UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 20192020
OR
o☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  to  .
Commission file number 001-36126


LGI HOMES, INC.


(Exact name of registrant as specified in its charter)


Delaware46-3088013
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1450 Lake Robbins Drive,Suite 430,The Woodlands, TexasTexas77380
(Address of principal executive offices)(Zip code)
(281)362-8998
(Registrant’s Telephone Number, Including Area Code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareLGIHNASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  ý ☒ No  ¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes  ý☒    No  ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐

Emerging growth company☐
Large accelerated filer ý
Accelerated filer ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨


Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨☐    No  ý☒

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareLGIHNASDAQ Global Select Market


As of May 3, 2019,1, 2020, there were 22,925,73025,074,446 shares of the registrant’s common stock, par value $0.01 per share, outstanding.


Table of Contents
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LGI HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
 March 31,December 31,
 20202019
ASSETS
Cash and cash equivalents$118,232  $38,345  
Accounts receivable45,006  56,390  
Real estate inventory1,481,833  1,499,624  
Pre-acquisition costs and deposits37,448  37,244  
Property and equipment, net1,888  1,632  
Other assets20,318  16,241  
Deferred tax assets, net2,301  4,621  
Goodwill and intangible assets, net12,018  12,018  
Total assets$1,719,044  $1,666,115  
LIABILITIES AND EQUITY
Accounts payable$19,066  $12,495  
Accrued expenses and other liabilities95,980  117,868  
Notes payable744,393  690,559  
Total liabilities859,439  820,922  
COMMITMENTS AND CONTINGENCIES
EQUITY
Common stock, par value $0.01, 250,000,000 shares authorized, 26,680,474 shares issued and 25,074,446 shares outstanding as of March 31, 2020 and 26,398,409 shares issued and 25,359,409 shares outstanding as of December 31, 2019266  264  
Additional paid-in capital255,509  252,603  
Retained earnings653,221  610,382  
Treasury stock, at cost, 1,606,028 shares and 1,039,000 shares, respectively(49,391) (18,056) 
Total equity859,605  845,193  
Total liabilities and equity$1,719,044  $1,666,115  
  March 31, December 31,
  2019 2018
ASSETS 
  
Cash and cash equivalents $35,084
 $46,624
Accounts receivable 31,987
 42,836
Real estate inventory 1,290,855
 1,228,256
Pre-acquisition costs and deposits 43,698
 45,752
Property and equipment, net 1,478
 1,432
Other assets 19,943
 15,765
Deferred tax assets, net 1,140
 2,790
Goodwill and intangible assets, net 12,018
 12,018
Total assets $1,436,203
 $1,395,473
     
LIABILITIES AND EQUITY    
Accounts payable $14,690
 $9,241
Accrued expenses and other liabilities 68,512
 76,555
Notes payable 676,075
 653,734
Total liabilities 759,277
 739,530
     
COMMITMENTS AND CONTINGENCIES 
 
EQUITY    
Common stock, par value $0.01, 250,000,000 shares authorized, 23,964,730 shares issued and 22,925,730 shares outstanding as of March 31, 2019 and 23,746,385 shares issued and 22,707,385 shares outstanding as of December 31, 2018 239
 237
Additional paid-in capital 244,635
 241,988
Retained earnings 450,108
 431,774
Treasury stock, at cost, 1,039,000 shares (18,056) (18,056)
Total equity 676,926
 655,943
Total liabilities and equity $1,436,203
 $1,395,473














See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)


 
 Three Months Ended March 31,
 20202019
Home sales revenues$454,727  $287,594  
Cost of sales348,163  221,290  
Selling expenses32,763  26,791  
General and administrative19,923  18,438  
   Operating income53,878  21,075  
Other income, net(1,011) (619) 
Net income before income taxes54,889  21,694  
Income tax provision12,050  3,360  
Net income$42,839  $18,334  
Earnings per share:
Basic$1.69  $0.81  
Diluted$1.67  $0.73  
Weighted average shares outstanding:
Basic25,323,119  22,744,726  
Diluted25,592,835  25,086,183  
  Three Months Ended March 31,
  2019 2018
Home sales revenues $287,594
 $279,024
     
Cost of sales 221,290
 209,765
Selling expenses 26,791
 22,949
General and administrative 18,438
 15,440
   Operating income 21,075
 30,870
Loss on extinguishment of debt —
 175
Other income, net (619) (532)
Net income before income taxes 21,694
 31,227
Income tax provision 3,360
 3,925
Net income $18,334
 $27,302
Earnings per share:    
Basic $0.81
 $1.23
Diluted $0.73
 $1.10
     
Weighted average shares outstanding:    
Basic 22,744,726
 22,188,121
Diluted 25,086,183
 24,772,027






































See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except share data)


 
Common StockAdditional Paid-In CapitalRetained EarningsTreasury StockTotal Equity
SharesAmount
BALANCE—December 31, 2019BALANCE—December 31, 201926,398,409  $264  $252,603  $610,382  $(18,056) $845,193  
Net incomeNet income—  —  —  42,839  —  42,839  
Issuance of restricted stock units in settlement of accrued bonusesIssuance of restricted stock units in settlement of accrued bonuses—  —  222  —  —  222  
Stock repurchaseStock repurchase—  —  —  —  (31,335) (31,335) 
Compensation expense for equity awardsCompensation expense for equity awards—  —  1,853  —  —  1,853  
Stock issued under employee incentive plansStock issued under employee incentive plans282,065  2  831  —  —  833  
BALANCE— March 31, 2020BALANCE— March 31, 202026,680,474  $266  $255,509  $653,221  $(49,391) $859,605  
 Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Total Equity
 Shares Amount
BALANCE—December 31, 2018 23,746,385
 $237
 $241,988
 $431,774
 $(18,056) $655,943
Net income —
 —
 —
 18,334
 —
 18,334
Issuance of restricted stock units in settlement of accrued bonuses —
 —
 217
 —
 —
 217
Compensation expense for equity awards —
 —
 1,783
 —
 —
 1,783
Stock issued under employee incentive plans 218,345
 2
 647
 —
 —
 649
BALANCE— March 31, 2019 23,964,730
 $239
 $244,635
 $450,108
 $(18,056) $676,926
            
            
BALANCE—December 31, 2017 22,845,580
 $228
 $229,680
 $276,488
 $(16,550) $489,846
Net income —
 —
 —
 27,302
 —
 27,302
Issuance of shares in settlement of Convertible Notes 486,679
 5
 (475) —
 —
 (470)
Issuance of restricted stock units in settlement of accrued bonuses —
 —
 181
 —
 —
 181
Compensation expense for equity awards —
 —
 1,351
 —
 —
 1,351
Stock issued under employee incentive plans 282,887
 3
 697
 —
 —
 700
BALANCE— March 31, 2018 23,615,146
 $236
 $231,434
 $303,790
 $(16,550) $518,910





BALANCE—December 31, 201823,746,385  $237  $241,988  $431,774  $(18,056) $655,943  
Net income—  —  —  18,334  —  18,334  
Issuance of restricted stock units in settlement of accrued bonuses—  —  217  —  —  217  
Compensation expense for equity awards—  —  1,783  —  —  1,783  
Stock issued under employee incentive plans218,345  2  647  —  —  649  
BALANCE— March 31, 201923,964,730  $239  $244,635  $450,108  $(18,056) $676,926  














See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended March 31,
 20202019
Cash flows from operating activities:
Net income$42,839  $18,334  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization161  165  
Compensation expense for equity awards1,853  1,783  
Deferred income taxes2,320  1,650  
Changes in assets and liabilities:
Accounts receivable11,385  10,849  
Real estate inventory17,902  (61,254) 
Pre-acquisition costs and deposits(204) 2,054  
Other assets(2,953) 1,112  
Accounts payable6,571  5,449  
Accrued expenses and other liabilities(21,071) (13,320) 
Net cash provided by (used in) operating activities58,803  (33,178) 
Cash flows from investing activities:
Purchases of property and equipment(417) (211) 
Investment in unconsolidated entity(1,125) —  
Net cash used in investing activities(1,542) (211) 
Cash flows from financing activities:
Proceeds from notes payable128,128  45,000  
Payments on notes payable(75,000) (23,800) 
Proceeds from sale of stock, net of offering expenses833  649  
Stock repurchase(31,335) —  
Net cash provided by financing activities22,626  21,849  
Net increase (decrease) in cash and cash equivalents79,887  (11,540) 
Cash and cash equivalents, beginning of period38,345  46,624  
Cash and cash equivalents, end of period$118,232  $35,084  
  Three Months Ended March 31,
  2019 2018
Cash flows from operating activities:    
Net income $18,334
 $27,302
Adjustments to reconcile net income to net cash used in operating activities:    
Depreciation and amortization 165
 180
Loss on extinguishment of debt —
 164
Compensation expense for equity awards 1,783
 1,351
Deferred income taxes 1,650
 932
Changes in assets and liabilities:    
Accounts receivable 10,849
 23,046
Real estate inventory (61,254) (120,306)
Pre-acquisition costs and deposits 2,054
 (5,743)
Other assets 1,112
 (3,207)
Accounts payable 5,449
 13,717
Accrued expenses and other liabilities (13,320) (48,360)
Net cash used in operating activities (33,178) (110,924)
Cash flows from investing activities:    
Purchases of property and equipment (211) (153)
Net cash used in investing activities (211) (153)
Cash flows from financing activities:    
Proceeds from notes payable 45,000
 110,000
Payments on notes payable (23,800) (15,038)
Proceeds from sale of stock, net of offering expenses 649
 700
Payment for earnout obligation —
 (132)
Net cash provided by financing activities 21,849
 95,530
Net decrease in cash and cash equivalents (11,540) (15,547)
Cash and cash equivalents, beginning of period 46,624
 67,571
Cash and cash equivalents, end of period $35,084
 $52,024














See accompanying notes to the consolidated financial statements.

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LGI HOMES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.  ORGANIZATION AND BASIS OF PRESENTATION
Organization and Description of the Business
LGI Homes, Inc., a Delaware corporation (the “Company”, “us,“we,” “we,“us,” or “our”), is engaged in the development of communities and the design, construction and sale of new homes in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Minnesota, Oklahoma, Alabama, California, Oregon, Nevada, West Virginia and West Virginia.
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019. The accompanying unaudited consolidated financial statements include all adjustments that are of a normal recurring nature and necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.
The accompanying unaudited financial statements as of March 31, 2019,2020, and for the three months ended March 31, 20192020 and 2018,2019, 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.
COVID-19
On March 11, 2020, the World Health Organization declared the current outbreak of the novel strain of coronavirus (“COVID-19”) to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in certain of our markets. We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations. During the first quarter of 2020, certain markets in which we do business temporarily stopped our construction of homes. As of the date of this Quarterly Report on Form 10-Q, we have resumed construction of homes in those markets. Although we continue to build and sell homes in all of our markets, sales have slowed significantly, and sales contract cancellations have been impacted. The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of COVID-19, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. While we cannot reasonably estimate the length or severity of this pandemic, an extended economic slowdown in the United States could materially impact our consolidated financial statements in 2020 and beyond.
Recently Adopted Accounting Standards
On January 1, 2019,2020, we adopted the Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2016-02”2018-15”), which amends the existing standards for lease accounting, requiring lesseesrequires entities that are customers in cloud computing arrangements to recognize most leases on their balance sheets and disclose key information about leasing arrangements. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than one year. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
We adopted the new standard with a modified retrospective transition approach, so financial information is not updated for periods prior to January 1, 2019. Pursuant to the adoption of the new standard, we elected the practical expedients upon transition that do not require us to reassess existing contracts to determinedefer implementation costs if they contain leaseswould be capitalized by the entity in software licensing arrangements under the new definitioninternal-use software guidance. The guidance may be applied retrospectively or prospectively to implementation costs incurred after the date of a lease, or to reassess historical lease classification or initial direct costs.We also elected the practical expedient to not separate lease and non-lease components for new leases after adoption of the new standard.
adoption. The adoption of Topic 842 is accounted for asASU 2018-15 did not have a change in accounting principle in conformity with FASB Accounting Standards Codification (“ASC”) 250, “Accounting Changes and Error Corrections.” As a resultmaterial effect on our consolidated financial statements or disclosures.
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Table of the adoption, the most significant changes are related to the recognition of new ROU assets and lease liabilities of $5.4 million as ofContents
On January 1, 2019 on the balance sheet for office operating leases. The Company's existing material leases are all considered operating leases under the new leasing standard and as a result, no adjustment to retained earnings was required.
Recently Issued Accounting Pronouncements
In August 2018,2020, we adopted the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements of fair value measurements. ASU 2018-13 is effective for us beginning January 1, 2020. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. We are currently evaluating the impact thatThe adoption of this guidance willASU 2018-13 did not have a material effect on our consolidated financial statementstatements or disclosures.

