LGIH US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist you in understanding our results of operations and our present financial condition. Our historical consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K contain additional information that should be referred to when reviewing this material. For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc. and its subsidiaries.

Key Results

Key financial results as of and for the year ended December 31, 2022, as compared to the year ended December 31, 2021, were as follows:

•Home sales revenues decreased 24.4% to $2.3 billion from $3.1 billion.

•Homes closed decreased 36.6% to 6,621 homes from 10,442 homes.

•Average sales price per home closed increased 19.2% to $348,052 from $292,104.

•Gross margin as a percentage of home sales revenues increased to 28.1% from 26.8%.

•Adjusted gross margin (non-GAAP) as a percentage of home sales revenues increased to 29.2% from 28.2%.

•Net income before income taxes decreased 23.0% to $418.1 million from $542.8 million.

•Net income decreased 24.0% to $326.6 million from $429.6 million.

•EBITDA (non-GAAP) as a percentage of home sales revenues remained at 19.1%.

•Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreased to 18.2% from 19.4%.

•Active communities at the end of 2022 decreased to 99 from 101.

•Total owned and controlled lots decreased 21.7% to 71,904 lots at December 31, 2022 from 91,845 lots at December 31, 2021.

For reconciliations of the non-GAAP financial measures of adjusted gross margin, EBITDA and adjusted EBITDA to the most directly comparable GAAP financial measures, please see “—Non-GAAP Measures.”

Current Homebuilding and Inflationary Environment

For the first half of 2022, we saw robust demand for our homes and continued to benefit from pricing power that allowed us to pass through rising input costs related to supply chain constraints. In the second half of 2022, the Federal Reserve’s aggressive actions to stem inflation caused mortgage interest rates to more than double between the end of 2021 and September 2022. The resulting increased costs of borrowing negatively impacted customer sentiment and accelerated existing affordability constraints for potential homebuyers. As a result, many homebuyers paused their home purchasing decisions. Additionally, challenges from ongoing supply chain disruptions and higher construction and development costs persisted during 2022. We anticipate this dynamic could continue in 2023, resulting in lower net orders and higher cancellation rates when compared to prior periods. Longer lead times relating to materials, municipality and labor activities increased our construction and development cycle times and slowed the timing of home closings. Our average home completion time was approximately 90 to 165 days in 2022 as compared to 90 to 130 days in 2021.

To address the demand headwinds and drive sales, we increased advertising spending to connect with more potential homebuyers, we began offering mortgage buy-down programs and other sales incentives to offset some of the affordability pressures and we increased our allocation of inventory available for sale to our wholesale channel. In addition, we evaluated our land position and significantly reduced our owned and controlled lots.

Thedecline in home closings for the year ended December 31, 2022 was primarily due to our strong prior year comparable numbers, combined with lower average community count and slower absorptions resulting from the impact of higher mortgage rates experienced during the second half of the year.

We expect that many of these challenges will persist in 2023 and could potentially worsen. However, we believe the long-term outlook for new homes remains strong, driven by solid fundamentals, including a historically low inventory of new and existing homes for sale, an aging housing stock, rising rents, strong household formations and low unemployment. We believe we are well positioned to meet the demands of this uncertain period based on our 100% spec-focused business model, targeted at the entry level buyers.

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Continuing Impact of COVID-19

We continue to see pressure on global supply chains due to disruptions created by the effects of COVID-19 and variants thereof (collectively, “COVID-19”), that extended construction and development cycles and delayed home closings and the opening of new communities. We continue to focus on meeting our customers' needs as we supply homes critical to maintaining essential infrastructure within the markets we serve.

Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, mortgage rates, inflation, financial market stability, consumer confidence, housing demand, availability of financing for homebuyers, availability and prices of new homes compared to existing inventory, and demographic trends. These factors, and in particular consumer confidence, can be significantly adversely affected by a variety of factors beyond our control.

For additional discussion regarding risks associated with our business and operations, see Item 1A. Risk Factors in Part I of this Annual Report on Form 10-K.

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Results of Operations

The following table sets forth our results of operations for the years ended December 31, 2022, 2021 and 2020.

Year Ended December 31,

(dollars in thousands, except per share data and average home sales price)

Statement of Income Data:

Expenses:

Loss on extinguishment of debt — 13,976 —

Other Financial and Operating Data:

Community count at end of period 99 101 116

(1)Gross margin is home sales revenues less cost of sales.

(2)Calculated as a percentage of home sales revenues.

(3)Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. Please see “—Non-GAAP Measures” for a reconciliation of adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable.

(4)EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our

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results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Please see “—Non-GAAP Measures” for reconciliations of EBITDA and adjusted EBITDA to net income, which is the GAAP financial measure that our management believes to be most directly comparable.

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Homes Sales. Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the years ended December 31, 2022 and 2021 were as follows (revenues in thousands):

Home Sales Revenues. Home sales revenues for the year ended December 31, 2022 were $2.3 billion, a decrease of $0.7 billion, or 24.4%, from $3.1 billion for the year ended December 31, 2021. The decrease in home sales revenues is primarily due to a 36.6% decrease in homes closed in fewer communities, partially offset by an increase in the average sales price per home closed during the year ended December 31, 2022 as compared to the year ended December 31, 2021. We closed 6,621 homes during 2022, as compared to 10,442 homes closed during 2021. The overall decrease in home closings is a result of lower average community count and overall lower absorption pace during the year ended December 31, 2022 as compared to the year ended December 31, 2021. Our average community count at December 31, 2022 decreased to 91.9 from 104.4 at December 31, 2021. The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities and longer development cycle times during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The average sales price per home closed during the year ended December 31, 2022 was $348,052, an increase of $55,948, or 19.2%, from the average sales price per home closed of $292,104 for the year ended December 31, 2021. The increase in the average sales price per home closed in all reportable segments is primarily due to favorable pricing environments that allowed us to pass through cost increases associated with the construction of our homes. The overall decrease in absorption relates to the slowdown of demand primarily resulting from increased mortgage rates and longer cycle times stemming from pandemic-related production disruptions. These disruptions have caused varying degrees of supply chain constraints in the markets we serve.

Included within our home sales revenues for the year ended December 31, 2022 was $340.6 million in wholesale revenues related to 1,233 home closings through our wholesale channel, representing 18.6% of the 6,621 total homes closed during the year ended December 31, 2022. Included within our home sales revenues during the year ended December 31, 2021 was $349.3 million in wholesale revenues related to 1,515 home closings through our wholesale channel, representing 14.5% of the 10,442 total homes closed during the year ended December 31, 2021. The increase in home closings as a percentage of revenues through our wholesale channel was related to the slowdown in retail sales experienced during the second half of 2022 and our

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decision to allocate more inventory available for sale to our wholesale partners during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

•Home sales revenues in our Central reportable segment decreased by $240.9 million, or 19.2%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 33.7% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

•Home sales revenues in our Southeast reportable segment decreased by $139.4 million, or 23.4%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 38.4% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

•Home sales revenues in our Northwest reportable segment decreased by $257.1 million, or 50.4%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 56.9% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

•Home sales revenues in our West reportable segment decreased by $50.3 million, or 14.3%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 24.5% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed.

•Home sales revenues in our Florida reportable segment decreased by $58.0 million, or 17.0%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to a 34.9% decrease in the number of homes closed driven by a decrease in the average community count at a lower absorption rate, partially offset by an increase in the average sales price per home closed for the majority of 2022.

Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales decreased for the year ended December 31, 2022 to $1.7 billion, a decrease of $0.6 billion, or 25.7%, from $2.2 billion for the year ended December 31, 2021. This decrease is primarily due to a 36.6% decrease in homes closed, offset by increased construction costs during 2022 as compared to 2021. Gross margin for the year ended December 31, 2022 was $646.6 million, a decrease of $171.4 million, or 21.0%, from $818.0 million for the year ended December 31, 2021. Gross margin as a percentage of home sales revenues was 28.1% for the year ended December 31, 2022 and 26.8% for the year ended December 31, 2021. This increase in gross margin as a percentage of home sales revenues during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to raising prices higher than increases in input costs.

Selling Expenses. Selling expenses for the year ended December 31, 2022 were $144.9 million, a decrease of $25.1 million, or 14.8%, from $170.0 million for the year ended December 31, 2021. Sales commissions decreased to $82.7 million for the year ended December 31, 2022 from $115.4 million for the year ended December 31, 2021 due to a 24.4% decrease in home sales revenues during 2022 as compared to 2021. Selling expenses as a percentage of home sales revenues were 6.3% and 5.6% for the years ended December 31, 2022 and 2021, respectively. The increase in selling expenses as a percentage of home sales revenues was driven primarily by higher advertising spend, partially offset by lower sales commission expensed during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

General and Administrative. General and administrative expenses for the year ended December 31, 2022 were $111.6 million, an increase of $11.2 million, or 11.2%, from $100.3 million for the year ended December 31, 2021. The increase in the amount of general and administrative expenses is primarily due to increased overhead expenses. General and administrative expenses as a percentage of home sales revenues were 4.8% and 3.3% for the years ended December 31, 2022 and 2021, respectively. The increase in general and administrative expenses as a percentage of home sales revenues reflects our increased personnel and associated overhead costs, as well as professional fees and terminated land purchase agreements, partially offset by a decrease in management bonus and stock compensation incurred during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Loss on extinguishment of debt. There was no loss on extinguishment of debt for the year ended December 31, 2022. Loss on extinguishment of debt was $14.0 million for the year ended December 31, 2021 due to the redemption premium associated with our 2026 Senior Notes, as well as debt issuance costs and discount previously capitalized that were associated with our 2026 Senior Notes and debt issuance costs previously capitalized that were associated with our credit agreement then in effect. We redeemed all of our 2026 Senior Notes in July 2021.

Other Income. Other income, net of other expenses was $28.0 million for the year ended December 31, 2022, an increase of $19.0 million from $9.1 million for the year ended December 31, 2021. The increase in other income primarily reflects the sale in July 2022 of the three-year interest rate cap of LIBOR prior to its expiration that resulted in $7.1 million in other

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income, income associated with our investments in unconsolidated entities and gains realized from the sale of land and lots not directly associated with our core homebuilding operations.

