206,818
213,157
Notes payable
896,272
784,777
Revolving line of credit
278,800
202,500
Mortgage repurchase facilities
77,798
104,555
Total liabilities
1,538,383
1,394,896
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none outstanding
—
Common stock, $0.01 par value, 100,000,000 shares authorized, 31,249,373 and 30,154,791 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
312
302
Additional paid-in capital
627,211
595,037
Retained earnings
323,656
264,020
Total stockholders' equity
951,179
859,359
Total liabilities and stockholders' equity
See Notes to Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2019 and 2018
(in thousands, except share and per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
Revenues
Homebuilding revenues
Home sales revenues
573,860
552,876
1,705,798
1,469,871
Land sales and other revenues
6,083
1,131
8,837
4,304
579,943
554,007
1,714,635
1,474,175
Financial services revenue
10,419
7,722
28,734
21,292
Total revenues
590,362
561,729
1,743,369
1,495,467
Homebuilding cost of revenues
Cost of home sales revenues
(469,834)
(460,144)
(1,407,519)
(1,206,924)
Cost of land sales and other revenues
(4,624)
(1,093)
(6,115)
(3,010)
(474,458)
(461,237)
(1,413,634)
(1,209,934)
Financial services costs
(8,174)
(6,056)
(22,750)
(15,836)
Selling, general and administrative
(72,834)
(70,975)
(216,987)
(191,130)
Loss on debt extinguishment
(10,832)
Acquisition expense
(58)
(395)
Equity in income of unconsolidated subsidiaries
14,849
Other income (expense)
(56)
(545)
(499)
(553)
Income before income tax expense
34,840
22,858
78,667
92,468
Income tax expense
(7,816)
(5,810)
(19,031)
(22,207)
Net income
27,024
17,048
59,636
70,261
Earnings per share:
Basic
0.88
0.56
1.96
2.35
Diluted
0.87
1.95
2.33
Weighted average common shares outstanding:
30,587,487
30,232,376
30,378,860
29,885,858
30,906,235
30,554,881
30,641,194
30,189,058
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2019 and 2018
(in thousands)
Operating activities
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
9,793
8,803
Stock-based compensation expense
11,391
10,135
10,832
Deferred income taxes
(514)
(804)
Distributions from unconsolidated subsidiaries
7,432
(14,849)
(Gain) loss on disposition of assets
846
1,399
Changes in assets and liabilities:
(6,018)
6,077
(4,465)
(13,324)
(215,771)
(243,355)
33,346
(32,640)
(11,212)
3,267
(53,901)
(9,285)
17,073
(10,114)
Net cash provided by (used in) operating activities
(148,964)
(216,997)
Investing activities
Purchases of property and equipment
(11,633)
(11,893)
Business combinations net of acquired cash
(28,036)
Other investing activities
78
272
Net cash provided by (used in) investing activities
(11,555)
(39,657)
Financing activities
Borrowings under revolving credit facilities
1,184,800
520,000
Payments on revolving credit facilities
(1,108,500)
(284,000)
Proceeds from issuance of senior notes due 2027
500,000
Extinguishment of senior notes due 2022
(391,942)
Proceeds from issuance of insurance premium notes and other
12,629
11,838
Principal payments on insurance notes payable and other
(19,275)
(2,173)
Extinguishments of debt assumed in business combination
(94,231)
Debt issuance costs
(6,075)
(3,521)
Net payments on mortgage repurchase facilities
(26,757)
9,008
Net proceeds from issuances of common stock
25,817
31,230
Repurchases of common stock upon vesting of stock based compensation
(3,588)
(5,483)
Repurchases of common stock under our stock repurchase program
(1,439)
Net cash provided by (used in) financing activities
165,670
182,668
Net increase (decrease)
5,151
(73,986)
Cash and cash equivalents and Restricted cash
Beginning of period
36,441
93,713
End of period
41,592
19,727
Supplemental cash flow disclosure
Cash paid for income taxes
20,722
39,326
15,927
Restricted cash (Note 6)
3,084
3,800
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
Three Months Ended September 30, 2019 and 2018
Common Stock
Shares
Amount
Additional Paid-In Capital
Retained Earnings
Total Stockholders' Equity
Balance at June 30, 2019
30,439
304
600,293
296,632
897,229
Issuance of common stock, net
799
8
23,146
23,154
Vesting of restricted stock units
11
(151)
3,923
Balance at September 30, 2019
31,249
Balance at June 30, 2018
30,119
301
582,627
220,778
803,706
600
16,915
16,921
1
(695)
(694)
3,812
Balance at September 30, 2018
30,759
308
602,659
237,826
840,793
Nine Months Ended September 30, 2019 and 2018
Balance at December 31, 2018
30,155
899
9
25,808
Repurchase of common stock
(83)
(1)
(1,438)
278
2
(3,587)
(3,585)
Balance at December 31, 2017
29,503
295
566,790
168,148
735,233
Adoption of ASC 606
(583)
1,086
31,219
170
(5,481)
10,133
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2019
1. Basis of Presentation
Century Communities, Inc. (which we refer to as “we,” “CCS,” or the “Company”), together with its subsidiaries, is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in the States of Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana, Iowa, Michigan, Nevada, North Carolina, Ohio, South Carolina, Tennessee, Texas, Utah, and Washington. 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 Communities and Wade Jurney Homes brands. Our Century Communities brand targets a wide range of buyer profiles including: first time, 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 Wade Jurney Homes brand targets first time homebuyers, primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Wade Jurney Homes. 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, to our home buyers have been identified as our Financial Services segment.
On June 14, 2018, we acquired the remaining 50% ownership interest in WJH, LLC (which we refer to as “WJH” or “Wade Jurney Homes”) for $37.5 million. On the acquisition date, WJH had operations in Alabama, Florida, Georgia, North Carolina and South Carolina.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (which we refer to as “GAAP”) for interim financial statements and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2018, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 that was filed with the SEC on February 13, 2019.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company, as well as all subsidiaries in which we have a controlling interest, and variable interest entities for which the Company is deemed to be the primary beneficiary. We currently do not have any variable interest entities in which we are deemed the primary beneficiary. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
Reclassifications
In order to conform to current year presentation, mortgage loans held for investment and derivative assets of $1.0 million and $0.7 million, respectively, have been reclassified to prepaid expenses and other assets from mortgage loans held for sale on the condensed consolidated balance sheets as of December 31, 2018.
Recently Adopted Accounting Standards
Leases
The Financial Accounting Standards Board (which we refer to as “FASB”) issued Accounting Standards Codification (ASC) 842, Leases (which we refer to as “ASC 842”) which requires the recognition of lease assets and lease liabilities by lessees for most leases. ASC 842 is effective for the Company beginning January 1, 2019 and interim periods within the annual period. We adopted ASC 842 under
a modified retrospective approach using the option to apply the transition provisions on the effective date January 1, 2019. The modified retrospective approach allows the Company to carry forward our historical lease classification, and to present historical periods under legacy lease accounting guidance. The Company’s leases primarily consist of leases for office space, and computer and office equipment where we are the lessee.
ASC 842 includes several practical expedients which we elected upon adoption including to (a) not reassess the lease classification for any expired or existing leases and (b) not reassess whether previously capitalized initial direct costs qualify for capitalization under ASC 842. Additionally, we elected to utilize hindsight when determining the lease term.
The adoption of ASC 842 resulted in the establishment of a right of use asset of $17.7 million and a lease liability of $18.7 million on our condensed consolidated balance sheet as of January 1, 2019. The adoption of ASC 842 did not impact stockholders’ equity.
Recently Issued Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The standard changes the accounting for credit losses for most financial assets and certain other instruments. Credit losses which have historically been accounted for on an incurred loss basis will now be accounted for using an estimate of lifetime expected credit losses. This will generally result in earlier recognition of allowances for credit losses. The standard is effective for the Company on January 1, 2020. Upon adoption, the standard will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We anticipate ASU 2016-13 will apply to certain of our loans held for investment and certain receivable balances. We do not anticipate this standard having a material effect on the consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40).” This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for the Company January 1, 2020. Upon adoption, the Company has elected to apply the standard prospectively. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.