InOn January 2017,1, 2020, we adopted the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.”Impairment” (“ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us beginning January 1, 2020, with early adoption permitted, and applied prospectively. We do not expectThe adoption of ASU 2017-04 todid not have a material impacteffect on our consolidated financial statements.statements or disclosures.
On January 1, 2020, we adopted the FASB ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments from an “incurred loss” approach to a new “expected credit loss” methodology. ASU 2016-13 is effective for us beginning January 1, 2020, with early adoption permitted. The adoption of ASU 2016-13 did not have a material effect on our consolidated financial statements or disclosures.
2.  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. Proceeds from home sales are generally received from the title company within a few business days after closing. Home sales discounts and incentives granted to customers, which are related to the customers’ closing costs that we pay on the 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):
Three Months Ended March 31,
20202019
Retail home sales revenues$410,402  $281,465  
Other44,325  6,129  
Total home sales revenues$454,727  $287,594  
  Three Months Ended March 31,
  2019 2018
Retail home sales revenues $281,465
 $272,038
Other 6,129
 6,986
Total home sales revenues $287,594
 $279,024
The following table presents our home sales revenues disaggregated by geography, based on our determined reportable segments in Note 13 (in thousands):
 Three Months Ended March 31,Three Months Ended March 31,
 2019 201820202019
Central $124,197
 $107,498
Central$165,775  $124,197  
SoutheastSoutheast88,447  52,414  
Northwest 36,254
 57,173
Northwest101,948  36,254  
Southeast 52,414
 45,108
WestWest58,485  45,817  
Florida 28,912
 42,443
Florida40,072  28,912  
West 45,817
 26,802
Total home sales revenues $287,594
 $279,024
Total home sales revenues$454,727  $287,594  
Home Sales Revenues
We generate revenues primarily by delivering move-in ready spec homes with our 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.
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Our other revenues are composed of our wholesale home sales under our LGI Homes brand and Terrata Homes brand in existing markets. Wholesale homes are primarily sold under a bulk sales agreement and focus on providing move-in ready homes with standardized features to real estate investors that will ultimately use the single-family homes as rental properties.
Performance Obligations
Our contracts with customers include a single performance obligation to transfer a completed home to the customer. We generally determine selling price per home on the expected cost plus margin. Our contracts contain no significant financing terms as customers who finance do so through a third party. Performance obligations are satisfied at a moment in time when the home is complete and control of the asset is transferred to the customer at closing. Home sales proceeds are generally received from the title company within a few business days after closing.

Sales and broker commissions are incremental costs incurred to obtain a contract with a customer that would not have been incurred if the contract had not been obtained. Sales and broker commissions are expensed upon fulfillment of a home closing. Advertising costs are costs to obtain a contract that would have been incurred regardless of whether the contract was obtained and are recognized as an expense when incurred. Sales and broker commissions and advertising costs are recorded within sales and marketing expense presented in our consolidated statements of operations as selling expenses.
3.  REAL ESTATE INVENTORY
Our real estate inventory consists of the following (in thousands):
 March 31, December 31,March 31,December 31,
 2019 201820202019
Land, land under development and finished lots $780,057
 $736,402
Land, land under development and finished lots$916,819  $912,651  
Information centers 23,512
 21,179
Information centers27,837  26,959  
Homes in progress 197,836
 149,506
Homes in progress243,390  234,470  
Completed homes 289,450
 321,169
Completed homes293,787  325,544  
Total real estate inventory $1,290,855
 $1,228,256
Total real estate inventory$1,481,833  $1,499,624  
Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case the affected inventory is written down to fair value.
Land, development and other project costs, including interest and property taxes incurred during development and home construction, and net of expected reimbursements ofreimbursable development costs, are capitalized to real estate inventory. Land development and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate. The costs of lots are transferred to homes in progress when home construction begins. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method. Costs that are not specifically identifiable to a home are allocated on a pro rata basis, which we believe approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots or homes within a community are similar in value. Inventory costs for completed homes are expensed to cost of sales as homes are closed. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining unsold lots and homes in the community on a pro rata basis.
The life cycle of a community generally ranges from two to five years, commencing with the acquisition of land, continuing through the land development phase and concluding with the construction and sale of homes. A constructed home is used as the community information center during the life of the community and then sold. Actual individual community lives will vary based on the size of the community, the sales absorption rate and whether the property was purchased as raw land or finished lots.
Interest and financing costs incurred under our debt obligations, as more fully discussed in Note 5, are capitalized to qualifying real estate projects under development and homes under construction.

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4.  ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued and other current liabilities consist of the following (in thousands):
March 31,December 31,
 March 31, December 31,20202019
 2019 2018
Taxes payableTaxes payable$19,649  $28,679  
Retentions and development payable 17,610
 18,899
Retentions and development payable27,223  26,790  
Taxes payable 12,228
 10,773
Accrued compensation, bonuses and benefits 8,783
 14,263
Accrued compensation, bonuses and benefits12,077  16,748  
Accrued interest 7,266
 12,339
Accrued interest5,789  11,361  
Inventory related obligations $7,245
 $7,041
Inventory related obligations7,215  7,808  
Lease Liability 5,290
 —
Lease Liability5,439  5,645  
Warranty reserve 3,000
 2,950
Warranty reserve3,750  3,500  
Other 7,090
 10,290
Other14,838  17,337  
Total accrued expenses and other liabilities $68,512
 $76,555
Total accrued expenses and other liabilities$95,980  $117,868  
Inventory Related Obligations
We own lots in certain communities in Arizona, California, 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. Such obligations represent a non-cash cost of the lots.
Estimated Warranty Reserve
We typically provide homebuyers with a one-yearone-year warranty on the house and a ten-yearten-year limited warranty for major defects in structural elements such as framing components and foundation systems.
Changes to our warranty accrual are as follows (in thousands):
Three Months Ended March 31,
 20202019
Warranty reserves, beginning of period$3,500  $2,950  
Warranty provision1,420  1,095  
Warranty expenditures(1,170) (1,045) 
Warranty reserves, end of period$3,750  $3,000  
  Three Months Ended March 31,
  2019 2018
Warranty reserves, beginning of period $2,950
 $2,450
Warranty provision 1,095
 988
Warranty expenditures (1,045) (838)
Warranty reserves, end of period $3,000
 $2,600

5.  NOTES PAYABLE
Revolving Credit Agreement
On May 25, 2018,6, 2019, we entered into that certain ThirdFourth Amended and Restated Credit Agreement (as amended by the First Amendment (as defined below), the “2019 Credit Agreement”) with several financial institutions and Wells Fargo Bank, National Association, as administrative agent, which was amended as of June 19, 2018 by that certain First Amendment thereto (the “First Amendment”; such credit agreement, as amended by the First Amendment, the “2018 Credit Agreement”).agent. The 20182019 Credit Agreement has substantially similar terms and provisions to our secondthird amended and restated credit agreement entered into in May 20172018 with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “2017“2018 Credit Agreement”), but among other things, providedprovides for a revolving credit facility of $450.0$550.0 million, which could be increased at our request by up to $50.0$100.0 million if the lenders make additional commitments, subject to the terms and conditions of the 20182019 Credit Agreement (which was requested and approved in October 2018)December 2019). On October 18, 2018,December 6, 2019, we entered into a Lender Addition and Acknowledgement Agreement and First Amendment to Fourth Amended and Restated Credit Agreement (the “First Amendment”) with certain lenders and Wells Fargo Bank, National Association, as an increasing lender and administrative agent, whereby the aggregate revolving commitments under the 20182019 Credit Agreement increased by $50.0$100.0 million from $450.0$550.0 million to $500.0$650.0 million in accordance with the relevant provisions of the 20182019 Credit Agreement.
The 20182019 Credit Agreement matures on May 31, 2021.2022. Before each anniversary of the 20182019 Credit Agreement, we may request a one-year extension of theits maturity date. The 20182019 Credit Agreement is guaranteed by each of our subsidiaries that have gross assets equal to or greater than $0.5 million. The borrowings and letters of $0.5 million or more. The revolving credit facility is currently unsecured, but we have agreed to provide collateral if we fail to meet certain financial conditions inoutstanding under the future. As2019 Credit Agreement, together with the outstanding principal balance of March 31, 2019,our 6.875% Senior Notes due 2026 (the “Senior Notes”), may
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not exceed the borrowing base under the 20182019 Credit

Agreement. As of March 31, 2020, the borrowing base under the 2019 Credit Agreement was $766.7$904.8 million, of which borrowings, including the Convertible Notes (as defined below) and the Senior Notes, (as defined below), of $685.2$752.7 million were outstanding, $5.1$15.0 million of letters of credit were outstanding and $74.7$137.1 million was available to borrow under the 20182019 Credit Agreement, net of deferred purchase price obligations.Agreement.
Interest is paid monthly on borrowings under the 20182019 Credit Agreement at LIBORthe London Interbank Offered Rate (“LIBOR”) plus 2.90%2.50%. The 20182019 Credit Agreement applicable margin for LIBOR loans ranges from 2.65%2.35% to 3.25%2.75% based on our leverage ratio. At March 31, 2019,2020, LIBOR was 2.49%0.92%.
The 20182019 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 20182019 Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At March 31, 2019,2020, we were in compliance with all of the covenants contained in the 20182019 Credit Agreement.
On May 6, 2019,April 30, 2020, we entered into that certaina Second Amendment to Fourth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”“Second Amendment”), which amends the 2019 Credit Agreement (as so amended, the “Credit Agreement”). In the Second Amendment, lenders with $520.0 million, or 80.0%, of the $650.0 million of commitments under the Credit Agreement, agreed to extend the maturity of their commitments to May 31, 2023, with the remaining lenders retaining their existing maturity. The Second Amendment also reduced the minimum EBITDA to interest expense ratio from 2.50 to 1.75, increased the sublimit for letters of credit to $40.0 million and restates andestablished a LIBOR floor of 0.70%. The Credit Agreement otherwise has substantially similar terms and provisions to the 20182019 Credit Agreement and providescontinues to provide for a $550.0$650.0 million revolving credit facility, which can be increased at the request of the Company by up to $100.0 million, subject to the terms and conditions of the Credit Agreement. See Note 14 - Subsequent Event for more information regarding the Credit Agreement.
Convertible Notes
We issued $85.0 million aggregate principal amount ofOn November 15, 2019, our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) matured, which resulted in November 2014 pursuant to an exemption from the registration requirements afforded by Section 4(a)(2)principal payment of the Securities Act of 1933, as amended (the “Securities Act”). The Convertible Notes mature on November 15, 2019. Interest on the Convertible Notes is payable semi-annually in arrears on May 15 and November 15 of each year at a rate of 4.25%. When the Convertible Notes were issued, the fair value of $76.5$70.0 million was recorded to notes payable. $5.5 million of the remaining proceeds was recorded to additional paid in capital to reflect the equity component and the remaining $3.0 million was recorded as a deferred tax liability. The carrying amountissuance of the Convertible Notes is being accreted to face value over the term to maturity.
Prior to May 15, 2019, the Convertible Notes are convertible only upon satisfaction of any of the specified conversion events. On or after May 15, 2019 and until the close of business on November 14, 2019 (the business day immediately preceding the stated maturity date of the Convertible Notes), the holders of the Convertible Notes can convert their Convertible Notes at any time at their option. Upon the election of a holder of Convertible Notes to convert their Convertible Notes, we may settle the conversion of the Convertible Notes using any combination of cash and shares of our common stock. It is our intent, and belief that we have the ability, to settle in cash the conversion of any Convertible Notes that the holders elect to convert. The initial conversion rate of the Convertible Notes is 46.47922,381,751 shares of our common stock for each $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $21.52 per share of our common stock. The conversion rate is subject to adjustments upon the occurrence of certain specified events.
During the fourth quarter of 2017, we received notice from holders of $15.0 million principal amount ofpremium associated with the Convertible Notes to convert their Convertible Notes. The conversion of such Convertible Notes was settled in the first quarter of 2018, resulting in the issuance of 486,679 shares of our common stock, a $0.6 million reduction to debt discount and additional paid in capital, a $0.2 million loss on the extinguishment of debt and a cash payment of $15.0 million for the principal amount of such Convertible Notes. As of March 31, 2019, we have $70.0 million aggregate principal amount of Convertible Notes outstanding.
During the first quarter of 2019, the Convertible Notes were convertible because the closing sale price of our common stock was greater than 130% of the $21.52 conversion price on at least 20 trading days during the 30 trading day period ending on December 31, 2018. As a result, the holders of the Convertible Notes could elect to convert some or all of their Convertible Notes in accordance with the terms and provisions of the indenture governing the Convertible Notes during the conversion period of January 1, 2019 through March 31, 2019 (inclusive). The Convertible Notes continue to be convertible during the second quarter of 2019. As of the date of the filing of this Quarterly Report on Form 10-Q, no other conversion notices have been received by us.
On July 6, 2018, concurrently with the offering of the Senior Notes, we entered into that certain First Supplemental Indenture, dated as of July 6, 2018, among us, our subsidiaries that guarantee our obligations under the 2018 Credit Agreement (the “Subsidiary Guarantors”) and Wilmington Trust, National Association, as trustee, which supplements the indenture governing the Convertible Notes, pursuant to which (i) the subordination provisions in the indenture governing the Convertible Notes were eliminated, (ii) each Subsidiary Guarantor agreed (A) to, concurrently with the issuance of the Senior Notes, fully and unconditionally guarantee the Convertible Notes to the same extent that such Subsidiary Guarantor is guaranteeing the Senior Notes and (B) that such Subsidiary Guarantor’s guarantee of the Convertible Notes ranks equally with such Subsidiary Guarantor’s guarantee of the Senior Notes and (iii) the Company agreed to not, directly or indirectly, incur any indebtedness in the form of, or otherwise become liable in respect of, any notes or other debt securities issued pursuant to an indenture or note purchase agreement (including the Senior Notes) unless such indebtedness is equal with or contractually subordinated to the Convertible Notes in right of payment.