Operating Income and Net Income before Income Taxes. Operating income for the year ended December 31, 2022 was $390.1 million, a decrease of $157.6 million, or 28.8%, from $547.7 million for the year ended December 31, 2021. Net income before income taxes for the year ended December 31, 2022 was $418.1 million, a decrease of $124.7 million, or 23.0%, from $542.8 million for the year ended December 31, 2021. Our reportable segments contributed the following amounts and percentages of net income before income taxes during 2022: Central - $213.2 million or 51.0%; Southeast - $88.4 million or 21.1%; Northwest - $51.0 million or 12.2%; West - $26.6 million or 6.4%; and Florida - $37.8 million or 9.0%. The decreases in operating income and net income before income taxes are primarily attributed to lower home sales revenues and lower home closings, partially offset by higher average sales price per home closed during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Income Taxes. Income tax provision for the year ended December 31, 2022 was $91.5 million, a decrease of $21.6 million, or 19.1%, from income tax provision of $113.1 million for the year ended December 31, 2021. The increase in our effective tax rate to 21.9% from 20.8% results from an increase in the compensation limitation under Section 162(m) of the Code, and the retroactive extension of the 45L tax credit, offset by deductions in excess of compensation cost for share-based payments for the year ended December 31, 2021.

Net Income. Net income for the year ended December 31, 2022 was $326.6 million, a decrease of $103.1 million, or 24.0%, from $429.6 million for the year ended December 31, 2021. The decrease in net income is primarily attributed to overall lower number of homes closed across all reportable segments, partially offset by higher average sales price per home closed at higher gross margins on a per home basis, during the year ended December 31, 2022.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Homes Sales. Our home sales revenues, home closings, average sales price per home closed (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the years ended December 31, 2021 and 2020 were as follows (revenues in thousands):

Home Sales Revenues. Home sales revenues for the year ended December 31, 2021 were $3.1 billion, an increase of $682.2 million, or 28.8%, from $2.4 billion for the year ended December 31, 2020. The increase in home sales revenues is primarily due to an 11.8% increase in homes closed and an increase in the average sales price per home closed during the year ended December 31, 2021 as compared to the year ended December 31, 2020. We closed 10,442 homes during 2021, as compared to 9,339 homes closed during 2020. The average sales price per home closed during the year ended December 31, 2021 was $292,104, an increase of $38,551, or 15.2%, from the average sales price per home closed of $253,553 for the year ended December 31, 2020. This increase in the average sales price per home closed was primarily due to higher price points in certain markets, partially offset by additional wholesale home closings. The overall increase in home closings was primarily driven by strong demand in all reportable segments during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The overall decrease in average community count relates to timing associated with the opening, close out or transition between certain active communities during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

We increased our home sales revenues in our reportable segments other than our Central reportable segment by $279.8 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020, representing a 1.6% increase in the number of homes closed in these reportable segments and increased average sales price per home closed on a consolidated basis during 2021 as compared to 2020.

•Home sales revenues in our Central reportable segment increased by $402.4 million, or 47.3%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to an increase in the number of homes closed at a higher average sales price per home closed and increased average community count at a higher absorption rate in this reportable segment.

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•Home sales revenues in our Southeast reportable segment increased by $35.5 million, or 6.4%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased closings in certain markets in North Carolina and South Carolina, partially offset by lower community count at December 31, 2021 as compared to December 31, 2020.

•Home sales revenues in our Northwest reportable segment increased by $121.0 million, or 31.1%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to a 16.6% increase in the number of homes closed in this reportable segment, as a result of increased demand.

•Home sales revenues in our West reportable segment increased by $65.1 million, or 22.7%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to higher average sales price per home closed and improved absorption rate associated with increased demand in certain markets in this reportable segment, partially offset by lower average community count.

•Home sales revenues in our Florida reportable segment increased by $58.2 million, or 20.6%, largely due to an increase of 13.7% in the average sales price per home closed as a result of strong demand and complemented by increased average community count during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the year ended December 31, 2021 to $2.2 billion, an increase of $467.3 million, or 26.5%, from $1.8 billion for the year ended December 31, 2020. This increase is primarily due to an 11.8% increase in homes closed, higher construction costs and product mix during 2021 as compared to 2020. Gross margin for the year ended December 31, 2021 was $818.0 million, an increase of $214.9 million, or 35.6%, from $603.1 million for the year ended December 31, 2020. Gross margin as a percentage of home sales revenues was 26.8% for the year ended December 31, 2021 and 25.5% for the year ended December 31, 2020. This increase in gross margin as a percentage of home sales revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to raising prices higher than increases in input costs.

Selling Expenses. Selling expenses for the year ended December 31, 2021 were $170.0 million, an increase of $21.6 million, or 14.6%, from $148.4 million for the year ended December 31, 2020. Sales commissions increased to $115.4 million for the year ended December 31, 2021 from $89.2 million for the year ended December 31, 2020 partially due to a 28.8% increase in home sales revenues during 2021 as compared to 2020. Selling expenses as a percentage of home sales revenues were 5.6% and 6.3% for the years ended December 31, 2021 and 2020, respectively. The decrease in selling expenses as a percentage of home sales revenues was driven primarily by operating leverage obtained from the increase in home sales revenues and to a lesser extent lower advertising expenses during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

General and Administrative. General and administrative expenses for the year ended December 31, 2021 were $100.3 million, an increase of $10.3 million, or 11.5%, from $90.0 million for the year ended December 31, 2020. The increase in the amount of general and administrative expenses is primarily due to increased overhead. General and administrative expenses as a percentage of home sales revenues were 3.3% and 3.8% for the years ended December 31, 2021 and 2020, respectively. The decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Loss on extinguishment of debt. Loss on extinguishment of debt was $14.0 million for the year ended December 31, 2021 primarily due to the redemption premium associated with the optional redemption of our 6.875% Senior Notes due 2026 (the “2026 Senior Notes”), as well as debt issuance costs and discount previously capitalized that were associated with our 2026 Senior Notes and debt issuance costs previously capitalized that were associated with our credit agreement then in effect. There was no loss on extinguishment of debt for the year ended December 31, 2020.

Other Income. Other income, net of other expenses was $9.1 million for the year ended December 31, 2021, an increase of $5.9 million from $3.1 million for the year ended December 31, 2020. The increase in other income primarily reflects the gain realized from the sale of lots not directly associated with our core homebuilding operations.

Operating Income and Net Income before Income Taxes. Operating income for the year ended December 31, 2021 was $547.7 million, an increase of $183.0 million, or 50.2%, from $364.7 million for the year ended December 31, 2020. Net income before income taxes for the year ended December 31, 2021 was $542.8 million, an increase of $174.9 million, or 47.6%, from $367.8 million for the year ended December 31, 2020. Our reportable segments contributed the following amounts and percentages of net income before income taxes during 2021: Central - $242.6 million or 44.7%; Southeast - $105.6 million or 19.5%; Northwest - $115.0 million or 21.2%; West - $50.8 million or 9.4%; and Florida - $49.9 million or 9.2%. The increases in operating income and net income before income taxes are primarily attributed to operating leverage realized from

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the increase in home sales revenues and higher average sales price per home closed during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

Income Taxes. Income tax provision for the year ended December 31, 2021 was $113.1 million, an increase of $69.2 million, or 157.4%, from income tax provision of $44.0 million for the year ended December 31, 2020. The increase in the amount of income tax provision is primarily due to the retroactive tax benefits relating to the federal energy efficient homes tax credits we recognized during 2020 and the 47.6% increase in net income before taxes, which resulted in an increase in our effective tax rate for the year ended December 31, 2021 to 20.8% from 11.9% for the year ended December 31, 2020.

Net Income. Net income for the year ended December 31, 2021 was $429.6 million, an increase of $105.8 million, or 32.6%, from $323.9 million for the year ended December 31, 2020. The increase in net income is primarily attributed to operating leverage realized from the increase in home sales revenues and higher average sales price per home closed, partially offset by tax benefits relating to the federal energy efficient homes tax credits we recognized for the year ended December 31, 2020.

Non-GAAP Measures

In addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”), we have provided information in this Annual Report on Form 10-K relating to adjusted gross margin, EBITDA and adjusted EBITDA.

Adjusted Gross Margin

Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.

The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands):

Year Ended December 31,

(1)Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.

(2)Calculated as a percentage of home sales revenues.

EBITDA and Adjusted EBITDA

EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting included in cost of sales. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and

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management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

(i) they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments, including for purchase of land;

(ii) they do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our debt;

(iii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and EBITDA and adjusted EBITDA do not reflect any cash requirements for such replacements or improvements;

(iv) they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

(v) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations; and

(vi) other companies in our industry may calculate them differently than we do, limiting their usefulness as a comparative measure.

Because of these limitations, our EBITDA and adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using our EBITDA and adjusted EBITDA along with other comparative tools, together with GAAP measures, to assist in the evaluation of operating performance. These GAAP measures include operating income, net income and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments and other non-recurring charges, which are not reflected in our EBITDA or adjusted EBITDA. EBITDA and adjusted EBITDA are not intended as alternatives to net income as indicators of our operating performance, as alternatives to any other measure of performance in conformity with GAAP or as alternatives to cash flows as a measure of liquidity. You should therefore not place undue reliance on our EBITDA or adjusted EBITDA calculated using these measures.

The following table reconciles EBITDA and adjusted EBITDA to net income, which is the GAAP measure that our management believes to be most directly comparable (dollars in thousands):

Year Ended December 31,

Loss on extinguishment of debt — 13,976 —

(1)Adjustments result from the application of purchase accounting for acquisitions and represent the amount of the fair value step-up adjustments included in cost of sales for real estate inventory sold after the acquisition dates.

(2)Calculated as a percentage of home sales revenues.

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Backlog

We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase contract. The amount of the required deposit is minimal (typically $1,000 to $10,000). We permit our retail homebuyers to cancel the purchase contract and obtain a refund of their deposit in the event mortgage financing cannot be obtained within a certain period of time, as specified in their purchase contract. Typically, our retail homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is signed. If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract. If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the preliminary criteria to obtain mortgage financing. Only purchase contracts that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing are included in new (gross) orders.