2. Reporting Segments
Our homebuilding operations are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in 17 states. We build and sell homes under our Century Communities and Wade Jurney Homes brands. Our Century Communities brand is managed by geographic location, and each of our four geographic regions targets a wide range of buyer profiles including: first time, 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. Each of our four geographic regions is considered a separate operating segment. Our Wade Jurney Homes brand targets first time homebuyers, primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. Our Wade Jurney Homes brand currently has operations in 11 states and is managed separately from our four geographic regions. Accordingly, it is considered a separate operating segment.
The management of our four geographic regions and Wade Jurney Homes reports to our chief operating decision makers (which we refer to as “CODMs”), the Co-Chief Executive Officers of our Company. The CODMs review the results of our operations, including total revenue and income before income tax expense to determine profitability and to allocate resources. Accordingly, we have presented our homebuilding operations as the following five reportable segments:
West (California and Washington)
Mountain (Colorado, Nevada and Utah)
Texas
Southeast (Georgia, North Carolina, South Carolina and Tennessee)
Wade Jurney Homes (Alabama, Arizona, Florida, Georgia, Indiana, Iowa, Michigan, North Carolina, Ohio, South Carolina, and Texas)
We have also identified our Financial Services operations, which provide mortgage, title, and insurance services to our homebuyers, as a sixth reportable segment. Our Corporate segment is a non-operating segment, as it serves to support our homebuilding, and to a lesser extent our financial services operations, through functions, such as our executive, finance, treasury, human resources, accounting and legal departments. The following table summarizes total revenue and income before income tax expense by segment (in thousands):
Revenue:
West
116,874
105,949
364,220
354,087
Mountain
171,617
162,912
510,693
488,928
Texas
68,812
56,220
180,820
157,793
Southeast
118,610
141,458
356,236
360,653
Wade Jurney Homes
104,030
87,468
302,666
112,714
Financial Services
Corporate
Total revenue
Income (loss) before income tax expense:
9,013
7,478
27,634
29,494
20,552
18,753
62,386
61,995
8,290
3,539
17,626
10,319
7,079
10,401
17,467
24,106
6,032
451
18,323
265
2,245
1,666
5,984
5,456
(18,371)
(19,430)
(70,753)
(39,167)
Total income before income tax expense
The following table summarizes total assets by operating segment (in thousands):
625,085
502,381
674,894
621,757
222,819
209,550
455,289
448,681
Wade Jurney
287,923
204,925
144,682
146,710
78,870
120,251
Corporate assets primarily include certain cash and cash equivalents, certain property and equipment, prepaid insurance, and deferred financing costs on our revolving line of credit.
3. Business Combinations
WJH, LLC - Wade Jurney Homes
On June 14, 2018, we acquired the remaining 50% ownership interest in WJH for $37.5 million, whereby WJH became a 100% owned subsidiary of the Company. We initially acquired a 50% ownership interest in WJH in November 2016 as part of a joint venture, which was accounted for under the equity method of accounting. Our Wade Jurney Homes brand targets first time homebuyers in markets which are traditionally underserved by new homebuilders, primarily sells homes through retail studios and the internet, and provides no option or upgrade selections. The acquired assets primarily include homes under construction that are in various stages of completion and are geographically dispersed. We determined that the fair value of the gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single-family residences, we concluded that the acquisition represents a business combination. We incurred $0.4 million in acquisition costs.
Authoritative guidance on accounting for business combinations requires that an acquirer re-measure its previously held equity interest in the acquisition at its acquisition date fair value and recognize the resulting gain or loss in earnings. As such, we valued our previously held equity interest in WJH at June 14, 2018 at $35.6 million, which was inclusive of an estimated discount for lack of control of $1.9 million, and recognized a gain of $7.2 million during the nine months ended September 30, 2018.
The following table outlines the total consideration transferred, inclusive of cash acquired and the fair value of our previously held equity interest (in thousands):
Cash consideration transferred for 50% ownership interest
37,500
Previously held equity interest acquisition date fair value
35,625
Net assets acquired
73,125
The following table summarizes our estimates of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
9,464
260
1,042
156,828
7,710
3,600
3,317
182,221
12,516
2,349
Total senior notes and revolving line of credit
94,231
109,096
Fair value of assets acquired
Acquired inventories consist primarily of work in process inventories. We estimated the fair value of acquired work in process inventories 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. The stage of production, as of the acquisition date, ranged from recently started lots to fully completed single family residences. Amortizable intangible assets include acquired trade names and a non-compete agreement, which were estimated to have fair values of $3.3 million and $0.3 million, respectively, and are amortized over 10 years and 2 years, respectively.
The Company determined that WJH’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.
Pro Forma Financial Information
Pro forma revenue and income before tax expense for the nine months ended September 30, 2018 give effect to the results of the acquisition of WJH. The effect of the WJH acquisition is reflected as though the acquisition date was as of January 1, 2018. Unaudited pro forma income before tax expense adjusts the operating results of WJH to reflect the additional costs that would have been recorded assuming the fair value adjustments had been applied as of the beginning of the year preceding the year of the acquisition and excludes acquisition expense incurred related to the transactions.
Nine Months Ended September 30, 2018
1,645,858
Income before tax expense
87,092
(21,773)
65,319
Less: Undistributed earnings allocated to participating securities
(54)
Numerator for basic and diluted pro forma EPS
65,265
Pro forma weighted average shares-basic
Pro forma weighted average shares-diluted
Pro forma basic EPS
2.18
Pro forma diluted EPS
2.16
4. Inventories
Inventories included the following (in thousands):
Homes under construction
1,205,232
1,073,682
Land and land development
820,126
720,719
Capitalized interest
68,135
53,842
Total inventories
5. Financial Services
Our Financial Services are principally comprised of our mortgage lending operations, Inspire Home Loans, Inc. (which we refer to as “Inspire”). Inspire is a full-service mortgage lender and primarily originates mortgage loans for our homebuyers. Inspire sells substantially all of the loans it originates and their related servicing rights in the secondary mortgage market within a short period of time after origination, generally within 30 days. Inspire primarily finances these loans using its mortgage repurchase facilities. Mortgage loans in process for which interest rates were committed to borrowers totaled approximately $59.2 million and $26.2 million at September 30, 2019 and December 31, 2018, respectively, and carried a weighted average interest rate of approximately 3.8%, and 4.7%, respectively. As of September 30, 2019 and December 31, 2018, Inspire had mortgage loans held for sale with an aggregate fair value of $95.3 million and $112.4 million, respectively, and an aggregate outstanding principal balance of $92.8 million and $108.0 million, respectively. Interest rate risks related to these obligations are mitigated by the preselling of loans to investors or through our interest rate hedging program.
Mortgage loans held-for-sale, including the rights to service the mortgage loans, as well as the derivative instrument used to economically hedge our interest rate risk, which are typically forward commitments on mortgage backed securities, are carried at fair value and changes in fair value are reflected in financial services revenue on the condensed consolidated statement of operations. Management believes carrying loans held-for-sale and the derivative instruments used to economically hedge them at fair value improves financial reporting by more accurately reflecting the underlying transaction. Refer to Note 12 – fair value disclosures for further information regarding our derivative instruments.
6. Prepaid Expenses and Other Assets
Prepaid expenses and other assets included the following (in thousands):
Prepaid insurance
29,311
20,226
Lot option and escrow deposits
50,758
51,038
Performance deposits
6,814
4,552
Deferred financing costs revolving line of credit, net
3,530
4,155
Restricted cash(1)
Secured note receivable
2,632
4,947
Right of use assets
16,760
Insurance receivable and other
17,036
51,940
Total prepaid expenses and other assets
(1) Restricted cash consists of earnest money deposits for home sale contracts held by third parties as required by various jurisdictions, and certain pledge balances associated with our mortgage repurchase facilities.