Senior Notes Offering
On July 6, 2018, we issued $300.0 million aggregate principal amount of the 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 Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019, and the Senior Notes mature on July 15, 2026. Terms of the Senior Notes are governed by an indentureIndenture and supplemental indenture,First Supplemental Indenture thereto, each dated as of July 6, 2018, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Subsidiary GuarantorsCredit Agreement and Wilmington Trust, National Association, as trustee.
We received net proceeds from the offering of the Senior Notes of approximately $296.2 million, after deducting the initial purchasers’ discounts of $2.3 million and commissions and offering expenses of $1.5 million. The net proceeds from the offering were used to repay a portion of the borrowings under the 2018 Credit Agreement.
Notes payable consist of the following (in thousands):
March 31, 2020December 31, 2019
Notes payable under the 2019 Credit Agreement ($650.0 million revolving credit facility at March 31, 2020) maturing on May 31, 2022; interest paid monthly at LIBOR plus 2.50%; net of debt issuance costs of approximately $4.5 million and $5.0 million at March 31, 2020 and December 31, 2019, respectively$448,199  $394,531  
6.875% Senior Notes due July 15, 2026; interest paid semi-annually at 6.875%; net of debt issuance costs of approximately $2.1 million and $2.2 million at March 31, 2020 and December 31, 2019, respectively; and approximately $1.7 million and $1.8 million in unamortized discount at March 31, 2020 and December 31, 2019, respectively296,194  296,028  
Total notes payable$744,393  $690,559  

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  March 31, 2019 December 31, 2018
Notes payable under the 2018 Credit Agreement ($500.0 million revolving credit facility at March 31, 2019) maturing on May 31, 2021; interest paid monthly at LIBOR plus 2.90%; net of debt issuance costs of approximately $3.4 million and $3.7 million at March 31, 2019 and December 31, 2018, respectively $311,801
 $290,131
4.25% Convertible Notes due November 15, 2019; interest paid semi-annually at 4.25%; net of debt issuance costs of approximately $0.3 million and $0.4 million at March 31, 2019 and December 31, 2018, respectively; and approximately $1.0 million and $1.3 million in unamortized discount at March 31, 2019 and December 31, 2018, respectively 68,750
 68,251
6.875% Senior Notes due July 15, 2026; interest paid semi-annually at 6.875%; net of debt issuance costs of approximately $2.5 million at March 31, 2019 and December 31, 2018; and approximately $2.0 million and $2.1 million in unamortized discount at March 31, 2019 and December 31, 2018, respectively 295,524
 295,352
Total notes payable $676,075
 $653,734
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Capitalized Interest
Interest activity, including other financing costs, for notes payable for the periods presented is as follows (in thousands):
 Three Months Ended March 31,Three Months Ended March 31,
 2019 201820202019
Interest incurred $11,417
 $7,193
Interest incurred$10,156  $11,417  
Less: Amounts capitalized (11,417) (7,193)Less: Amounts capitalized(10,156) (11,417) 
Interest expense $—
 $—
Interest expense$—  $—  
    
Cash paid for interest $14,833
 $5,170
Cash paid for interest$15,024  $14,833  
Included in interest incurred was amortization of deferred financing costs and discounts for notes payable and amortization of Convertible Notes and Senior Notes discounts of $1.1$0.7 million and $0.8$1.1 million for the three months ended March 31, 20192020 and 2018,2019, respectively.
6.  INCOME TAXES
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.
For the three months ended March 31, 2019,2020, our effective tax rate of 15.5%22.0% is lowerhigher than the Federal statutory rate primarily as a result of an increase in the rate for state income taxes and expenses related to non-deductible salaries related to Section 162(m) of the Internal Revenue Code of 1986, as amended, offset by the net of the federal benefit payments, deductions in excess of compensation cost (“windfalls”) for share-based payments, offset by an increase in rate for state income taxes, net of the federal benefit payments.

Income taxes paid were $0.2$18.4 million and $42.9$0.2 million for the three months ended March 31, 20192020 and 2018,2019, respectively.
7.  EQUITY
Shelf Registration Statement
On August 24, 2018, we and certain of our subsidiaries filedWe have an automaticeffective shelf registration statement on Form S-3 (Registration No. 333-227012), that was filed on August 24, 2018 with the Securities and Exchange Commission, registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these securities.
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. For the three months ended March 31, 2020, we repurchased 567,028 shares of our common stock for $31.3 million to be held as treasury stock. A total of 606,028 shares have been repurchased since the stock repurchase program commenced. As of March 31, 2020, we may purchase up to $17.2 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. The stock repurchase program may be modified, discontinued or suspended at any time.

8.  EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 20192020 and 2018:2019:
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 Three Months Ended March 31,Three Months Ended March 31,
 2019 201820202019
Numerator (in thousands):    Numerator (in thousands):
Net Income (Numerator for basic and dilutive earnings per share) $18,334
 $27,302
Net Income (Numerator for basic and dilutive earnings per share)$42,839  $18,334  
Denominator:    Denominator:
Basic weighted average shares outstanding 22,744,726
 22,188,121
 Basic weighted average shares outstanding25,323,119  22,744,726  
Effect of dilutive securities:     Effect of dilutive securities:
Convertible Notes - treasury stock method 2,043,494
 2,217,336
Convertible Notes - treasury stock method—  2,043,494  
Stock-based compensation units 297,963
 366,570
 Stock-based compensation units269,716  297,963  
Diluted weighted average shares outstanding 25,086,183
 24,772,027
 Diluted weighted average shares outstanding25,592,835  25,086,183  
    
Basic earnings per share $0.81
 $1.23
Basic earnings per share$1.69  $0.81  
Diluted earnings per share $0.73
 $1.10
Diluted earnings per share$1.67  $0.73  
Antidilutive non-vested restricted stock units excluded from calculation of diluted earnings per share 35,157
 25,106
Antidilutive non-vested restricted stock units excluded from calculation of diluted earnings per share26,893  35,157  
In accordance with ASCAccounting Standards Codification (“ASC”) 260-10,Earnings Per Share, we calculated the dilutive effect of the Convertible Notes using the treasury stock method, since we havehad the intent and ability to settle the principal amount of the outstanding Convertible Notes in cash. UnderThe Convertible Notes matured and were repaid in full on November 15, 2019. Prior to the treasury stock method,maturity of the Convertible Notes, have awe included the effect of the additional potential dilutive impact on diluted earnings per share to the extent that the average market price ofshares if our common stock for a reporting period exceedsprice exceeded the conversion price of $21.52 per share.
share under the treasury stock method. During the three months ended March 31, 2019, and 2018, the average market price of our common stock exceeded the conversion price of $21.52 per share. Included in the calculation of diluted earnings per share was the effect of approximately 2.0 million and 2.2 million shares of our common stock related to the conversion spread of the Convertible Notes for the three months ended March 31, 2019 and 2018, respectively.

9. STOCK-BASED COMPENSATION
Non-performance Based Restricted Stock Units
The following table summarizes the activity of our time-vested restricted stock units (“RSUs”):
Three Months Ended March 31,
20202019
SharesWeighted Average Grant Date Fair ValueSharesWeighted Average Grant Date Fair Value
Beginning balance162,686  $50.84  171,055  $39.04  
   Granted46,701  $59.81  47,245  $56.49  
   Vested(51,531) $31.95  (40,265) $21.82  
   Forfeited(982) $51.03  (2,026) $48.61  
Ending balance156,874  $59.71  176,009  $47.59  
  Three Months Ended March 31,
  2019 2018
  Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value
Beginning balance 171,055
 $39.04
 175,100
 $27.66
   Granted 47,245
 $56.49
 35,048
 $64.60
   Vested (40,265) $21.82
 (31,021) $14.75
   Forfeited (2,026) $48.61
 (2,611) $30.68
Ending balance 176,009
 $47.59
 176,516
 $37.22
DuringWe recognized $0.8 million and $0.5 million of stock-based compensation expense related to outstanding RSUs for the three months ended March 31, 2020 and 2019, we issued 20,847 RSUs to senior management for the time-based portion of our 2019 long-term incentive compensation program, 16,159 RSUs for 2018 bonuses to managers under our Annual Bonus Plan and 10,239 RSUs to other employees.respectively. Generally, the RSUs cliff vest on the third anniversary of the grant date and can only be settled in shares of our common stock.
We recognized $0.5 million and $0.4 million of stock-based compensation expense related to outstanding RSUs for the three months ended March 31, 2019 and 2018, respectively. At March 31, 2019,2020, we had unrecognized compensation cost of $5.4$5.9 million related to unvested RSUs, which is expected to be recognized over a weighted average period of 2.32.1 years.
Performance-Based Restricted Stock Units
The Compensation Committee of ourthe Board of Directors has granted awards of Performance-Basedperformance-based RSUs (“PSUs”) under the Amended and Restated LGI Homes, Inc. 2013 Equity Incentive Plan to certain members of senior management based on the three-year performance cycles. The PSUs provide for shares of our common stock to be issued based on the attainment of certain performance metrics over the applicable three-yearthree-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
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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-yearthree-year period and require that the recipients continue to be employed by us through the determination date. The PSUs can only be settled in shares of our common stock.
The following table summarizes the activity of our PSUs for the three months ended March 31, 2019:
2020:
Period Granted Performance Period Target PSUs Outstanding at December 31, 2018 Target PSUs Granted Target PSUs Vested Target PSUs Forfeited Target PSUs Outstanding at March 31, 2019 Weighted Average Grant Date Fair ValuePeriod GrantedPerformance PeriodTarget PSUs Outstanding at December 31, 2019Target PSUs GrantedTarget PSUs VestedTarget PSUs ForfeitedTarget PSUs Outstanding at March 31, 2020Weighted Average Grant Date Fair Value
2016 2016 - 2018 83,656
 —
 (83,656) —
 —
 $21.79
2017 2017 - 2019 108,247
 —
 —
 —
 108,247
 $31.64
20172017 - 2019104,770  —  (104,770) —  —  $31.64  
2018 2018 - 2020 61,898
 —
 —
 —
 61,898
 $64.60
20182018 - 202060,040  —  —  —  60,040  $64.60  
2019 2019 - 2021 —
 83,367
 —
 —
 83,367
 $56.49
20192019 - 202181,242  —  —  —  81,242  $56.49  
202020202020-202288,538  —  —  88,538  $59.81  
Total 253,801
 83,367
 (83,656) —
 253,512
  Total246,052  88,538  (104,770) —  229,820  
At March 31, 2019,2020, management estimates that the recipients will receive approximately 100%, 100%89% and 196%113% of the 2020, 2019 2018 and 20172018 target number of PSUs, respectively, at the end of the applicable three-yearthree-year performance cycle based on projected performance compared to the target performance metrics. We recognized $1.2$0.9 million and $0.9$1.2 million of total stock-based compensation expense related to outstanding PSUs for the three months ended March 31, 20192020 and 2018,2019, respectively. PSUs granted in 20162017 vested on March 31, 201915, 2020 at 200%199% of the target amount, and 167,312208,867 shares of our common stock were issued

upon such vesting. At March 31, 2019,2020, we had unrecognized compensation cost of $9.0$9.3 million, based on the probable amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of 2.32.4 years.
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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 greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that differs from the transaction price or market price of the asset or liability.
ASC 820 provides a framework for measuring fair value under GAAP, expands disclosures about fair value measurements and establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of the fair value hierarchy are summarized as follows:
Level 1 - Fair value is based on quoted prices in active markets for identical assets or liabilities.
Level 2 - Fair value is determined using significant observable inputs, generally either quoted prices in active markets for
similar assets or liabilities, or quoted prices in markets that are not active.
Level 3 - Fair value is determined using one or more significant inputs that are unobservable in active markets at the
measurement date, such as a pricing model, discounted cash flow or similar technique.
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets. The fair value of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and certain accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. As of March 31, 2020, the 2019 our revolving credit facility’sCredit 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 Convertible Notes and the Senior Notes, listed below, the future contractual cash flows are discounted at our estimate of current market rates of interest, which were determined based upon the average interest rates of similar convertible notes and senior notes within the homebuilding industry (Level 2 measurement).
The following table below shows the level and measurement of liabilities at March 31, 20192020 and December 31, 20182019 (in thousands):
March 31, 2020December 31, 2019
Fair Value HierarchyCarrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value
Senior NotesLevel 2$296,194  $263,362  $296,028  $337,853  
    March 31, 2019 December 31, 2018
  Fair Value Hierarchy Carrying Value 
Estimated Fair Value (1)
 Carrying Value 
Estimated Fair Value (1)
Convertible Notes Level 2 $68,750
 $68,996
 $68,251
 $67,787
Senior Notes Level 2 $295,524
 $305,528
 $295,352
 $296,905

(1)
Excludes the fair value of the equity component of the Convertible Notes. See the “Convertible Notes” section within Note 5 for further details.
11. RELATED PARTY TRANSACTIONS
Land Purchases from Affiliates
As of March 31, 2019,2020, we have two land purchase contracts to purchase a total of 198 finished lots in Pasco County and Manatee County, Florida from affiliates of one of our directors for a total base purchase price of approximately $6.9 million. The lots will be purchased in takedowns, subject to annual price escalation ranging from 3% to 6% per annum, and may provide for additional payments to the seller at the time of sale to the homebuyer. We have a $0.7$0.5 million non-refundable deposit at March 31, 20192020 related to these land purchase contracts. We anticipate theIn August 2019, we purchased our first closingtakedown of 58 lots on the Pasco County contract to occur infor a base purchase price of approximately $2.1 million. We did not experience any takedowns concerning these two land purchase contracts during the second quarter of 2019three months ended March 31, 2020 and 2019. We anticipate the first closing on the Manatee County contract to occur in the thirdsecond half of 2020.
During the three months ended March 31, 2020, we entered into a land purchase contract to purchase 25 finished lots in Montgomery County, Texas from an affiliate of a family member of our chief executive officer for a total base purchase price of approximately $2.0 million. We anticipate the closing on the Montgomery County contract to occur in the second quarter of 2020.
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12.  COMMITMENTS AND CONTINGENCIES
Contingencies
In the ordinary course of doing business, we are subject to claims or proceedings from time to time relating to the purchase, development and sale of real estate and homes and other aspects of our homebuilding operations. Management believes that these claims include usual obligations incurred by real estate developers and residential home builders in the normal course of business.

