10-K 1 a12311610k.htm 10-K Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
   
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
Commission file number 001-36126      
 
 
 
LGI HOMES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
  
Delaware
   
46-3088013
(State or other jurisdiction of incorporation or organization)
   
(I.R.S. Employer Identification No.)
   
   
   
1450 Lake Robbins Drive, Suite 430, The Woodlands, Texas
   
77380
(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 class
Common Stock ($0.01 par value)
Name of each exchange on which registered
NASDAQ

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨  No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ý     No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨     No ý

As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $580.1 million based on the closing price as reported on the NASDAQ Stock Market. As of March 3, 2017, there were 21,311,310 shares of the registrant’s common stock, par value $.01 per share, issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the registrant’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated herein by reference (to the extent indicated) into Part III.


TABLE OF CONTENTS
   
   
Page
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.
 
 
 
 
 
 
 
 




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PART I
ITEM 1.    BUSINESS
General
We are engaged in the design, construction, marketing and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, South Carolina, North Carolina, Colorado, Washington and Tennessee. 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 16,000 homes. During the year ended December 31, 2016, we had 4,163 home closings, compared to 3,404 home closings in 2015.
LGI Homes, Inc. is a Delaware corporation incorporated on July 9, 2013. Our principal executive offices are located at 1450 Lake Robbins Drive, Suite 430, The Woodlands, Texas 77380, and our telephone number is (281) 362-8998. Information on or linked to our website is not incorporated by reference into this Annual Report on Form 10-K unless expressly noted.
Unless otherwise indicated or the context requires, “LGI,” the “Company,” “we,” “our” and “us” refer collectively to LGI Homes, Inc. and its subsidiaries.
Business Opportunities
We believe there is an opportunity to continue to grow in our existing markets. Given our knowledge of and proven success in these markets, as well as the favorable demographic and economic trends forecasted for these markets, we expect to continue to grow in these markets.
We see opportunities to develop properties with multiple product lines and within the same communities which we believe will enable us to grow our business by increasing the number of price points in some of our existing markets. Our current product offerings include entry-level homes and move-up homes sold under our LGI Homes brand, and our luxury series homes, which are sold under our Terrata Homes brand. At December 31, 2016, we had 59 active communities with our LGI Homes brand and four with our Terrata Homes brand.
Our Terrata Homes brand allows us to leverage our systems and process approach, including our customer centric sales system, to deliver move-in ready homes with standardized features. We opened our first Terrata Homes communities in 2015: Potranco Ranch in San Antonio, Texas and Riverchase Estates in Lancaster, South Carolina, 30 miles south of Charlotte, North Carolina. In 2016, we added two additional Terrata Homes communities, Yeager Farms in Denver, Colorado and Magnolia Reserve in Houston, Texas. During 2016, we closed 44 Terrata Homes with an average sales price of $455,000 compared to 33 Terrata Homes with an average sales price of $408,000 in 2015.
We expect to continue to pursue a flexible land acquisition strategy of purchasing or optioning finished lots, if they can be acquired at attractive prices, or purchasing raw land for residential development. We generally target land acquisitions that are further away from urban centers than many other suburban communities but have access to major thoroughfares, retail districts and centers of business. These target areas that are further away from urban centers generally result in a better value for the homeowner through either lower price points or larger lot sizes. We consider development opportunities that meet our profit and return objectives, including opportunities which may involve the sale of home sites as a part of the product mix. We will continue to focus on entry-level home buyers, and expect our home closings in communities with our luxury series or those that include the sales of home sites will be less than 5% of our annual home closings during 2017. In addition, during 2017 we plan to further diversify our entry level offerings with townhome products in select markets.
We intend to continue to expand into new markets where we identify opportunities to build homes and develop communities that meet our profit and return objectives. One of the keys to our successful geographic expansion has been our operating model. After successfully implementing this operating model in the Houston market, we expanded into 16 additional markets, and have future operations planned in additional markets, including Raleigh, North Carolina, Portland, Oregon and Minneapolis, Minnesota that are expected to open for sales in 2017.
During October 2014, we completed our first acquisition of another home-builder when we acquired the homebuilding related assets and liabilities of Oakmont Home Builders, Inc. and its affiliate (collectively, “Oakmont”) in Charlotte, North Carolina. We expect to continue to evaluate potential opportunities, including acquisitions of other homebuilders and further diversifying our products, to expand our presence in our existing markets or to expand into new markets.
Operating Model
We developed our operating model based on our belief that there is a more effective and efficient method of constructing and selling homes. We are focused on maintaining an appropriate supply of move-in ready homes to fuel our sales force. We believe that the key competitive advantages of our operational model include our sales and marketing expertise; recruitment,

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selection, training and development of our people; our land acquisition process; our commitment to systems and processes across our organization; and our quality assurance and quality control procedures associated with our homebuilding operations.
Our operating model has been refined since our inception. We believe our operating model will be effective with respect to home sales across all price points, including in our new markets. We believe that our operating model can be adapted as needed, for the requirements of individual communities and new geographic markets.
Sales and Marketing
We utilize a well-defined sales and marketing approach to identify leads for our communities and to educate potential buyers on the process and benefits of homeownership. For many of our communities, our marketing efforts are focused on converting renters of apartments and single-family homes into homeowners.
We use extensive print and digital advertising to attract potential homebuyers. We employ various marketing techniques such as direct mail, newspaper advertisements, social media and interactive online media as well as directional signage and billboards to attract and drive potential homebuyers to our information centers.
Our print advertising methods are extensive and have proven to be highly effective in placing potential homebuyers in front of our highly trained sales professionals. Direct mail has also proven to be very effective in reaching our target market and communicating our core message of value and dream fulfillment.
With respect to our communities with higher price points or that include the sale of home sites, our sales and marketing approaches are tailored to the potential purchasers of such homes and home sites and include more involvement by real estate agents and brokers.
Across all price points, our marketing strategy calls for a balanced approach of corporate support and local expertise to attract potential homebuyers in a focused, efficient and cost-effective manner. Our proprietary customer relationship management system provides our management team with tools to continually monitor and measure the performance level of every sales professional through each phase of the sales process. Utilization of these tools allows us to assess the cost effectiveness of a particular advertising campaign and marketing medium as well as the strengths and weaknesses of every member of our sales team.
Our marketing efforts are generally designed to encourage the prospective homebuyer to call our information centers to schedule an appointment and our primary objective is to establish direct communication between the prospective homebuyer and the salesperson. Our professional salespeople are well-trained to determine specific needs and wants of the potential homebuyer and to provide the potential homebuyer with all information required to make a buying decision.
Our information centers are open approximately 12 hours per day, 359 days per year, and generally staffed by two to five sales professionals and supported by an independent on-site loan officer. Our commission-based sales professionals provide potential homebuyers with a comprehensive and thorough understanding of the steps required to achieve homeownership. Throughout the sales process, our sales professionals learn about the current housing situation of the potential homebuyers and seek to understand their individual needs while also educating them on the value we provide through superior quality and affordable prices.
We provide information regarding floor plans and pricing, credit and income qualifications and conduct tours of our homes based on the potential homebuyer’s budget. In addition, we provide each potential homebuyer with a comprehensive introduction to the community and the surrounding area, providing them with detailed information regarding utilities, schools, homeowners association dues and restrictions, local entertainment and nearby dining and shopping options. We provide our potential homebuyers with a clear understanding of who we are by sharing our history, vision and values. As a result of our transparent approach, potential homebuyers receive all this information before making a buying decision, which we believe eliminates confusion during the home buying process and sets clear expectations. In addition, the potential home buyers benefit from the availability of move-in ready homes by seeing the completed or near-completed home that they will own.
Recruitment, Training and Development
We focus on identifying and attracting the best talent and providing them with world-class training and continuous development. We directly invest in our sales professionals by conducting an intensive 100-day introductory training program consisting of 30 days of initial in-depth, in-house education about our time-proven selling strategies, which includes a two-week intensive training program at our headquarters, and an additional 70 days of secondary training at the local division. Our continued commitment to our sales personnel is reflected in the ongoing weekly training sessions held in each of our information centers coupled with quarterly regional training events. We also work closely with our subcontractors and construction managers, training them using a comprehensive construction manual that outlines the most efficient way to build an LGI home. Many of our subcontractors have worked on our homes since we commenced homebuilding operations in 2003, and therefore, are familiar with our business model.

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Homebuilding Operations
Our homebuilding operations are organized and managed by divisions:
Texas
 
Southwest
 
Southeast
 
Florida
 
Northwest
Houston, TX
 
Phoenix, AZ
 
Atlanta, GA
 
Tampa, FL
 
Seattle, WA
Dallas/Ft. Worth, TX
 
Tucson, AZ
 
Charlotte, NC
 
Orlando, FL
 
 
San Antonio, TX
 
Albuquerque, NM
 
Nashville, TN
 
Fort Myers, FL
 
 
Austin, TX
 
Denver, CO
 
 
 
Jacksonville, FL
 
 
 
 
Colorado Springs, CO
 
 
 
 
 
 
Our five divisions are aggregated into one reporting segment. See our consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K for the financial results and total assets of our one reporting segment and Note 15 “Segment Information” to our consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K for a discussion of our one reporting segment.
Our even-flow, or continuous, construction methodology enables us to build and maintain an inventory of move-in ready homes that are available for immediate sale. We offer a set number of floor plans in each community with standardized features that commonly include upgrades such as granite countertops, appliances and ceramic tile flooring. Our homes are designed to meet the preferences of our target market of potential homebuyers and enable cost efficient and effective construction processes. We have developed a collection of home designs, which can be modified for local conditions and market preferences, and implemented across multiple communities to maximize efficiency. We maintained an average home completion time of approximately 45 to 75 days during 2016; the homes closed during 2016 ranged from 1,100 to 5,000 square feet with prices ranging from the $150,000’s to the $800,000’s.
We believe in 2017 and beyond, we will continue to focus on our target market of entry level homebuyers. Our townhome product in select markets will further enable us to offer affordable (well-priced) products in desirable locations. We expect that sales of Terrata Homes will represent less than 5% of our home closings through 2017. We expect to continue to utilize our even flow construction methodology in communities with homes at all of our price points and will maintain our focus on marketing complete or move-in ready homes with standardized features. We also plan to strategically pursue single-family rental buyers if the transactions meet or exceed our return hurdles and allow us to optimize our land investment.
We employ experienced construction management professionals to perform the tasks of general contractors for home construction in each of our communities. Our employees provide the purchasing, construction management and quality assurance for the homes we build, while third-party subcontractors provide the material and labor components of our homes. In each of our markets, we employ construction managers with local market knowledge and expertise. Additionally, our construction managers monitor our compliance with zoning and other regulations, production schedules, and quality standards for their projects.
We endeavor to obtain favorable pricing from subcontractors through long-term relationships and consistent workflow. As we have expanded into new markets outside of Texas, the employees that we have hired in those markets have brought long-term relationships with several subcontracting firms. We have expanded upon existing relationships with subcontracting firms also located in Texas. A number of our trade partners have subcontracted on our projects since we commenced homebuilding operations in 2003. We purchase some components and materials centrally to leverage our purchasing power to achieve volume discounts, a practice that often reduces costs and ensures timely deliveries. We typically do not store significant inventories of construction materials, except for work in progress materials for homes under construction. Consistency of our trade partners is an integral part of our homebuilding operations that also leads us to reduced warranty costs. We believe in building long lasting relationships with our trade partners in order to provide consistent, quality and timely deliveries across our markets. We also work closely with our construction managers and subcontractors and train them using a comprehensive construction manual that outlines the most efficient way to build an LGI home.
Throughout our homebuilding operations, we utilize a paperless purchase order system to conduct business with our subcontractors and suppliers. Our master build schedule allows our trade partners to receive their specific task from our electronic system and plan several weeks in advance before starting their work. This means of communication allows our subcontractors to schedule their crews efficiently, thereby allowing for better pricing and better quality of work. Typically, our contractors are paid every week, which contributes to the strength of our business relationships with them.
Land Acquisition Policies and Development
We continue to be an active and opportunistic acquirer of land for residential development in our markets. We source land from a wide range of landowners, brokers, lenders, builders and other land development companies. We generally acquire finished lots and raw land in affordable locations that are further away from urban centers than many other suburban communities but have access to major thoroughfares, retail districts and centers of business. We conduct thorough due diligence on each of our potential

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land acquisitions, and we look at numerous opportunities before finding one that meets our requirements. We test the market and speak with potential homebuyers before committing to purchase land. We also maintain a pipeline of desirable land positions for replacement communities and new communities. We increased our active communities from 52 as of December 31, 2015 to 63 as of December 31, 2016. We also increased our lot inventory from 23,915 owned or controlled lots as of December 31, 2015 to 29,460 owned or controlled lots as of December 31, 2016.
Our allocation of capital for land investment is performed at the corporate level with a disciplined approach to portfolio management. Our Acquisitions Committee meets periodically and consists of our Chief Executive Officer, Chief Financial Officer, and Executive Vice President of Acquisitions. Annually, our divisions prepare a strategic plan for their respective geographic areas. Supply and demand are analyzed to ensure land investment is targeted appropriately. The long-term plan is compared on an ongoing basis to our experience in the marketplace and is then adjusted to the extent necessary.
We have also purchased larger tracts of land across our markets which will provide us with more opportunities to build homes with multiple price points in our communities. We believe that our land development expertise will allow us to meet our growth and profit objectives with respect to opportunities in which we are the developer. Similar to our home building operations, our personnel oversee the contractors who perform the development work. Our land development projects may include the sale of home sites as a part of the project.
We have strong relationships with the land brokerage community in many of our markets. We believe that in the brokerage community, we have a reputation for knowing our business, having the capital to close deals, and making accurate and timely decisions that benefit both the buyer and seller. For these reasons, we believe that brokers routinely notify us when desirable tracts of land are available for purchase.
In our land acquisition process, projects of interest are evaluated at the division level using an extensive due diligence checklist which includes assessing the permitting and regulatory requirements, environmental considerations, local market conditions, and anticipated floor plans, pricing, and financial returns. We also determine the number of residents in the market and rental households that are within driving distance to the proposed project and conduct test marketing which includes mailings to prospective homebuyers to get their feedback on our potential land acquisition. By testing the market before entering it and acquiring land in it, we are able to assess the level of interest in the location and amenities, determine the cost of rent in the area, and assess the size of the market opportunity. The amount of information that we are able to ascertain about potential home buyers, including renters, allows us to better identify the opportunity to sell move-in ready homes.
The table below shows (i) home closings by division for the year ended December 31, 2016 and (ii) our owned or controlled lots by division as of December 31, 2016.
 