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities included the following (in thousands):
Earnest money deposits
13,805
13,990
Warranty reserve
9,990
7,970
Accrued compensation costs
22,636
29,770
Land development and home construction accruals
117,511
77,748
Accrued interest
18,327
15,636
Lease liabilities - operating leases
17,380
Liability for product financing arrangements and other
7,169
68,043
Total accrued expenses and other liabilities
8. Warranties
Estimated future direct warranty costs are accrued and charged to cost of home sales revenues in the period when the related home sales revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the condensed consolidated balance sheets, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through a model that incorporates historical payment trends and adjust the amounts recorded if necessary. We decreased our warranty reserve by $0.6 million during the three months ended September 30, 2019 and during the same period in 2018. We decreased our warranty reserve by $0.4 million during the nine months ended September 30, 2019, compared to a $0.8 million decrease during the same period in 2018. These adjustments are included in cost of home sales revenues on our condensed consolidated statements of operations. Changes in our warranty accrual are detailed in the table below (in thousands):
Beginning balance
9,768
10,269
8,531
Warranty reserve assumed in business combination
397
Warranty expense provisions
1,665
1,568
5,433
4,789
Payments
(870)
(968)
(3,063)
(2,688)
Warranty adjustment
(573)
(597)
(350)
(757)
Ending balance
10,272
9. Debt
Our outstanding debt obligations included the following as of September 30, 2019 and December 31, 2018 (in thousands):
6.750% senior notes, due May 2027(1)
494,178
5.875% senior notes, due July 2025(1)
395,944
395,415
6.875% senior notes, due May 2022(1)
380,567
Insurance premium notes and other financing obligations
6,150
8,795
Revolving line of credit, due April 2022
Mortgage repurchase facility
Total debt
1,252,870
1,091,832
(1) The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes.
Issuance of 6.750% Senior Notes Due 2027
In May 2019, the Company completed a private offering of $500.0 million aggregate principal amount of the Company’s 6.750% Senior Notes due 2027 (the “2027 Notes”) in reliance on Rule 144A and Regulation S under the Securities Act of 1933. The 2027 Notes were issued under the Indenture, dated as of May 23, 2019, among the Company, our subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee (which we refer to as the “May 2019 Indenture,” as it may be supplemented or amended from time to time). The 2027 Notes were issued at 100% of their principal amount and we received net proceeds of $493.9 million. The 2027 Notes contain certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the 2027 Notes is due June 2027, with interest only payments due semi-annually in June and December of each year, beginning on December 1, 2019.
In connection with this issuance, the Company deferred $6.1 million of issuance costs, which is presented in the notes payable line item of the condensed consolidated balance sheet.
Extinguishment of 6.875% Senior Notes Due 2022
During the nine months ended September 30, 2019, the Company extinguished $385.0 million in outstanding principal of our 6.875% Senior Notes due 2022 (the “2022 Notes”). The extinguishment was the result of two separate transactions whereby a tender offer validly tendered $189.3 million of the 2022 Notes on March 23, 2019 and the remaining $195.7 million was redeemed in accordance with the Indenture agreement on June 10, 2019. The transaction resulted in a loss of $10.8 million, which is presented in loss on debt extinguishment in the consolidated statement of operations for the nine months ended September 30, 2019.
Revolving Line of Credit
We are party to an Amended and Restated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, the lenders party thereto and certain of our subsidiaries, which, as amended most recently on February 12, 2019, provides us with a revolving line of credit of up to $640.0 million, and unless terminated earlier, will mature on April 30, 2022. Under the terms of the Amended and Restated Credit Agreement, we may request a twelve-month extension of the maturity date. Our obligations under the Amended and Restated Credit Agreement are guaranteed by certain of our subsidiaries. The Amended and Restated 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. These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly. Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. As of September 30, 2019, we had $278.8 million outstanding under the credit facility and were in compliance with all covenants.
Mortgage Repurchase Facilities – Financial Services
On May 4, 2018 and September 14, 2018, Inspire entered into mortgage warehouse facilities, with Comerica Bank, and J.P. Morgan, respectively. The mortgage warehouse lines of credit (which we refer to as the “repurchase facilities”) provide Inspire with uncommitted repurchase facilities of up to an aggregate of $140 million, secured by the mortgage loans financed thereunder. Amounts outstanding under the repurchase facilities are not guaranteed by us or any of our subsidiaries and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2019, we had $77.8 million outstanding under these repurchase facilities and were in compliance with all covenants thereunder. No assurance can be provided, however, that we will remain in compliance with the covenants or have continued access to these facilities or substitute or replacement facilities in an amount sufficient to fund our mortgage lending business. During the three months ended September 30, 2019 and 2018, we incurred interest expense on the repurchase facilities of $0.6 million and $0.4 million, respectively, which are included in financial services costs on our condensed consolidated statements of operations. During the nine months ended September 30, 2019 and 2018, we incurred interest expense on the repurchase facilities of $2.1 million and $0.8 million, respectively.
10. Interest
Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed. As our qualifying assets exceeded our outstanding debt during the three and nine months ended September 30, 2019 and 2018, we capitalized all interest costs incurred during these periods, except for interest incurred on our mortgage repurchase facilities.
Our interest costs are as follows (in thousands):
Interest capitalized beginning of period
63,068
47,797
41,762
Interest capitalized during period
19,325
16,109
55,792
43,387
Less: capitalized interest in cost of sales
(14,258)
(12,334)
(41,499)
(33,577)
Interest capitalized end of period
51,572
11. Income Taxes
At the end of each interim period we are required to estimate our annual effective tax rate for the fiscal year, and to use that rate to provide for income taxes for the current year-to-date reporting period. Our 2019 estimated annual effective tax rate of 27.9% is driven by our blended federal and state statutory rate of 25.2%, and certain other permanent differences between GAAP and tax which increased our rate by 2.7%.
For the three months ended September 30, 2019, our estimated annual rate of 27.9% was impacted by discrete items which had a net impact of decreasing our rate by 5.5%, including federal energy tax credits claimed in the current period related to homes closed in prior years. For the nine months ended September 30, 2019 our estimated annual rate of 27.9% was impacted by discrete items which had a net impact of decreasing our rate by 3.7%, including federal energy tax credits and excess tax benefits for vested stock-based compensation.
For the three months ended September 30, 2019 and 2018, we recorded income tax expense of $7.8 million and $5.8 million, respectively. For the nine months ended September 30, 2019 and 2018, we recorded income tax expense of $19.0 million and $22.2 million, respectively.
12. Fair Value Disclosures
Accounting Standards Codification Topic 820, Fair Value Measurement, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date.
Level 3 — Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date.
The following table presents carrying values and estimated fair values of financial instruments (in thousands):
December 31, 2018
Hierarchy
Carrying
Fair Value
Secured notes receivable(1)
Level 2
2,577
4,830
Mortgage loans held for sale(2)
Derivative assets(3)
1,593
726
6.750% senior notes(4) (5)
535,550
6.875% senior notes(4) (5)
372,488
5.875 % senior notes (4) (5)
413,000
356,000
3.278% insurance premium notes(6)
6,475
Revolving line of credit(6)
Level 3
Other financing obligation(6)
2,320
Mortgage repurchase facilities(6)
Estimated fair value of the secured notes receivable was based on cash flow models discounted at market interest rates which considered the underlying risks of the note.
(2)The mortgage loans held for sale are carried at fair value, which is based on quoted market prices for committed mortgage loans.
(3)Derivative instruments are carried at fair value and based on market prices for similar instruments. Changes in fair value are reflected in financial services revenue on the condensed consolidated statement of operations. As of September 30, 2019 and December 31, 2018, we had immaterial amounts of derivative liabilities which are presented within accrued expenses and other liabilities on the condensed consolidated balance sheets. Refer to Note 5 – financial services for further information regarding our derivative instruments.
(4)Estimated fair value of the senior notes is based on recent trading activity in inactive markets.
(5)Carrying amounts include any associated unamortized deferred financing costs, premiums and discounts. As of September 30, 2019, these amounts totaled $5.8 million and $4.1 million for the 6.750% senior notes and 5.875% senior notes, respectively. As of December 31, 2018, these amounts totaled $4.9 million and $4.6 million for the 6.875% senior notes and 5.875% senior notes, respectively.
(6)Carrying amount approximates fair value due to short-term nature and interest rate terms.
The carrying amount of cash and cash equivalents approximates fair value. Non-financial assets and liabilities are measured at fair value when acquired in a business combination. Long-lived assets determined to be impaired are measured at fair value.