In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.
We have provided unsecured environmental indemnities to certain lenders and other counterparties. In each case, we have performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, we may have recourse against other previous owners. In the ordinary course of doing business, we are subject to regulatory proceedings from time to time related to environmental and other matters. In the opinion of management, these matters will not have a material effect on our consolidated financial position, results of operations or cash flows.
Land Deposits
We have land purchase contracts, generally through cash deposits, for the right to purchase land or lots at a future point in time with predetermined terms. We do not have title to the property, and obligations with respect to the land purchase contracts are generally limited to the forfeiture of the related nonrefundable cash deposits. The following is a summary of our land purchase deposits included in pre-acquisition costs and deposits (in thousands, except for lot count):
 March 31, 2019 December 31, 2018March 31, 2020December 31, 2019
Land deposits and option payments $39,390
 $40,015
Land deposits and option payments$34,829  $35,111  
Commitments under the land purchase contracts if the purchases are consummated $673,929
 $776,224
Commitments under the land purchase contracts if the purchases are consummated$560,730  $539,122  
Lots under land purchase contracts 20,722
 22,820
Lots under land purchase contracts18,855  16,205  
As of March 31, 20192020 and December 31, 2018,2019, approximately $27.2$25.1 million and $25.2$26.3 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
As described in the “Recently Adopted Accounting Standards” section within Note 1, as of January 1, 2019, we adopted the provisions of ASU 2016-02 and recognizedWe recognize lease obligations and associated 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 $5.1$5.2 million as ofand $5.3 million at March 31, 2019.2020 and December 31, 2019, respectively. Lease obligations, as included in accrued expenses and other liabilities on the consolidated balance sheets, were $5.3$5.4 million as ofand $5.6 million at March 31, 2019.2020 and December 31, 2019, respectively.
Operating lease cost, as included in selling, general and administrative expense in our consolidated statements of operations, for the three months ended March 31, 2020 and 2019 was $0.4 million and $0.3 million.million, respectively. Cash paid for amounts included in the measurement of lease liabilities for operating leases during the three months ended March 31, 2020 and 2019 was $0.4 million and $0.3 million.million, respectively. As of March 31, 2019,2020, the weighted-average discount rate was 5.73%5.47% and our weighted-average remaining life was 8.17.0 years.
The Company does We do not have any significant lease contracts that have not yet commenced at March 31, 2019. 2020.
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The table below shows the future minimum payments under non-cancelable operating leases at March 31, 20192020 (in thousands):

Year Ending December 31,Operating leases
2020$857  
20211,099  
2022944  
2023819  
2024674  
Thereafter2,237  
Total6,630  
Lease amount representing interest(1,191) 
Present value of lease liabilities$5,439  
Year Ending December 31, Operating leases
2019 $734
2020 927
2021 926
2022 799
2023 722
Thereafter 2,838
Total 6,946
Lease amount representing interest (1,656)
Present value of lease liabilities $5,290
Bonding and Letters of Credit
We have outstanding letters of credit and performance and surety bonds totaling $78.8$118.5 million (including $5.1$15.0 million of letters of credit issued under the 20182019 Credit Agreement) and $77.5$108.7 million at March 31, 20192020 and December 31, 2018,2019, 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 Entity
In July 2019, we became a limited partner in 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. As of March 31, 2020 and December 31, 2019, we have a total of $2.1 million and $1.1 million, respectively, within other assets on the balance sheet. Contributions into the unconsolidated entity are for the use of investing in certain real estate transactions.
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13.  SEGMENT INFORMATION
Beginning in the fourth quarter of 2018, we changed our reportable segments to Central, Northwest, Southeast, Florida, and West. These segments reflect the way the Company evaluates its business performance and manages its operations. Prior period information has been restated for corresponding items of our segment information.
We operate one principal homebuilding business that is organized and reports by division. We have seven7 operating segments (our Central, Midwest, Northwest, Southeast, Mid-Atlantic, Florida,Northwest, West, and WestFlorida divisions) that we aggregate into five5 reportable segments at March 31, 2019:2020: our Central, Southeast, Northwest, Southeast,West, and Florida divisions. These segments reflect the way the Company evaluates its business performance and West divisions.manages its operations. The Central division is our largest division and comprised approximately 43% and 39%36% of total home sales revenues for the three months ended March 31, 2019 and 2018, respectively.2020.
In accordance with ASC Topic 280, Segment Reporting, operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-makers (“CODMs”) in deciding how to allocate resources and in assessing performance. The CODMs primarily evaluate performance based on the number of homes closed, gross margin and average sales price.
The seven7 operating segments qualify as our five5 reportable segments. In determining the most appropriate reportable segments, we consider operating segments’ economic and other characteristics, including home floor plans, average selling prices, gross margin percentage, geographical proximity, production construction processes, suppliers, subcontractors, regulatory environments, customer type and underlying demand and supply. Each operating segment follows the same accounting policies and is managed by our management team. We have no0 inter-segment sales, as all sales are to external customers. Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.
Financial information relating to our reportable segments was as follows (in thousands):

Three Months Ended March 31,
20202019
Revenues:
Central$165,775  $124,197  
Southeast88,447  52,414  
Northwest101,948  36,254  
West58,485  45,817  
Florida40,072  28,912  
Total home sales revenues$454,727  $287,594  
Net income (loss) before income taxes:
Central$24,234  $14,647  
Southeast7,908  415  
Northwest16,527  3,376  
West5,272  3,107  
Florida2,525  1,215  
Corporate (1)
(1,577) (1,066) 
Total net income (loss) before income taxes$54,889  $21,694  
(1)The Corporate balance consists primarily of general and administration unallocated costs for various shared service functions, as well as our warranty reserve. Actual warranty expenses are reflected within the reportable segments.
March 31, 2020December 31, 2019
Assets:
Central$635,106  $637,083  
Southeast419,068  410,944  
Northwest195,660  221,132  
West186,546  193,545  
Florida149,126  149,877  
Corporate (1)
133,538  53,534  
Total assets$1,719,044  $1,666,115  
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  Three Months Ended March 31,
  2019 2018
Revenues:    
Central $124,197
 $107,498
Northwest 36,254
 57,173
Southeast 52,414
 45,108
Florida 28,912
 42,443
West 45,817
 26,802
Total home sales revenues $287,594
 $279,024
     
Net income (loss) before income taxes:    
Central $14,647
 $15,306
Northwest 3,376
 6,262
Southeast 415
 4,327
Florida 1,215
 3,972
West 3,107
 1,781
Corporate (1)
 (1,066) (421)
Total net income (loss) before income taxes $21,694
 $31,227
(1)The Corporate balance consists primarily of general and administration unallocated costs for various shared service functions, as well as our warranty reserve and loss on extinguishment of debt. Actual warranty expenses are reflected within the reportable segments.
(1)As of March 31, 2020 and December 31, 2019 , the Corporate balance consists primarily of cash, prepaid insurance, ROU assets and prepaid expenses.
  March 31, 2019 December 31, 2018
Assets:    
Central $548,199
 $569,409
Northwest 218,645
 200,443
Southeast 330,132
 300,758
Florida 117,484
 106,398
West 175,707
 161,514
Corporate (1)
 46,036
 56,951
Total assets $1,436,203
 $1,395,473
(1)As of March 31, 2019, the Corporate balance consists primarily of cash, prepaid insurance, ROU assets and prepaid expenses.
14. SUBSEQUENT EVENTEVENTS
Amendment to 2019 Credit Agreement. On May 6, 2019,April 30, 2020, we entered into the Second Amendment, which amended the 2019 Credit Agreement, as more fully discussed in Note 5.
Additional Subsidiary Guarantors. On April 30, 2020, we and our subsidiaries that guarantee our obligations under the Credit Agreement entered into a Second Supplemental Indenture to that certain Fourth Amended and Restated Credit AgreementIndenture, dated as of July 6, 2018, with several financial institutions, and Wells Fargo Bank,Wilmington Trust, National Association, as administrative agent (the “Credit Agreement”),trustee, pursuant to which amendsthe Company’s wholly owned subsidiaries, LGI Homes – Pennsylvania, LLC and restatesLGI Homes – Utah, LLC, issued a full and has substantially similar terms and provisions to the 2018 Credit Agreement and provides for a $550.0 million revolving credit facility, which can be increased at the requestunconditional guarantee of the Company by up to $100.0 million, subject to the terms and conditionsSenior Notes.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operation, references to “we,” “our,” “us” or similar terms refer to LGI Homes, Inc. and its subsidiaries.
Business Overview
We are engaged in the design, construction and sale of new homes in the following markets:
WestNorthwestCentralMidwestFloridaSoutheastMid-Atlantic
Phoenix, AZSeattle, WAHouston, TXMinneapolis, MNTampa, FLAtlanta, GAWashington, D.C.
Tucson, AZPortland, ORDallas/Dallas Ft. Worth, TXOrlando, FLCharlotte, NC/SCNCRichmond, VA
Albuquerque, NMDenver, COSan Antonio, TXFort Myers, FLNashville, TNRaleigh, NC
Sacramento, CALas Vegas, NVColorado Springs, COAustin, TXJacksonville, FLRaleigh,Wilmington, NC
Las Vegas, NVSacramento, CAOklahoma City, OKFort Pierce, FLWilmington,Winston-Salem, NC
Riverside, CADaytona Beach, FLWinston-Salem, NCColumbia, SC
Sarasota, FLGreenville, SC
Birmingham, AL
Nashville, TN
Our management team has been in the residential land development business since the mid-1990s. Since commencing home building operations in 2003, we have constructed and closed over 30,00035,000 homes. During the three months ended March 31, 2019,2020, we had 1,2281,835 home closings, compared to 1,2441,228 home closings during the three months ended March 31, 2018.2019.
We sell homes under the LGI Homes and Terrata Homes brands. Our 87113 active communities at March 31, 20192020 included fivetwo Terrata Homes communities.
During the three months ended March 31, 2020, we recorded $44.3 million in wholesale revenues as a result of 199 homes closings, representing 10.8% of the total homes closed during the three months ended March 31, 2020. During the three months ended March 31, 2019, we recorded $6.1 million in wholesale revenues as a result of 30 wholesale home closings, representing 2.4% of the total homes closed during the three months ended March 31, 2019. We believe our wholesale home closings provide opportunities for us to leverage our systems and processes to meet the needs of companies looking to acquire multiple homes for rental purposes, primarily through bulk sales agreements.
COVID-19
On March 11, 2020, the World Health Organization declared the current outbreak of the novel strain of coronavirus (“COVID-19”) to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in certain of our markets. We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations. During the first quarter of 2020, certain markets in which we do business temporarily stopped our construction of homes. As of the date of this Quarterly Report on Form 10-Q, we have resumed construction of homes in those markets. Although we continue to build and sell homes in all of our markets, sales have slowed significantly, and sales contract cancellations have been impacted. There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of COVID-19, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us, our subcontractors, suppliers and other business counterparties to experience operational delays.
Demand for our homes is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, consumer confidence, housing demand, availability of financing for home buyers, availability and prices of new homes compared to existing inventory, and demographic trends. These factors, and in particular
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consumer confidence, can be significantly adversely affected by a variety of factors beyond our control. The outbreak of COVID-19 has caused the shutdown of large portions of our national economy. The spread of COVID-19 has also caused significant volatility in U.S. and international debt and equity markets, which can negatively impact consumer confidence.
In response to COVID-19, we have taken steps to prioritize the health and safety of our employees, customers, subcontractors and suppliers, including enhancing sales office procedures and reducing information center hours for employee protection, adjusting staffing in the field, requiring corporate personnel to work remotely and following Center for Disease Control guidelines. We are continuing to protect the health and safety of our employees and those of our subcontractors, customers and other business counterparties, and this includes changes to comply with health-related guidelines as they are modified and supplemented.
As a homebuilder and developer, we provide an important service to our customers. During the COVID-19 outbreak, our main focus beyond the health and safety mentioned above, will be to continue our efforts to sell homes and complete our homes under construction. In addition to the measures discussed above, we have implemented certain cash management policies, including eliminating business air travel, cancelling group meetings, delaying or canceling land acquisitions, deferring new starts to reduce our overall inventory, significantly reducing marketing expenditures and delaying major expenditures.
While we continue to assess the COVID-19 situation, at this time we cannot estimate with any degree of certainty the full impact of the COVID-19 outbreak on our financial condition and future results of operations, although we expect the COVID-19 situation to adversely impact future quarters. We also cannot predict the full impact that the significant disruption and volatility currently being experienced in the markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of COVID-19, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. For additional discussion regarding risks associated with the COVID-19 pandemic, see Item 1A. Risk Factors in Part II of this Quarterly Report on Form 10-Q.
Recent Developments
On May 6, 2019,During the three months ended March 31, 2020, we enteredcontinued our previously announced stock repurchase program with the purchase of 567,028 shares of our common stock for $31.3 million through open market transactions, privately negotiated transactions or otherwise in accordance with applicable laws.
During the three months ended March 31, 2020, we increased our market presence in two of our operating segments with the entry into that certain Fourth Amendedthe Sarasota, Florida and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”), which amends and restates and has substantially similar terms and provisions to the 2018 Credit Agreement and provides for a $550.0 million revolving credit facility, which can be increased at the request of the Company by up to $100.0 million, subject to the terms and conditions of the Credit Agreement. See Note 14 - Subsequent Event for more information regarding the Credit Agreement.Greenville, South Carolina markets.
Key Results
Key financial results as of and for the three months ended March 31, 2019,2020, as compared to the three months ended March 31, 2018,2019, were as follows:
•Home sales revenues increased 3.1%58.1% to $287.6$454.7 million from $279.0$287.6 million.
•Homes closed decreased 1.3%increased 49.4% to 1,2281,835 homes from 1,2441,228 homes.
•Average sales price of our homes increased 4.4%5.8% to $234,197$247,808 from $224,296.$234,197.
•Gross margin as a percentage of home sales revenues decreasedincreased to 23.1%23.4% from 24.8%23.1%.
•Adjusted gross margin (non-GAAP) as a percentage of home sales revenues decreasedincreased to 25.1%25.5% from 26.4%25.1%.
•Net income before income taxes decreased 30.5%increased 153.0% to $21.7$54.9 million from $31.2$21.7 million.
•Net income decreased 32.8%increased 133.7% to $18.3$42.8 million from $27.3$18.3 million.
•EBITDA (non-GAAP) as a percentage of home sales revenues decreasedincreased to 9.5%14.1% from 12.8%9.5%.
•Adjusted EBITDA (non-GAAP) as a percentage of home sales revenues decreasedincreased to 9.5%14.0% from 12.7%9.5%.
•Total owned and controlled lots decreased 1.4%increased 4.6% to 50,70050,273 lots at March 31, 20192020 from 51,44248,062 lots at December 31, 2018.2019.
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.”