 
 
Year Ended December 31, 2016
 
As of December 31, 2016
Division
 
Home Closings
 
Owned (1)
 
Controlled
 
Total
Texas
 
2,143

 
12,398

 
4,255

 
16,653

Southwest
 
737

 
2,249

 
598

 
2,847

Southeast
 
635

 
3,947

 
2,776

 
6,723

Florida
 
595

 
1,649

 
284

 
1,933

Northwest
 
53

 
749

 
237

 
986

Midwest (2)
 
—

 
—

 
318

 
318

Total
 
4,163

 
20,992

 
8,468

 
29,460


(1)
Of the 20,992 owned lots as of December 31, 2016, 13,167 were raw/under development lots and 7,825 were finished lots.
(2)
As of December 31, 2016, all controlled lots associated with the future planned Midwest division are located in Minneapolis, Minnesota.
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 December 31, 2016, we had a total of 895 completed homes, including information centers, and 742 homes in progress.

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The following is a summary of our homes in inventory by division as of December 31, 2016 (dollar values in thousands):
Division
 
Homes in Inventory (1)
 
Inventory Value (1) 
Texas
 
535

 
$
77,563

Southwest
 
388

 
56,917

Southeast
 
317

 
36,789

Florida
 
224

 
34,339

Northwest
 
100

 
21,023

Total
 
1,564

 
$
226,631


(1)
Includes homes in progress and completed homes; excludes information centers.
Backlog
See discussion included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations─
Backlog.”
Raw Materials
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 contractors. 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 commodities and lumber.
Seasonality
The homebuilding industry generally exhibits seasonality. We have historically experienced, and in the future expect to continue to experience, variability in our results on a monthly and quarterly basis. See discussion included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations─Seasonality.”
Government Regulation and Environmental Matters
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements, the result of which is to limit the number of homes that can be built within the boundaries of a particular area. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future. Local governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development.
We are also subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the environment. The particular environmental laws which apply to any given homebuilding site vary according to multiple factors, including the site’s location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas. In addition, in those cases where an endangered or threatened species is involved, environmental rules and regulations can result in the restriction or elimination of development in identified environmentally sensitive areas. From time to time, the United States Environmental Protection Agency (the “EPA”) and similar federal or state agencies review homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs. Further, we expect that increasingly stringent requirements may be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber.

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Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for related damages, including for bodily injury, and for investigation and clean-up costs incurred by such parties in connection with the contamination. A mitigation system may be installed during the construction of a home if a cleanup does not remove all contaminants of concern or to address a naturally occurring condition such as methane. Some homebuyers may not want to purchase a home with a mitigation system.
Competition
The U.S. homebuilding industry is highly competitive. We compete in each of our markets with numerous other national, regional and local homebuilders for homebuyers, desirable properties, raw materials and skilled labor. We also compete with sales of existing homes and with the rental housing market. Our homes compete on the basis of quality, price, design, mortgage financing terms and location. There has been some consolidation among national homebuilders in the United States and we expect that this trend will continue.
Employees
As of December 31, 2016, we employed 591 people of whom 77 were located at our corporate headquarters, 367 were on-site sales and support personnel, and 147 were involved with construction. None of our employees are covered by collective bargaining agreements. We believe we have good relations with our employees.
Available Information
We make available, as soon as reasonably practicable, on our website, www.lgihomes.com, all of our reports required to be filed with the Securities and Exchange Commission (“SEC”). These reports can be found on the “Investor Relations” page of our website under “SEC Filings” and include our annual and quarterly reports on Form 10-K and 10-Q (including related filings in XBRL format), current reports on Form 8-K, beneficial ownership reports on Forms 3, 4, and 5, proxy statements and amendments to such reports. Our SEC filings are also available to the public on the SEC’s website at www.sec.gov, and the public may read and copy any document we file at the SEC’s public reference room located at 100 F Street NE, Washington, D.C. 20549. Further information on the operation of the public reference room can be obtained by calling the SEC at 1-800-SEC-0330. In addition to our SEC filings, our corporate governance documents, including our Corporate Governance Guidelines and Code of Business Conduct and Ethics, are available on the “Investor Relations” page of our website under “Corporate Governance.” Our stockholders may also obtain these documents in paper format free of charge upon request made to our Investor Relations department.
Executive Officers
The following table sets forth information regarding our executive officers as of March 7, 2017:

 
Name
 
Age
 
Position
Eric Lipar
 
46
 
Chief Executive Officer and Chairman of the Board
Michael Snider
 
45
 
President and Chief Operating Officer
Charles Merdian
 
47
 
Chief Financial Officer and Treasurer
Jack Lipar
 
48
 
Executive Vice President of Acquisitions
Margaret Britton
 
54
 
Chief Administrative Officer and Secretary
Rachel Eaton
 
35
 
Chief Marketing Officer
 
Eric Lipar.    Mr. Lipar is our Chief Executive Officer and serves as Chairman of our Board of Directors. He has served as our Chief Executive Officer since 2009, as a director since June 2013 and as Chairman of the Board since July 2013. Previously, Mr. Lipar served as our President from 2003 until 2009. Mr. Lipar has been in the residential land development business since the mid-1990s and is one of our founders. He has overseen land acquisition, development and the sales of over 16,000 homes since our inception. Mr. Lipar currently serves on the Residential Neighborhood Development Council for the Urban Land Institute.

Michael Snider.    Mr. Snider has served as our President since 2009, and Chief Operating Officer since July 2013. He oversees all aspects of our sales, construction, and product development. Prior to serving as our President, Mr. Snider was Executive Vice President of Homebuilding (2005-2009). Prior to joining LGI in 2004, Mr. Snider was a Project Manager for Tadian Homes, a homebuilder based in Troy, Michigan.


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Charles Merdian.    Mr. Merdian serves as our Chief Financial Officer and Treasurer. He was elected Secretary and Treasurer in 2013. Prior to becoming our Chief Financial Officer in 2010, Mr. Merdian was our Controller from 2004 through 2010. Prior to joining us in 2004, Mr. Merdian served as Accounting and Finance Manager for The Woodlands Operating Company where he specialized in accounting and financial analysis of real estate ventures, focusing primarily on residential and commercial developments. Prior to The Woodlands Operating Company, Mr. Merdian served as an accounting manager working at the Williamson-Dickie Manufacturing Co. and as a senior auditor for Coopers & Lybrand, L.L.P. Mr. Merdian has worked in residential real estate and homebuilding finance since 1998. Mr. Merdian is a Certified Public Accountant and is a member of the Texas Society of Certified Public Accountants.

Jack Lipar.    Mr. Lipar has served as our Executive Vice President of Acquisitions since March 2013. He previously served as Vice President of Acquisitions from December 2010 through February 2013, and Acquisitions Manager from 2006 to December 2010. Mr. Lipar oversees land acquisitions and development for LGI. Prior to joining us, Mr. Lipar worked at HP Pelzer, an auto parts manufacturing company based in Germany, as the Vice President of Purchasing and Director of Operations. Mr. Lipar was also the General Manager and a member of the Board of Directors at Alliance Interiors, an affiliate of HP Pelzer. Prior to HP Pelzer, Mr. Lipar was a worldwide Purchasing Manager for Cooper Standard, one of the world’s leading manufacturers of automotive parts.

Margaret Britton.    Mrs. Britton has served as our Chief Administrative Officer since August 2013 and has served as our Secretary since May 2016. She is responsible for various corporate areas, including governance, risk and compliance matters. From 2008 to 2012, Mrs. Britton was a Director at Deloitte Financial Advisory Services, LLP, where she provided advisory services and was a leader in their national environmental consulting practice. She worked as a consultant from 2003 to 2007 and, as such, among other things, assisted two multinational energy companies with the implementation and oversight of their Sarbanes-Oxley Act requirements. Prior to 2002, Mrs. Britton was an assurance partner at Arthur Andersen LLP. Mrs. Britton is a Certified Public Accountant.

Rachel Eaton.    Mrs. Eaton serves as our Chief Marketing Officer and is responsible for the overall growth and direction of our marketing initiatives, brand image and social media. Prior to becoming our Chief Marketing Officer in June 2013, Mrs. Eaton served as our Vice President of Marketing and Administration from May 2012 through May 2013, Director of Marketing & Special Events from 2007 to May 2012, Executive Assistant from 2004 to 2007. Mrs. Eaton joined the Company in 2003.


Board of Directors of LGI Homes, Inc.
Mr. Eric Lipar - Chief Executive Officer of LGI Homes, Inc. and serves as Chairman of our Board of Directors.
Mr. Bryan Sansbury - Chief Operating Officer and Chief Information Officer of Aon Hewitt, a global human capital and management consulting firm, and serves as our Lead Independent Director.
Mr. Ryan Edone - Chief Financial Officer of Petroleum Wholesale L.P., a distributor of branded and wholesale motor fuel products and operator of retail convenience stores/travel centers.
Mr. Duncan Gage - Retired. Former President and CEO of Giant Cement Holdings, Inc. and currently manages his personal investments.
Mr. Steven Smith - Shareholder of Baker Donelson, a law firm.
Mr. Robert Vahradian - Senior Managing Director of GTIS Partners, LP, a global real estate investment firm.