13. Stock-Based Compensation
During the nine months ended September 30, 2019, we granted performance share units (which we refer to as “PSUs”) covering up to 0.3 million shares of common stock, assuming maximum level of performance, with a grant date fair value of $22.01 per share that are subject to both service and performance vesting conditions. The quantity of shares that will vest under the PSUs ranges from 0% to 250% of a targeted number of shares for each participant and will be determined based on an achievement of a three year pre-tax income performance goal. During the nine months ended September 30, 2019, we also granted restricted stock units (which we refer to as “RSUs”) covering 0.6 million shares of common stock with a grant date fair value of $23.85 per share that vest over a three year period.
A summary of our outstanding RSUs and PSUs, assuming maximum level of performance, are as follows (in thousands, except years):
As of September 30, 2019
Unvested units
1,225
Unrecognized compensation cost
16,421
Period to recognize compensation cost
1.6 years
During the three months ended September 30, 2019 and 2018, we recognized stock-based compensation expense of $3.9 million and $3.8 million, respectively. During the nine months ended September 30, 2019 and 2018, we recognized stock-based compensation expense of $11.4 million and $10.1 million, respectively. Stock-based compensation expense is included in selling, general, and administrative expense on our condensed consolidated statements of operations.
14. Stockholders’ Equity
Our authorized capital stock consists of 100.0 million shares of common stock, par value $0.01 per share, and 50.0 million shares of preferred stock, par value $0.01 per share. As of September 30, 2019 and December 31, 2018, there were 31.2 million and 30.2 million shares of common stock issued and outstanding, respectively.
On May 10, 2017, our stockholders approved the adoption of the Century Communities, Inc. 2017 Omnibus Incentive Plan (which we refer to as our “2017 Incentive Plan”), which replaced our First Amended & Restated 2013 Long-Term Incentive Plan. We had reserved a total of 1.8 million shares of our common stock for issuance under our First Amended & Restated 2013 Long-Term Incentive Plan, of which approximately 0.6 million shares rolled over into the 2017 Incentive Plan when it became effective. On May 8, 2019, our stockholders approved an amended and restated 2017 Omnibus Incentive Plan, which increased the number of shares of our common stock authorized for issuance under the 2017 Incentive Plan by an additional 1.631 million shares. We issued 0.3 million shares of our common stock related to the vesting of RSUs during the nine months ended September 30, 2019.
On July 3, 2018, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, Citigroup Global Markets Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated (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 million from time to time through any of the sales agents party thereto in “at-the-market” offerings. During the three and nine months ended September 30, 2019, we sold and issued an aggregate of 0.8 million shares and 0.9 million shares, respectively, of our common stock under the Distribution Agreement, which provided gross proceeds of $23.7 million and $26.5 million, respectively, and in connection with such sales, paid total offering costs of $0.6 million and $0.7 million, respectively. During the three and nine months ended September 30, 2018, we sold and issued an aggregate of 0.6
million and 1.1 million shares of our common stock under the Second and Third Distribution Agreements, which provided gross proceeds of $17.4 million and $32.4 million, respectively, and, in connection with such sales, paid total offering costs of $0.5 million and $1.1 million respectively. 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. This Distribution Agreement had $56.1 million remaining as of September 30, 2019.
15. Earnings Per Share
We use the two-class method of calculating EPS, where applicable, as our previously issued non-vested restricted stock awards had non-forfeitable rights to dividends and, accordingly, represent a participating security. The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period. We use the treasury stock method to calculate the dilutive effect of our RSUs and PSUs as these awards do not have participating rights.
The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2019 and 2018 (in thousands, except share and per share information):
Three Months Ended
Nine Months Ended
Numerator
Net income allocable to common stockholders
70,203
Denominator
Weighted average common shares outstanding - basic
Dilutive effect of restricted stock units
318,748
322,505
262,334
303,200
Weighted average common shares outstanding - diluted
Stock-based awards are excluded from the calculation of diluted EPS in the event they are subject to unsatisfied performance conditions or are antidilutive. We excluded 0.6 million common unit equivalents from diluted earnings per share during the three and nine months ended September 30, 2019 related to the PSUs for which performance conditions remain unsatisfied. We excluded 0.3 million common unit equivalents from diluted earnings per share during the three and nine months ended September 30, 2018 related to the PSUs granted during the periods.
16. Commitments and Contingencies
Letters of Credit and Performance Bonds
In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of September 30, 2019 and December 31, 2018, we had $347.6 million and $289.8 million, respectively, in letters of credit and performance bonds issued and outstanding.
Litigation
We are subject to claims and lawsuits that arise primarily in the ordinary course of business, which consist primarily of construction defect claims. It is the opinion of our management that if the claims have merit, parties other than the Company would be, at least in part, liable for the claims, and the eventual outcome of these claims will not have a material adverse effect upon our consolidated financial condition, results of operations, or cash flows. When we believe that a loss is probable and estimable, we record a charge to selling, general, and administrative expense on our condensed consolidated statements of operations for our estimated loss.
Under various insurance policies, we have the ability to recoup costs in excess of applicable self-insured retentions. Estimates of such amounts are recorded in other assets when recovery is probable. As of December 31, 2018, substantially all of the amounts reflected in Insurance receivable and other were related to construction claims, which were settled and amounts collected under the applicable insurance policies during the nine months ended September 30, 2019.
We do not believe that the ultimate resolution of any claims and lawsuits will have a material adverse effect upon our consolidated financial position, results of operations, or cash flows.
17. Leases
Under ASC 842, the Company determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.
We primarily enter into operating leases for the right to use office space, and computer and office equipment, which have lease terms that generally range from 1 to 7 years and often include one or more options to renew. We include renewal terms in the lease term when it is reasonably certain that we will exercise the option. For leases entered into after January 1, 2019, we establish a right of use asset and a lease liability at the commencement date of the lease based on the present value of future minimum lease payments. As the rate implicit in each lease is not readily determinable, we utilize our incremental borrowing rate in determining the present value of future minimum payments. Our incremental borrowing rate is determined based on information available at the commencement date. We account for the lease components and non-lease components as a single lease component. As of September 30, 2019, the Company had $16.8 million and $17.4 million recognized as a right of use asset and lease liability, respectively, which are presented on the consolidated balance sheet within prepaid expenses and other assets and accrued expenses and other liabilities, respectively. The Company has entered into various short-term operating leases, primarily for marketing billboards, with an initial term of twelve months or less. These leases are not recorded on the Company's condensed consolidated balance sheet.
Under both ASC 840 and ASC 842, operating lease expense is recognized on a straight-line basis over the lease term and was $1.6 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively. Operating lease expense was $4.3 million and $2.8 million for the nine months ended September 30, 2019 and 2018, respectively.
Information related to the Company’s right of use asset and lease liability were as follows (in thousands):
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Cash paid for operating lease liabilities
1,460
4,183
Right-of-use assets obtained in exchange for new operating lease obligations
1,275
2,785
Weighted-average remaining lease term
4.05 years
Weighted-average discount rate
6.38
%
Maturities of lease liabilities as of September 30, 2019 were as follows (in thousands):
Due in 12 month period ended September 30,
2020
5,136
2021
5,191
2022
3,734
2023
3,083
2024
2,029
Thereafter
622
Total
19,795
Less: discount
(2,415)
Total lease liabilities
18. Supplemental Guarantor Information
Our 5.875% senior notes due 2025 and 6.750% senior notes due 2027 (which we collectively refer to as our “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 6.875% senior notes due 2022 which were extinguished during the second quarter of 2019, were our unsecured senior obligations and were fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by the Guarantors.
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 6.875% senior notes due 2022 contained a similar provision.