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Results of Operations
The following table sets forth our results of operations for the periods indicated: 
 Three Months Ended March 31,
 20202019
(dollars in thousands, except per share data and average home sales price)
Statement of Income Data:
Home sales revenues$454,727  $287,594  
Expenses:
Cost of sales348,163  221,290  
Selling expenses32,763  26,791  
General and administrative19,923  18,438  
     Operating income53,878  21,075  
Other income, net(1,011) (619) 
     Net income before income taxes54,889  21,694  
Income tax provision12,050  3,360  
     Net income$42,839  $18,334  
Basic earnings per share$1.69  $0.81  
Diluted earnings per share$1.67  $0.73  
Other Financial and Operating Data:
Active communities at end of period113  87  
Home closings1,835  1,228  
Average sales price of homes closed$247,808  $234,197  
Gross margin (1)
$106,564  $66,304  
Gross margin % (2)
23.4 %23.1 %
Adjusted gross margin (3)
$116,117  $72,328  
Adjusted gross margin % (2)(3)
25.5 %25.1 %
EBITDA (4)
$63,980  $27,253  
EBITDA margin % (2)(4)
14.1 %9.5 %
Adjusted EBITDA (4)
$63,592  $27,264  
Adjusted EBITDA margin % (2)(4)
14.0 %9.5 %
  Three Months Ended March 31,
  2019 2018
  (dollars in thousands, except per share data and average home sales price)
Statement of Income Data:    
Home sales revenues $287,594
 $279,024
Expenses:    
Cost of sales 221,290
 209,765
Selling expenses 26,791
 22,949
General and administrative 18,438
 15,440
     Operating income 21,075
 30,870
Loss on extinguishment of debt —
 175
Other income, net (619) (532)
     Net income before income taxes 21,694
 31,227
Income tax provision 3,360
 3,925
     Net income $18,334
 $27,302
Basic earnings per share $0.81
 $1.23
Diluted earnings per share $0.73
 $1.10
Other Financial and Operating Data: 
 
Active communities at end of period 87
 79
Home closings 1,228
 1,244
Average sales price of homes closed $234,197
 $224,296
Gross margin (1)
 $66,304
 $69,259
Gross margin % (2)
 23.1% 24.8%
Adjusted gross margin (3)
 $72,328
 $73,568
Adjusted gross margin % (2)(3)
 25.1% 26.4%
EBITDA (4)
 $27,253
 $35,719
EBITDA margin % (2)(4)
 9.5% 12.8%
Adjusted EBITDA (4)
 $27,264
 $35,359
Adjusted EBITDA margin % (2)(4)
 9.5% 12.7%
(1)Gross margin is home sales revenues less cost of sales.
(1)Gross margin is home sales revenues less cost of sales.
(2)Calculated as a percentage of home sales revenues.
(3)
(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 application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. Please see “—Non-GAAP Measures” for a reconciliation of adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable.
(4)EBITDA and adjusted EBITDA are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization and (iv) capitalized interest charged to the cost of sales. We define adjusted EBITDA as net income before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) capitalized interest charged to the cost of sales, (v) loss on extinguishment of debt, (vi) other income, net and (vii) adjustments resulting from the application of purchase accounting. Our management believes that the

presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by
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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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Three Months Ended March 31, 20192020 Compared to Three Months Ended March 31, 20182019
Homes Sales. Our home sales revenues, home closings, average sales price (ASP), average community count, average monthly absorption rate and closing community count by reportable segment for the three months ended March 31, 20192020 and 20182019 were as follows (revenues in thousands):
Three Months Ended March 31, 2020
RevenuesHome ClosingsASPAverage Community CountAverage
Monthly
Absorption Rate
Central$165,775  741  $223,718  34.0  7.3  
Southeast88,447  403  219,471  31.0  4.3  
Northwest101,948  273  373,436  12.3  7.4  
West58,485  236  247,818  14.7  5.4  
Florida40,072  182  220,176  16.7  3.6  
Total$454,727  1,835  $247,808  108.7  5.6  
  Three Months Ended March 31, 2019
  Revenues Home Closings ASP Average Community Count Average
Monthly
Absorption Rate
Central $124,197
 578
 $214,874
 32.0
 6.0
Northwest 36,254
 99
 366,202
 11.0
 3.0
Southeast 52,414
 230
 227,887
 19.0
 4.0
Florida 28,912
 142
 203,606
 11.0
 4.3
West 45,817
 179
 255,961
 11.3
 5.3
Total $287,594
 1,228
 $234,197
 84.3
 4.9

Three Months Ended March 31, 2019
RevenuesHome ClosingsASPAverage Community CountAverage Monthly
Absorption Rate
Central$124,197  578  $214,874  32.0  6.0  
Southeast52,414  230  227,887  19.0  4.0  
Northwest36,254  99  366,202  11.0  3.0  
West45,817  179  255,961  11.3  5.3  
Florida28,912  142  203,606  11.0  4.3  
Total$287,594  1,228  $234,197  84.3  4.9  
  Three Months Ended March 31, 2018
  Revenues Home Closings ASP Average Community Count Average Monthly
Absorption Rate
Central $107,498
 521
 $206,330
 29.3
 5.9
Northwest 57,173
 155
 368,858
 10.3
 5.0
Southeast 45,108
 229
 196,978
 17.0
 4.5
Florida 42,443
 209
 203,077
 11.3
 6.2
West 26,802
 130
 206,169
 9.0
 4.8
Total $279,024
 1,244
 $224,296
 76.9
 5.4


As of March 31,As of March 31,
Community count2019 2018Community count20202019
Central34
 30
Central35  34  
SoutheastSoutheast34  19  
Northwest11
 11
Northwest12  11  
Southeast19
 17
WestWest15  13  
Florida10
 12
Florida17  10  
West13
 9
Total community count87
 79
Total community count113  87  
Home sales revenues for the three months ended March 31, 20192020 were $287.6$454.7 million, an increase of $8.6$167.1 million, or 3.1%58.1%, from $279.0$287.6 million for the three months ended March 31, 2018.2019. The increase in home sales revenues is primarily due to a 4.4%49.4% increase in homes closed and an increase in the average sales price per home during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018, partially offset by a decrease in home closings by 1.3%.2019. The average sales price per home closed during the three months ended March 31, 20192020 was $234,197,$247,808, an increase of $9,901,$13,611, or 4.4%5.8%, from the average sales price per home of $224,296$234,197 for the three months ended March 31, 2018.2019. This increase in the average sales price per home was primarily due to changes in product mix and higher price points in certain new markets, and increasespartially offset by additional wholesale home closings. All reportable segments experienced an increase in sales prices in existing communities.
We increased our home sales revenues in our Central reportable segment by $16.7 million, or 15.5%,closings during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018, representing2019. The average monthly absorption rate fluctuations relate to timing associated with the opening, close out or transition between certain of their respective active communities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.
Home sales revenues in our Northwest reportable segment increased by $65.7 million, or 181.2%, during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, primarily due to a 10.9%175.8% increase in the number of homes closed in this reportable segment, which is due to close out or transition between certain of their
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respective active communities during the three months ended March 31, 20192019. Home sales revenues in our Southeast reportable segment increased by $36.0 million, or 68.7%, during the three months ended March 31, 2020 as compared to the three months ended March 31, 2018. Revenues2019, primarily due to an increase in community count associated with deepening our presence in existing markets and to a lesser extent our geographic expansion into certain markets in South Carolina and Virginia at March 31, 2020 as compared to March 31, 2019. Home sales revenues in our WestCentral reportable segment increased by $19.0$41.6 million, or 70.9%33.5%, primarily due to community count associated with our geographic expansion into our California and Nevada markets. Revenues in our Northwest and Florida reportable segments decreased by $20.9 million and $13.5 million, or 36.6% and 31.9%, respectively, due to close out or transition

between certain of its active communities forduring the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019, primarily due to a 28.2% increase in the number of homes closed in this reportable segment, which is due to increased community count at a higher absorption rate. Home sales revenues in all other reportable segments increased, largely due to close out or transition between certain of their respective active communities during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. Our active selling communities at March 31, 20192020 increased to 87113 from 7987 at March 31, 2018. Half of the active selling communities added between March 31, 2018 and March 31, 2019 were outside of our Central reportable segment, contributing to the further geographic diversification of our business.2019. All reportable segments maintained or added communities by expanding into new markets or deepening existing markets with the exception of the Florida reportable segment, which had two fewer active communities due to close out or transition between certain of its active communities forduring the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019.
Cost of Sales and Gross Margin (home sales revenues less cost of sales). Cost of sales increased for the three months ended March 31, 20192020 to $221.3$348.2 million, an increase of $11.5$126.9 million, or 5.5%57.3%, from $209.8$221.3 million for the three months ended March 31, 2018.2019. This overall increase is primarily due to constructiona 49.4% increase in homes closed, as well as higher lot costs recognized, product mix, increased capitalized interest costs and lothigher construction costs, during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019. In addition, there was an increase in construction overhead due to additional personnel and costs associated with geographic expansion and a 29.9% increase in community count expansion during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018. 2019.
Gross margin for the three months ended March 31, 20192020 was $66.3$106.6 million, a decreasean increase of $3.0$40.3 million, or 4.3%60.7%, from $69.3$66.3 million for the three months ended March 31, 2018.2019. Gross margin as a percentage of home sales revenues was 23.4% for the three months ended March 31, 2020 and 23.1% for the three months ended March 31, 2019 and 24.8% for the three months ended March 31, 2018.2019. This decreaseincrease in gross margin as a percentage of home sales revenues is primarily due to a combination of higher construction costs, construction overhead, lot costs and to a lesser degree purchase accounting, partially offset by higher average home sales price for the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019 is primarily due to higher average sales price fueled by our product mix, favorable pricing environments and operational leverage obtained, partially offset by an increase in wholesale home closings as a percentage of total home closings.
Selling Expenses. Selling expenses for the three months ended March 31, 20192020 were $26.8$32.8 million, an increase of $3.8$6.0 million, or 16.7%22.3%, from $22.9$26.8 million for the three months ended March 31, 2018.2019. Sales commissions increased to $16.5 million for the three months ended March 31, 2020 from $11.6 million for the three months ended March 31, 2019, from $11.1 million for the three months ended March 31, 2018, largelypartially due to a 3.1%58.1% increase in home sales revenues during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019. Selling expenses as a percentage of home sales revenues were 9.3%7.2% and 8.2%9.3% for the three months ended March 31, 20192020 and 2018,2019, respectively. The increasedecrease in selling expenses as a percentage of home sales revenues reflects increased personnel,operational leverage obtained and reduced advertising and selling expenses primarily associated with newactive communities, partially offset by increased personnel, during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019.
General and Administrative. General and administrative expenses for the three months ended March 31, 20192020 were $18.4$19.9 million, an increase of $3.0$1.5 million, or 19.4%8.1%, from $15.4$18.4 million for the three months ended March 31, 2018.2019. The increase in the amount of general and administrative expenses is primarily due to increased personnel associated with an increase of active communities during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019. General and administrative expenses as a percentage of home sales revenues were 6.4%4.4% and 5.5%6.4% for the three months ended March 31, 20192020 and 2018,2019, respectively. The increasedecrease in general and administrative expenses as a percentage of home sales revenues reflects additional costsoperating leverage realized from the increase of personnel associated with the increase of community countin home sales revenues during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019.
Operating Income, Net Income before Income Taxes and Net Income. Operating income for the three months ended March 31, 20192020 was $21.1$53.9 million, a decreasean increase of $9.8$32.8 million, or 31.7%155.6%, from $30.9$21.1 million for the three months ended March 31, 2018.2019. Net income before income taxes for the three months ended March 31, 20192020 was $21.7$54.9 million, a decreasean increase of $9.5$33.2 million, or 30.5%153.0%, from $31.2$21.7 million for the three months ended March 31, 2018. The following2019. All reportable segments contributed to net income before income taxes during the three months ended March 31, 2019:2020 as follows: Central - $14.6$24.2 million or 67.5%44.2%; Southeast - $7.9 million or 14.4%; Northwest - $3.4$16.5 million or 15.6%30.1%; West - $5.3 million or 9.6%; and Florida - $1.2$2.5 million or 5.6%; Southeast - $0.4 million or 1.9%; and West - $3.1 million or 14.3%4.6%. Net income for the three months ended March 31, 20192020 was $18.3$42.8 million, a decreasean increase of $9.0$24.5 million, or 32.8%133.7%, from $27.3$18.3 million for the three months ended March 31, 2018.2019. The decreases inimprovement to operating income net income before income taxes and net income areis primarily attributed to loweran increase in the number of homes closed with an overall higher gross margin increased advertising and additional costs realized from the increasepercentage, as a result of personnel associated with the increase of community count and start-up costs in the Southeast, partially offset by a higher average sales price realized for operating income, net income before income taxes and net income during the three months ended March 31, 20192020 as compared to the three months ended March 31, 2018.2019.
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Non-GAAP Measures
In addition to the results reported in accordance with U.S. GAAP, we have provided information in this Quarterly Report on Form 10-Q relating to adjusted gross margin, EBITDA and adjusted EBITDA.