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ITEM 1A.    RISK FACTORS
Discussion of our business and operations included in this Annual Report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties we are or may become subject to, many of which are difficult to predict or beyond our control. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.
Risks Related to Our Business
Continued or additional tightening of mortgage lending standards and mortgage financing requirements and rising interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby reduce our sales.
Almost all purchasers of our homes finance their acquisition through lenders that provide mortgage financing. According to the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the 30-year average mortgage rate was approximately 4.15% in January 2017 and may increase during 2017. If mortgage interest rates increase, the ability of prospective homebuyers to finance home purchases may be adversely affected, and, as a result, our operating results may be significantly negatively impacted. Our homebuilding activities are dependent upon the availability of mortgage financing to homebuyers. The availability of mortgage financing continues to be constrained, due in part to continued regulatory changes and lower risk appetite by lenders. Lenders continue to require increased levels of financial documentation, and may require larger down payments and more restrictive income to debt ratios. First-time homebuyers are generally more affected by the availability of mortgage financing than other potential homebuyers. These homebuyers are a key source of demand for our new homes. A limited availability of home mortgage financing may adversely affect the volume and sales price of our home sales.
The federal government has a significant role in supporting mortgage lending through its conservatorship of Federal National Mortgage Association (“Fannie Mae”) and Freddie Mac, both of which purchase or insure mortgage loans and mortgage loan-backed securities, and its insurance of mortgage loans through or in connection with the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). FHA and USDA backing of mortgage loans has been particularly important to the mortgage finance industry and to our business. If either the FHA or USDA raised their down payment requirements or lowered maximum loan amounts, our business could be materially affected. Increased lending volume and losses insured by the FHA have resulted in a reduction of the FHA insurance fund. The USDA rural development program provides for zero down payment and 100% financing for homebuyers in qualifying areas. As of December 31, 2016, the USDA program is available in all our markets and is available to approximately 40% of our active communities. If the USDA program was discontinued or if funding was decreased, then our business could be adversely affected. In addition, if the USDA changed its determination of areas that are eligible to qualify for the program, it could have an adverse effect on our business. In addition, changes in governmental regulation with respect to mortgage lenders could adversely affect demand for housing.
The availability and affordability of mortgage loans, including interest rates for such loans, could also be adversely affected by a scaling back or termination of the federal government’s mortgage loan-related programs or policies. Because Fannie Mae-, Freddie Mac-, FHA-, USDA- and VA-backed mortgage loans have been an important factor in marketing and selling many of our homes, any limitations or restrictions in the availability of, or higher consumer costs for, such government-backed financing could reduce our business, prospects, liquidity, and financial condition and results of operations could be materially and adversely affected. The elimination or curtailment of state bonds to assist homebuyers could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
In addition, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act established several new standards and requirements relating to the origination, securitizing and servicing of residential consumer mortgage loans. These and other laws and regulations could further restrict the availability and affordability of mortgage loans, which could adversely affect our home sales, financial condition and results of operations.
Our long-term growth depends in part upon our ability to acquire finished lots and land parcels suitable for residential homebuilding at reasonable prices.
Our long-term growth depends in large part on the price at which we are able to obtain suitable finished lots and land parcels for development to support our homebuilding operation. Our ability to acquire finished lots and land parcels for new single-family homes and other projects may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning, regulations that limit housing density, the ability to obtain building permits, environmental requirements and other market conditions and regulatory requirements. If suitable lots or land at reasonable prices become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased substantially, which could adversely impact us. As competition for suitable land increases, the cost of undeveloped lots and the cost of developing owned

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land could rise and the availability of suitable land at acceptable prices may decline, which could adversely impact us. The availability of suitable land assets could also affect the success of our land acquisition strategy, which may impact our ability to increase the number of our active communities, grow our revenue and margins, and achieve or maintain profitability. Additionally, developing undeveloped land is capital intensive and time consuming and we may develop land based upon forecasts and assumptions that prove to be inaccurate, resulting in projects that are not economically viable.
Risks associated with our land and lot inventories could adversely affect our business or financial results.
Risks inherent in controlling, purchasing, holding and developing land for new home construction are substantial. The risks inherent in purchasing and developing land parcels increase as consumer demand for housing decreases and the holding period increases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. In certain circumstances, a grant of entitlements or development agreement with respect to a particular parcel of land may include restrictions on the transfer of such entitlements to a buyer of such land, which would negatively impact the price of such entitled land by restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing community or market. Developing land and constructing homes takes a significant amount of time and requires a substantial cash investment. Land development is a key part of our operations and we develop land in all of our markets. The time and investment required for development may adversely impact our business. We have substantial real estate inventories which regularly remain on our balance sheet for significant periods of time, during which time we are exposed to the risk of adverse market developments, prior to their sale. Our business model is based on building homes before a sales contract is executed and a customer deposit is received. Because interest and other expenses are capitalized only during construction, we recognize interest and maintenance expense on unsold completed homes in inventory. As of December 31, 2016, we had 895 completed homes in inventory and 742 homes in progress in inventory. In the event there is a downturn in housing sales in our markets, our inventory of completed homes could increase, leading to additional financing costs and lower margins, which could have a material adverse effect on our financial results and operations. In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all. Additionally, deteriorating market conditions could cause us to record significant inventory impairment charges. The recording of a significant inventory impairment could negatively affect our reported earnings per share and negatively impact the market perception of our business.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for reasonable prices in response to changing economic, financial and investment conditions may be limited and we may be forced to hold non-income producing properties for extended periods of time.
Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in response to changing economic, financial and investment conditions is limited and we may be forced to hold non-income producing assets for an extended period of time or sell homes or land at a loss either of which may require us to record impairment charges. We cannot predict whether we will be able to sell any property for the price or on the terms that we set or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could materially and adversely affect us.
The residential construction industry experiences serious labor and raw material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be more severe during periods of strong demand for housing or during periods following natural disasters that have a significant impact on existing residential and commercial structures. Our markets may exhibit a reduced level of skilled labor relative to increased homebuilding demand in these markets. Labor and raw material shortages and any resulting price increases could cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Our business and results of operations are dependent on the availability and skill of subcontractors.
We engage subcontractors to perform the construction of our homes, and in many cases, to select and obtain the raw materials. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. While we anticipate being able to obtain sufficient materials and reliable subcontractors and believe that our relationships with subcontractors are good, we do not have long-term contractual commitments with any subcontractors, and we can provide no assurance that skilled subcontractors will continue to be available at reasonable rates and in our markets. The inability to contract with skilled subcontractors at reasonable rates on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

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Despite our quality control efforts, we may discover that our subcontractors have engaged in improper construction practices or have installed defective materials in our homes. When we discover these issues, we utilize our subcontractors to repair the homes in accordance with our new home warranty and as required by law. The adverse costs of satisfying our warranty and other legal obligations in these instances may be significant and we may be unable to recover the costs of warranty-related repairs from subcontractors, suppliers and insurers, which could have a material impact on our business, prospects, liquidity, financial condition and results of operations. We may also suffer reputational damage from the actions of subcontractors, which are beyond our control.
We could be adversely affected by efforts to impose joint employer liability on us for labor law violations committed by our subcontractors.
Our homes are constructed by employees of subcontractors and other parties. We do not have the ability to control what these parties pay their employees or the rules they impose on their employees. However, various governmental agencies have taken actions to hold parties like us responsible for violations of wage and hour laws and other labor laws by subcontractors. In August 2015, the National Labor Relations Board ruled that a company could be held responsible for labor violations by its contractors. If that ruling is upheld on appeal, we could be held responsible for labor violations committed by our subcontractors. Governmental rulings that hold us responsible for labor practices by our subcontractors could create substantial exposures for us under our subcontractor relationships.
Any limitation on, or reduction or elimination of, tax benefits associated with homeownership would have an adverse effect upon the demand for homes, which could be material to our business.
Changes in federal and state income tax laws may affect demand for new homes. Current tax laws generally permit significant expenses associated with homeownership, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual’s federal and, in many cases, state taxable income. Proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. For instance, under the American Taxpayer Relief Act of 2012, which was signed into law in January 2013, the federal government enacted higher income tax rates and limits on the value of tax deductions for certain high-income individuals and households. If the federal government or a state government changes or further changes its income tax laws, as some lawmakers have proposed, by eliminating, limiting or substantially reducing these income tax benefits without offsetting provisions, the after-tax cost of owning a new home would increase for many of our potential homebuyers. Enactment of any such proposal may have an adverse effect on the homebuilding industry in general, as the loss or reduction of homeowner tax deductions could decrease the demand for new homes.
The recent growth in the housing market may not continue at the same rate, and any decline in the growth rate in our served housing markets or for the homebuilding industry may materially and adversely affect our business and financial condition.
Although the housing markets in the geographic areas in which we operate are generally stronger than they have been in recent years, we cannot predict whether and to what extent this will continue, particularly if interest rates for mortgage loans rise. Other factors which might impact growth in the homebuilding industry include uncertainty in domestic and international financial, credit and consumer lending markets amid slow growth or recessionary conditions in various regions or industries around the world; tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, more conservative appraisals, higher loan-to-value ratios and extensive buyer income and asset documentation requirements, changes to mortgage regulations, slower rates of population growth or population decline in our markets, or Federal Reserve policy changes. Given these factors, we can provide no assurance that present housing market trends will continue, whether overall or in our markets.
If there is limited economic growth or declines in employment and consumer income and/or tightening of mortgage lending standards, practices and regulation in the geographic areas in which we operate or if interest rates for mortgage loans rise, there could likely be a corresponding adverse effect on our business, prospects, liquidity, financial condition and results of operations, including, but not limited to, the number of homes we sell, our average selling prices, the amount of revenues or profits we generate, and the effect may be material.
If we are unable to develop our communities successfully or within expected time-frames, our results of operations could be adversely affected.
Before a community generates any revenue, time and material expenditures are required to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities and sales facilities. It can take several years from the time we acquire control of an undeveloped property to the time we make our first home sale on the site. Delays in the development of communities expose us to the risk of changes in market conditions for homes. A decline in our ability to develop and market one of our new undeveloped communities successfully and to generate positive cash flow from these operations in a timely manner

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could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements. In addition, higher than expected absorption rates in existing communities may result in lower than expected inventory levels until the development for replacement communities is completed.
Third-party lenders may not complete mortgage loan originations for our homebuyers in a timely manner or at all, which can lead to cancellations and a lower backlog of orders, or to significant delays in our closing homes sales and recognizing revenues from those homes.
Our homebuyers may obtain mortgage financing for their home purchases from any lender or other provider of their choice. If, due to credit or consumer lending market conditions, reduced liquidity, increased risk retention or minimum capital level obligations and/or regulatory restrictions related to the Dodd-Frank Act or other laws, or other factors or business decisions, these lenders refuse or are unable to provide mortgage loans to our homebuyers, or increase the costs to borrowers to obtain such loans, the number of homes we close and our business, prospects, liquidity, financial condition and results of operations may be materially adversely affected.
We may be unable to obtain suitable bonding for the development of our housing projects.
We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. As a result of market conditions, some surety providers have been reluctant to issue new bonds and providers may require credit enhancements (such as cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. If we are unable to obtain required bonds in the future for our projects, or if we are required to provide credit enhancements with respect to our current or future bonds, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.
We may incur a variety of costs to engage in future growth or expansion of our operations and the anticipated benefits may never be realized.
We intend to grow our operations in existing markets, and we may expand into new markets or acquire other home builders. We may be unable to achieve the anticipated benefits of any such growth or expansion, including through acquisition, the anticipated benefits may take longer to realize than expected or we may incur greater costs than expected in attempting to achieve the anticipated benefits. In such cases, we will likely need to employ additional personnel or consultants that are knowledgeable of such markets. There can be no assurance that we will be able to employ or retain the necessary personnel, to successfully implement a disciplined management process and culture with local management, or that our expansion operations will be successful. This could disrupt our ongoing operations and divert management resources that would otherwise focus on developing our existing business, or that we will be able to successfully integrate any acquired homebuilder. Accordingly, any such expansion could expose us to significant risks, beyond those associated with operating our existing business, and may adversely affect our business, prospects, liquidity, financial condition and results of operations.
The homebuilding industry is highly competitive and, if our competitors are more successful or offer better value to our customers, our business could decline.
We operate in a very competitive environment which is characterized by competition from a number of other homebuilders and land developers in each market in which we operate. Additionally, there are relatively low barriers to entry into our business. We compete with large national and regional homebuilding companies, many of which have greater financial and operational resources than us, and with smaller local homebuilders and land developers, some of which may have lower administrative costs than us. We may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding competitors whose operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturn in the housing market. Furthermore, we generally have a lower market share in each of our markets as compared to many of our competitors. Many of our competitors may also have longer operating histories and longstanding relationships with subcontractors and suppliers in the markets in which we operate. This may give our competitors an advantage in marketing their products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at more favorable prices. We compete for, among other things, homebuyers, desirable land parcels, financing, raw materials and skilled management and labor resources. Our competitors may independently develop land and construct homes that are substantially similar to our products.
Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase our selling incentives and reduce our prices. An oversupply of homes available for sale or discounting of home prices could adversely affect pricing for homes in the markets in which we operate. Oversupply and price discounting have periodically adversely affected certain markets, and it is possible that our markets will be adversely affected by these factors in the future.