Our backlog consists of homes that are under a purchase contract that has been signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve months. Since our business model is generally based on building move-in ready homes before a purchase contract is signed, the majority of our homes in backlog are currently under construction or complete. Ending backlog represents the number of homes in backlog from the previous period plus the number of net orders (new orders for homes less cancellations) generated during the current period minus the number of homes closed during the current period. Our backlog at any given time will be affected by cancellations, the number of our active communities and the timing of home closings. Homes in backlog are generally closed within one to two months, although home closings have been, and may continue to be, delayed. In addition, we may experience cancellations of purchase contracts at any time prior to closing. It is important to note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract.

Our net orders decreased in 2022 primarily due to the sharp rise in mortgage rates as homebuyer demand softened, combined with historically low levels of finished lots resulting from years of sustained demand and the rapid pace of fluctuating rising costs for certain supplies and labor, previously experienced in 2021. Our wholesale orders decreased 67.4% to 157 units at December 31, 2022 from 481 units at December 31, 2021.

As of the dates set forth below, our net orders, cancellation rate, and ending backlog homes and value were as follows (dollars in thousands):

Backlog Data Year Ended December 31,

(1)Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period.

(2)Cancellation rate for a period is the total number of purchase contracts cancelled during the period divided by the total new (gross) orders for the purchase of homes during the period.

(3)Ending backlog consists of retail homes at the end of the period that are under a purchase contract that has been signed by homebuyers who have met our preliminary financing criteria but have not yet closed and wholesale contracts for which vertical construction is generally set to occur within the next six to twelve months. Ending backlog is valued at the contract amount.

(4)As of December 31, 2022, we had 157 units related to bulk sales agreements associated with our wholesale business.

(5)As of December 31, 2021, we had 481 units related to bulk sales agreements associated with our wholesale business.

(6)As of December 31, 2020, we had 1,139 units related to bulk sales agreements associated with our wholesale business.

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Land Acquisition Policies and Development

See discussion included in “Business—Land Acquisition Policies and Development.”

Homes in Inventory

See discussion included in “Business—Homes in Inventory.”

Raw Materials and Labor

See discussion included in “Business—Raw Materials and Labor.”

Seasonality

In all of our reportable segments, we have historically experienced similar variability in our results of operations and in capital requirements from quarter to quarter due to the seasonal nature of the homebuilding industry. We generally close more homes in our second, third and fourth quarters. Thus, our revenues may fluctuate on a quarterly basis and we may have higher capital requirements in our second, third and fourth quarters in order to maintain our inventory levels. Our revenues and capital requirements are generally similar across our second, third and fourth quarters.

As a result of seasonal activity, our quarterly results of operations and financial position at the end of a particular quarter, especially the first quarter, are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to continue in the long term.

Liquidity and Capital Resources

Overview

As of December 31, 2022, we had $32.0 million of cash and cash equivalents. Cash flows for each of our active communities depend on the status of the development cycle and can differ substantially from reported earnings.

Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness and the payment of various liabilities. In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition and repurchase shares of our common stock. Early stages of development or expansion require significant cash outlays for land acquisitions, land development, plats, vertical development, construction of information centers, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of home sales revenues. In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement purposes, as the costs associated with home and land construction were previously incurred.

Short-term Liquidity and Capital Resources

We generally rely on our ability to finance our operations by generating operating cash flows and borrowing under the Credit Agreement (as defined below) to adequately fund our short-term working capital obligations and to purchase land and other assets, develop lots and homes and repurchase shares of our common stock. As needed, we will consider accessing the debt and equity capital markets as part of our ongoing financing strategy. We rely on our ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects. Furthermore, we utilize, on a limited and strategic basis, land banking financing arrangements to access short-term liquidity.

As of the date of this Annual Report on Form 10-K, we believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from the Credit Agreement or through accessing debt or equity capital, as needed. However, with the uncertainty surrounding COVID-19, our ability to engage in the transactions described above may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as moderated investor or lender interest or capacity and our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.

Long-term Liquidity and Capital Resources

We believe that our long-term principal uses of liquidity and capital resources will be inventory related purchases concerning land, lot development, repurchases of shares of our common stock, other capital expenditures, and principal and interest payments on our debt obligations maturing in 2025 and 2029. We believe that we will be able to fund our long-term liquidity needs with cash generated from operations and cash expected to be available to borrow under the Credit Agreement or through accessing debt or equity capital, as needed, although no assurance can be provided that such additional debt or equity capital will be available when needed or on terms that we find attractive. Additionally, we plan to further utilize, on a limited and strategic basis, land banking financing arrangements to maximize long-term liquidity for lot development projects where we have sufficient finished lot availability in certain markets. To the extent these sources of capital are insufficient to meet our

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needs, we may also conduct additional public or private offerings of our securities, refinance our indebtedness, or dispose of certain assets to fund our operating activities and capital needs.

Material Cash Requirements

The following is a summary of our material cash requirements from known contractual and other obligations as of December 31, 2022 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

Payments due by period (in thousands)

Total < 1 year 1 - 3 years 3 - 5 yrs More than 5 years

Borrowings:

(a)Represents borrowings under the Credit Agreement, which matures on April 28, 2025. Interest calculated using the effective rate as of December 31, 2022. See Note 6 “Notes Payable” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our long-term debt.

(b)Represents $300.0 million aggregate principal amount of our 4.000% 2029 Senior Notes. The 2029 Senior Notes mature on July 15, 2029. See Note 6 “Notes Payable” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our long-term debt.

(c)All of the outstanding borrowings under the Credit Agreement are at variable rates based on SOFR, or subject to an interest rate floor. The interest rate for our variable rate indebtedness as of December 31, 2022 was SOFR plus 1.85%. Fees under the Credit Agreement are approximately $0.1 million per year. Interest on the 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each year. Interest related to the land banking financing arrangements is not included in the table.

(d)The land banking financing arrangements may incur interest at time of purchase and are subject to certain performance obligations, financial and other penalties if the lots are not purchased and are excluded from the table.

In the ordinary course of business, we enter into land purchase contracts in order to procure land and lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These contracts typically require cash deposits and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, which may include obtaining applicable property and development entitlements or the completion of development activities and the delivery of finished lots. We also utilize contracts with land sellers as a method of acquiring lots and land in staged takedowns, which helps us manage the financial and market risk associated with land holdings and minimize the use of funds from our corporate financing sources. Such contracts generally require a non-refundable deposit for the right to acquire land or lots over a specified period of time at pre-determined prices. We generally have the right at our discretion to terminate our obligations under purchase contracts during the initial feasibility period and receive a refund of our deposit, or we may terminate the contracts after the end of the feasibility period by forfeiting our cash deposit with no further financial obligations to the land seller. In addition, our deposit may also be refundable if the land seller does not satisfy all conditions precedent in the respective contract. As of December 31, 2022, we had $22.4 million of cash deposits pertaining to land purchase contracts for 13,184 lots with an aggregate purchase price of $411.8 million. Approximately $12.8 million of the cash deposits as of December 31, 2022 are secured by third-party guarantees or indemnity mortgages on the related property.

Our utilization of land purchase contracts is dependent on, among other things, the availability of land sellers willing to enter into contracts at acceptable terms, which may include option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing conditions, and local market dynamics. Land purchase contracts may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain markets.

Revolving Credit Facility

On April 29, 2022, we entered into that certain Lender Addition and Acknowledgement Agreement and Second Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Second Amendment” and, as so amended, the “Credit Agreement”), which

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amended that certain Fifth Amended and Restated Credit Agreement, dated as of April 28, 2021, with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “2021 Credit Agreement”). The Credit Agreement contains revolving commitments of $1.1 billion, subject to a borrowing base primarily consisting of a percentage of commercial land, land held for development, lots under development and finished lots held by the Company and its subsidiaries that guarantee the obligations under the Credit Agreement.

The Credit Agreement matures on April 28, 2025. Before each anniversary of the Credit Agreement, we may request a one-year extension of its maturity date. The Credit Agreement is guaranteed by, among others, each of our subsidiaries that have gross assets of at least $0.5 million.

The borrowings and letters of credit outstanding under the Credit Agreement, together with the outstanding principal balance of our 4.000% Senior Notes due 2029 (the “2029 Senior Notes”), may not exceed the borrowing base under the Credit Agreement. As of December 31, 2022, the borrowing base under the Credit Agreement was $1.4 billion, of which borrowings, including the 2029 Senior Notes, of $1.1 billion were outstanding, $33.4 million of letters of credit were outstanding and $236.6 million was available to borrow under the Credit Agreement.

For a further description of the Credit Agreement, please refer to Note 6, “Notes Payable” to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Senior Notes Offering

On June 28, 2021, we issued $300.0 million aggregate principal amount of the 2029 Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act. Interest on the 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each year. The 2029 Senior Notes mature on July 15, 2029. The terms of the 2029 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Third Supplemental Indenture thereto, dated as of June 28, 2021, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.

Letters of Credit, Surety Bonds and Financial Guarantees

We are often required to provide letters of credit and surety bonds to secure our performance under construction contracts, development agreements and other arrangements. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit.

Under these letters of credit, surety bonds and financial guarantees, we are committed to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $368.1 million as of December 31, 2022. Although significant development and construction activities have been completed related to the improvements at these sites, the letters of credit and surety bonds are not generally released until all development and construction activities are completed. We do not believe that it is probable that any outstanding letters of credit, surety bonds or financial guarantees as of December 31, 2022 will be drawn upon.