Adjusted Gross Margin
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustments, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.
The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands):
Three Months Ended March 31,
20202019
Home sales revenues$454,727  $287,594  
Cost of sales348,163  221,290  
Gross margin106,564  66,304  
Capitalized interest charged to cost of sales8,930  5,394  
Purchase accounting adjustments (1)
623  630  
Adjusted gross margin$116,117  $72,328  
Gross margin % (2)
23.4 %23.1 %
Adjusted gross margin % (2)
25.5 %25.1 %


Three Months Ended March 31,


2019
2018
Home sales revenues
$287,594
 $279,024
Cost of sales
221,290
 209,765
Gross margin
66,304
 69,259
Capitalized interest charged to cost of sales
5,394
 4,312
Purchase accounting adjustments (1)

630
 (3)
Adjusted gross margin
$72,328
 $73,568
Gross margin % (2)

23.1% 24.8%
Adjusted gross margin % (2)

25.1% 26.4%
(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.
(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 the cost of sales. Our management believes that the presentation of EBITDA and adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. EBITDA and adjusted EBITDA provide indicators of general economic performance that are not affected by fluctuations in interest rates or effective tax rates, levels of depreciation or amortization and items considered to be unusual or non-recurring. Accordingly, our management believes that these measures are useful for comparing general operating performance from period to period. Other companies may define these measures differently and, as a result, our measures of EBITDA and adjusted EBITDA may not be directly comparable to the measures of other companies. Although we use EBITDA and adjusted EBITDA as financial measures to assess the performance of our business, the use of these measures is limited because they do not include certain material costs, such as interest and taxes, necessary to operate our business. EBITDA and adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. Our presentation of EBITDA and adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items. Our use of EBITDA and adjusted EBITDA is limited as an analytical tool, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
(i) they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments, including for purchase of land;
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(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):
Three Months Ended March 31,
20202019
Net income$42,839  $18,334  
Income taxes12,050  3,360  
Depreciation and amortization161  165  
Capitalized interest charged to cost of sales8,930  5,394  
EBITDA63,980  27,253  
Purchase accounting adjustments(1)
623  630  
Other income, net(1,011) (619) 
Adjusted EBITDA$63,592  $27,264  
EBITDA margin %(2)
14.1 %9.5 %
Adjusted EBITDA margin %(2)
14.0 %9.5 %
  Three Months Ended March 31,
  2019 2018
Net income $18,334
 $27,302
Income taxes 3,360
 3,925
Depreciation and amortization 165
 180
Capitalized interest charged to cost of sales 5,394
 4,312
EBITDA 27,253
 35,719
Purchase accounting adjustments(1)
 630
 (3)
Loss on extinguishment of debt —
 175
Other income, net (619) (532)
Adjusted EBITDA $27,264
 $35,359
EBITDA margin %(2)
 9.5% 12.8%
Adjusted EBITDA margin %(2)
 9.5% 12.7%
(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.
(1)Adjustments result from the application of purchase accounting related to prior acquisitions and represent the amount of the fair value step-up adjustments for real estate inventory included in cost of sales.
(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 (generally $1,000). The deposits are refundable if the retail homebuyer is unable to obtain mortgage financing. 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. As a result of COVID-19, it may be more difficult for our homebuyers to qualify for and obtain mortgage financing to purchase a home.
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 set to occur within the required deposit has been made.next six 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 closings may be delayed during the COVID-19 pandemic. In addition, we may experience cancellations of purchase contracts at any time prior to closing. It is important to note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be

used only as a general gauge to evaluate performance. Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract. We also expect to experience decreases in our net orders as a result of the impacts and uncertainties resulting from the COVID-19 pandemic and related mitigation efforts.
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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 DataThree Months Ended March 31,
2020 (4)
2019 (5)
Net orders (1)
2,481  1,948  
Cancellation rate (2)
18.3 %17.4 %
Ending backlog – homes (3)
1,879  1,344  
Ending backlog – value (3)
$446,271  $328,588  
Backlog Data
Three Months Ended March 31,
2019 (4)

2018 (5)
Net orders (1)

1,948

1,798
Cancellation rate (2)

17.4%
20.6%
Ending backlog – homes (3)

1,344

1,370
Ending backlog – value (3)

$328,588

$357,870
(1)Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period.
(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 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 the required deposit has been made. Ending backlog is valued at the contract amount.
(4)67 units and values related to bulk sales agreements are not included in the table above.
(5)70 units and values related to bulk sales agreements are not included in the table above.
(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 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 set to occur within the next six months. Ending backlog is valued at the contract amount.
(4)As of March 31, 2020, we have 338 units related to bulk sales agreements associated with our wholesale business.
(5)As of March 31, 2019, we have 213 units related to bulk sales agreements associated with our wholesale business, of which 67 units and values are not included in the table above.
Land Acquisition Policies and Development
We decreasedincreased our active communities to 87113 as of March 31, 20192020 from 88106 as of December 31, 2018. We also decreased our2019. Our lot inventory increased to 50,70050,273 owned or controlled lots as of March 31, 20192020 from 51,44248,062 owned or controlled lots as of December 31, 2018.2019.
The table below shows (i) home closings by reportable segment for the three months ended March 31, 20192020 and (ii) our owned or controlled lots by reportable segment as of March 31, 2019.2020.
Three Months Ended March 31, 2020As of March 31, 2020
Reportable SegmentHome Closings
Owned (1)
ControlledTotal
Central741  15,078  6,951  22,029  
Southeast403  9,749  5,596  15,345  
Northwest273  2,049  1,241  3,290  
West236  1,845  2,309  4,154  
Florida182  2,697  2,758  5,455  
Total1,835  31,418  18,855  50,273  
  Three Months Ended March 31, 2019 As of March 31, 2019
Reportable Segment Home Closings 
Owned (1)
 Controlled Total
Central 578
 15,497
 7,168
 22,665
Northwest 99
 1,913
 1,990
 3,903
Southeast 230
 7,957
 9,069
 17,026
Florida 142
 2,541
 1,185
 3,726
West 179
 2,070
 1,310
 3,380
Total 1,228
 29,978
 20,722
 50,700
(1)Of the 31,418 owned lots as of March 31, 2020, 20,003 were raw/under development lots and 11,415 were finished lots.
(1)Of the 29,978 owned lots as of March 31, 2019, 18,087 were raw/under development lots and 11,891 were finished lots.
Homes in Inventory
When entering a new community, we build a sufficient number of move-in ready homes to meet our budgets. We base future home starts on closings. As homes are closed, we start more homes to maintain our inventory. As of March 31, 2019,2020, we had a total of 1,6971,780 completed homes, including information centers, and 1,5941,857 homes in progress.

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Raw Materials and Labor
When constructing homes, we use various materials and components. We generally contract for our materials and labor at a fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Typically, the raw materials and most of the components used in our business are readily available in the United States. In addition, the majority of our raw materials is supplied to us by our subcontractors, and is included in the price of our contract with such subcontractors. Most of the raw materials necessary for our subcontractors are standard items carried by major suppliers. Substantially all of our construction work is done by third-party subcontractors, most of whom are non-unionized. We continue to monitor the supply markets to achieve the best prices available. Typically, the price changes that most significantly influence our operations are price increases in labor, commodities and lumber.
Seasonality
In all of our divisions,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 revenue 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 revenue 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 March 31, 2019,2020, we had $35.1$118.2 million of cash and cash equivalents. Cash flows for each of our active communities depend on the status of the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, land development, plats, vertical development, construction of information centers, general landscaping and other amenities. Because these costs are a component of our inventory and are not recognized in our statement of operations until a home closes, we incur significant cash outflows prior to recognition of home sales revenues. In the later stages of an active community, cash inflows may exceed home sales revenues reported for financial statement purposes, as the costs associated with home and land construction were previously incurred.
Our principal uses of capital are operating expenses, land and lot purchases, lot development, home construction, interest costs on our indebtedness and the payment of various liabilities. In addition, we may purchase land, lots, homes under construction or other assets as part of an acquisition.
We generally rely on our ability to finance our operations by generating operating cash flows, borrowing under our revolving credit facilitythe Credit Agreement (as defined below) or the issuance and sale of shares of our common stock. As needed, we will consider accessing the debt and equity capital markets as part of our ongoing financing strategy. We also rely on our ability to obtain performance, payment and completion surety bonds as well as letters of credit to finance our projects.
On August 24, 2018, we and certain of our subsidiaries filedWe have an automaticeffective shelf registration statement on Form S-3 (Registration No. 333-227012), that was filed on August 24, 2018 with the Securities and Exchange Commission, registering the offering and sale of an indeterminate amount of debt securities, guarantees of debt securities, preferred stock, common stock, warrants, depositary shares, purchase contracts and units that include any of these securities. Under the shelf registration statement, we have the ability to access the debt and equity capital markets as needed as part of our ongoing financing strategy.
WeWhile the COVID-19 pandemic and related mitigation efforts have created significant uncertainty as to general economic and housing market conditions for the remainder of 2020 and beyond, as of the date of this Quarterly Report on Form 10-Q, we believe that we will be able to fund our current and foreseeable liquidity needs for at least the next twelve months with our cash on hand, cash generated from operations and cash expected to be available from our revolving credit facilitythe Credit Agreement or through accessing debt or equity capital, as needed. However, with the uncertainty surrounding COVID-19, our ability to engage in the transactions described above may be constrained by volatile or tight economic, capital, credit and financial market conditions, as well as moderated investor or lender interest or capacity and our liquidity, leverage and net worth, and we can provide no assurance as to successfully completing, the costs of, or the operational limitations arising from any one or series of such transactions.
Revolving Credit Facility
On May 25, 2018,6, 2019, we entered into that certain ThirdFourth Amended and Restated Credit Agreement (as amended by the First Amendment (as defined below), the “2019 Credit Agreement”) with several financial institutions and Wells Fargo Bank,
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National Association, as administrative agent, which was amended as of June 19, 2018 by that certain First Amendment thereto (the “First Amendment”; such credit agreement, as amended by the First Amendment, the “2018 Credit Agreement”).agent. The 20182019 Credit Agreement has substantially similar terms and provisions to our secondthird amended and restated credit agreement entered into in May 20172018 with several financial institutions and Wells Fargo Bank, National Association, as administrative agent (the “2017“2018 Credit Agreement”), but, among other things, providedprovides for a revolving credit facility of $450.0$550.0 million, which could be increased at our request by up to $50.0$100.0 million if the lenders make additional commitments, subject to the terms and conditions of the 20182019 Credit Agreement (which was requested and approved in October 2018)December 2019). On October 18,