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If we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected. We can provide no assurance that we will be able to continue to compete successfully in any of our markets. Our inability to continue to compete successfully in any of our markets could have a material adverse effect on our business, prospects, liquidity, financial condition or results of operations.
We cannot make any assurances that our growth or expansion strategies will be successful or not expose us to additional risks.
We have expanded our business through selected investments in new geographic markets and by diversifying our products in certain markets. Investments in land, lots and home inventories can expose us to risks of economic loss and inventory impairments if housing conditions weaken or we are unsuccessful in implementing our growth strategies.
We may develop communities in which we build townhomes or other multi-family homes in addition to single-family homes, sell acreage home sites as a part of the development, sell homes to investors or portfolio management companies, or develop commercial properties that may be complementary to our communities. We might acquire another homebuilder or developer in order to accomplish our growth or expansion strategies. We can give no assurance that we will be able to successfully identify, acquire or implement these new strategies in the future. Accordingly, any such expansion, including through acquisition, could expose us to significant risks, beyond those associated with operating our existing business, including diversion of our management’s attention from ongoing business concerns, difficulties in integrating an acquired business, and incurrence of unanticipated liabilities and expenses and may materially adversely affect our business, prospects, liquidity, financial condition and results of operations.
New and existing laws and regulations or other governmental actions, including with respect to zoning and entitlement, may increase our expenses, limit the number of homes that we can build or delay completion of our projects.
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements, the result of which is to limit the number of homes that can be built within the boundaries of a particular area. We may encounter issues with entitlement, not identify all entitlement requirements during the pre-development review of a project site, or encounter zoning changes that impact our operations. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or zoning changes. Such moratoriums generally relate to insufficient water supplies, sewage facilities, delays in utility hook-ups, or inadequate road capacity within specific market areas or subdivisions. Local governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development. As a result, home sales could be delayed, could decline and costs could increase, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We are subject to environmental laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can build homes and delay completion of our projects.
We are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental requirements which apply to any given site vary according to multiple factors, including the site’s location, its environmental conditions, the current and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and conditions at nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or in areas contaminated by others before we commence development. We are also subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals for our projects and operations. Sometimes regulators from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project.
From time to time, the EPA and similar federal, state or local agencies review land developers’ and homebuilders’ compliance with environmental laws and may levy fines and penalties or other enforcement actions for failure to strictly comply with applicable environmental laws, including those applicable to control storm water discharges during construction, or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. We expect that increasingly stringent requirements will be imposed on land developers and homebuilders

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in the future. We cannot assure you that environmental, health and safety laws will not change or become more stringent in the future in a manner that could have a material adverse effect on our business.
Environmental regulations can also have an adverse impact on the availability and price of certain raw materials, such as lumber.
There is a variety of new legislation being enacted, or considered for enactment at the federal, state and local level relating to energy and climate change. This legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards. New building code requirements that impose stricter energy efficiency standards could significantly increase our cost to construct homes. As climate change concerns continue to grow, legislation and regulations of this nature are expected to continue and become more costly to comply with. Similarly, energy-related initiatives affect a wide variety of companies throughout the U.S. and because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, they could have an indirect adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are burdened with expensive cap and trade and similar energy related regulations.
Ownership, leasing or occupation of land and the use of hazardous materials carries potential environmental risks and liabilities.
We are subject to a variety of local, state and federal statutes, rules and regulations concerning land use and the protection of health and the environment, including those governing discharge of pollutants to soil, water and air, including asbestos, the handling of hazardous materials and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation or remediation of man-made or natural hazardous or toxic substances located on, under or in a property currently or formerly owned, leased or occupied by us, whether or not we caused or knew of the pollution.
The particular impact and requirements of environmental laws that apply to any given community vary greatly according to the site, its environmental conditions and the present and former uses of the site. We expect that increasingly stringent requirements may be imposed on land developers and homebuilders in the future. Environmental laws may result in delays, cause us to implement time consuming and expensive compliance programs and prohibit or severely restrict development in certain environmentally sensitive regions or areas, such as wetlands. Concerns could arise due to post-acquisition changes in laws or agency policies, or the interpretation thereof.
Furthermore, we could incur substantial costs, including cleanup costs, fines, penalties and other sanctions and damages from third-party claims for property damage or personal injury, as a result of our failure to comply with, or liabilities under, applicable environmental laws and regulations. In addition, we are subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental laws and regulations to the permits and other approvals required for our projects and operations. These matters could adversely affect our business, prospects, liquidity, financial condition and results of operations.
As a homebuilding and land development business with a wide variety of historic ownership, development, homebuilding and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials, including building materials or fixtures known or suspected to be hazardous or to contain hazardous materials or due to use of building materials or fixtures which are associated with mold. Any such claims may adversely affect our business, prospects, financial condition and results of operations. Insurance coverage for such claims may be limited or nonexistent.
Difficulties with appraisal valuations in relation to the proposed sales price of our homes could force us to reduce the price of our homes for sale.
Each of our home sales may require an appraisal of the home value before closing. These appraisals are professional judgments of the market value of the property and are based on a variety of market factors. If our internal valuations of the market and pricing do not line up with the appraisal valuations and appraisals are not at or near the agreed upon sales price, we may be forced to reduce the sales price of the home to complete the sale. These appraisal issues could have a material adverse effect on our business and results of operations.
Because of the seasonal nature of our business, our quarterly operating results fluctuate.
As discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality,” we have historically experienced, and in the future expect to continue to experience, variability in our results on a quarterly and monthly basis. We 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. Accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames. If, due to market conditions, construction delays or other causes, we do not complete home sales at anticipated pricing levels or within anticipated time frames, our business, prospects,

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liquidity, financial condition and results of operations would be adversely affected. We expect this seasonal pattern to continue over the long term but we can make no assurances as to the degree to which our historical seasonal patterns will occur in the future.
Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect us.
As a homebuilder and land developer, we are subject to the risks associated with numerous weather-related and geologic events. These weather-related and geologic events include but are not limited to hurricanes, tornados, droughts, floods, brushfires, wildfires, prolonged periods of precipitation, landslides, soil subsidence and earthquakes and other natural disasters. The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability. In addition to directly damaging our land or projects, many of these natural events could damage roads and highways providing access to those assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market homes or sell land in those areas and possibly increasing the costs of homebuilding completion.
There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with hurricanes, landslides, prolonged periods of precipitation, earthquakes and other weather-related and geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should experience a decline.
Our business strategy is focused on the acquisition of suitable land and the design, construction and sale of primarily single-family homes in residential subdivisions, including planned communities, in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington, Tennessee, Alabama, Minnesota, Nevada, Oklahoma and Oregon. Because our operations are currently concentrated in these areas, a prolonged economic downturn in the future in one or more of these areas or a particular industry that is fundamental to one of these areas, particularly within Texas, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations. To the extent the oil and gas industries, which can be very volatile, are negatively impacted by declining commodity prices, climate change, legislation or other factors, a result could be a reduction in employment, or other negative economic consequences, which in turn could adversely impact our home sales and activities in Texas and certain of our other markets. 
Moreover, certain insurance companies doing business in Florida and Texas have restricted, curtailed or suspended the issuance of homeowners’ insurance policies on single-family homes. This has both reduced the availability of hurricane and other types of natural disaster insurance in Florida and Texas, in general, and increased the cost of such insurance to prospective purchasers of homes in Florida and Texas. Mortgage financing for a new home is conditioned, among other things, on the availability of adequate homeowners’ insurance. There can be no assurance that homeowners’ insurance will be available or affordable to prospective purchasers of our homes offered for sale in the Florida and Texas markets. Long-term restrictions on, or unavailability of, homeowners’ insurance in the Florida and Texas markets could have an adverse effect on the homebuilding industry in that market in general, and on our business within that market in particular. Additionally, the availability of permits for new homes in new and existing developments has been adversely affected by the significantly limited capacity of the schools, roads, and other infrastructure in that market.
If adverse conditions in these markets develop in the future, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. Furthermore, if buyer demand for new homes in these markets decreases, home prices could decline, which would have a material adverse effect on our business.
Difficulty in obtaining sufficient capital could result in an inability to acquire land for our developments or increased costs and delays in the completion of development projects, increase home construction costs or delay home construction entirely.
The homebuilding and land development industry is capital-intensive and requires significant up-front expenditures to acquire land parcels and begin development. In addition, if housing markets are not favorable or permitting or development takes longer than anticipated, we may be required to hold our investments in land for extended periods of time. If internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be constrained regionally or nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. Since the global recession in 2008, credit and capital markets have, from time to time, experienced unusual volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient funding for our planned capital and other expenditures, we may be unable

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to acquire additional land for development and/or to develop new housing. Additionally, if we cannot obtain additional financing to fund the purchase of land under our purchase or option contracts, we may incur contractual penalties, fees and increased expenses from the write-off of due diligence and pre-acquisition costs. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.
Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in short-term and long-term interest rates; employment levels and job and personal income growth; housing demand from population growth, household formation and other demographic changes, among other factors; availability and pricing of mortgage financing for homebuyers; consumer confidence generally and the confidence of potential homebuyers in particular; financial system and credit market stability; private party and government mortgage loan programs (including changes in FHA, USDA, VA, Fannie Mae and Freddie Mac conforming mortgage loan limits, credit risk/mortgage loan insurance premiums and/or other fees, down payment requirements and underwriting standards), and federal and state regulation, oversight and legal action regarding lending, appraisal, foreclosure and short sale practices; federal and state personal income tax rates and provisions, including provisions for the deduction of mortgage loan interest payments, real estate taxes and other expenses; supply of and prices for available new or resale homes (including lender-owned homes) and other housing alternatives, such as apartments, single-family rentals and other rental housing; homebuyer interest in our current or new product designs and new home community locations, and general consumer interest in purchasing a home compared to choosing other housing alternatives; and real estate taxes. Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular submarkets in which we operate. Inclement weather, natural disasters (such as earthquakes, hurricanes, tornadoes, floods, prolonged periods of precipitation, droughts and fires), and other environmental conditions can delay the delivery of our homes and/or increase our costs. Civil unrest or acts of terrorism can also have a negative effect on our business.
The potential difficulties described above can cause demand and prices for our homes to fall or cause us to take longer and incur more costs to develop the land and build our homes. We may not be able to recover these increased costs by raising prices because of market conditions. The potential difficulties could also lead some homebuyers to cancel or refuse to honor their home purchase contracts altogether.
Inflation could adversely affect our business and financial results.
Inflation could adversely affect our business and financial results by increasing the costs of land, raw materials and labor needed to operate our business. If our markets have an oversupply of homes relative to demand, we may be unable to offset any such increases in costs with corresponding higher sales prices for our homes. Inflation may also accompany higher interests rates, which could adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.
Interest rate changes may adversely affect us.
We currently do not hedge against interest rate fluctuations. We may obtain in the future one or more forms of interest rate protection in the form of swap agreements, interest rate cap contracts or similar agreements to hedge against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder. In addition, we may be subject to risks of default by hedging counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our assets at times which may not permit us to receive an attractive return on our assets in order to meet our debt service obligations.
We are subject to warranty and liability claims arising in the ordinary course of business that can be significant.
As a homebuilder, we are subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly. There can be no assurance that any developments we undertake will be free from defects once completed and any defects attributable to us may lead to significant contractual or other liabilities. We maintain, and require our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance and generally seek to require our subcontractors to indemnify us for liabilities arising from their work. While these insurance policies, subject to deductibles and other coverage limits, and indemnities protect us against a portion of our risk of loss

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from claims related to our homebuilding activities, we cannot provide assurance that these insurance policies and indemnities will be adequate to address all our home warranty, product liability and construction defect claims in the future, or that any potential inadequacies will not have an adverse effect on our financial statements. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently limited and costly. We cannot provide assurance that coverage will not be further restricted, increasing our risks and financial exposure to claims, and/or become more costly.
We may suffer uninsured losses or suffer material losses in excess of insurance limits.
We could suffer physical damage to property and liabilities resulting in losses that may not be fully recoverable by insurance. Insurance against certain types of risks, such as terrorism, earthquakes or floods or personal injury claims, may be unavailable, available in amounts that are less than the full market value or replacement cost of investment or underlying assets or subject to a large deductible or self-insurance retention amount. In addition, there can be no assurance certain types of risks which are currently insurable will continue to be insurable on an economically feasible basis. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles or self-insurance retention, we could sustain financial loss or lose capital invested in the affected property as well as anticipated future income from that property. Furthermore, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles. We may be liable for any debt or other financial obligations related to affected property. Material losses or liabilities in excess of insurance proceeds may occur in the future.
If the market value of our land inventory decreases, our results of operations could be adversely affected by impairments and write-downs.
The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. There is an inherent risk that the value of the land owned by us may decline after purchase. The valuation of property is inherently subjective and based on the individual characteristics of each property. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably. In addition, our deposits for lots controlled under purchase, option or similar contracts may be put at risk.
Factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainty. Moreover, our valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality.
If housing demand fails to meet our expectations when we acquired our inventory, our profitability may be adversely affected and we may not be able to recover our costs when we build and sell houses. We regularly review the value of our land holdings and continue to review our holdings on a periodic basis. Material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial condition.
Fluctuations in real estate values may require us to write-down the book value of our real estate assets.
The homebuilding and land development industries are subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with U.S. GAAP, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Acts of war or terrorism may seriously harm our business.
Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power or acts of terrorism may cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of construction, result in uninsured losses, affect job growth and consumer confidence, or cause economic changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial condition and results of operations.