As the guarantees were made in connection with exchange offers effected in February 2015, October 2015 and April 2017 and the issuance of the 5.875% senior notes due 2025 and of the 6.750% senior notes due 2027, the Guarantors’ condensed financial information is presented as if the guarantees existed during the periods presented. 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:
Supplemental Condensed Consolidated Balance Sheet
As of September 30, 2019 (in thousands)
Guarantor
Non Guarantor
Elimination
Consolidated
Century
Subsidiaries
Entries
1,894
2,125
34,489
4,043
13,989
(103)
Investment in consolidated subsidiaries
2,107,232
(2,107,232)
8,451
108,265
13,209
15,179
19,247
832
2,151,076
2,301,970
143,748
Liabilities and stockholders’ equity
190
77,882
623
30,785
166,443
9,590
890,122
1,199,897
250,475
88,011
Stockholders’ equity:
2,051,495
55,737
Total liabilities and stockholders’ equity
As of December 31, 2018 (in thousands)
2,183
2,101
28,618
6,117
7,424
(77)
1,827,456
(1,827,456)
51,177
85,224
3,996
13,274
18,989
995
1,913,970
2,021,815
145,926
88,627
657
75,506
131,548
6,103
775,982
1,054,611
228,970
111,315
1,792,845
34,611
Supplemental Condensed Consolidated Statement of Operations
For the Three Months Ended September 30, 2019 (in thousands)
(17,621)
(55,213)
Equity in earnings from consolidated subsidiaries
39,268
(39,268)
104
(119)
(41)
21,751
50,153
2,204
5,273
(12,539)
(550)
37,614
1,654
For the Three Months Ended September 30, 2018 (in thousands)
(20,187)
(50,788)
32,282
(32,282)
61
(606)
12,098
41,376
4,950
(10,344)
(416)
31,032
1,250
For the Nine Months Ended September 30, 2019 (in thousands)
Cost of homes sales revenues
(55,089)
(161,898)
108,939
(108,939)
(664)
57
108
42,354
139,160
6,092
17,282
(34,790)
(1,523)
104,370
4,569
For the Nine Months Ended September 30, 2018 (in thousands)
(53,802)
(137,328)
97,688
(97,688)
Equity in income from unconsolidated subsidiaries
(194)
(359)
58,146
126,554
12,115
(32,904)
(1,418)
93,650
4,038
Supplemental Condensed Consolidated Statement of Cash Flows
Net cash provided by/(used in) operating activities
(52,863)
(112,548)
16,447
Net cash provided by/(used in) investing activities
(146,499)
(7,610)
163
142,391
Proceeds from the issuance of senior notes due 2027
Proceeds from the issuance of insurance premium notes and other
Principal payments on insurance notes payable
Net proceeds from mortgage repurchase facilities
Payments from (and advances to) parent/subsidiary
125,834
16,557
(142,391)
199,073
119,188
(10,200)
(289)
(970)
6,410
4,006
30,252
3,036
36,662
Restricted Cash
911
2,173
(71,743)
(123,418)
(5,256)
(16,580)
(153,607)
(165,939)
(159)
280,048
Proceeds from insurance notes payable
Principal payments on notes payable
(9)
(2,164)
5,130
263,120
11,798
(280,048)
169,116
272,794
20,806
(56,234)
(16,563)
15,391
56,234
28,044
9,435
11,481
24,826
8,922
23,585
2,559
1,241
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Some of the statements included in this Quarterly Report on Form 10-Q (which we refer to as this “Form 10-Q”) constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, forecasts, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events and results of operations could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors.
The forward-looking statements included in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Statements regarding the following subjects, among others, may be forward-looking and subject to risks and uncertainties including among others:
economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;
a downturn in the homebuilding industry, including a decline in real estate values or market conditions resulting in impairment of our assets;
changes in assumptions used to make industry forecasts;
continued volatility and uncertainty in the credit markets and broader financial markets;
our future operating results and financial condition;
our business operations;
changes in our business and investment strategy;
availability of land to acquire, and our ability to acquire such land on favorable terms or at all;
availability, terms and deployment of capital;
availability of mortgage financing or an increase in the number of foreclosures in the market;
shortages of or increased prices for labor, land or raw materials used in housing construction;
delays in land development or home construction resulting from adverse weather conditions or other events outside our control;
impact of construction defect, product liability, and/or home warranty claims, including the adequacy of accruals and the applicability and sufficiency of our insurance coverage;
changes in, or the failure or inability to comply with, governmental laws and regulations;
the timing of receipt of regulatory approvals and the opening of projects;
the degree and nature of our competition;
our leverage, debt service obligations and exposure to changes in interest rates;
our ability to successfully integrate the acquired businesses and realize projected cost savings and other benefits;
availability of qualified personnel and our ability to retain our key personnel;
taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance, including as a result of the Tax Cuts and Jobs Act; and
changes in GAAP.
Forward-looking statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these events and factors are described above and in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K, and other risks and uncertainties detailed in this and our other reports and filings with the SEC. If a change occurs, our business, financial condition, liquidity, cash flows and results of operations may vary materially from those expressed in or implied by our forward-looking statements. New risks and uncertainties arise over time, and it is not possible for us to predict the occurrence of those matters or the manner in which they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. Therefore, you should not rely on these forward-looking statements as of any date subsequent to the date of this Form 10-Q.
As used in this Form 10-Q, references to “we,” “us,” “our” or the “Company” refer to Century Communities, Inc., a Delaware corporation, and, unless the context otherwise requires, its subsidiaries and affiliates.
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 condensed consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. 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 “Cautionary Note About Forward-Looking Statements” and the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. 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.
Overview
Century is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in the States of Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana, Iowa, Michigan, Nevada, North Carolina, Ohio, South Carolina, Tennessee, Texas, Utah, and Washington. 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 Communities and Wade Jurney Homes brands. Our Century Communities brand targets a wide range of buyer profiles including: first time, 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 Wade Jurney Homes brand targets first time homebuyers, primarily sells homes through retail studios and over the internet, and provides no option or upgrade selections. Our homebuilding operations are organized into the following five reportable segments: West, Mountain, Texas, Southeast, and Wade Jurney Homes. 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, to our home buyers have been identified as our Financial Services segment.
Results of Operations
During the three and nine months ended September 30, 2019, we delivered 1,891 and 5,521 homes, respectively, with an average sales price of $303.5 thousand and $309.0 thousand, respectively. These deliveries represent increases of 8.3% and 35.6%, respectively, as compared to the three and nine months ended September 30, 2018. During the same periods, we generated approximately $573.9 million and $1,705.8 million in home sales revenues, respectively, approximately $34.8 million and $78.7 million in income before income tax expense, respectively, and approximately $27.0 million and $59.6 million, respectively, in net income.
For the three and nine months ended September 30, 2019, our new home contracts, net of cancelations, totaled 2,046 and 6,086, respectively, a 35.0% and 37.2% increase over the same respective periods in 2018. As of September 30, 2019, we had a backlog of 2,746 homes, an 8.1% decrease as compared to September 30, 2018, representing approximately $854.9 million in sales value, an 8.2% decrease as compared to September 30, 2018.
The following table summarizes our results of operations for the three and nine months ended September 30, 2019 and 2018.
(in thousands, except per share amounts)
Consolidated Statements of Operations:
Revenue
Land sales revenues
Selling, general, and administrative
Adjusted diluted earnings per share(1)
0.86
2.26
2.83
Other Operating Information (dollars in thousands):
Number of homes delivered
1,891
1,746
5,521
4,071
Average sales price of homes delivered
303.5
316.7
309.0
361.1
Homebuilding gross margin percentage
18.1
16.8
17.5
17.9
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory (1)
20.6
21.2
20.0
22.1
Backlog at end of period, number of homes
2,746
2,988
Backlog at end of period, aggregate sales value
854,856
930,951
Average sales price of homes in backlog
311.3
311.5
Net new home contracts
2,046
1,515
6,086
4,436
Selling communities at period end
129
125
Average selling communities
127
123
120
Total owned and controlled lot inventory
39,315
38,147
Adjusted EBITDA(1)
52,695
50,270
142,530
163,091
Adjusted income before income tax expense(1)
34,850
91,223
114,011
Adjusted net income(1)
26,137
69,154
85,508
(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 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.