2018,December 6, 2019, we entered into a Lender Addition and Acknowledgement Agreement and First Amendment to Fourth Amended and Restated Credit Agreement (the “First Amendment”) with certain lenders and Wells Fargo Bank, National Association, as an increasing lender and administrative agent, whereby the aggregate revolving commitments under the 20182019 Credit Agreement increased by $50.0$100.0 million from $450.0$550.0 million to $500.0$650.0 million in accordance with the relevant provisions of the 20182019 Credit Agreement.
The 20182019 Credit Agreement matures on May 31, 2021.2022. Before each anniversary of the closing of the 20182019 Credit Agreement, we may request a one-year extension of theits maturity date. The 20182019 Credit Agreement is guaranteed by each of our subsidiaries that have gross assets ofequal to or greater than $0.5 million. The revolvingborrowings and letters of credit facility is currently unsecured, but we have agreed to provide collateral if we fail to meet certain financial conditions inoutstanding under the future. As2019 Credit Agreement, together with the outstanding principal balance of March 31, 2019,our 6.875% Senior Notes due 2026 (the “Senior Notes”), may not exceed the borrowing base under the 20182019 Credit Agreement. As of March 31, 2020, the borrowing base under the 2019 Credit Agreement was $766.7$904.8 million, of which borrowings, including the Convertible Notes (as defined below) and the Senior Notes, (as defined below), of $685.2$752.7 million were outstanding, $5.1$15.0 million of letters of credit were outstanding and $74.7$137.1 million was available to borrow under the 20182019 Credit Agreement.
Interest is paid monthly on borrowings under the 2019 Credit Agreement net of deferred purchase price obligations.at the London Interbank Offered Rate (“LIBOR”) plus 2.50%. The 2019 Credit Agreement applicable margin for LIBOR loans ranges from 2.35% to 2.75% based on our leverage ratio. At March 31, 2020, LIBOR was 0.92%.
The 20182019 Credit Agreement requires us to maintain (i) a tangible net worth of not less than $400.0approximately $486.9 million plus 75% of the net proceeds of all equity issuances plus 50%50.0% of the amount of our positive net income in any fiscal quarter after December 31, 2017,2018, (ii) a leverage ratio of not greater than 64.0%60.0%, (iii) liquidity of at least $50.0 million and (iv) a ratio of EBITDA to interest expense for the most recent four quarters of at least 2.50 to 1.00. The 20182019 Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At March 31, 2019,2020, we were in compliance with all of the covenants contained in the 20182019 Credit Agreement.
In July 2017, the Financial Conduct Authority in the United Kingdom, which regulates LIBOR, announced that it intends to phase out LIBOR as a benchmark by the end of 2021. At the present time, the Credit Agreement has a term that extends beyond 2021, and borrowings under the Credit Agreement bear interest at LIBOR plus an applicable margin. The Credit Agreement provides for a mechanism to amend the Credit Agreement to reflect the establishment of an alternate rate of interest upon the occurrence of certain events related to the phase-out of any applicable interest rate. However, we have not yet pursued any technical amendment or other contractual alternative to address this matter. We are currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate on the Credit Agreement.
On May 6, 2019,April 30, 2020, we entered into that certaina Second Amendment to Fourth Amended and Restated Credit Agreement with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”“Second Amendment”), which amends the 2019 Credit Agreement (as so amended, the “Credit Agreement”). In the Second Amendment, lenders with $520.0 million, or 80.0%, of the $650.0 million of commitments under the Credit Agreement, agreed to extend the maturity of their commitments to May 31, 2023, with the remaining lenders retaining their existing maturity. The Second Amendment also reduced the minimum EBITDA to interest expense ratio from 2.50 to 1.75, increased the sublimit for letters of credit to $40.0 million and restates andestablished a LIBOR floor of 0.70%. The Credit Agreement otherwise has substantially similar terms and provisions to the 20182019 Credit Agreement and providescontinues to provide for a $550.0$650.0 million revolving credit facility, which can be increased at the request of the Company by up to $100.0 million, subject to the terms and conditions of the Credit Agreement. See Note 14 - Subsequent Event for more information regarding the Credit Agreement. As of March 31, 2019, the Credit Agreement increases our available borrowing base from $74.7 million to $116.5 million on a proforma basis as compared to the available borrowing base under the 2018 Credit Agreement.
Convertible Notes
We issued $85.0 million aggregate principal amount of our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) in November 2014 pursuant to an exemption from the registration requirements afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (“the Securities Act”). The Convertible Notes mature on November 15, 2019. Interest on the Convertible Notes is payable semi-annually in arrears on May 15 and November 15 of each year at a rate of 4.25%. When the Convertible Notes were issued, the fair value of $76.5 million was recorded to notes payable. $5.5 million of the remaining proceeds was recorded to additional paid in capital to reflect the equity component and the remaining $3.0 million was recorded as a deferred tax liability. The carrying amount of the Convertible Notes is being accreted to face value over the term to maturity.
Prior to May 15, 2019, the Convertible Notes are convertible only upon satisfaction of any of the specified conversion events. On or after May 15, 2019 and until the close of business on November 14, 2019 (the business day immediately preceding the stated maturity date of the Convertible Notes), the holders of Convertible Notes can convert their Convertible Notes at any time at their option. Upon the election of a holder of Convertible Notes to convert their Convertible Notes, we may settle the conversion of the Convertible Notes using any combination of cash and shares of our common stock. It is our intent, and belief that we have the ability, to settle in cash the conversion of any Convertible Notes that the holders elect to convert. The initial conversion rate of the Convertible Notes is 46.4792 shares of our common stock for each $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $21.52 per share of our common stock. The conversion rate is subject to adjustments upon the occurrence of certain specified events.
During the fourth quarter of 2017, we received notice from holders of $15.0 million principal amount of the Convertible Notes to convert their Convertible Notes. The conversion of such Convertible Notes was settled in the first quarter of 2018, resulting in the issuance of 486,679 shares of our common stock, a $0.6 million reduction to debt discount and additional paid in capital, a $0.2 million loss on the extinguishment of debt and a cash payment of $15.0 million for the principal amount of such Convertible Notes. As of March 31, 2019, we have $70.0 million aggregate principal amount of Convertible Notes outstanding.
During the first quarter of 2019, the Convertible Notes were convertible because the closing sale price of our common stock was greater than 130% of the $21.52 conversion price on at least 20 trading days during the 30 trading day period ending on December 31, 2018. As a result, the holders of the Convertible Notes could elect to convert some or all of their Convertible Notes in accordance with the terms and provisions of the indenture governing the Convertible Notes during the conversion period of January 1, 2019 through March 31, 2019 (inclusive). The Convertible Notes continue to be convertible during the second quarter of 2019. As of the date of the filing of this Quarterly Report on Form 10-Q, no other conversion notices have been received by us.
On July 6, 2018, concurrently with the offering of the Senior Notes, we entered into that certain First Supplemental Indenture, dated as of July 6, 2018, among us, our subsidiaries that guarantee our obligations under the 2018 Credit Agreement (the “Subsidiary

Guarantors”) and Wilmington Trust, National Association, as trustee, which supplements the indenture governing the Convertible Notes, pursuant to which (i) the subordination provisions in the indenture governing the Convertible Notes were eliminated, (ii) each Subsidiary Guarantor agreed (A) to, concurrently with the issuance of the Senior Notes, fully and unconditionally guarantee the Convertible Notes to the same extent that such Subsidiary Guarantor is guaranteeing the Senior Notes and (B) that such Subsidiary Guarantor’s guarantee of the Convertible Notes ranks equally with such Subsidiary Guarantor’s guarantee of the Senior Notes and (iii) the Company agreed to not, directly or indirectly, incur any indebtedness in the form of, or otherwise become liable in respect of, any notes or other debt securities issued pursuant to an indenture or note purchase agreement (including the Senior Notes) unless such indebtedness is equal with or contractually subordinated to the Convertible Notes in right of payment.
Senior Notes Offering
On July 6, 2018, we issued $300.0 million aggregate principal amount of the Senior Notes in an offering to persons reasonably believed to be qualified institutional buyers in the United States pursuantpursuant 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 Senior Notes accrues at a rate of 6.875% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019, and the Senior Notes mature on July 15, 2026. Terms of the Senior Notes are governed by an indentureIndenture and supplemental indenture,First Supplemental Indenture thereto, each dated as of July 6, 2018, as may be supplemented from time to time, among us, our subsidiaries that guarantee our obligations under the Subsidiary GuarantorsCredit Agreement and Wilmington Trust, National Association, as trustee.
We received net proceeds from
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Convertible Notes
On November 15, 2019, our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) matured, which resulted in the offeringprincipal payment of the Senior Notes of approximately $296.2 million, after deducting the initial purchasers’ discounts of $2.3$70.0 million and commissions and offering expensesthe issuance of $1.5 million. The net proceeds from2,381,751 shares of our common stock for the offering were used to repay a portion ofpremium associated with the borrowings under the 2018 Credit Agreement.Convertible Notes.

Letters of Credit, Surety Bonds and Financial Guarantees
We are often required to provide letters of credit and surety bonds to secure our performance under construction contracts, development agreements and other arrangements. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit.
Under these letters of credit, surety bonds and financial guarantees, we are committed to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit, surety bonds and financial guarantees under these arrangements, totaled $78.8$118.5 million as of March 31, 2019.2020. 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 March 31, 20192020 will be drawn upon.
Cash Flows
Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018Operating Activities
Net cash usedprovided by operating activities was $58.8 million for the three months ended March 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 three months ended March 31, 2019 was $33.2 million as compared to $110.9 million during the three months ended March 31, 2018. The $77.7 million decrease in net cash used in operating activities2020 was primarily attributable todriven by net income of $42.8 million, and included cash outlays forinflow from the $59.1$17.9 million decrease in the net change in real estate inventory, year-over-year, which was primarily related to our homes under construction and land acquisitions and development level of activity and to the $26.8 million decrease in accounts payable, accrued expenses and other liabilities. Year-over-year change in net cash provided by working capital items were a $12.2 million decrease in accounts receivable, offset by a $4.3 million increasechanges in other assets and by a $7.8 million increase in cash paid for pre-acquisition costs and deposits year-over-year. The decrease innon-inventory balances of $1.9 million.
Net cash used in operating activities reflectswas $33.2 million for the three months ended March 31, 2019, primarily driven by net income of $18.3 million,and included cash outlays for the $61.3 million increase in the net change in real estate inventory, which was primarily related to our homebuilding activitieshomes under construction and to a lesser extent, the timingland acquisitions and development level of tax payments.activity offset by changes in non-inventory balances of $9.7 million.
Investing Activities
Net cash used in investing activities duringwas $1.5 million for the three months ended March 31, 2019 and 2018 was $0.2 million. Net cash used in investing activities is2020, primarily due to the additional investment in an unconsolidated entity and purchase of property and equipment.
Net cash provided by financingused in investing activities duringwas $0.2 million for the three months ended March 31, 2019, which reflects the purchase of property and equipment.
Financing Activities
Net cash provided by financing activities was $21.8$22.6 million as compared to $95.5 million duringfor the three months ended March 31, 2018. The $73.72020, primarily driven by borrowings of $128.1 million decrease in netunder the 2019 Credit Agreement, offset by $75.0 million of payments on the 2019 Credit Agreement and by the $31.3 million payment for shares repurchased under our stock repurchase program to be held as treasury stock.
Net cash provided by financing activities inwas $21.8 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018 consists primarily of the $73.8 million decrease indriven by net borrowings associated withunder the our revolving credit facility.2018 Credit Agreement.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into land purchase contracts in order to procure land and lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These contracts typically require cash deposits and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, which may include obtaining applicable property and development

entitlements or the completion of development activities and the delivery of finished lots. We also utilize contracts with land sellers as a method of acquiring lots and land in staged takedowns, which helps us manage the financial and market risk associated with land holdings and minimize the use of funds from our corporate financing sources. Such contracts generally require a non-refundable deposit for the right to acquire land or lots over a specified period of time at pre-determined prices. We generally have the right at our discretion to terminate our obligations under purchase contracts during the initial
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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 March 31, 2019,2020, we had $39.4$34.8 million of cash deposits pertaining to land purchase contracts for 20,72218,855 lots with an aggregate purchase price of $673.9$560.7 million. Approximately $27.2$25.1 million of the cash deposits as of March 31, 20192020 are secured by third-party guarantees or indemnity mortgages on the related property.
Our utilization of land purchase contracts is dependent on, among other things, the availability of land sellers willing to enter into contracts at acceptable terms, which may include option takedown arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing conditions and local market dynamics. Land purchase contracts may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain markets.
Inflation
Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers.
Contractual Obligations
As of March 31, 2019,2020, there have been no material changes to our contractual obligations appearing in the “Contractual Obligations” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, management evaluates such estimates and judgments and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future.
We believe that there have been no significant changes to our critical accounting policies during the three months ended March 31, 20192020 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
Cautionary Statement about Forward-Looking Statements
From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “predict,” “projection,” “should,” “will” or other similar words.
We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may, and often do, vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements.
The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:
•the impact of the COVID-19 pandemic and its effect on us, our business, customers and subcontractors, and the markets in which we operate, U.S. and world financial markets, mortgage availability, potential regulatory actions, changes in customer and stakeholder behaviors and impacts on and modifications to our operations, business and financial condition relating to COVID-19;
•adverse economic changes either nationally or in the markets in which we operate, including, among other things, increases in unemployment, volatility of mortgage interest rates and inflation and decreases in housing prices;
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•a slowdown in the homebuilding industry;
•volatility and uncertainty in the credit markets and broader financial markets;

•disruption in the terms or availability of mortgage financing or increase in the number of foreclosures in our markets;
•the cyclical and seasonal nature of our business;
•our future operating results and financial condition;
•our business operations;
•changes in our business and investment strategy;
•the success of our operations in recently opened new markets and our ability to expand into additional new markets;
•our ability to successfully extend our business model to building homes with higher price points, developing larger communities and producing and selling multi-unit products, townhouses, wholesale products, and acreage home sites;
•our ability to develop our projects successfully or within expected timeframes;
•our ability to identify potential acquisition targets and close such acquisitions;
•our ability to successfully integrate any acquisitions including the Wynn Homes acquisition, with our existing operations;
•availability of land to acquire and our ability to acquire such land on favorable terms or at all;
•availability, terms and deployment of capital;capital and ability to meet our ongoing liquidity needs;
•decisions of the Credit Agreement lender group of our revolving credit facility;group;
the occurrence of the specific conversion events that enable early conversion of the Convertible Notes;
•decline in the market value of our land portfolio;
disruption in the terms or availability of mortgage financing or increase in the number of foreclosures in our markets;
•shortages of or increased prices for labor, land, or raw materials used in land development and housing construction;construction, including due to changes in trade policies;
•delays in land development or home construction resulting from natural disasters, adverse weather conditions or other events outside our control;
•uninsured losses in excess of insurance limits;
•the cost and availability of insurance and surety bonds;
•changes in, liabilities under, or the failure or inability to comply with, governmental laws and regulations;
•the timing of receipt of regulatory approvals and the opening of projects;
•the degree and nature of our competition;
•increases in taxes or government fees;
•negative publicity or poor relations with the residents of our projects;
•existing and future litigation, arbitration or other claims;
•availability of qualified personnel and third-party contractors and subcontractors;
•information system interruptionsfailures, cyber incidents or breaches in security;
•our ability to retain our key personnel;
•our leverage and future debt service obligations;
•the impact on our business of any future government shutdown;
•other risks and uncertainties inherent in our business;
•
other factors we discuss under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and
•other factors we discuss under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
•the risk factors set forth in Item 1A. Risk Factors in this Quarterly Report on Form 10-Q; and
•the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
•
the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Quarterly Report on Form 10-Q.