Stock Repurchase Program

In November 2018, we announced that our Board of Directors (the “Board”) authorized a stock repurchase program, pursuant to which we may purchase up to $50.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws. In October 2020 and February 2022, the Board approved an increase in our stock repurchase program by an additional $300.0 million and $200.0 million, respectively. For the years ended December 31, 2022, 2021 and 2020, we repurchased 892,916 shares of our common stock for $95.1 million to be held as treasury stock, 1,288,563 shares of our common stock for $193.8 million to be held as treasury stock and 718,993 shares of our common stock for $48.1 million to be held as treasury stock, respectively. A total of 2,939,472 shares of our common stock has been repurchased since our stock repurchase program commenced. As of December 31, 2022, we may purchase up to $211.5 million of shares of our common stock under our stock repurchase program. The timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase program will be determined by our management at its discretion based on a variety of factors, including the market price of our common stock, corporate considerations, general market and economic conditions and legal requirements. Our stock repurchase program may be modified, discontinued or suspended at any time.

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Cash Flows

Operating Activities

Net cash used in operating activities was $370.5 million during the year ended December 31, 2022. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash used in operating activities during the year ended December 31, 2022 was primarily driven by cash outflow from the $823.9 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity, partially offset by net income of $326.6 million, as well as the $32.8 million decrease and $58.1 million increase in the net change in accounts receivable, and accrued expenses and other liabilities, respectively.

Net cash provided by operating activities was $21.7 million during the year ended December 31, 2021. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash provided by operating activities during the year ended December 31, 2021 was primarily driven by net income of $429.6 million, and included cash outflows from the $463.6 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity and a $58.0 million decrease in the net change in accounts receivable.

Net cash provided by operating activities was $202.2 million during the year ended December 31, 2020. The primary drivers of operating cash flows are typically cash earnings and changes in inventory levels, including land acquisition and development. Net cash provided by operating activities during the year ended December 31, 2020 was primarily driven by net income of $323.9 million, offset by cash outflows from the $70.2 million increase in the net change in real estate inventory, which was primarily related to our homes under construction and land acquisitions and development level of activity and a $59.5 million increase in the net change in accounts receivable.

Investing Activities

Net cash used in investing activities was $6.0 million during the year ended December 31, 2022, primarily due to additional investments in unconsolidated entities.

Net cash used in investing activities was $70.4 million during the year ended December 31, 2021, primarily due to the business acquisitions of certain real estate assets owned by KenRoe Inc. and its affiliated entities, including R Home LLC and Paxmar Land Development, and the real estate assets of Buffington Homebuilding Group, Ltd. in 2021.

Net cash used in investing activities was $5.6 million during the year ended December 31, 2020, which reflects the purchase of property and equipment and investment in unconsolidated entity.

Financing Activities

Net cash provided by financing activities was $357.9 million during the year ended December 31, 2022, primarily driven by $618.9 million of borrowings under the 2021 Credit Agreement and the Credit Agreement and $149.5 million of proceeds related to financing arrangements with a third-party land banker. These were partially offset by $308.0 million of repayments on the Credit Agreement and by $95.1 million in payments for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock.

Net cash provided by financing activities during the year ended December 31, 2021 was $63.3 million, primarily driven by borrowings of $1.2 billion under the 2021 Credit Agreement and the 2029 Senior Notes, offset by $969.0 million of payments associated with the 2026 Senior Notes and our credit agreement then in effect and by the $193.8 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock.

Net cash used in financing activities during the year ended December 31, 2020 was $198.9 million, primarily driven by $530.0 million of payments under our credit agreement then in effect and by the $48.1 million payment for shares of our common stock repurchased under our stock repurchase program to be held as treasury stock, offset by borrowings of $377.1 million under our credit agreement then in effect.

Inflation

Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material, and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. In June 2022 we began to experience a moderation of buyer demand resulting from the Federal Reserve’s ongoing actions to stem inflation, which ultimately resulted in higher mortgage rates for our homebuyers.

During the year ended December 31, 2022, we have experienced a significant increase in land, labor, materials and construction costs, which we currently expect to continue throughout 2023. Generally, we have been able to increase the sales

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prices of our homes to absorb such increased costs. See “Industry and Economic Risks—Inflation could adversely affect our business and financial results” in Item 1A. Risk Factors in Part I of this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

In preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates, judgments and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our estimates, judgments and assumptions on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board. Discussed below are accounting policies that we believe are critical because of the significance of the activity to which they relate or because they require the use of significant judgment in their application.

Home Sales Revenue Recognition

We recognize home sales revenue upon the transfer of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled by applying the following five-step process:

•Identify the contract(s) with a customer

•Identify the performance obligations

•Determine the transaction price

•Allocate the transaction price

•Recognize revenue when the performance obligations are met

Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms as customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title company within a few business days after closing. Little to no estimation is involved in recognizing such revenues.

Real Estate Inventory and Cost of Home Sales

Inventory consists of land, land under development, finished lots, information centers, homes in progress and completed homes. Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case inventory is written down to fair value.

Pre-acquisition costs, land, development and other project costs, including interest and property taxes, incurred during development and home construction, and net of expected reimbursements of development costs, are capitalized to real estate inventory. Pre-acquisition costs, land development and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate, on a pro rata basis which we believe approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots or homes within a community are similar in value.

We use judgements and assumptions to recognize the appropriate amount of cost of sales by estimating the total land development costs. We use estimates which are affected by changes to the land development project’s schedule; the cost of labor, materials, and subcontractors; and potential cost reimbursements from various municipalities. Changes to estimated total remaining development costs subsequent to initial home closings in a community are allocated to the remaining unsold homes in the community on a prospective basis. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method and are capitalized as they are incurred. Capitalized interest, property taxes, and other carrying costs are generally capitalized to real estate inventory from the point development begins to the point construction is completed. Costs associated with homes closed are charged to cost of sales simultaneously with revenue recognition. We believe that our policies provide for reasonably dependable estimates to be used in the calculation and reporting of land development and home construction costs.

Impairment of Real Estate Inventories

Real estate inventory is evaluated for indicators of impairment by each community during each reporting period. In conducting our review for indicators of impairment on a community level, we evaluate, among other things, the margins on homes that have been closed, communities with slow moving inventory, projected margins on future home sales over the life of the community, and the estimated fair value of the land. We pay particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales prices and/or margins are trending downward and are anticipated to continue to trend downward. Due largely to the relatively short development and construction

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periods for our communities and our growth, we have experienced limited circumstances during 2022, 2021 or 2020 that are indicators of impairment. Our future sales and margins may be impacted by our inability to realize continued growth, increased cost associated with holding and developing land, local economic factors, pressure on home sales prices, increased carrying costs, and insufficient access to labor and materials at reasonable costs. For individual communities with indicators of impairment, we perform additional analysis to estimate the community’s undiscounted future cash flows. If the estimated undiscounted future cash flows are greater than the carrying value of the asset, no impairment adjustment is required. If the undiscounted cash flows are less than the asset’s carrying value, the asset is impaired and is written down to its fair value. We estimate the fair value of communities using a discounted cash flow model; changes to the expected cash flows may lead to changes in the outcome of our impairment analysis.

We purchase both finished lots and land to be developed. Generally, the life cycle of a community ranges from two to five years. For projects we develop, the period between the acquisition of a raw piece of land and completion of the development of that land generally ranges from two to three years. During the life of a project, a constructed home is used as the community information center and then sold. Actual individual community lives will vary based on the size of the community, the sales absorption rate, and whether the property was purchased as raw land or finished lots. Sustained changes in the life cycle of a community, which is an indicator used for impairment, may negatively impact our results of operations.

Impairment of Land and Land Under Development

For raw land, land under development and completed lots that our management anticipates will be utilized for future homebuilding activities or to be sold as finished lots to individuals, the recoverability of assets is measured by comparing the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets based on home or lot sales, consistent with the evaluation of operating communities discussed above. As of December 31, 2022, we had not identified any raw land, land under development or completed lots that management intends to market for sale in bulk to a third-party.

Pre-acquisition Costs and Controlled Lots Not Owned

We enter into land purchase agreements in the ordinary course of business in order to secure land for the construction of homes in the future. Pursuant to these agreements, we typically provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. We do not have title to the property and our obligations with respect to the contracts are generally limited to the forfeiture of the related nonrefundable cash deposits.

To the extent that any deposits are nonrefundable and the associated land acquisition process is terminated or no longer determined probable, the deposit and any related pre-acquisition costs (e.g. due diligence costs) are charged to general and administrative expense. Assessments are made on each agreement based on criteria including, but not limited to, market absorption, historical and current average sales price per home, timing of purchase and size of land parcel. We terminated $6.7 million, $2.4 million and $2.1 million of nonrefundable pre-acquisition costs or controlled lots deposits for the years ended December 31, 2022, 2021 and 2020, respectively. We regularly review the likelihood of the acquisition of contracted lots in conjunction with our periodic real estate impairment analysis.

Warranty Reserves

We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements. Estimated future direct warranty costs are assessed monthly on a consistent basis as part of our policy and accrued and charged to cost of sales in connection with our home sales.

The primary assumption to record amounts accrued for our warranty liability is based upon a trailing 120 month period of historical warranty cost experience on a per house basis established based on (i) trends in historical warranty payment levels, (ii) the historical range of amounts paid per house, (iii) any warranty expenditures not considered to be normal and recurring, and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our expansion. Our analysis also considers improvements in quality control and construction techniques expected to impact future warranty expenditures and the expertise of our personnel. Our warranty reserves are reviewed quarterly to assess the reasonableness and adequacy and we make adjustments to the balance of the pre-existing reserves, as needed, to reflect changes in trends and historical data as information becomes available. We increased our warranty reserve by $2.9 million, $2.5 million and $1.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Business Acquisitions

We account for certain homebuilding asset purchases as business combinations using the acquisition method of accounting and allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date with excess recorded as goodwill. The acquisition method of accounting

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requires us to make significant estimates and assumptions regarding the fair value of the acquired assets. We determine the estimated fair values of the real estate inventory with the assistance of appraisals performed by independent third-party specialists and estimates by management. Assumptions utilized in our estimates of the fair value of the assets acquired may include market comparisons, gross margin comparisons, future development costs and the timing of the completion of development activities, absorption rates, and mix of products sold in each community.