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A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.
Building sites are inherently dangerous, and operating in the homebuilding and land development industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business.
Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation and our relationships with relevant regulatory agencies, governmental authorities and local communities, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We may become subject to litigation, which could materially and adversely affect us.
In the future, we may become subject to litigation or enforcement actions, including claims relating to our operations, securities offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.
Poor relations with the residents of our communities could negatively impact sales, which could cause our revenue or results of operations to decline.
Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents and subsequent actions by these residents could adversely affect our sales or our reputation. In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or to modify our community development plans, which could adversely affect our results of operations.
An information systems interruption or breach in security could adversely affect us.
We rely on accounting, financial and operational management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, any security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.
Termination of the employment agreement with our Chief Executive Officer could be costly and prevent a change in control of our company.
The employment agreement with our Chief Executive Officer, Eric Lipar, provides that if his employment with us terminates under certain circumstances, we may be required to pay him a significant amount of severance compensation, thereby making it costly to terminate his employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our common stock.
Any future government shutdowns or slowdowns may materially adversely affect our business or financial results.
The U.S. federal government shutdown in the first part of October 2013 which impacted FHA and the USDA, among other federal agencies, and their backing of mortgage loans, negatively affected our closings in October 2013. Any future government shutdowns or slowdowns may materially adversely affect our business or financial results. We can make no assurances that potential closings affected by any such shutdown or slowdown will occur after the shutdown or slowdown has ended.
Negative publicity could adversely affect our reputation as well as our business, financial results and stock price.
Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity can be disseminated has increased dramatically with the capabilities of electronic communication, including social media outlets, websites, blogs, or newsletters. Our success in maintaining, extending and expanding our brand

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image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary from any media outlets could damage our reputation and reduce the demand for our homes, which would adversely affect our business.
Risks Related to Our Organization and Structure
We depend on key management personnel and other experienced employees.
Our success depends to a significant degree upon the contributions of certain key management personnel including, but not limited to, Eric Lipar, our Chief Executive Officer and Chairman of our board of directors. Although we have entered into an employment agreement with Mr. Lipar, there is no guarantee that Mr. Lipar will remain employed by us. If any of our key management personnel were to cease employment with us, our operating results could suffer. Our ability to retain our key management personnel or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key management personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial condition and results of operations. Further, such a loss could be negatively perceived in the capital markets. We have not obtained key man life insurance that would provide us with proceeds in the event of death or disability of any of our key management personnel.
Experienced employees in the homebuilding, land acquisition, development, and construction industries are fundamental to our ability to generate, obtain and manage opportunities. In particular, local knowledge and relationships are critical to our ability to source attractive land acquisition opportunities. Experienced employees working in the homebuilding, development and construction industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not lost when they leave the business through retirement, redundancy or otherwise may adversely affect the standards of our service and may have an adverse impact on our business, prospects, liquidity, financial condition and results of operations. The loss of any of our key personnel could adversely impact our business, prospects, financial condition and results of operations.
We may change our operational policies, investment guidelines and our business and growth strategies without stockholder consent, which may subject us to different and more significant risks in the future.
Our board of directors will determine our operational policies, investment guidelines and our business and growth strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this Annual Report on the Form 10-K. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.
Accounting rules and interpretations for certain aspects of our financial reporting, including those relating to our goodwill and other intangibles, are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.
We expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise be recourse. As of December 31, 2016, we had a $385 million revolving credit facility (the “A&R Credit Facility” or “A&R Credit Agreement”) to finance our construction and development activities. As of December 31, 2016, we had outstanding borrowings of $325.0 million under the A&R Credit Facility and we could borrow an additional $53.7 million under the A&R Credit Facility. As of December 31, 2016, borrowings under the A&R Credit Facility bore interest at a rate of LIBOR plus 3.50% per annum. In November 2014, the Company issued $85.0 million aggregate principal amount of its 4.25% Convertible Notes due 2019 (the “Convertible Notes”).
Our board of directors will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, if any, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. As a means of sustaining our long-term financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized. However,

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our certificate of incorporation does not contain a limitation on the amount of indebtedness we may incur and our board of directors may change our target debt levels at any time without the approval of our stockholders.
Incurring substantial indebtedness could subject us to many risks that, if realized, would adversely affect us, including the risk that:
•
our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt which is likely to result in acceleration of such indebtedness;
•
our indebtedness may increase our vulnerability to adverse economic and industry conditions with no assurance that our profitability will increase with higher financing cost;
•
we may be required to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for operations and capital expenditures, future investment opportunities or other purposes; and
•
the terms of any refinancing may not be as favorable as the terms of the indebtedness being refinanced.
If we do not have sufficient funds to repay our indebtedness at maturity, it may be necessary to refinance the indebtedness through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our indebtedness on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Unsecured debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other indebtedness in some circumstances. Defaults under the A&R Credit Facility and our other debt agreements, if any, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.
Our access to additional third-party sources of financing will depend, in part, on:
•
general market conditions;
•
the market’s perception of our growth potential;
•
with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to be acquired and/or developed;
•
our current debt levels;
•
our current and expected future earnings;
•
our cash flow; and
•
the market price per share of our common stock.
Since the global recession in 2008, domestic financial markets have, from time to time, experienced unusual volatility, uncertainty and a tightening of liquidity in both the high yield debt and equity capital markets. Credit spreads for major sources of capital widened significantly during the U.S. credit crisis as investors demanded a higher risk premium. Given such possible volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may increase collateral requirements or may charge us prohibitively high fees in order to obtain financing. Consequently, our ability to access the credit market in order to attract financing on reasonable terms may be adversely affected. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all.
Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.
Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive provisions.
Our current financing arrangements contain, and the financing arrangements we enter into in the future likely will contain, provisions that limit our ability to do certain things. In particular, the A&R Credit Agreement requires us to maintain a tangible net worth of not less than $202.5 million plus 75% of the net proceeds of any equity issuances plus 50% of the amount of our net income in any fiscal quarter after the date of the A&R Credit Agreement, a leverage ratio of not greater than 67.5%, liquidity of at least $40.0 million and a ratio of EBITDA to interest expense for the most recent four quarters of at least 2.50 to 1.0. The A&R Credit Agreement also prohibits us from making any investments other than those permitted under the A&R Credit Agreement.

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In addition, the A&R Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt.
If we fail to meet or satisfy any of these provisions, we would be in default under the A&R Credit Agreement and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. In addition, future indebtedness may contain financial covenants limiting our ability to, for example, incur additional indebtedness, make certain investments, reduce liquidity below certain levels and pay dividends to our stockholders, and otherwise affect our operating policies. If we default on one or more of our debt agreements, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
In addition, upon the occurrence of a “Fundamental Change” (as defined in the indenture governing the Convertible Notes), subject to certain conditions, the Convertible Notes include terms that allow a holder of the Convertible Notes to require to purchase all or a portion of such holder’s Convertible Notes for cash at a price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus any then accrued, but unpaid, interest.
Interest expense on debt we incur may limit our cash available to fund our growth strategies.
As of December 31, 2016, we had a $385.0 million revolving credit facility, outstanding borrowings of $325.0 million under the A&R Credit Facility and we could borrow an additional $53.7 million under the A&R Credit Facility. As of December 31, 2016, borrowings under the A&R Credit Facility bore interest at a rate of LIBOR plus 3.50% per annum. During November 2014, the Company issued $85.0 million aggregate principal amount of the Convertible Notes. If our operations do not generate sufficient cash from operations at levels currently anticipated, we may seek additional capital in the form of debt financing. Our current indebtedness includes, and any additional indebtedness we subsequently incur may have, a floating rate of interest. Higher interest rates could increase debt service requirements on our current floating rate indebtedness and on any floating rate indebtedness we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay existing indebtedness during periods of rising interest rates, we could be required to refinance our then-existing indebtedness on unfavorable terms or liquidate one or more of our assets to repay such indebtedness at times which may not permit realization of the maximum return on such assets and could result in a loss. The occurrence of either such event or both could materially and adversely affect our cash flows and results of operations.
We are a holding company, and we are accordingly dependent upon distributions from our subsidiaries to pay dividends, if any, taxes and other expenses.
We are a holding company and will have no material assets other than our ownership of membership interests or limited partnership interests in our subsidiaries. We have no independent means of generating revenue. We intend to cause our subsidiaries to make distributions to their members or partners in an amount sufficient to cover all applicable taxes payable and dividends, if any, declared by us. Future financing arrangements may contain negative covenants, limiting the ability of our subsidiaries to declare or pay dividends or make distributions. To the extent that we need funds, and our subsidiaries are restricted from making such dividends or distributions under applicable law or regulations, or otherwise unable to provide such funds, for example, due to restrictions in future financing arrangements that limit the ability of our operating subsidiaries to distribute funds, our liquidity and financial condition could be materially harmed.
The obligations associated with being a public company will require significant resources and management attention.
As a public company with listed equity securities, we must comply with laws, regulations and requirements, including the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and requirements of the NASDAQ Global Select Market. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.
Section 404 of the Sarbanes-Oxley Act requires our management and independent auditors to report annually on the effectiveness of our internal control over financial reporting. However, we are an “emerging growth company,” as defined in the JOBS Act, and, so for as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404.
Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent auditors on the effectiveness of our internal control over financial reporting.

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These reporting and other obligations place significant demands on our management, administrative, operational and accounting resources and cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We are an “emerging growth company,” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements. We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of our IPO, although a variety of circumstances could cause us to lose that status earlier. We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised financial accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have determined to opt out of such extended transition period and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable.
If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could materially and adversely affect us.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect us.
Any joint venture investments that we make could be adversely affected by our lack of sole decision making authority, our reliance on the financial condition of our joint venture partners and disputes between us and our joint venture partners.
We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development. In this event, we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that our joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay necessary decisions. Our joint venture partners may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor our joint venture partners would have full control over the land acquisition or development. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.

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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:
•
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;
•
a slowdown in the homebuilding industry;
•
volatility and uncertainty in the credit markets and broader financial 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, multi-unit products, townhouses and sales of 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 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;
•
decisions of the lender group of our revolving credit facility;
•
the occurrence of the specific conversion events that enable early conversion of our 4.25% Convertible Notes due 2019;
•
decline in the market value of our land portfolio;
•
continued or increased 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;
•
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;
•
poor relations with the residents of our projects;
•
future litigation, arbitration or other claims;
•
availability of qualified personnel and third-party contractors and subcontractors our ability to retain our key personnel;
•
our leverage and future debt service obligations;
•
the impact on our business of any future government shutdown similar to the one that occurred in October 2013;
•
other risks and uncertainties inherent in our business; and
•
other factors we discuss under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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

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acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Annual Report on Form 10-K.

ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 2.     PROPERTIES
We lease approximately 20,000 square feet in The Woodlands, Texas for our corporate headquarters; this lease expires in 2018. In addition, we lease divisional offices in Arizona, Florida, and Georgia. We lease approximately 1,800 square feet in Arizona and this lease expires in 2018.  We lease approximately 6,600 square feet in Florida for a divisional office and an information center, and these leases expire in 2019 and 2017, respectively. We lease approximately 1,900 square feet in Georgia and this lease expires in 2019. See “Business—Land Acquisition Policies and Development” for a summary of the other property which we owned or controlled as of December 31, 2016.
ITEM 3.         LEGAL PROCEEDINGS
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 other aspects of our homebuilding operations. Management believes that these claims include usual obligations incurred by real estate developers and residential homebuilders in the normal course of business. In the opinion of management, these matters will not have a material effect on our financial position, results of operations or cash flows.
We have provided unsecured environmental indemnities to certain lenders and other contractual 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 financial position, results of operations, or cash flows.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

25

PART II
ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the NASDAQ Stock Market (NASDAQ) under the symbol “LGIH.” The following tablesets forth, for the periods indicated, the range of high and low closing sales prices for our common stock, as reported by the NASDAQ.        
 