Results of Operations by Segment
(dollars in thousands)
New Homes Delivered
Average Sales Price of Homes Delivered
Home Sales Revenues
Income before Income Tax
228
193
512.4
548.6
116,826
105,880
390
377
424.8
430.2
165,666
162,182
247
177
278.4
68,753
56,058
341
424
347.8
333.2
118,584
141,288
WJH
685
575
151.9
152.1
104,031
683
606
533.0
584.2
364,005
354,049
1,168
1,141
430.3
425.5
502,648
485,541
626
491
288.6
320.2
180,661
157,225
1,036
1,093
343.5
329.7
355,817
360,343
2,008
740
150.7
152.3
302,667
112,713
In our West segment, for the three and nine months ended September 30, 2019, our income before income tax increased by $1.5 million and decreased by $1.9 million, respectively, to $9.0 million and $27.6 million, respectively. During the three and nine months ended September 30, 2019, we delivered 228 homes and 683 homes, respectively, with an average sales price of $512.4 thousand and $533.0 thousand, respectively, and generated $116.8 million and $364.0 million in home sales revenue, respectively. Income before income tax increased during the three months ended September 30, 2019 primarily due to an increase in home sales revenues of $10.9 million. Income before income tax decreased for the nine months ended September 30, 2019, primarily due to the mix of deliveries in higher margin communities in the prior year.
Mountain
In our Mountain segment, for the three and nine months ended September 30, 2019, our income before income tax increased by $1.8 million and $0.4 million, respectively, to $20.6 million and $62.4 million, respectively. The increase of income before income tax for the three and nine months ended September 30, 2019 is primarily related to the increase in revenues.
In our Texas segment, for the three and nine months ended September 30, 2019, our income before income tax increased by $4.8 million and $7.3 million, respectively, to $8.3 million and $17.6 million, respectively, as compared $3.5 million and $10.3 million for the same periods in 2018. The increase in income before income tax is primarily related to increases in the number of homes delivered during the three and nine months ended September 30, 2019 as compared to the same periods in 2018, which was partially offset by a decrease in the average sales price as we continue our shift towards first time homebuyers.
In our Southeast segment, for the three and nine months ended September 30, 2019, our income before income tax decreased by $3.3 million and $6.6 million, respectively, to $7.1 million and $17.5 million, respectively, as compared to $10.4 million and $24.1 million for the same periods in 2018. The decrease in income before income tax for the three and nine months ended September 30, 2019 is primarily related to the decrease in homes delivered.
On June 14, 2018, we acquired the remaining 50% ownership interest in WJH for $37.5 million. For the three and nine months ended September 30, 2019, we delivered 685 homes and 2,008 homes, respectively, with an average price of $151.9 thousand and $150.7 thousand, respectively, and generated $104.0 million and $302.7 million in home sales revenues in our WJH segment, respectively. Our income before income tax for the three and nine months ended September 30, 2019 was $6.0 million and $18.3 million, respectively. Income before income tax for the three and nine months ended September 30, 2018 include purchase accounting for acquired work in process of $10.1 million and $13.0 million, respectively.
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, to our home buyers have been identified as our Financial Services segment. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. During the three and nine months ended September 30, 2019, income before income tax remained relatively consistent compared to the same periods during 2018.
During the three and nine months ended September 30, 2019, our Corporate segment generated losses of $18.4 million and $70.8 million, respectively, as compared to losses of $19.4 million and $39.2 million for the same periods in 2018. The increase in expenses during the three months ended September 30, 2019 was primarily attributed to nominal increases in numerous items associated with our increased scale. The increase in expenses during the nine months ended September 30, 2019 was primarily attributed to the following: (1) a loss on debt extinguishment of $10.8 million during the current period, (2) prior period income from equity in unconsolidated subsidiaries of $14.8 million and (3) nominal increases in numerous items associated with our increased scale.
Homebuilding Gross Margin
Homebuilding gross margin represents home sales revenues less cost of home sales revenues. Our homebuilding gross margin percentage, which represents homebuilding gross margin divided by home sales revenues, increased during the three months ended September 30, 2019 to 18.1% as compared to 16.8% for the same period in 2018, which was primarily driven by $11.9 of purchase accounting adjustments for acquired work in process inventory in the prior year period. Homebuilding gross margin percentage decreased for the nine months ended September 30, 2019 to 17.5% as compared to 17.9% for the same period in 2018. The decrease was primarily related to the geographic mix of closings between periods and higher incentives period over period in certain markets.
In the following table, we calculate our homebuilding gross margin, as adjusted to exclude interest in cost of home sales revenues, and purchase price accounting for acquired work in process inventory.
100.0
(81.9)
(83.2)
Gross margin from home sales
104,026
92,732
Add: Interest in cost of home sales revenues
14,258
2.5
12,334
2.2
Adjusted homebuilding gross margin excluding interest
118,284
105,066
19.0
Add: Purchase price accounting for acquired work in process inventory
11,934
Adjusted homebuilding gross margin excluding interest and purchase price accounting for acquired work in process inventory
117,000
(82.5)
(82.1)
298,279
262,947
41,499
2.4
33,577
2.3
339,778
19.9
296,524
20.2
1,724
0.1
28,367
1.9
341,502
324,891
(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 three and nine months ended September 30, 2019, excluding interest in cost of home sales revenues and purchase price accounting for acquired work in process inventory, our adjusted homebuilding gross margin percentage was 20.6% and 20.0%, respectively, as compared to 21.2%, and 22.1%, respectively, for the same periods in 2018. The decreases primarily related to the geographic mix of closings between periods, continued cost pressure, and higher incentives throughout our markets. We believe the above information is meaningful as it isolates the impact that indebtedness and acquisitions 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 Expense
Increase
(1,859)
2.6
As a percentage of home sales revenue
12.7
12.8
(25,857)
13.5
As a percentage of homes sales revenue
13.0
Our selling, general and administrative expense increased $1.9 million for the three months ended September 30, 2019 as compared to the same period in 2018. The increase was primarily attributable to an increase of $2.6 million in commission expense primarily due to increases in external realtor commissions, which was partially offset by other nominal decreases throughout various accounts.
Our selling, general and administrative expense increased $25.9 million for the nine months ended September 30, 2019 as compared to the same period in 2018. The increase was primarily attributable to the following: (1) an increase of $11.0 million in commission
expense, resulting from a 16% increase in home sales revenues, (2) an increase of $7.7 million in compensation-related expenses associated with higher headcount as a result of the WJH acquisition to support our growth, (3) an increase of $1.2 million in legal costs, (4) an increase of $1.2 million in taxes and licenses, (5) an increase in depreciation and amortization of $1.1 million, (6) an increase in rent expense of $1.0 million, (7) an increase in information technology related expenses of $1.0 million, and (8) nominal increases in numerous items associated with our increased scale throughout selling, general and administrative to support our growth.
Income Tax Expense
Segment Assets
(Dollars in thousands)
Increase (Decrease)
Change
122,704
24.4
53,137
8.5
13,269
6.3
6,608
1.5
82,998
40.5
(2,028)
(1.4)
(41,381)
(34.4)
235,307
10.4
Lots owned and
% Change
controlled
Owned
Controlled
3,210
1,920
3,457
1,790
5,247
(7.1)
7.3
(2.2)
5,011
6,883
11,894
5,335
5,641
10,976
(6.1)
22.0
8.4
3,589
2,663
6,252
3,943
2,616
6,559
(9.0)
1.8
(4.7)
4,484
2,719
7,203
4,828
2,808
7,636
(3.2)
(5.7)
3,454
5,382
8,836
3,447
4,054
7,501
0.2
32.8
17.8
19,748
19,567
21,010
16,909
37,919
(6.0)
15.7
3.7
Of our total lots owned and controlled as of September 30, 2019, 50.2% were owned and 49.8% were controlled, as compared to 55.4% owned and 44.6% controlled as of December 31, 2018.
Total assets increased by $235.3 million, or 10.4%, to $2.5 billion at September 30, 2019 as compared to December 31, 2018. The increase is driven by investments in inventory during the period.