Taxes

We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, changes in tax rate are recognized in the year of enactment. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Our ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established, if required. We compute our provision for income taxes based on the statutory tax rates. Judgment is required in evaluating our tax positions and determining our annual tax provision. We recognize the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. We recognize potential interest and penalties related to uncertain tax positions in income tax expense, as applicable.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our operations are interest rate sensitive. As overall housing demand is adversely affected by increases in interest rates, a significant increase in mortgage interest rates may negatively affect the ability of homebuyers to secure adequate financing. Higher interest rates could adversely affect our revenues, gross margin, and net income.

Quantitative and Qualitative Disclosures About Interest Rate Risk

We utilize both fixed-rate debt ($300.0 million aggregate principal amount of the 2029 Senior Notes and certain inventory related obligations) and variable-rate debt (our $1.1 billion Credit Agreement) as part of financing our operations. We do not have the obligation to prepay the 2029 Senior Notes or our fixed-rate inventory related obligations prior to maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant impact on our fixed-rate debt.

In November 2020, we entered into a three-year interest rate cap of LIBOR of 0.70% to hedge a portion of the 2021 Credit Agreement risk exposure and future variable cash flows associated with LIBOR interest rates. In July 2022, we sold this three-year interest rate cap prior to its expiration. We currently do not hold derivatives for trading or speculative purposes, but we may do so in the future. Many of the statements contained in this section are forward looking and should be read in conjunction with our disclosures under the heading “Cautionary Statement about Forward-Looking Statements” in Item 1A. Risk Factors.

We are exposed to market risks related to fluctuations in interest rates on our outstanding variable rate indebtedness. As of December 31, 2022, we had $828.4 million of variable rate indebtedness outstanding under the Credit Agreement. All of the outstanding borrowings under the Credit Agreement are at variable rates based on SOFR. The interest rate for our variable rate indebtedness as of December 31, 2022 was SOFR plus 1.85%. At December 31, 2022, SOFR was 4.32%, subject to the 0.50% SOFR floor as included in the Credit Agreement. A hypothetical 100 basis point increase in the average interest rate above the SOFR floor on our variable rate indebtedness would increase our annual interest cost by approximately $8.3 million.

Based on the current interest rate management policies we have in place with respect to our outstanding indebtedness, we do not believe that the future interest rate risks related to our existing indebtedness will have a material adverse impact on our financial position, results of operations, or liquidity.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of LGI Homes, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of LGI Homes, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated February 21, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Land development costs

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2013.

Houston, Texas

February 21, 2023

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LGI HOMES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31,

ASSETS

LIABILITIES AND EQUITY

COMMITMENTS AND CONTINGENCIES

EQUITY

See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

For the Year Ended December 31,

Loss on extinguishment of debt — 13,976 —

Earnings per share:

Weighted average shares outstanding:

See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except share data)

Shares Amount

Restricted stock units granted for accrued annual bonuses — — 222 — — 222

Compensation expense for equity awards — — 13,517 — — 13,517

Restricted stock units granted for accrued annual bonuses — — 272 — — 272

Compensation expense for equity awards — — 13,595 — — 13,595

Restricted stock units granted for accrued annual bonuses — — 294 — — 294

Compensation expense for equity awards — — 9,188 — — 9,188

See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

For the Year Ended December 31,

Cash flows from operating activities:

Equity in income of unconsolidated entities (5,507) — —

Distributions of earnings from unconsolidated entities 4,593 — —

Loss on extinguishment of debt — 13,976 —

Gain on sale of interest rate cap (7,055) — —

Gain on disposal of assets (2,206) (717) (4)

Changes in assets and liabilities:

Cash flows from investing activities:

Investment in unconsolidated entities (5,016) (1,692) (2,956)

Return of capital from unconsolidated entities 235 — —

Payment for business acquisitions — (66,970) —

Cash flows from financing activities:

Proceeds from financing arrangements 149,526 — —

Payments on financing arrangements (8,813) — —

Redemption premium — (10,314) —

Proceeds from sale of stock, net of offering expenses 5,617 7,114 4,259

Net increase (decrease) in cash and cash equivalents (18,516) 14,572 (2,403)

See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS

Organization and Description of the Business

LGI Homes, Inc., a Delaware corporation (the “Company”, “we,” “us,” or “our”), is headquartered in The Woodlands, Texas. We engage in the development of communities and the design, construction and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia, Virginia, Pennsylvania and Maryland.

Acquisitions

On May 6, 2021, we acquired certain real estate assets owned by KenRoe Inc. and its affiliated entities, including R Home LLC and Paxmar Land Development (collectively, “KenRoe”), and assumed certain related liabilities. As a result of the KenRoe acquisition, we expanded our Minnesota presence in the Minneapolis market. We acquired approximately 100 homes under construction and more than 3,000 owned and controlled lots. The total purchase price for the KenRoe assets, primarily consisting of inventory, was approximately $27.3 million in cash, subject to certain potential post-closing adjustments. The acquisition was accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). Our purchase accounting for KenRoe as of December 31, 2022 was final.

On July 14, 2021, we acquired the real estate assets of Buffington Homebuilding Group, Ltd. (“Buffington”) and assumed certain related liabilities. The total purchase price for the Buffington assets, primarily consisting of inventory, was approximately $39.1 million in cash, subject to certain potential post-closing adjustments. This acquisition further expands our land position in the Austin, Texas market. The acquired assets include over 100 homes under construction, and more than 500 owned and controlled lots. The acquisition is accounted for in accordance with ASC 805. Our purchase accounting for Buffington as of December 31, 2022 was final.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and these differences could have a significant impact on the financial statements. The significant accounting estimates include land development cost of sales, impairment of real estate inventory, warranty reserves, loss contingencies, incentive compensation expense, and income taxes.

Cash and Cash Equivalents and Concentration of Credit Risk

Cash and cash equivalents are defined as cash on hand, demand deposits with financial institutions, and short-term liquid investments with an initial maturity date of less than three months. Our cash in demand deposit accounts may exceed federally insured limits and could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or diminished access to cash in our demand deposit accounts.

Accounts Receivable

Accounts receivable consist primarily of proceeds due from title companies for sales closed prior to period end and are generally collected within a few days from closing.

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Real Estate Inventory

Inventory consists of land, land under development, finished lots, information centers, homes in progress, completed homes and real estate not owned. Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case the affected inventory is written down to fair value.

Land, development and other project costs, including interest and property taxes incurred during development and home construction, net of expected reimbursable development costs, are capitalized to real estate inventory. Land development and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate. The costs of lots are transferred to homes in progress when home construction begins. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method. Costs that are not specifically identifiable to a home are allocated on a pro rata basis, which we believe approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots or homes within a community are similar in value. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining unsold lots and homes in the community on a pro rata basis. Inventory costs for completed homes are expensed to cost of sales as homes are closed.

We purchase both finished lots and land to be developed. Generally, the life cycle of a community ranges from two to five years. For projects we develop, the period between the acquisition of a raw piece of land and completion of the development of that land generally ranges from two to three years. During the life of a project, a constructed home is used as the community information center and then sold. Actual individual community lives will vary based on the size of the community, the sales absorption rate, and whether the property was purchased as raw land or finished lots.

Interest and financing costs incurred under our debt obligations, as more fully discussed in Note 6, are capitalized to qualifying real estate projects under development and homes under construction.

We have land banking financing arrangements with a third-party land banker to repurchase land that we sold to the land banker as a method of acquiring finished lots in staged takedowns, while limiting risk and minimizing the use of funds from our available cash or other financing sources. In consideration for this repurchase option, we paid a non-refundable commitment fee. Based on our right to control the ultimate economic outcome of these finished lots, these assets will be held as real estate not owned within our inventory as shown in tabular form in Note 3 and a corresponding obligation was established within our accrued liabilities as more fully discussed in Note 5 to recognize this relationship. While we are not legally obligated to repurchase the balance of the lots, we will be subject to certain performance obligations, financial and other penalties if the lots are not purchased. We do not have any ownership interest or title to the assets that we have sold to the land banker and we do not guarantee any of the land banker’s liabilities.

In accordance with ASC Topic 360, Property, Plant, and Equipment, real estate inventory is evaluated for indicators of impairment by each community during each reporting period. In conducting its review for indicators of impairment on a community level, management evaluates, among other things, the margins on homes that have been closed, communities with slow moving inventory, projected margins on future home sales over the life of the community, and the estimated fair value of the land. For individual communities with indicators of impairment, additional analysis is performed to estimate the community’s undiscounted future cash flows. If the estimated undiscounted future cash flows are greater than the carrying value of the community group of assets, no impairment adjustment is required. If the undiscounted cash flows are less than the community’s carrying value, the asset group is impaired and is written down to its fair value. We estimate the fair value of communities using a discounted cash flow model. As of December 31, 2022 and 2021, the real estate inventory is stated at cost; there were no inventory impairment charges recorded during the years ended December 31, 2022, 2021 and 2020.

Capitalized Interest

Interest and other financing costs are capitalized as cost of inventory during community development and home construction activities, in accordance with ASC Topic 835, Interest and expensed in cost of sales as homes in the community are closed. To the extent the debt exceeds qualified assets, a portion of the interest incurred is expensed.

Pre-Acquisition Costs and Deposits

Amounts paid for land options, deposits on land purchase contracts, and other pre-acquisition costs are capitalized and classified as deposits to purchase. Upon execution of the purchase, these deposits are applied to the acquisition price of the land and recorded as a cost component of the land in real estate inventory. To the extent that any deposits are nonrefundable and the associated land acquisition process is terminated or no longer determined probable, the deposit and related pre-acquisition costs are charged to general and administrative expenses. Management reviews the likelihood of the acquisition of contracted lots in conjunction with its periodic real estate impairment analysis.

Under ASC Topic 810, Consolidation (“ASC 810”), a nonrefundable deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Non-refundable land purchase and lot option

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deposits generally represent our maximum exposure if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to close. Such costs are classified as preacquisition costs, which we would have to absorb should the option not be exercised. Therefore, whenever we enter into a land option or purchase contract with an entity and make a nonrefundable deposit, we may have a variable interest in a variable interest entity (“VIE”). In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE and would consolidate the VIE if we are deemed to be the primary beneficiary. As of December 31, 2022 and 2021, we were not deemed to be the primary beneficiary for any VIEs associated with non-refundable land deposits.