 
High
 
Low
2015
 
 
 
 
1st Quarter
 
$
16.69

 
$
12.66

2nd Quarter
 
$
19.92

 
$
16.47

3rd Quarter
 
$
29.58

 
$
18.47

4th Quarter
 
$
35.54

 
$
21.81

2016
 
 
 
 
1st Quarter
 
$
24.33

 
$
19.49

2nd Quarter
 
$
31.94

 
$
23.44

3rd Quarter
 
$
39.46

 
$
32.20

4th Quarter
 
$
36.97

 
$
28.63


As of March 3, 2017, the closing price of our common stock on the NASDAQ was $29.91, and we had 32 stockholders of record, including Cede & Co. as nominee of The Depository Trust Company.
Initial Public Offering
On November 13, 2013, we completed an IPO of 10,350,000 shares of our common stock, which was conducted pursuant to our Registration Statement on Form S-1 (File No. 333-190853), as amended, that was declared effective on November 6, 2013. The IPO provided us with net proceeds of $102.6 million. During November 2013, we used $36.9 million of the net proceeds from the IPO for the cash portion of the purchase price to acquire all of the joint venture interests of our joint venture partners in the LGI/GTIS Joint Ventures.  The remaining proceeds were used for working capital and general corporate purposes, including the acquisition of land, development lots and construction of homes. 
Purchases of Equity Securities
In November 2014, in connection with the issuance of the Convertible Notes, we purchased 1.0 million shares of our common stock at $16.55 per share.
Shelf Registration Statement and ATM Offering Programs
We filed a shelf registration statement on Form S-3 (the “Registration Statement”) to offer and sell from time to time various securities with a maximum offering price of $300.0 million. The Registration Statement was declared effective in August 2015. Under the Registration Statement, we established an at the market common stock offering program (the “2015 ATM Program”) in August 2015 with Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, JMP Securities LLC and Builder Advisor Group, LLC, as sales agents to sell up to $30.0 million of our common stock. We issued and sold 743,554 and 345,760 shares of our common stock under the 2015 ATM Program during 2016 and 2015, respectively, and received net proceeds of approximately $19.8 million and $9.6 million during the years ended December 31, 2016 and 2015, respectively, under the 2015 ATM Program. On September 7, 2016, we established our second at the market common stock offering program (the “2016 ATM Program”) under the Registration Statement, which enables us to offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $25.0 million in accordance with the terms and provisions of that certain Equity Distribution Agreement dated September 7, 2016 between us and Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, JMP Securities LLC and Builder Advisor Group, LLC, as sales agents. During 2016, we issued and sold 250,000 shares of our common stock under the 2016 ATM Program and received net proceeds of approximately $9.0 million. At December 31, 2016, subject to the terms and conditions of the Equity Distribution Agreement, we have the ability to sell an additional $15.8 million aggregate offering price of shares of our common stock under the 2016 ATM Program.

26

Dividends
We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any of our financing arrangements and such other factors as our board of directors may deem relevant. We have not previously declared or paid any cash dividends on our common stock.
Equity Compensation Plans
The table below sets forth the information as of December 31, 2016 for our equity compensation plans approved by our stockholders:
Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans
2013 Equity Incentive Plan
 
441,579

 
$
—

 
1,540,887

Employee Stock Purchase Plan
 
—

 
$
—

 
480,602

A total of 2,000,000 shares of the Company’s common stock have been reserved for issuance under the LGI Homes, Inc. 2013 Equity Incentive Plan (the “2013 Incentive Plan”). There were 133,853 restricted stock units (RSUs) outstanding at December 31, 2016, that were issued at a $0.00 exercise price. At December 31, 2016, there were 268,556 performance-based restricted stock units (“PSUs”) outstanding that have been granted to certain members of management at a $0.00 exercise price. The number of shares of Company common stock underlying the PSUs that will be issued to the recipient may range from 0% to 200% of the base award depending on actual performance metrics as compared to the target performance metrics. See Note 10 “Stock-Based Compensation” in the accompanying consolidated financial statements for a description of the 2013 Incentive Plan. In January 2017, the Board of Directors authorized an additional 500,000 shares of the Company’s common stock be reserved for issuance under the 2013 Incentive Plan.
A total of 500,000 of the Company’s common shares have been reserved for issuance under the LGI Homes, Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP provides for employees to make quarterly elections for payroll withholdings to purchase shares of our common stock at a 15% discount from the closing price on the purchase date, which is the last business day of each calendar quarter. As of December 31, 2016, 480,602 shares remain available for issuance under the ESPP. See Note 10 “Stock-Based Compensation” in the accompanying consolidated financial statements for a description of the ESPP.


27

Stock Performance Graph
This chart compares the cumulative total return on our common stock with that of the Standard & Poor’s 500 Companies Stock Index (the “S&P 500 Index”) and the Standard & Poor’s Homebuilders Select Industry Index (the “S&P Homebuilders Index”). The chart assumes $100.00 was invested at the close of market on November 7, 2013, the first day shares of our common stock traded on the NASDAQ Global Select Market, which was the day after we priced our initial public offering, in shares of our common stock, the S&P 500 Index and the S&P Homebuilders Index, and assumes the reinvestment of any dividends. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
Comparison of Cumulative Total Return among LGI Homes, Inc. Common Stock, the S&P 500 Index, and the S&P Homebuilders Index for the years ended December 31, 2016, 2015, 2014 and from November 7, 2013 to December 31, 2013
stockpricegraph2016.jpg
 
 
11/7/2013
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
LGIH
 
$100.00
 
$137.91
 
$115.66
 
$188.60
 
$222.71
S&P 500 Index
 
$100.00
 
$105.79
 
$117.84
 
$116.99
 
$128.14
S&P Homebuilders Index
 
$100.00
 
$110.54
 
$113.33
 
$113.54
 
$112.50


28

ITEM 6.     SELECTED FINANCIAL DATA
The following table presents our selected historical financial and operating data as of the dates and for the periods indicated.
The selected historical balance sheet and statement of operations information presented as of December 31, 2016, 2015 2014, 2013 and 2012 and for the years then ended have been derived from our audited historical consolidated financial statements. The following table should be read together with, and is qualified in its entirety by reference to, our historical consolidated financial statements and the accompanying notes included elsewhere in this Annual Report. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(dollars in thousands, except per share data and average home sales price)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
Home sales revenues
 
$
838,320

 
$
630,236

 
$
383,268

 
$
160,067

 
$
73,820

Management and warranty fees
 
—

 
—

 
—

 
2,729

 
2,401

Total revenues
 
838,320

 
630,236

 
383,268

 
162,796

 
76,221

Expenses:
 
 
 
 
 
 
 
 
 
 
Cost of sales
 
616,707

 
463,304

 
280,481

 
121,326

 
54,531

Selling expenses
 
66,984

 
52,998

 
36,672

 
15,769

 
7,269

General and administrative
 
43,158

 
34,260

 
23,744

 
13,604

 
6,096

Income from unconsolidated joint ventures
 
—

 
—

 
—

 
(4,287
)
 
(1,526
)
   Operating income
 
111,471

 
79,674

 
42,371

 
16,384

 
9,851

Interest expense, net
 
—

 
—

 
—

 
51

 
1

Gain on remeasurement of interests in LGI/GTIS Joint Ventures

—

 
—

 
—

 
(6,446
)
 
—

Other income, net
 
(2,201
)
 
(606
)
 
(708
)
 
(24
)
 
(173
)
   Net income before income taxes
 
113,672

 
80,280

 
43,079

 
22,803

 
10,023

Income tax provision
 
38,641

 
27,450

 
14,868

 
1,066

 
155

   Net income
 
75,031

 
52,830

 
28,211

 
21,737

 
9,868

(Income) loss attributable to non-controlling interests
 
—

 
—

 
—

 
590

 
(163
)
   Net income attributable to owners
 
$
75,031

 
$
52,830

 
$
28,211

 
$
22,327

 
$
9,705

Basic earnings per share (1)

$
3.61

 
$
2.65

 
$
1.37

 
$
0.34

 
 
Diluted earnings per share (1)

$
3.41

 
$
2.44

 
$
1.33

 
$
0.34

 
 
Other Financial and Operating Data:
 
 
 
 
 
 
 
 
 
 
Active communities at end of year
 
63

 
52

 
39

 
25

 
10

Home closings
 
4,163

 
3,404

 
2,356

 
1,062

 
536

Average sales price of homes closed
 
$
201,374

 
$
185,146

 
$
162,677

 
$
150,722

 
$
137,724

Gross margin (2)
 
$
221,613

 
$
166,932

 
$
102,787

 
$
38,741

 
$
19,289

Gross margin % (3)
 
26.4
%
 
26.5
%
 
26.8
%
 
24.2
%
 
26.1
%
Adjusted gross margin (4)
 
$
232,778

 
$
175,120

 
$
108,111

 
$
43,371

 
$
20,236

Adjusted gross margin % (3)(4)
 
27.8
%
 
27.8
%
 
28.2
%
 
27.1
%
 
27.4
%

29

 
 
December 31,
  
 
2016
 
2015
 
2014
 
2013 (5)
 
2012 (5)
Balance Sheet Data:
 
(in thousands)
Cash and cash equivalents
 
$
49,518

 
$
37,568

 
$
31,370

 
$
54,069

 
$
7,069

Real estate inventory
 
$
717,681

 
$
531,228

 
$
367,908

 
$
141,983

 
$
28,489

Goodwill and intangible assets, net
 
$
12,018

 
$
12,234

 
$
12,481

 
$
—

 
$
—

Total assets (6)
 
$
814,514

 
$
618,702

 
$
434,289

 
$
220,905

 
$
45,447

Notes payable (6)
 
$
400,483

 
$
304,561

 
$
212,261

 
$
35,430

 
$
14,860

Total liabilities (6)
 
$
459,313

 
$
371,313

 
$
251,790

 
$
56,531

 
$
20,236

Total equity
 
$
355,201

 
$
247,389

 
$
182,499

 
$
164,374

 
$
25,211

 
(1)
Earnings per share is presented for the years ended December 31, 2016, 2015 and 2014 and the period from November 13, 2013 (date of closing of IPO) to December 31, 2013. See Note 9 “Equity” to our consolidated financial statements included in Part II, Item 8 of this Annual Report of this Form 10-K for calculation of earnings per share.
(2)
Gross margin is home sales revenues less cost of sales.
(3)
Calculated as a percentage of home sales revenues.
(4)
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 adjustment, 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures—Adjusted Gross Margin” 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.
(5)
On November 13, 2013, we completed an initial public offering (the “IPO”) of 10,350,000 shares of our common stock. As a result of the reorganization transactions completed in connection with the IPO (the “Reorganization Transactions”), for accounting purposes, our historical results included herein present the combined assets, liabilities and results of operations of LGI Homes, Inc. since the date of its formation and LGI Homes Group, LLC, LGI Homes Corporate, LLC, LGI Homes II, LLC, LGI Homes-Sunrise Meadow, LLC, LGI Homes-Canyon Crossing, LLC, LGI Homes-Deer Creek, LLC and their direct and indirect subsidiaries prior to the IPO (collectively, our “Predecessor”). For the period subsequent to the IPO, the assets, liabilities and results of operations present the consolidated results of the Company. Prior to the completion of the IPO, our Predecessor owned a 15% equity interest in and managed the day-to-day operations of four joint venture entities (the “LGI/GTIS Joint Ventures”). Concurrent with the IPO, LGI Homes, Inc. acquired all of the equity interests in the LGI/GTIS Joint Ventures that it did not own immediately prior to the IPO (the “GTIS Acquisitions”). Our financial statements present our Predecessor’s historical interest in the LGI/GTIS Joint Ventures using the equity method and our Predecessor’s share of the LGI/GTIS Joint Ventures’ net earnings are included in income from unconsolidated joint ventures. Effective November 13, 2013, we own all of the equity interests in the LGI/GTIS Joint Ventures and we account for them on a consolidated basis after such date.
(6)
Prior year amounts were reclassified to conform to our current year presentation following the adoption of ASU 2015-03, which resulted in our reclassification of applicable unamortized debt issuance costs from other assets to notes payable.




30

ITEM 7.    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 when used in a historical context refer to LGI Homes, Inc. and its subsidiaries.
Key Results
Key financial results as of and for the year ended December 31, 2016, as compared to the year ended December 31, 2015, were as follows:
•
Home sales revenues increased 33.0% to $838.3 million from $630.2 million.
•
Homes closed increased 22.3% to 4,163 homes from 3,404 homes.
•
Average sales price of our homes increased $16,228 to $201,374 from $185,146.
•
Gross margin as a percentage of home sales revenues decreased slightly to 26.4% from 26.5%.
•
Adjusted gross margin (non-GAAP) as a percentage of home sales revenues remained at 27.8%.
•
Net income before income taxes increased 41.6% to $113.7 million from $80.3 million.
•
Active communities at the end of 2016 increased to 63 from 52. Eleven active communities added during 2016 are outside of our Texas markets, contributing to the further geographic diversification of our business to markets outside of Texas.
•
Total owned and controlled lots increased 23.2% to 29,460 lots at December 31, 2016 from 23,915 lots at December 31, 2015.
Please see “Non-GAAP Measures-Adjusted Gross Margin” for a reconciliation of adjusted gross margin (non-GAAP) to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable.
Recent Developments
At December 31, 2016, the Convertible Notes became 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, 2016. As a result, the holders of the Convertible Notes may 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, 2017 through March 31, 2017 (inclusive). As of the date of the filing of this Annual Report on Form 10-K, none of the holders of the Convertible Notes have elected to convert their Convertible Notes.
On February 28, 2017, borrowing commitments of our lender group under the A&R Credit Agreement were increased by $15.0 million to $400.0 million in accordance with the accordion feature of the A&R Credit Agreement.