Other Homebuilding Operating Data
235
214
21
9.8
767
616
151
24.5
419
111
36.0
1,290
1,313
(23)
(1.8)
150
110
73.3
733
493
240
48.7
494
422
72
17.1
1,449
(199)
(13.7)
638
421
217
51.5
565
1,481
NM
531
35.0
1,650
37.2
NM – Not Meaningful
Net new home contracts (new home contracts net of cancellations) for the three months ended September 30, 2019 increased by 531 homes, or 35.0%, to 2,046, compared to 1,515 for the same period in 2018. Net new home contracts for the nine months ended September 30, 2019 increased by 1,650 homes, or 37.2%, to 6,086, compared to 4,436 for the same period in 2018. The increase in our net new home contracts during these periods was primarily driven by our acquisition of WJH.
Our overall monthly “absorption rate” (the rate at which home orders are contracted, net of cancelations) for the three and nine months ended September 30, 2019 by segment are included in the tables below:
4.2
(0.5)
(11.9)
3.0
-
4.6
109.1
3.8
2.8
1.0
35.7
N/A
3.6
2.9
0.7
24.1
4.1
4.0
3.1
4.3
(1.2)
(27.9)
79.2
3.2
3.5
3.4
N/A – Not Applicable
Our absorption rates increased by 24.1% to 3.6 per month during the three months ended September 30, 2019, as compared to the same period in 2018. Our absorptions increased primarily due to the timing of community openings in our Texas and Southeast region.
Our absorption rates decreased by 2.9% to 3.5 per month during the nine months ended September 30, 2019, as compared to the same period in 2018. Our absorptions moderated primarily due to the timing of community openings in our Mountain region.
As of September 30,
Increase/(Decrease)
17
23.5
46
34
12
35.3
19
(4)
(17.4)
43
51
(8)
(15.7)
Our selling communities increased to 129 communities at September 30, 2019 as compared to 125 at September 30, 2018. As WJH does not sell homes by community, but through studios and other methods, there are no communities or absorptions presented for that segment.
Backlog
Homes
Dollar Value
Average Sales Price
153,626
508.7
280
153,121
546.9
7.9
0.3
(7.0)
523
230,203
440.2
627
283,534
452.0
(16.6)
(18.8)
(2.6)
288
79,536
276.2
75,129
346.2
32.7
5.9
(20.2)
684
243,712
356.3
736
241,943
328.7
949
147,779
155.7
1,128
177,224
157.1
(15.9)
(0.9)
Total / Weighted Average
(8.1)
(8.2)
(0.1)
Backlog reflects the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home. At September 30, 2019, we had 2,746 homes in backlog with a total value of $854.9 million, which represents a decrease of 8.1% and 8.2%, respectively, as compared to September 30, 2018. The decrease in backlog dollar value is primarily attributable to a decrease in the number of homes in backlog.
Supplemental Pro Forma Information
The supplemental pro forma information below presents pro forma combined financial and operating data reflecting the WJH acquisition as if it had occurred on January 1, 2018. The selected condensed combined pro forma data combines the historical home sales revenues, net new home contracts, new homes delivered and average sales price of homes delivered of Century and WJH. The pro forma information is for informational purposes only and supplements our condensed consolidated financial statements prepared in accordance with US GAAP. We believe that the pro forma information is useful as it provides additional information given the significant impact of the acquisition, and a reflection of how the combined business performed year over year that is not readily discernible from the actual year over year comparison. The pro forma information below does not purport to reflect the results of operations that would have occurred if WJH had been acquired on January 1, 2018, nor does the pro forma information purport to represent the results of operations of the Company for any future dates or periods.
Pro Forma Home Sales Revenues
Pro Forma Net New Home Contracts
Pro Forma Deliveries
Pro Forma Average Sales Price
Pro forma Century Communities
1,620,262
5,850
5,064
320.0
Critical Accounting Policies
Critical accounting estimates are those that we believe are both significant and 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. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 13, 2019, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”
Liquidity and Capital Resources
Our principal uses of capital for the three and nine months ended September 30, 2019 were our land purchases, land development, home construction, and the payment of routine liabilities. We use funds generated by operations, available borrowings under our revolving credit facility, and from time to time proceeds from sales of common stock, including our current at-the-market facility, and debt
securities to fund our short term working capital obligations and fund our purchases of land, as well as land development and home construction activities.
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 are not recognized in our 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, we expect that our cash outlays for land purchases and land development to grow our lot inventory will continue to exceed our cash generated by operations.
Our Financial Services operations use funds generated from operations, and availability under our mortgage repurchase facilities to finance operations including originations of mortgage loans to our homebuyers.
Under our shelf registration statement, which we filed with the SEC in July 2018 and was automatically effective upon filing, we have the ability to access the debt and equity capital markets in an aggregate offering amount of up to $869 million, as needed as part of our ongoing financing strategy and subject to market conditions. Of this amount, up to $100 million may be offered under our at-the-market distribution agreement referred to below.
We believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, and cash expected to be available from our revolving credit facility or through accessing debt or equity capital, as needed.
In May 2019, the Company completed a private offering of $500.0 million aggregate principal amount of the Company’s 6.750% Senior Notes due 2027 (the “2027 Notes”) in reliance on Rule 144A and Regulation S under the Securities Act of 1933. The 2027 Notes were issued under the Indenture, dated as of May 23, 2019, among the Company, our subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee (which we refer to as the “May 2019 Indenture,” as it may be supplemented or amended from time to time). The 2027 Notes were issued at 100% of their principal amount and we received net proceeds of $493.9 million. The aggregate principal balance of the 2027 Notes is due June 2027, with interest only payments due semi-annually in June and December of each year, beginning on December 1, 2019.
During the nine months ended September 30, 2019, the Company extinguished $385.0 million in outstanding principal of our 6.875% Senior Notes due 2022 (the “2022 Notes”). The extinguishment was the result of two separate transactions whereby a tender offer validly tendered $189.3 million of the 2022 Notes on March 23, 2019 and the remaining $195.7 million was redeemed in accordance with the Indenture agreement on June 10, 2019. The transaction resulted in a loss of $10.8 million, which is presented in loss on debt extinguishment in the condensed consolidated statement of operations.
Revolving Credit Facility
We are party to an Amended and Restated Credit Agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, the lenders party thereto and certain of our subsidiaries, which, as amended most recently on February 12, 2019, provides us with a revolving line of credit of up to $640.0 million, and unless terminated earlier, will mature on April 30, 2022. Under the terms of the Amended and Restated Credit Agreement, we may request a twelve-month extension of the maturity date. Our obligations under the Amended and Restated Credit Agreement are guaranteed by certain of our subsidiaries. The Amended and Restated 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. These covenants are measured as defined in the Amended and Restated Credit Agreement and are reported to the lenders quarterly. Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the
Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. As of September 30, 2019, we had $278.8 million outstanding under the credit facility and were in compliance with all covenants.
At the Market Offerings
On July 3, 2018, we entered into a Distribution Agreement with J.P. Morgan Securities LLC, Citigroup Global Markets Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated (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 million from time to time through any of the sales agents party thereto in “at-the-market” offerings. During the three and nine months ended September 30, 2019, we sold and issued an aggregate of 0.8 million shares and 0.9 million shares, respectively, of our common stock under the Distribution Agreement, which provided gross proceeds of $23.7 million and $26.5 million, respectively, and in connection with such sales, paid total offering costs of $0.6 million and $0.7 million, respectively. During the three and nine months ended September 30, 2018, we sold and issued an aggregate of 0.6 million and 1.1 million shares of our common stock under a prior Distribution Agreement, which provided gross proceeds of $17.4 million and $32.4 million, respectively, and, in connection with such sales, paid total offering costs of $0.5 million and $1.1 million respectively. 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. This Distribution Agreement had $56.1 million remaining as of September 30, 2019.
Mortgage Repurchase Facility and Mortgage Warehouse Line of Credit – Financial Services
On May 4, 2018 and September 14, 2018 Inspire entered into mortgage warehouse facilities, with Comerica Bank and J.P. Morgan, respectively. The mortgage warehouse lines of credit (which we refer to as the “Repurchase Facilities”) provide Inspire with uncommitted repurchase facilities of up to $140 million, secured by the mortgage loans financed thereunder. Amounts outstanding under the Repurchase Facilities are not guaranteed by us or any of our subsidiaries and the agreements contain various affirmative and negative covenants applicable to Inspire that are customary for arrangements of this type. As of September 30, 2019, we had $77.8 million outstanding under these Repurchase Facilities and were in compliance with all covenants thereunder. No assurance can be provided, however, that we will remain in compliance with the covenants or have continued access to these facilities or substitute or replacement facilities in an amount sufficient to fund our mortgage lending business.