Deferred Loan Costs

Deferred loan costs represent debt issuance costs related to a recognized debt liability and are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.

Other Assets

Other assets consist primarily of municipal utility district reimbursements, income tax receivables related to the federal energy efficient homes tax credit, prepaid insurance, prepaid expenses, financing arrangement commitment fees, right-of-use (“ROU”) assets, investments in unconsolidated entities and other receivables. Our prepaid insurance and prepaid expenses were $8.3 million and $12.0 million as of December 31, 2022 and 2021, respectively.

Investment in Unconsolidated Entities

We have investments in unconsolidated entities with independent third parties. The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally, this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we recognize our proportionate share of the earnings and losses of this entity.

We evaluate our investments in unconsolidated entities for recoverability in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures. If we determine that a loss in the value of any of the investments is other than temporary, we write down the investment to its estimated fair value. Any such losses are recorded to equity in (earnings) loss of unconsolidated entities, which is reflected in other income, net.

Property and Equipment, Net

Property and equipment are stated at cost, less accumulated depreciation. Depreciation expense is recorded in general and administrative expenses. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in other income, net. Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets, ranging from two to five years for property and equipment and 30 years for our rental properties. Leasehold improvements are depreciated over the shorter of the asset life or the term of the lease. Maintenance and repair costs are expensed as incurred.

Impairments of long-lived assets are determined periodically when indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on judgments as to the future undiscounted operating cash flows to be generated from these assets throughout the remaining estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related asset, impairment is recognized for the excess of the carrying value over its fair value. There were no impairments of property, equipment and leasehold improvements recorded during the years ended December 31, 2022, 2021 and 2020.

Goodwill

The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is capitalized as goodwill in accordance with ASC 805, Business Combinations. Goodwill that do not have finite lives are not amortized, but are assessed for impairment at least annually or more frequently if certain impairment indicators are present. The $12.0 million of goodwill is related to the reorganization transactions completed in connection with the initial public offering of our common stock in November 2013. In applying the goodwill impairment test, we have the option to perform a qualitative test. Under the optional qualitative test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than their carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, we determine it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing a quantitative test is necessary. Annually, we have performed a qualitative analysis and determined that it is not “more likely than not” that the fair values of

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the reporting units were less than their carrying amounts. No goodwill impairment charges were recorded in 2022, 2021 and 2020.

Warranty Reserves

Future direct warranty costs are accrued and charged to cost of sales in the period when the related home is closed. Our warranty liability is based upon historical warranty cost experience and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our continued expansion.

Warranty reserves are reviewed quarterly to assess the reasonableness and adequacy and adjusted, as needed, to reflect changes in trends and historical data as information becomes available.

Customer Deposits

Customer deposits are received upon signing a purchase contract and are typically $1,000 to $10,000. Deposits are generally refundable if the customer is unable to obtain financing. Forfeited buyer deposits related to home sales are recognized in other income in the period in which it is determined that the buyer will not complete the purchase of the property and the deposit is nonrefundable to the buyer.

Home Sales

In accordance with ASC Topic 606, Revenue from Contracts with Customers,revenues from home sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the customer and we have no significant continuing involvement with the home. Home sales discounts and incentives granted to customers, which are related to the customers’ closing costs that we pay on the customers’ behalf, are recorded as a reduction of revenue in our consolidated financial statements of operations.

Cost of Sales

As discussed under “Real Estate Inventory” above, cost of sales for homes closed include the construction costs of each home and allocable land acquisition and land development costs, capitalized interest, and other related common costs (both incurred and estimated to be incurred).

Selling and Commission Costs

Sales commissions are paid and expensed based on homes closed. Other selling costs are expensed in the period incurred.

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs were $18.7 million, $7.7 million and $10.7 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Income Taxes

We are a taxable entity subject to federal and state taxes. We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Changes in tax rates are recognized in the year of enactment. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Our ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established, if required. We recognize the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. We recognize potential interest and penalties related to uncertain tax positions in income tax expense.

Earnings Per Share

Basic earnings per share is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding. Diluted earnings per share excludes all dilutive potential shares of common stock if their effect is antidilutive.

Stock-Based Compensation

Compensation costs for non-performance-based restricted stock awards are measured using the closing price of our common stock on the date of grant and are expensed on a straight-line basis over the requisite service period of the award. Compensation costs for performance-based restricted stock awards also contain a market condition. These costs are measured

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using the derived grant date fair value, based on a third party valuation analysis, and are expensed in accordance with ASC 718-10-25-20, Compensation - Stock Compensation, which requires an assessment of probability of attainment of the performance target. Once the performance target outcome is determined to be probable, the cumulative expense is adjusted, as needed, to recognize compensation expense on a straight-line basis over the award’s requisite service period.

Recent Accounting Pronouncements

Effective April 29, 2022, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform. Effective April 28, 2022, we adopted FASB ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”), which clarified the scope and application of the original guidance. The adoption of both ASU 2020-04 and ASU 2021-01 replaced LIBOR as the benchmark interest rate with the Secured Overnight Financing Rate (“SOFR”) and did not have a material effect on our consolidated financial statements or related disclosures.

3. REAL ESTATE INVENTORY

Our real estate inventory consists of the following (in thousands):

December 31,

Land, land under development, and finished lots $ 1,911,307 $ 1,499,761

Real estate not owned 141,792 —

Our real estate not owned relates to land banking financing arrangements with a third-party land banker to repurchase land that we sold to the land banker as a method of acquiring finished lots in staged takedowns, while limiting risk and minimizing the use of funds from our available cash or other financing sources. See “Real Estate Inventory” under Note 2 for more information.

Interest and financing costs incurred under our debt obligations and financing arrangements, as more fully discussed in Note6 and Note 5, respectively, are capitalized to qualifying real estate projects under development and homes under construction.

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

December 31,

(years)

Computer software and equipment 2-5 $ 3,894 $ 2,950

Machinery and equipment 5 127 87

Less: Accumulated depreciation (3,383) (1,807)

During the year ended December 31, 2022, we transferred $16.4 million of home assets from real estate inventory to rental properties within property and equipment. We are lessors of homes. Contracts are typically one year or less.

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Depreciation expense incurred for the years ended December 31, 2022, 2021 and 2020 was $1.6 million, $1.1 million and $0.7 million, respectively.

5. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued and other liabilities consist of the following (in thousands):

December 31,

Land banking financing arrangements 141,792 —

Real estate inventory development and construction payable 73,678 48,656

Accrued compensation, bonuses and benefits 12,900 24,914

Total accrued expenses and other liabilities $ 340,128 $ 136,609

Land Banking Financing Arrangements

We have entered into land banking financing arrangements with a third-party land banker to repurchase land that we sold to the land banker as a method of acquiring finished lots in staged takedowns. Principal payments on these financing arrangements will generally coincide with the repurchase of lot takedowns from the land banker. We expect to complete the repurchase of all lots via takedowns associated with these transactions over the course of approximately two to four years.

Inventory Related Obligations

We own lots in certain communities in Arizona, Florida, and Texas that have Community Development Districts or similar utility and infrastructure development special assessment programs that allocate a fixed amount of debt service associated with development activities to each lot. This obligation for infrastructure development is attached to the land, which is typically payable over a 30-year period, and is ultimately assumed by the homebuyer when home sales are closed. The obligations assumed by the homebuyer represent a non-cash cost of the lots.

Estimated Warranty Reserve

We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems.

Changes to our warranty accrual are as follows (in thousands):

December 31,

Warranty reserves, beginning of period $ 7,850 $ 5,350 $ 3,500

6. NOTES PAYABLE

Revolving Credit Agreement

On April 29, 2022, we entered into that certain Lender Addition and Acknowledgement Agreement and Second Amendment to Fifth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Second Amendment” and, as so amended, the “Credit Agreement”), which amended that certain Fifth Amended and Restated Credit Agreement, dated as of April 28, 2021, with several financial

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institutions, and Wells Fargo Bank, National Association, as administrative agent (the “2021 Credit Agreement”). The Second Amendment, among other things, (a) increased the commitments under the 2021 Credit Agreement by an additional $250.0 million, bringing the total commitments under the Credit Agreement to $1.1 billion, and (b) replaced LIBOR as the benchmark interest rate with SOFR.

Borrowings under the Credit Agreement bear interest, payable monthly in arrears, at the Company’s option, at either (1) term SOFR (based on 1, 3 or 6 month interest periods, as selected by the Company) plus a 10, 15 or 25 basis point adjustment, respectively, which rate is subject to a 50 basis point floor, plus an applicable margin (ranging from 145 basis points to 210 basis points (the “Applicable Margin”)) based on the Company’s leverage ratio as determined in accordance with a pricing grid, and (2) term SOFR based on a 1 month interest period plus a 10 basis point adjustment, subject to a 50 basis point floor, plus the Applicable Margin.

The Credit Agreement matures on April 28, 2025. Before each anniversary of the Credit Agreement, we may request a one-year extension of its maturity date. The Credit Agreement is guaranteed by, among others, each of our subsidiaries that have gross assets of at least $0.5 million.

The borrowings and letters of credit outstanding under the Credit Agreement, together with the outstanding principal balance of our 4.000% Senior Notes due 2029 (the “2029 Senior Notes”), may not exceed the borrowing base under the Credit Agreement. The borrowing base primarily consists of a percentage of commercial land, land held for development, lots under development and finished lots held by the Company and its subsidiaries that guarantee the obligations under the Credit Agreement. As of December 31, 2022, the borrowing base under the Credit Agreement was $1.4 billion, of which borrowings, including the 2029 Senior Notes, of $1.1 billion were outstanding, $33.4 million of letters of credit were outstanding and $236.6 million was available to borrow under the Credit Agreement.

Interest is paid monthly on borrowings under the Credit Agreement at SOFR plus 1.85%. The Credit Agreement applicable margin for SOFR loans ranges from 1.45% to 2.10% based on our leverage ratio. At December 31, 2022, SOFR was 4.32%, subject to the 0.50% SOFR floor as included in the Credit Agreement.