31

Results of Operations
The following table sets forth our results of operations for the periods indicated:
 
 
 
Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
(dollars in thousands, except per share data and average home sales price)
 
 
 
Statement of Income Data:
 
 
 
 
 
 
Home sales revenues
 
$
838,320

 
$
630,236

 
$
383,268

Expenses:
 
 
 
 
 
 
Cost of sales
 
616,707

 
463,304

 
280,481

Selling expenses
 
66,984

 
52,998

 
36,672

General and administrative
 
43,158

 
34,260

 
23,744

   Operating income
 
111,471

 
79,674

 
42,371

Other income, net
 
(2,201
)
 
(606
)
 
(708
)
   Net income before income taxes
 
113,672

 
80,280

 
43,079

Income tax provision
 
38,641

 
27,450

 
14,868

   Net income
 
$
75,031

 
$
52,830

 
$
28,211

Basic earnings per share
 
$
3.61

 
$
2.65

 
$
1.37

Diluted earnings per share
 
$
3.41

 
$
2.44

 
$
1.33

Other Financial and Operating Data:

 
 
 
 
 
Active communities at end of year
 
63

 
52

 
39

Home closings
 
4,163

 
3,404

 
2,356

Average sales price of homes closed
 
$
201,374

 
$
185,146

 
$
162,677

Gross margin (1)

$
221,613

 
$
166,932

 
$
102,787

Gross margin % (2)

26.4
%
 
26.5
%
 
26.8
%
Adjusted gross margin (3)

$
232,778

 
$
175,120

 
$
108,111

Adjusted gross margin % (2)(3)

27.8
%
 
27.8
%
 
28.2
%

(1)
Gross margin is home sales revenues less cost of sales.
(2)
Calculated as a percentage of home sales revenues.
(3)
Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance. We define adjusted gross margin as gross margin less capitalized interest and adjustments resulting from the application of purchase accounting included in the cost of sales. Our management believes this information is useful because it isolates the impact that capitalized interest and purchase accounting adjustments have on gross margin. However, because adjusted gross margin information excludes capitalized interest and purchase accounting adjustment, 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—Adjusted Gross Margin” 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.



32

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Homes Sales.  Our home sales revenues and closings by division for the years ended December 31, 2016 and 2015 were as follows (dollars in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
  
 
Revenues
 
Closings
 
Revenues
 
Closings
Texas
 
$
429,505

 
2,143

 
$
350,674

 
1,856

Southwest
 
165,017

 
737

 
109,878

 
565

Southeast
 
111,651

 
635

 
95,949

 
587

Florida
 
115,276

 
595

 
73,735

 
396

Northwest
 
16,871

 
53

 
—

 
—

Total home sales
 
$
838,320

 
4,163

 
$
630,236

 
3,404

 Home sales revenues for the year ended December 31, 2016 were $838.3 million, an increase of $208.1 million, or 33.0%, from $630.2 million for the year ended December 31, 2015. The increase in home sales revenues is primarily due to a 22.3% increase in homes closed and an increase in the average selling price per home during the year ended December 31, 2016 as compared to the year ended December 31, 2015. We closed 4,163 homes during 2016, as compared to 3,404 homes closed during 2015. This increase in home closings was largely due to the increase in the number of active communities in 2016. The average selling price per home closed during the year ended December 31, 2016 was $201,374, an increase of $16,228, or 8.8%, from the average selling price per home of $185,146 for the year ended December 31, 2015. This increase in the average selling price per home was primarily due to changes in product mix, higher price points in certain new markets and a favorable pricing environment.
Cost of Sales and Gross Margin (home sales revenues less cost of sales).  Cost of sales increased for the year ended December 31, 2016 to $616.7 million, an increase of $153.4 million, or 33.1%, from $463.3 million for the year ended December 31, 2015. This increase is primarily due to a 22.3% increase in homes closed during 2016 as compared to 2015 as well as changes in our product mix and higher price points in certain new markets. Gross margin for the year ended December 31, 2016 was $221.6 million, an increase of $54.7 million, or 32.8%, from $166.9 million for the year ended December 31, 2015. Gross margin as a percentage of home sales revenues was 26.4% for the year ended December 31, 2016 and 26.5% for the year ended December 31, 2015. The gross margin as a percentage of home sales revenues remained relatively consistent year over year, decreasing slightly as a result of increased construction costs, overall higher lot costs and higher carrying costs (including capitalized interest) attributed to closed homes offset by higher average home sales prices for the year ended December 31, 2016 as compared to the year ended December 31, 2015.
Selling Expenses.  Selling expenses as a percentage of home sales revenues were 8.0% and 8.4% for the years ended December 31, 2016 and 2015, respectively. The decrease of selling expenses as a percentage of home sales revenues in 2016 was primarily due to leveraging our marketing spend and advertising during 2016 as compared to 2015. Selling expenses for the year ended December 31, 2016 were $67.0 million, an increase of $14.0 million, or 26.4%, from $53.0 million for the year ended December 31, 2015. Sales commissions increased to $31.1 million for the year ended December 31, 2016 from $25.1 million during 2015 largely due to a 22.3% increase in homes closed during 2016 as compared to 2015. Advertising and direct mail costs increased to $11.3 million during the year ended December 31, 2016 from $9.3 million for year ended December 31, 2015 primarily due to the increase in the number of active communities in 2016 as compared to 2015.
General and Administrative. General and administrative expenses as a percentage of home sales revenues were 5.1% and 5.4% for the years ended December 31, 2016 and 2015, respectively. The decrease in general and administrative expenses as a percentage of home sales revenues in 2016 reflects improved leverage realized from the increase in home sales revenues in 2016. General and administrative expenses for the year ended December 31, 2016 were $43.2 million, an increase of $8.9 million, or 26.0%, from $34.3 million for the year ended December 31, 2015. The increase in the amount of general and administrative expenses during 2016 as compared to 2015 is primarily attributable to additional employees added and expenses incurred to support the increased number of active communities and the higher number of home closings.
Other Income. Other income, net of other expenses was $2.2 million for the year ended December 31, 2016, an increase of $1.6 million from $0.6 million for the year ended December 31, 2015. Other income includes $1.0 million and $0.2 million from the sales of lots in 2016 and 2015, respectively.
Operating Income and Net Income.  Operating income for the year ended December 31, 2016 was $111.5 million, an increase of $31.8 million, or 39.9%, from $79.7 million for the year ended December 31, 2015. Net income for the year ended December 31, 2016 was $75.0 million, an increase of $22.2 million, or 42.0%, from $52.8 million for the year ended December 31, 2015. The

33

increases are primarily attributed to a 22.3% increase in homes closed, a higher average sales price and improved leverage realized during 2016 as compared to 2015.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Homes Sales.  Our home sales revenues and closings by division for the years ended December 31, 2015 and 2014 were as follows (dollars in thousands):
 
 
Year Ended December 31,
 
 
2015
 
2014
  
 
Revenues
 
Closings
 
Revenues
 
Closings
Texas
 
$
350,674

 
1,856

 
$
255,355

 
1,575

Southwest
 
109,878

 
565

 
45,725

 
273

Southeast
 
95,949

 
587

 
38,814

 
253

Florida
 
73,735

 
396

 
43,374

 
255

Total home sales
 
$
630,236

 
3,404

 
$
383,268

 
2,356

Home sales revenues for the year ended December 31, 2015 were $630.2 million, an increase of $247.0 million, or 64.4%, from $383.3 million for the year ended December 31, 2014. The increase in home sales revenues is primarily due to a 44.5% increase in homes closed and an increase in the average selling price per home during the year ended December 31, 2015 as compared to the year ended December 31, 2014. We closed 3,404 homes during 2015, as compared to 2,356 homes closed during 2014. This increase in home closings was largely due to the increase in the number of active communities in 2015 as well as 269 home closings in 2015 attributed to the assets acquired in connection with the Oakmont Acquisition. The average selling price per home closed during the year ended December 31, 2015 was $185,146, an increase of $22,469, or 13.8%, from the average selling price per home of $162,677 for the year ended December 31, 2014. This increase in the average selling price per home was primarily due to changes in product mix, higher price points in certain new markets and a favorable pricing environment.
Cost of Sales and Gross Margin (home sales revenues less cost of sales).  Cost of sales increased for the year ended December 31, 2015 to $463.3 million, an increase of $182.8 million, or 65.2%, from $280.5 million for the year ended December 31, 2014. This increase is primarily due to a 44.5% increase in homes closed during 2015 as compared to 2014 as well as changes in our product mix and higher price points in certain new markets. Gross margin for the year ended December 31, 2015 was $166.9 million, an increase of $64.1 million, or 62.4%, from $102.8 million for the year ended December 31, 2014. Gross margin as a percentage of home sales revenues was 26.5% for the year ended December 31, 2015 and 26.8% for the year ended December 31, 2014. The decrease in gross margin as a percentage of home sales revenues reflects increased construction costs, overall higher lot costs and higher carrying costs (including capitalized interest) attributed to closed homes partially offset by higher average home sales price for the year ended December 31, 2015 as compared to the year ended December 31, 2014.
Selling Expenses.  Selling expenses as a percentage of home sales revenues were 8.4% and 9.6% for the years ended December 31, 2015 and 2014, respectively. The decrease of selling expenses as a percentage of home sales revenues in 2015 was primarily due to leveraging our marketing spend and advertising during 2015 as compared to 2014. Selling expenses for the year ended December 31, 2015 were $53.0 million, an increase of $16.3 million, or 44.5%, from $36.7 million for the year ended December 31, 2014. Sales commissions increased to $25.1 million for the year ended December 31, 2015 from $14.7 million during 2014 largely due to a 44.5% increase in homes closed during 2015 as compared to 2014. Advertising and direct mail costs increased to $9.3 million during the year ended December 31, 2015 from $8.6 million for 2014 primarily due to the increase in the number of active communities in 2015 as compared to 2014.
General and Administrative. General and administrative expenses as a percentage of home sales revenues were 5.4% and 6.2% for the years ended December 31, 2015 and 2014, respectively. The decrease in general and administrative expenses as a percentage of home sales revenues in 2015 reflects improved leverage realized from the increase in home sales revenues in 2015. General and administrative expenses for the year ended December 31, 2015 were $34.3 million, an increase of $10.5 million, or 44.3%, from $23.7 million for the year ended December 31, 2014. The increase in the amount of general and administrative expenses during 2015 as compared to 2014 is primarily attributable to additional employees added to support the increased number of active communities and the higher number of home closings.
Other Income. Other income, net of other expenses was $0.6 million for the year ended December 31, 2015, a decrease of $0.1 million from $0.7 million for the year ended December 31, 2014. Other income in 2015 includes $0.2 million from the sales of lots. Other income in 2014 included a $0.6 million gain realized from the sale of certain land tracts not directly associated with our core homebuilding operations.
Operating Income and Net Income.  Operating income for the year ended December 31, 2015 was $79.7 million, an increase of $37.3 million, or 88.0%, from $42.4 million for the year ended December 31, 2014. Net income for the year ended December 31,

34

2015 was $52.8 million, an increase of $24.6 million, or 87.3%, from $28.2 million for the year ended December 31, 2014. The increases are primarily attributed to a 44.5% increase in homes closed, a higher average sales price and improved leverage realized during 2015 as compared to 2014.
Non-GAAP Measures
In addition to the results reported in accordance with U.S. GAAP, we have provided information in this Annual Report on Form 10-K relating to “adjusted gross margin.”
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 adjustment, which have real economic effects and could impact our results, the utility of adjusted gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate adjusted gross margin information in the same manner that we do. Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.
The following table reconciles adjusted gross margin to gross margin, which is the GAAP financial measure that our management believes to be most directly comparable (dollars in thousands):
 
 
Year Ended December 31,
  
 
2016
 
2015
 
2014
Home sales revenues
 
$
838,320

 
$
630,236

 
$
383,268

Cost of sales
 
616,707

 
463,304

 
280,481

Gross margin
 
221,613

 
166,932

 
102,787

Capitalized interest charged to cost of sales
 
10,680

 
6,057

 
1,704

Purchase accounting adjustments (a)
 
485

 
2,131

 
3,620

Adjusted gross margin
 
$
232,778

 
$
175,120

 
$
108,111

Gross margin % (b)
 
26.4
%
 
26.5
%
 
26.8
%
Adjusted gross margin % (b)
 
27.8
%
 
27.8
%
 
28.2
%
 
(a)
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.
(b)
Calculated as a percentage of home sales revenues.
Backlog
We sell our homes under standard purchase contracts, which generally require a homebuyer to pay a deposit at the time of signing the purchase contract. The amount of the required deposit is minimal (generally $1,000 or less). The deposits are refundable if the homebuyer is unable to obtain mortgage financing. We permit our 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 homebuyers provide documentation regarding their ability to obtain mortgage financing within 14 days after the purchase contract is signed. If we determine that the homebuyer is not qualified to obtain mortgage financing or is not otherwise financially able to purchase the home, we will terminate the purchase contract. If a purchase contract has not been cancelled or terminated within 14 days after the purchase contract has been signed, then the homebuyer has met the preliminary criteria to obtain mortgage financing. Only purchase contracts that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing are included in new (gross) orders.
Our “backlog” consists of homes that are under a purchase contract that are signed by homebuyers who have met the preliminary criteria to obtain mortgage financing but have not yet closed. 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

35

home closings. Homes in backlog are generally closed within one to two months, although we may experience cancellations of purchase contracts at any time prior to closing. It is important to note that net orders, backlog and cancellation metrics are operational, rather than accounting data, and should be used only as a general gauge to evaluate performance. Backlog may be impacted by customer cancellations for various reasons that are beyond our control, and in light of our minimal required deposit, there is little negative impact to the potential homebuyer from the cancellation of the purchase contract. As of the dates set forth below, our net orders, cancellation rate, and ending backlog homes and value were as follows (dollars in thousands):   
Backlog Data
 
Year Ended December 31,
2016 (4)
 
2015
 
2014
Net orders (1)
 
4,086

 
3,628

 
2,259

Cancellation rate (2)
 
24.5
%
 
27.2
%
 
31.3
%
Ending backlog - homes (3)
 
446

 
523

 
152

Ending backlog - value (3)
 
$
96,940

 
$
102,593

 
$
27,067


(1)
Net orders are new (gross) orders for the purchase of homes during the period, less cancellations of existing purchase contracts during the period. New orders for 2014 include home sale contracts acquired in the Oakmont Acquisition.
(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 have met our preliminary financing criteria but have not yet closed. Ending backlog is valued at the contract amount.
(4)
Effective December 2016, we have entered into a Bulk Sales Agreement (“BSA”) to provide 156 homes to a third-party during 2017 through the first quarter of 2018. All associated units and values related to the BSA are not included in the table above.