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ITEM 3.      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. We do not enter into, or intend to enter into, derivative financial instruments for trading or speculative purposes.
Quantitative and Qualitative Disclosures About Interest Rate Risk
We currently utilize both fixed-rate debt ($70.0 million aggregate principal amount of the Convertible Notes, $300.0300.0 million aggregate principal amount of the Senior Notes and certain inventory related obligations) and variable-rate debt (our $500.0$650.0 million revolving credit facility)Credit Agreement) as part of financing our operations. Upon the election of a holder of Convertible Notes to convert their Convertible Notes, we may settle the conversion of the Convertible Notes using any combination of cash and shares of our common stock. Other than as a result of an election of a holder of Convertible Notes to convert their Convertible Notes, weWe do not have the obligation to prepay the Convertible Notes, the 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. The Convertible Notes mature on November 15, 2019.
We are exposed to market risks related to fluctuations in interest rates on our outstanding variable rate indebtedness. We did not utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivative financial instruments as of or during the three months ended March 31, 2019.2020. We have not entered into and 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” above.
As of March 31, 2019,2020, we had $315.3$452.7 million of variable rate indebtedness outstanding under the 20182019 Credit Agreement. All of the outstanding borrowings under the 20182019 Credit Agreement were, and all of the outstanding borrowings under the Credit Agreement, are at variable rates based on LIBOR. The interest rate for our variable rate indebtedness as of March 31, 20192020 was LIBOR plus 2.90%2.50%. At March 31, 2019,2020, LIBOR was 2.49%0.92%. A hypothetical 100 basis point increase in the average interest rate on our variable rate indebtedness would increase our annual interest cost by approximately $3.2$4.5 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 4. 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)1934, as amended (the “Exchange Act”)) as of March 31, 2019.2020. 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.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of controls.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Changes in Internal Controls
No change in our internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) occurred during the three months ended March 31, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
There are numerous factors that affect our business and results of operations, many of which are beyond our control. In addition to the risk factor set forth below and the other information presented in this Quarterly Report on Form 10-Q, you should carefully read and consider Management’s Discussion and Analysis of Financial Condition and Results of Operations included in, and the risk factors set forth in, our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which contains descriptions of significant risks that have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.
Our business could be materially and adversely disrupted by an epidemic or pandemic (such as the present outbreak and worldwide spread of COVID-19), or similar public threat, or fear of such an event, and the measures that federal, state and local governments and other authorities implement to address it.
An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, and along with any associated economic and social instability or distress, have a material adverse impact on our business, financial condition, results of operations, cash flows, strategies or prospects.
On March 11, 2020, the World Health Organization declared the current outbreak of COVID-19 to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in certain of our markets. We have experienced resulting disruptions to our business operations, as these restrictions have significantly impacted many sectors of the economy, with businesses curtailing or ceasing normal operations. During the first quarter of 2020, certain markets in which we do business temporarily stopped our construction of homes. As of the date of this Quarterly Report on Form 10-Q, we have resumed construction of homes in those markets. Although we continue to build and sell homes in all of our markets, sales have slowed significantly, and sales contract cancellations have been impacted. The economic impact of COVID-19 may be reduced by financial assistance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or other similar COVID-19 related federal and state programs; however, such programs may not have a positive impact on our business. While we continue to assess the COVID-19 situation, at this time we cannot estimate with any degree of certainty the full impact of the COVID-19 outbreak on our financial condition and future results of operations, although we expect the COVID-19 situation to adversely impact future quarters. The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, among others, the ultimate geographic spread of COVID-19, the consequences of governmental and other measures designed to prevent the spread of COVID-19, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, subcontractors, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.
Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home; cause civil unrest; negatively impact mortgage availability or the federal government’s mortgage loan-related programs or policies; delay mortgage originations; tighten mortgage lending standards; or precipitate a prolonged economic downturn or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our products; negatively impact general consumer interest in purchasing a home compared to choosing other housing alternatives; impair our ability to sell and build homes in a typical manner or at all, generate revenues and cash flows or access the Credit Agreement or the capital or lending markets (or significantly increase the costs of doing so), as may be necessary to sustain our business; increase the costs or decrease the supply of building materials or the financial viability or availability of subcontractors, including as a result of infections or medically necessary or recommended self-quarantining, or governmental mandates to direct production activities to support public health efforts; and result in our recognizing charges in future periods, which may be material, for inventory impairments or land option contract abandonments, or both, related to our current inventory assets. The inherent uncertainty surrounding COVID-19, due in part to rapidly changing governmental directives, public health challenges and progress and market reactions thereto, also makes it more challenging for our management to estimate the future performance of our business and develop strategies to generate growth or achieve our objectives for the remainder of 2020.
Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, decreases in our net orders, homes closed, average sales prices, revenues and profitability, and such impacts could be material to our business, financial condition, results of operations, cash flows, strategies or prospects in future quarters. In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our markets, we could generate few or no orders and deliver few, if any, homes during the applicable period, which could be prolonged. Along with a potential increase in cancellations of home purchase contracts, if there are prolonged government restrictions on our business and our customers, or an extended economic recession,
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we could be unable to produce revenues and cash flows sufficient to conduct our business; meet the terms of our covenants and other requirements under the Credit Agreement, the Senior Notes and the related indenture, and/or mortgages and land contracts due to land sellers and other loans; or service our outstanding indebtedness. Such a circumstance could, among other things, exhaust our available liquidity and ability to access liquidity sources or trigger an acceleration to pay a significant portion or all of our then-outstanding debt obligations, which we may be unable to do.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the repurchase of shares of our common stock during the three months ended March 31, 2020.
PeriodTotal Number of Shares PurchasedAverage Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1)
(in thousands)
January 1-31, 2020—  $—  —  $48,494  
February 1-29, 202020,000  $76.12  20,000  $46,972  
March 1-31, 2020547,028  $54.50  547,028  $17,159  
567,028  $55.26  567,028  
(1)In November 2018, we announced that our 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. 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. The stock repurchase program may be modified, discontinued or suspended at any time.
ITEM 5.  OTHER INFORMATION
Amendment to 2019 Credit Agreement. On May 6, 2019,April 30, 2020, we entered into that certain Fourth Amended and Restatedthe Second Amendment, which amends the 2019 Credit Agreement dated as of May 6, 2019 (the “Credit Agreement”) by and amongAgreement. In the Company, eachSecond Amendment, lenders with $520.0 million, or 80.0%, of the financial institutions initially a signatory thereto (the “Lenders”), and Wells Fargo Bank, National Association, as administrative agent (the “Administrative Agent”), Wells Fargo Securities, LLC, as sole lead arranger and sole bookrunner, and Fifth Third Bank and U.S. Bank, National Association, as documentation agents. Capitalized terms used in this discussion$650.0 million of commitments under the Credit Agreement, agreed to extend the maturity of their commitments to May 31, 2023, with the remaining lenders retaining their existing maturity. The Second Amendment also reduced the minimum EBITDA to interest expense ratio from 2.50 to 1.75, increased the sublimit for letters of credit to $40.0 million and not defined in this Quarterly Report on Form 10-Q (this “Quarterly Report”) shall have the meanings given to such terms in the Credit Agreement.
established a LIBOR floor of 0.70%. The Credit Agreement amends and restates andotherwise has substantially similar terms and provisions to the 20182019 Credit Agreement and providescontinues to provide for a $550.0$650.0 million revolving credit facility, which can be increased at the request of the Company by up to $100.0 million, subject to the terms and conditions of the Credit Agreement. The revolving credit facility matures on May 31, 2022. Prior to each annual anniversary of the Credit Agreement, the Company may request a one-year extension of the maturity date. The initial interest rate under the Credit Agreement is LIBOR (one month) plus 2.75%.
The Company’s obligations under the Credit Agreement and all other Guaranteed Obligations are guaranteed by each of the Company’s subsidiaries having gross assets of $500,000.
The Credit Agreement requires the Company to maintain (i) Tangible Net Worth of not less than the sum of $486.9 million plus 75% of the Net Proceeds of all Equity Issuances after December 31, 2018 plus 50% of positive Consolidated Earnings after taxes earned in any fiscal quarter after December 31, 2018, (ii) a Leverage Ratio of not greater than 60.0% (as determined as of the last day of each fiscal quarter), (iii) Liquidity of at least $50.0 million, and (iv) a ratio of EBITDA to Interest Expense for the most recent four quarters of at least 2.50 to 1.00.
The Credit Agreement also prohibits (i) the Company and its subsidiaries from making any Investments, other than as permitted under the Credit Agreement (including a limitation on investments in rental housing), (ii) the Company from having its Land Value exceed, at any time, 130% of Tangible Net Worth, (iii) the number of Speculative Housing Units and Model Housing Units, at the end of any fiscal quarter, from exceeding the number of Housing Units sold during the period of six months ending on the last day of such fiscal quarter, on an annualized basis, multiplied by 45% and (iv) the number of Housing Units closed pursuant to third-party purchasers pursuant to Wholesale Sales Contracts, at the end of any fiscal quarter, to exceed 15% of the number of Housing Units closed during the 12 months then ending.
In addition, the Credit Agreement contains various covenants that, among other restrictions, limit the Company’s’ ability to (i) create, issue, incur or assume indebtedness, (ii) conduct intercompany transfers and (iii) merge, consolidate or acquire all or substantially all of the assets of any person other than subsidiaries of the Company. The Credit Agreement also contains events of default, subject to cure periods in certain circumstances, including, among others, (a) failure to pay principal, interest and other amounts due, (b) failure to perform any financial, negative or certain specified affirmative covenants, (c) inaccuracy in any material respect of any statement, representation or warranty by the Company or any subsidiary in any loan document, (d) cross-default to Indebtedness of $1.0 million or more, (e) certain changes of control or changes in management of the Company, (f) certain bankruptcy or other insolvency events, (g) certain events or circumstances that could reasonably be expected to have a material adverse effect and (h) unpaid or unstayed judgment or attachment of $500,000 or more.
If any default occurs under the Credit Agreement, the Company may be unable to borrow funds under the Credit Agreement. In addition, upon the occurrence of any event of default, the Lenders may, at their sole option, declare all sums owing to the Lenders under the Credit Agreement immediately due and payable.
The description of the Credit AgreementSecond Amendment set forth in Note 5 – Notes Payable and Note 14 - – Subsequent EventEvents and referred to in other places in this Quarterly Report on Form 10-Q is qualified in its entirety by reference to the Credit Agreement,Second Amendment, a copy of which is filed as Exhibit 10.110.2 to this Quarterly Report on Form 10-Q and incorporated herein by reference.
Additional Subsidiary Guarantors. On April 30, 2020, we and our subsidiaries that guarantee our obligations under the Credit Agreement entered into a Second Supplemental Indenture to that certain Indenture, dated as of July 6, 2018, with Wilmington Trust, National Association, as trustee, pursuant to which the Company’s wholly owned subsidiaries, LGI Homes – Pennsylvania, LLC and LGI Homes – Utah, LLC, issued a full and unconditional guarantee of the Senior Notes.
ITEM 6.      EXHIBITS

39
Table of Contents
Exhibit No.
Description  
3.1**
Certificate of Incorporation of LGI Homes, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 33-190853) of LGI Homes, Inc. filed with the SEC on August 28, 2013).
3.2**
Bylaws of LGI Homes, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-190853) of LGI Homes, Inc. filed with the SEC on August 28, 2013).
10.1*
Second Supplemental Indenture, dated as of April 30, 2020, among LGI Homes, Inc., the guaranteeing subsidiaries listed therein, the other subsidiary guarantors listed therein and Wilmington Trust, National Association, as trustee, governing LGI Homes, Inc.’s 6.875% Senior Notes due 2026.
10.2*
Second Amendment to Fourth Amended and Restated Credit Agreement, dated as of May 6, 2019,April 30, 2020, by and among LGI Homes, Inc., each of the financial institutions initially a signatory thereto, and Wells Fargo Bank, National Association, as administrative agent, with Wells Fargo Securities, LLC, as sole Lead Arranger and sole Bookrunner, and Fifth Third Bank and U.S. Bank, National Association, as Documentation Agents .agent.
31.1*
CEO Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
CFO Certification, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS†
101.INS†Inline XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH†Inline XBRL Taxonomy Extension Schema Document.
101.CAL†Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF†Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB†Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE†Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104†Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Filed herewith.
**Previously filed.

†XBRL information is deemed not filed or a part of a registration statement or Annual Report for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under such sections.



Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


LGI Homes, Inc.
Date:May 5, 2020LGI Homes, Inc.
Date:May 7, 2019/s/    Eric Lipar
Eric Lipar
Chief Executive Officer and Chairman of the Board
May 7, 20195, 2020/s/    Charles Merdian
Charles Merdian
Chief Financial Officer and Treasurer