The Credit Agreement contains various financial covenants, including a minimum tangible net worth, a leverage ratio, a minimum liquidity amount and an EBITDA to interest expense ratio. The Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At December 31, 2022, we were in compliance with all of the covenants contained in the Credit Agreement.

Senior Notes Offering

On June 28, 2021, we issued $300.0 million aggregate principal amount of the 2029 Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States pursuant to Regulation S under the Securities Act. Interest on the 2029 Senior Notes accrues at a rate of 4.000% per annum, payable semi-annually in arrears on January 15 and July 15 of each year. The 2029 Senior Notes mature on July 15, 2029. The terms of the 2029 Senior Notes are governed by an Indenture, dated as of July 6, 2018, and Third Supplemental Indenture thereto, dated as of June 28, 2021, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Credit Agreement and Wilmington Trust, National Association, as trustee.

Notes payable consist of the following (in thousands):

December 31,

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As of December 31, 2022, the annual aggregate maturities of notes payable during each of the next five fiscal years are as follows (in thousands):

Amount

Less: Debt issuance costs (11,349)

Capitalized Interest

Interest activity, including other financing costs, for financial arrangements and notes payable for the periods presented is as follows (in thousands):

Year Ended December 31,

Interest expense $ — $ — $ —

Included in interest incurred was amortization of deferred financing costs and applicable discounts for notes payable and financing arrangements of $3.5 million for the year ended December 31, 2022 and $2.9 million for each of the years ended December 31, 2021 and 2020.

7. INCOME TAXES

The provision for income taxes consisted of the following (in thousands):

Year ended December 31,

Current:

Deferred:

Deferred tax provision (benefit) 12 788 (2,365)

Income taxes paid were $56.9 million, $127.9 million and $68.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before provision for income taxes for the years ended December 31, 2022, 2021 and 2020 (in thousands):

Year Ended December 31,

Change in tax rates - deferred taxes 23 — (367) (0.1) (78) —

Retroactive federal energy efficient homes taxcredits — — — — (29,703) (8.1)

The 2022 effective tax rate differs from the federal statutory rate primarily due to state income tax expense on current year earnings and non-deductible salaries related to Section 162(m) of the U.S. Internal Revenue Code, as amended (the “Code”) partially offset by benefits associated with the federal energy efficient homes tax credits enacted into law in December 2019 and the deductions in excess of compensation cost (“windfalls”) for share-based payments. The 2021 effective tax rate differs from the federal statutory rate primarily due to benefits associated with the federal energy efficient homes tax credits enacted into law in December 2019 and the windfalls for share-based payments, partially offset by state income tax expense on current year earnings and non-deductible salaries related to Section 162(m) of the Code. The 2020 effective tax rate differs from the federal statutory rate primarily due to benefits associated with the federal energy efficient homes tax credits enacted into law in December 2019, partially offset by state income tax expense on current year earnings.

Income tax expense for 2022 and 2021 includes a benefit of $9.1 and $16.2 million, respectively, associated with the extension of federal energy efficient homes tax credits. Income tax expense for 2020 includes a benefit of $41.2 million associated with the extension of federal energy efficient homes tax credits, including $29.7 million related to homes closed in prior open tax years. The federal energy efficient homes tax credit provision applies to qualifying homes closed through December 31, 2022.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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The components of net deferred tax assets and liabilities at December 31, 2022 and 2021 are as follows (in thousands):

December 31,

Deferred tax assets:

Deferred tax liabilities:

Goodwill and other assets amortized for tax (982) (860)

Tax depreciation in excess of book depreciation (707) (488)

Total deferred tax liabilities (4,630) (5,101)

Total net deferred tax assets $ 6,186 $ 6,198

All Company operations are domestic. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The statute of limitations with regards to our federal income tax filings is three years. The statute of limitations for our state tax jurisdictions is three to four years depending on the jurisdiction. In the normal course of business, we are subject to tax audits in various jurisdictions, and such jurisdictions may assess additional income taxes. We do not expect the outcome of any audit to have a material effect on our consolidated financial statements; however, audit outcomes and the timing of audit adjustments are subject to significant uncertainty.

8. EQUITY

We are authorized to issue 250,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. As of December 31, 2022 and 2021, no shares of preferred stock were issued or outstanding.

At December 31, 2022, we had 27,245,278 shares of common stock issued and 23,305,806 shares of common stock outstanding, including 3,939,472 treasury shares of our common stock. At December 31, 2021, we had 26,963,915 shares of common stock issued and 23,917,359 shares of common stock outstanding, including 3,046,556 treasury shares of our common stock.

Stock Repurchase Program

In November 2018, we announced that our Board of Directors (the “Board”) authorized a stock repurchase program, pursuant to which we may purchase up to $50.0 million of shares of our common stock through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws. In October 2020 and February 2022, the Board approved an increase in our stock repurchase program by an additional $300.0 million and $200.0 million, respectively. For the years ended December 31, 2022, 2021 and 2020, we repurchased 892,916 shares of our common stock for $95.1 million to be held as treasury stock, 1,288,563 shares of our common stock for $193.8 million to be held as treasury stock and 718,993 shares of our common stock for $48.1 million to be held as treasury stock, respectively. A total of 2,939,472 shares of our common stock has been repurchased since our stock repurchase program commenced. As of December 31, 2022, we may purchase up to $211.5 million of shares of our common stock under our stock repurchase program. The timing, amount and other terms and conditions of any repurchases of shares of our common stock under our stock repurchase program will be determined by our management at its discretion based on a variety of factors, including the market price of our common stock, corporate considerations, general market and economic conditions and legal requirements. Our stock repurchase program may be modified, discontinued or suspended at any time.

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Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2022, 2021, and 2020.

For the Year Ended December 31,

Numerator (in thousands):

Denominator:

Effect of dilutive securities:

9. STOCK-BASED COMPENSATION

Non-performance Based Restricted Stock Units

A total of 2,680,172 shares of our common stock have been reserved for issuance under the LGI Homes, Inc. Amended and Restated 2013 Equity Incentive Plan (the “2013 Incentive Plan”). There were 146,239 restricted stock units (“RSUs”) outstanding at December 31, 2022, issued at a $0.00 exercise price.

The following table summarizes the activity of our time-vested RSUs:

Shares Weighted Average Grant Date Fair Value

In 2022, we issued 16,731 RSUs to senior management for the time-based portion of our 2022 long-term incentive compensation program and 10,404 RSUs for 2021 annual bonuses to managers, which generally cliff vest on the third anniversary of the grant date. In 2021, we issued 11,511 RSUs to senior management for the time-based portion of our 2021 long-term incentive compensation program and 8,094 RSUs for 2020 annual bonuses to managers, which generally cliff vest on the third anniversary of the grant date. In 2020, we issued 22,141 RSUs to senior management for the time-based portion of our 2020 long-term incentive compensation program and 15,585 RSUs for 2019 annual bonuses to managers, which generally cliff

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vest on the third anniversary of the grant date. In addition, during the years ended December 31, 2022, 2021 and 2020, we issued 56,116, 10,059 and 19,009 RSUs, respectively, to certain employees, executives and non-employee directors, which vest over periods ranging from one to three years. Under the terms of the grant award agreements, all of the RSUs may only be settled in shares of our common stock.

We recognized $3.6 million, $3.3 million, and $3.5 million of stock-based compensation expense related to RSUs for the years ended December 31, 2022, 2021 and 2020, respectively. At December 31, 2022, we had unrecognized compensation cost of $8.7 million related to unvested RSUs, which is expected to be recognized over a weighted average period of 2.2 years.

Performance-Based Restricted Stock Units

The Compensation Committee of the Board has granted awards of performance-based RSUs (“PSUs”) under the 2013 Incentive Plan to certain members of senior management based on three-year performance cycles. At December 31, 2022, there were 192,828 PSUs outstanding that have been granted to certain members of management at a $0.00 exercise price. The PSUs provide for shares of our common stock to be issued based on the attainment of certain performance metrics over the applicable three-year periods. The number of shares of our common stock that may be issued to the recipients for the PSUs range from 0% to 200% of the target amount depending on actual results as compared to the target performance metrics. The terms of the PSUs provide that the payouts will be capped at 100% of the target number of PSUs granted if absolute total stockholder return is negative during the performance period, regardless of EPS performance; this market condition applies for amounts recorded above target. The compensation expense associated with the PSU grants is determined using the derived grant date fair value, based on a third-party valuation analysis, and expensed over the applicable period. The PSUs vest upon the determination date for the actual results at the end of the three-year period and require that the recipients continue to be employed by us through the determination date. The PSUs can only be settled in shares of our common stock.

The following table summarizes the activity of our PSUs:

At December 31, 2022, management estimates that the recipients will receive approximately 50%, 97%, and 200% of the 2022, 2021, and 2020 target number of PSUs at the end of the applicable three-year performance cycle based on projected performance compared to the target performance metrics. We recognized $4.5 million, $9.0 million, and $9.2 million of total stock-based compensation expense related to PSUs for the years ended December 31, 2022, 2021 and 2020, respectively. The 2019 - 2021 performance period PSUs vested and issued on March 15, 2022 at 200% of the target number. At December 31, 2022, we had unrecognized compensation cost of $6.2 million, based on the probable amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of 1.6 years.

Employee Stock Purchase Plan

The LGI Homes, Inc. Employee Stock Purchase Plan (the “ESPP”) provides for employees to make quarterly elections for payroll withholdings to purchase shares of our common stock at a 15% discount from the closing price of our common stock on the purchase date, which is the last business day of each calendar quarter. During the years ended December 31, 2022, 2021 and 2020, we issued 73,461, 55,068, and 60,918 shares of our common stock to the ESPP participants. We received net proceeds of approximately $5.6 million, $7.1 million and $4.3 million related to the ESPP for 2022, 2021, and 2020, respectively. We recognized $1.0 million, $1.3 million, and $0.8 million in stock compensation expense related to the ESPP for 2022, 2021, and 2020, respectively. The ESPP contributions are not refundable (other than in the case of termination of employment) and, therefore, the shares purchasable with the amounts withheld are included in weighted-average shares outstanding for both basic and diluted earnings per share. The maximum aggregate number of shares of our common stock which may be issued pursuant to the ESPP is 500,000 shares, and as of December 31, 2022, 159,793 shares of our common stock remain available for issuance under the ESPP.