In the normal course of business, we post letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of September 30, 2019 and December 31, 2018, we had $347.6 million and $289.8 million, respectively, in letters of credit and performance 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 bonds are not generally released until all development and construction activities are completed.
Debt
Senior notes payable
A summary of our debt obligations is included in Note 12 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the SEC on February 13, 2019. For further information regarding our 2019 issuance of the 6.750% Senior Notes due 2027 and extinguishment of our 6.875% Senior Notes due 2022, refer to Note 9 - Debt in Part I, Item 1 of this report.
Stock Repurchase Program
On 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. There is no guarantee as to the number of shares that will be repurchased, and the stock repurchase program may be extended, suspended or discontinued 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 nine months ended September 30, 2019, an aggregate of 83,000 shares were repurchased for a total purchase price of approximately $1.4 million or an average of $17.14 per share. No shares were repurchased during the three months ended September 30, 2019 and the three and nine months ended September 30, 2018.
Cash Flows—Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
For the nine months ended September 30, 2019 and 2018, the comparison of cash flows is as follows:
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 is 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. During the nine months ended September 30, 2019 and 2018, we used $149.0 million and $217.0 million in cash from operations, respectively. The decrease in cash used from operations is primarily a result of a comparatively favorable decrease in
changes in assets and liabilities for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.
Net cash used in investing activities decreased to $11.6 million during the nine months ended September 30, 2019, compared to $39.7 million used during the same period in 2018. The decrease was primarily related to our purchase of the remaining 50% ownership interest in WJH during 2018.
Net cash provided by financing activities was $165.7 million during the nine months ended September 30, 2019, compared to $182.7 million during the same period in 2018. The decrease was primarily attributable to a decrease in net borrowings on our revolving credit facility, partially offset by an increase in proceeds from the issuance of the 2027 Notes and a portion of those proceeds used to extinguish the 2022 Notes.
As of September 30, 2019, our cash and cash equivalents and restricted cash balance was $41.6 million.
Off-Balance Sheet Arrangements
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. 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 use 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 September 30, 2019, we had outstanding purchase contracts and option contracts for 19,567 lots with a total purchase price of approximately $726.1 million and had $42.3 million of non-refundable cash deposits pertaining to land option 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 50% to 60% of the purchase and option contracts during the next twelve months, with performance on the remaining purchase and option contracts occurring in future periods, if at all.
Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option 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.
We post letters of credit and performance bonds related to our land development performance obligations, with local municipalities. As of September 30, 2019 and December 31, 2018, we had $347.6 million and $289.8 million, respectively, in letters of credit and performance bonds issued and outstanding. We anticipate that the obligations secured by these performance bonds and letters of credit generally will be performed in the ordinary course of business.
Non-GAAP Financial Measures
In this Form 10-Q, we use certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA, net debt to net capital, and adjusted net earnings per diluted common shares. 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.
EBITDA and Adjusted EBITDA
The following table presents EBITDA and adjusted EBITDA for the three and nine months ended September 30, 2019 and 2018. 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) adjustments resulting from the
application of purchase accounting for acquired work in process inventory related to business combinations and purchase price accounting for investment in unconsolidated subsidiaries, and (vii) acquisition expense. 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.
58.5
(15.1)
7,816
5,810
34.5
19,031
22,207
(14.3)
Interest in cost of home sales revenues
15.6
23.6
Interest expense (income)
(205)
N/M
15
(579)
Depreciation and amortization expense
3,597
3,291
9.3
11.2
EBITDA
38,278
37.7
129,974
134,269
Purchase price accounting for acquired work in process inventory
(100.0)
(93.9)
Purchase price accounting for investment in unconsolidated subsidiaries outside basis
60
58
395
Adjusted EBITDA
4.8
(12.6)
Net Homebuilding Debt to Net Capital
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 (senior notes payable and borrowing 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). 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.
Total homebuilding debt
1,175,072
987,277
Total capital
2,126,251
1,846,636
Debt to capital
55.3%
53.5%
(38,508)
(32,902)
(30,362)
(24,344)
Net homebuilding debt
1,106,202
930,031
Net capital
2,057,381
1,789,390
Net homebuilding debt to net capital
53.8%
52.0%
Adjusted Diluted Earnings per Share
Adjusted diluted earnings per share (which we refer to as “Adjusted Diluted EPS”) is a non-GAAP financial measure that we believe is 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. Adjusted Diluted EPS is calculated by excluding loss on debt extinguishment, gain on previously held interest in WJH and the effect of acquisition costs and purchase price accounting for acquired work in process from the calculation of reported earnings per share.
Adjusted Earnings per share
Gain on previously held interest in WJH
(7,219)
Adjusted income before income tax expense
Adjusted income tax expense(1)
(8,713)
(22,069)
(28,503)
Adjusted net income
Less: Adjusted undistributed earnings allocated to participating securities
(71)
Adjusted net income allocable to common stockholders
85,437
Denominator - Diluted
Adjusted diluted earnings per share
(1)The tax rate used in calculating adjusted net income for the three and nine months ended September 30, 2019 and 2018 was the estimated annual rate offset by the benefit associated with federal energy credits related to homes delivered in prior years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rates
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our Amended and Restated Credit Agreement Borrowings under the Amended and Restated Credit Agreement bear interest at a floating rate equal to the adjusted Eurodollar Rate plus an applicable margin between 2.60% and 3.10% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.60% and 2.10% per annum. The “applicable margins” described above are determined by a schedule based on the leverage ratio of the Company, as defined in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement also provides for fronting fees and letter of credit fees payable to the L/C Issuer and commitment fees payable to the Administrative Agent equal to 0.20% of the unused portion of the revolving line of credit.
For fixed rate debt, such as our senior notes, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows.
In our Financial Services business, we utilize mortgage-backed securities, forward commitments, option contracts and investor commitments to protect the value of rate-locked commitments and loans held-for-sale from fluctuations in mortgage-related interest rates. To mitigate interest risk associated with loans held-for-sale, we use derivative financial instruments to hedge our exposure to risk from the time a borrower locks a loan until the time the loan is securitized. We also hedge our interest rate exposure through entering into interest rate swap futures.
Inflation
Our homebuilding operations 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. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our co-principal executive officers and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (which we refer to as the “Exchange Act”)) as of September 30, 2019, the end of the period covered by this Form 10-Q. Based on this evaluation, our co-principal executive officers and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2019 in providing reasonable assurance that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes during the third quarter of 2019 in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS.
Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business. In the opinion of our management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS.
There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 that was filed with the SEC on February 13, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
The following exhibits are either filed herewith or incorporated herein by reference:
Item No.
Description
Certificate of Incorporation of Century Communities, Inc., as amended (incorporated by reference to Exhibit 3.1 to the initial filing of the Company’s Registration Statement on Form S-1, filed with the SEC on May 5, 2014 (File No. 333-195678))
Bylaws of Century Communities, Inc. (incorporated by reference to Exhibit 3.2 to the initial filing of the Company’s Registration Statement on Form S-1, filed with the SEC on May 5, 2014 (File No. 333-195678))
3.3
Amendment to the Bylaws of Century Communities, Inc., adopted and effective on April 10, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the SEC on April 11, 2017 (File No. 001-36491))
31.1
Certification of the Co-Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith)
31.2
31.3
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith)
32.1
Certification of the Co-Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2
32.3
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF
Inline XBRL Taxonomy Definition Linkbase Document (filed herewith)
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document (filed herewith)
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 29, 2019
By:
/s/ Dale Francescon
Dale Francescon
Chairman of the Board and Co-Chief Executive Officer
(Co-Principal Executive Officer)
/s/ Robert J. Francescon
Robert J. Francescon
Co-Chief Executive Officer and President
/s/ David Messenger
David Messenger
Chief Financial Officer
(Principal Financial Officer)
/s/ J. Scott Dixon
J. Scott Dixon
Chief Accounting Officer
(Principal Accounting Officer)