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10. FAIR VALUE DISCLOSURES

ASC Topic 820, Fair Value Measurements (“ASC 820”), defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the most significant volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that differs from the transaction price or market price of the asset or liability.

ASC 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements, and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows:

Level 1 - Fair value is based on quoted prices in active markets for identical assets or liabilities.

Level 2 - Fair value is determined using significant observable inputs, generally either quoted prices in active markets for

similar assets or liabilities, or quoted prices in markets that are not active.

Level 3 - Fair value is determined using one or more significant inputs that are unobservable in active markets at the

measurement date, such as a pricing model, discounted cash flow, or similar technique.

We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets. The fair value of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities, approximate their carrying amounts due to the short-term nature of these instruments. As of December 31, 2022, the Credit Agreement’s carrying value approximates market value since it has a floating interest rate, which increases or decreases with market interest rates and our leverage ratio.

In order to determine the fair value of the 2029 Senior Notes, the future contractual cash flows are discounted at our estimate of current market rates of interest, which were determined based upon the average interest rates of similar senior notes within the homebuilding industry (Level 2 measurement).

The following table below shows the level and measurement of liabilities at December 31, 2022 and 2021 (in thousands):

(1)See Note 6 for more details regarding the offering of the 2029 Senior Notes.

11. RELATED PARTY TRANSACTIONS

Land Purchases from Affiliates

We did not complete any related party transactions during the year ending December 31, 2022.

For the year ended December 31, 2021, we completed a land purchase contract to purchase a total of 110 finished lots in Pasco County, Florida, from an affiliate of one of our directors for a total base purchase price of approximately $4.0 million.

For the year ended December 31, 2021, we completed a land purchase contract to purchase a total of 25 finished lots in Burnet County, Texas, from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately $2.5 million.

12. RETIREMENT BENEFITS

Our employees are eligible to participate in a 401(k) savings plan. Employees are eligible to participate beginning in the quarterly period after completing 30 days of service and attaining the age of 21. Salary deferrals are allowed in amounts up to 100% of an eligible employee’s salary, not to exceed the maximum permitted by law. We may make a discretionary match of up to 100% of the first 4% of an eligible employee’s deferral, not to exceed the maximum allowed by law. For each of the years ended December 31, 2022, 2021 and 2020, our matching contributions were $4.5 million, $4.6 million and $4.0 million, respectively.

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13. COMMITMENTS AND CONTINGENCIES

Contingencies

In the ordinary course of doing business, we are subject to claims or proceedings from time to time relating to the purchase, development and sale of real estate and homes and other aspects of our homebuilding operations. Management believes that these claims include usual obligations incurred by real estate developers and residential home builders in the normal course of business. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.

We have provided unsecured environmental indemnities to certain lenders and other counterparties. In each case, we have performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, we may have recourse against other previous owners. In the ordinary course of doing business, we are subject to regulatory proceedings from time to time related to environmental and other matters. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.

Land Deposits

We have land purchase contracts, generally through cash deposits, for the right to purchase land or lots at a future point in time with predetermined terms. We do not have title to the property, and obligations with respect to the land purchase contracts are generally limited to the forfeiture of the related nonrefundable cash deposits. The following is a summary of our land purchase deposits included in pre-acquisition costs and deposits (in thousands, except for lot count):

December 31,

(1) Includes land banking financing arrangements, see Notes 3 and 5 for more details regarding real estate not owned.

As of December 31, 2022 and 2021, approximately $12.8 million and $19.3 million, respectively, of the land deposits are related to purchase contracts to deliver finished lots that are refundable under certain circumstances, such as feasibility or specific performance, and secured by mortgages or letters of credit or guaranteed by the seller or its affiliates.

Lease Obligations

We recognize lease obligations and associated right-of-use (“ROU”) assets for our existing non-cancelable leases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We have non-cancelable operating leases primarily associated with our corporate and regional office facilities. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms. Variable lease costs such as common area costs and property taxes are expensed as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets, as included in other assets on the consolidated balance sheets, were $4.9 million and $5.1 million as of December 31, 2022 and 2021, respectively. Lease obligations, as included in accrued expenses and other liabilities on the consolidated balance sheets, were $5.2 million and $5.3 million as of December 31, 2022 and 2021, respectively.

Operating lease cost, as included in general and administrative expense in our consolidated statements of operations, totaled $2.1 million, $1.7 million and $1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of lease liabilities for operating leases during the years ended December 31, 2022 and 2021 was $1.8 million and $1.6 million, respectively. As of December 31, 2022, the weighted-average discount rate was 5.5% and our weighted-average remaining life was 4.7 years. We do not have any significant lease contracts that have not yet commenced at December 31, 2022.

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The table below shows the future minimum payments under non-cancelable operating leases at December 31, 2022 (in thousands):

Year Ending December 31, Operating leases

Lease amount representing interest (733)

Present value of lease liabilities $ 5,182

Bonding and Letters of Credit

We have outstanding letters of credit and performance and surety bonds totaling $368.1 million (including $33.4 million of letters of credit issued under the Credit Agreement) and $206.8 million (including $9.1 million of letters of credit issued under the Credit Agreement) at December 31, 2022 and 2021, respectively, related to our obligations for site improvements at various projects. Management does not believe that draws upon the letters of credit, surety bonds, or financial guarantees if any, will have a material effect on our consolidated financial position, results of operations, or cash flows.

Investment in Unconsolidated Entities

In 2019, we entered as a limited partner into a real estate investment fund with a maximum $30.0 million commitment. The term of the commitment is eight years and includes renewals of up to two additional years. Additionally, in 2021, we entered into a joint venture with a mortgage lender. As of December 31, 2022 and 2021, we have a total of $11.2 million and $5.6 million, respectively, within other assets on the balance sheet relating to our investment in this real estate investment fund and the mortgage joint venture. Contributions into the unconsolidated entities are for the use of investing in certain real estate transactions and residential mortgage services, respectively. Income associated with our investment in unconsolidated entities was $5.5 million for the year ended December 31, 2022. We did not have any income recognized for our investment in unconsolidated entities for the year ended December 31, 2021.

14. REVENUES

Revenue Recognition

Revenues from home sales are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the customer and we have no significant continuing involvement with the home. Home sales discounts and incentives granted to customers, which are related to the customers’ closing costs that we pay on the customers’ behalf, are recorded as a reduction of revenue in our consolidated financial statements of operations.

The following table presents our home sales revenues disaggregated by revenue stream (in thousands):

For the Year Ended December 31,

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The following table presents our home sales revenues disaggregated by geography, based on our determined reportable segments in Note 15 (in thousands):

For the Year Ended December 31,

Home Sales Revenues

We generate revenues primarily by delivering move-in ready entry-level and move-up spec homes sold under our LGI Homes brand and our luxury series spec homes sold under our Terrata Homes brand.

Retail homes sold under both our LGI Homes brand and Terrata Homes brand focus on providing move-in ready homes with standardized features within favorable markets that meet certain demographic and economic conditions. Our LGI Homes brand primarily markets to entry-level or first-time homebuyers, while our Terrata Homes brand primarily markets to move-up homebuyers.

Wholesale homes are primarily sold under a bulk sales agreement and focus on providing move-in ready homes with standardized features to real estate investors that will ultimately use the single-family homes as rental properties.

Performance Obligations

Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms as customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title company within a few business days after closing.

Sales and broker commissions are incremental costs incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained. Sales and broker commissions are expensed upon fulfillment of a home closing. Advertising costs are costs to obtain a contract that would have been incurred regardless of whether the contract was obtained and are recognized as an expense when incurred. Sales and broker commissions and advertising costs are recorded within sales and marketing expense presented in our consolidated statements of operations as selling expenses.

15. SEGMENT INFORMATION

We operate one principal homebuilding business that is organized and reports by division. We have seven operating segments (our Central, Midwest, Southeast, Mid-Atlantic, Northwest, West and Florida divisions) that we aggregate into five qualifying reportable segments at December 31, 2022: our Central, Southeast, Northwest, West and Florida divisions. These segments reflect the way the Company evaluates its business performance and manages its operations. The Central division is our largest division and comprised approximately 43.9%, 41.1% and 35.9% of total home sales revenues for the years ended December 31, 2022, 2021 and 2020, respectively.

In accordance with ASC 280, Segment Reporting, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in deciding how to allocate resources and in assessing performance. The CODMs primarily evaluate performance based on the number of homes closed, gross margin and average sales price per home closed.

In determining the most appropriate reportable segments, we consider operating segments’ economic and other characteristics, including home floor plans, average selling prices, gross margin percentage, geographical proximity, production construction processes, suppliers, subcontractors, regulatory environments, customer type and underlying demand and supply. Each operating segment follows the same accounting policies and is managed by our management team. We have no inter-segment sales, as all sales are to external customers. Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.

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Financial information relating to our reportable segments was as follows (in thousands):

For the Year Ended December 31,

Revenues:

Net income (loss) before income taxes:

(1) The Corporate balance consists of general and administration unallocated costs for various shared service functions and non-strategic other income, as well as our warranty reserve. Actual warranty expenses are reflected within the reportable segments. For the year ended December 31, 2021, the Corporate balance includes $14.0 million of loss on extinguishment of debt. Additionally, for the year ended December 31, 2022, the Corporate balance includes the $7.1 million gain on the sale of the three-year interest rate cap of LIBOR prior to its expiration.

December 31,

(1) The Corporate balance consists primarily of cash, investments in unconsolidated entities and tax receivables.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, our disclosure controls and procedures are effective to ensure information is recorded, processed, summarized and reported within the periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Management of LGI Homes, Inc. (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed, as defined in Rule 13a-15(f) under the Exchange Act, to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles in the United States.

In connection with respect to the preparation of the Company’s annual consolidated financial statements, and the processes under which they were prepared, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the 2013 COSO framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial reporting. Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.