Land Acquisition Policies and Development
See discussion included in “Business—Land Acquisition Policies and Development.”
Homes in Inventory
See discussion included in “Business—Homes in Inventory.”
Raw Materials
See discussion included in “Business—Raw Materials.”
Seasonality
In all of our regions, 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 operation and financial position at the end of a particular quarter, especially the first quarter, are not necessarily representative of the results we expect at year end. We expect this seasonal pattern to continue in the long term.
Liquidity and Capital Resources
Overview
As of December 31, 2016, we had $49.5 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 significantly exceed home sales revenues reported for financial statement purposes, as the costs associated with home and land construction were previously incurred.

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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 a business combination.
We generally rely on our ability to finance our operations by generating operating cash flows, borrowing under our revolving credit facility or the issuance and sale of shares of our common stock pursuant to our at the market (ATM) offering programs. 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.
Under our $300.0 million Form S-3 shelf registration statement, effective September 2016, we have the ability to access the debt and equity capital markets, as needed as part of our ongoing financing strategy. Under the 2016 ATM Program, we may issue and sell from time to time shares of our common stock having an aggregate offering price of up to $25.0 million. We issued and sold 250,000 shares of our common stock under the 2016 ATM Program and received net proceeds of approximately $9.0 million during the year ended December 31, 2016. At December 31, 2016, we had approximately $15.8 million of additional shares of our common stock that have been authorized by our Board and can be issued under our 2016 ATM Program.
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, cash expected to be available from our revolving credit facility, and the net proceeds from the issuance and sale of shares of our common stock under our 2016 ATM Program or through accessing debt or equity capital, as needed.
Revolving Credit Facility
In May 2016, we entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent. The A&R Credit Agreement provides for a revolving credit facility of $385.0 million, which could be increased upon our request up to $400.0 million. The A&R Credit Agreement has terms substantially similar to our previous $300.0 million revolving credit facility. In September 2016, the A&R Credit Agreement was amended to permit up to $4.0 million of deferred purchase price indebtedness related to land purchases at any given time. The revolving credit facility matures on May 27, 2019. Prior to each annual anniversary of the closing of the A&R Credit Agreement, we may request a one-year extension of the maturity date. The A&R Credit Agreement is guaranteed by each of our subsidiaries having gross assets equal to or greater than $500,000. Prior to the occurrence of a trigger event under the A&R Credit Agreement, the revolving credit facility is unsecured except that the facility is secured by a first priority lien on certain land held for development, lots under development and/or finished lots with an aggregate land value of at least $35.0 million.
As of December 31, 2016, the borrowing base was $385.0 million, of which $325.0 million was outstanding, $6.3 million represents letter of credit assurances, and the remaining $53.7 million was available to borrow.
The A&R Credit Agreement requires us to maintain a tangible net worth of not less than $202.5 million plus (i) 75% of the net proceeds of any equity issuances and (ii) 50% of the amount of our net income in any fiscal quarter after the date of the A&R Credit Agreement, a leverage ratio of not greater than 67.5%, liquidity of at least $40.0 million and a ratio of EBITDA to interest expense for the most recent four quarters of at least 2.50 to 1.0. The A&R Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At December 31, 2016, we were in compliance with all of the covenants contained in the A&R Credit Agreement.
On February 28, 2017, borrowing commitments of our lender group under the A&R Credit Agreement were increased by $15.0 million to $400.0 million in accordance with the accordion feature of the A&R Credit Agreement.
Convertible Notes
In November 2014, we issued $85.0 million aggregate principal amount of our 4.25% Convertible Notes due 2019 (the “Convertible Notes”). The Convertible Notes mature on November 15, 2019 and bear interest at a rate of 4.25%, payable semiannually in May and November. Prior to May 15, 2019, the Convertible Notes will be convertible only upon satisfaction of any of the specified conversion events. On or after May 15, 2019, note holders can convert their Convertible Notes at any time at their option.
On April 30, 2015, our stockholders approved the flexible settlement provisions of the Convertible Notes which allows us to settle the conversion of the Convertible Notes using any combination of cash and shares of our common stock. It is our intent, and we believe 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.
At December 31, 2016, the Convertible Notes became convertible because the closing sales 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 December

37

31, 2016. As a result, the holders of the Convertible Notes may 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, 2017 through March 31, 2017 (inclusive). As of the date of the filing of this Annual Report on Form 10-K, none of the holders of the Convertible Notes have elected to convert their Convertible Notes.
The issuance of our Convertible Notes was recorded at the issuance date fair value of $76.5 million. The fair value was determined using a discount rate of 6.6% based on the rate of return investors would require for a similar liability, reflecting an $8.5 million discount. $5.5 million of the remaining proceeds was recorded to additional paid-in capital to reflect the equity component of the Convertible Notes and $3.0 million was recorded as a deferred tax liability. The carrying amount of the Convertible Notes is being accreted over the term to maturity. The net proceeds from the offering of the Convertible Notes was approximately $82.0 million. Of the $3.0 million of debt issuance costs, $2.7 million was allocated to the liability component and the remaining $0.3 million was allocated as an offset to the equity component of the Convertible Notes. At December 31, 2016, Notes payable in our accompanying consolidated financial statements include $78.2 million representing the accreted principal amount of the Convertible Notes.
Concurrent with the issuance of the Convertible Notes, we utilized, approximately $16.6 million of the net proceeds from the sale of the Convertible Notes to repurchase 1.0 million shares of our common stock held as treasury stock. The remaining net proceeds from issuance of the Convertible Notes were used for the purchase of land and lots and general corporate purposes, including repayment of borrowings under our revolving credit facility.
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 $29.8 million as of December 31, 2016. 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 or surety bonds or financial guarantees as of December 31, 2016 will be drawn upon.
Cash Flows
Year Ended December 31, 2016 compared to Year Ended December 31, 2015
Net cash used in operating activities during the year ended December 31, 2016 was $108.2 million as compared to $89.2 million during the year ended December 31, 2015. The $19.0 million increase in net cash used in operating activities was primarily attributable to a $32.2 million net increase in our investment in real estate inventory for 2016 as compared to 2015. The increase in net cash used in operating activities between periods also reflects a $22.2 million increase in net income, and $21.7 million increase in accounts payable, and accrued expenses and other liabilities during the year ended December 31, 2016, as a result of our continued growth and the increased number of our active communities.
Net cash used in investing activities during the year ended December 31, 2016 was $0.7 million as compared to $1.1 million used in investing activities during the year ended December 31, 2015 and reflects the purchase of property and equipment.
Net cash provided by financing activities totaled $120.9 million during the year ended December 31, 2016 as compared to $96.5 million during the year ended December 31, 2015. The $24.4 million increase in net cash provided by financing activities is primarily due to the $4.4 million increase in net borrowings under our revolving credit facility and the $19.9 million of net proceeds from the issuance and sale of shares of our common stock compared to 2015.
Year Ended December 31, 2015 compared to Year Ended December 31, 2014
Net cash used in operating activities during the year ended December 31, 2015 was $89.2 million as compared to $173.2 million during the year ended December 31, 2014. The $84.1 million decrease in net cash used in operating activities was primarily attributable to a $46.7 million net decrease in our investment in real estate inventory for 2015 as compared to 2014. The decrease in net cash used in operating activities between periods also reflects a $24.6 million increase in net income, and $14.2 million increase in accounts payable, and accrued expenses and other liabilities during the year ended December 31, 2015, as a result of our continued growth and the increased number of our active communities.

38

Net cash used in investing activities during the year ended December 31, 2015 was $1.1 million as compared to $16.4 million used in investing activities during the year ended December 31, 2014. The decrease is due to our investment in
the Oakmont Acquisition, completed in October 2014.
Net cash provided by financing activities totaled $96.5 million during the year ended December 31, 2015 as compared to $166.9 million during the year ended December 31, 2014. The $70.4 million decrease in net cash provided by financing activities is primarily due to the decrease in net borrowings in 2015 as compared to 2014, partially offset by $9.6 million of net proceeds from the issuance and sale of shares of our common stock under our 2015 ATM Program in 2015.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into land option 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 purchase 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 option contracts with land sellers as a method of acquiring lots and land in staged takedowns, to help us manage the financial and market risk associated with land holdings, and to minimize the use of funds from our corporate financing sources. Option 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 both purchase contracts and option contracts during the initial feasibility period and receive a refund of our deposit, or we may terminate the contracts after the end of the feasibility period by forfeiting our cash deposit with no further financial obligations to the land seller. In addition, our deposit may also be refundable if the land seller does not satisfy all conditions precedent in the respective contract. As of December 31, 2016, we had $10.0 million of cash deposits pertaining to land option contracts and purchase contracts for 8,462 lots with an aggregate purchase price of $234.2 million. Approximately $2.9 million of the cash deposits as of December 31, 2016 are related to purchase contracts to deliver finished lots and these deposits are refundable under certain circumstances and secured by third-party guarantees or indemnity mortgages on the related property.
Our utilization of land option 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. Option 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 home buyers.
Contractual Obligations Table
The following is a summary of our contractual obligations as of December 31, 2016 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.    
   
 
Payments due by period (in thousands)
Contractual Obligations
 
 
Total
 
Less
than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
Borrowings:
 
   

 
   

 
   

 
   

 
   

Credit Facility (a)
 
$
325,000

 
$
—

 
$
325,000

 
$
—

 
$
—

Convertible Notes (b)
 
85,000

 
85,000

 
—

 
—

 
—

Inventory related obligations(c)
 
16,352

 
379

 
826

 
916

 
14,231

Interest and fees (d)
 
64,731

 
20,778

 
33,122

 
1,551

 
9,280

Operating leases
 
1,212

 
742

 
470

 
—

 
—

Total
 
$
492,295

 
$
106,899

 
$
359,418

 
$
2,467

 
$
23,511

(a)
Represents borrowings under our $385.0 million revolving credit facility which matures on May 27, 2019. See Note 7 “Notes Payable” to our consolidated financial statements included in Part II Item 8 of this Annual Report on Form 10-K for additional information regarding our long-term debt.
(b)
Represents $85.0 million aggregate principal amount of our 4.25% Convertible Notes due 2019. The Convertible Notes mature on November 15, 2019. Based on the terms of the Convertible Notes, the holders may elect to convert all or a portion of the Convertible

39

Notes owned during the period January 1, 2017 through March 31, 2017 (inclusive) therefore are reflected above with a current maturity date. As of the date of the filing of this Annual Report on Form 10-K, none of the holders of the Convertible Notes have elected to convert their Convertible Notes. See Note 7 “Notes Payable” to our consolidated financial statements included in Part II Item 8 of this Annual Report on Form 10-K for additional information regarding our long-term debt.
(c)
The Company owns lots in certain communities that have Community Development Districts (“CDD”) or similar utility and infrastructure development special assessment programs that allocate a fixed amount of debt service associated with development activities to each lot. Such obligations represent a non-cash cost of the lots.
(d)
All of the outstanding borrowings under the A&R Credit Facility is at variable rates based on LIBOR, or subject to an interest rate floor. The interest rate for our variable rate indebtedness as of December 31, 2016 was LIBOR plus 3.50%. Fees on the A&R Credit Facility are approximately $0.1 million per year. Interest on our Convertible Notes accrues at a fixed rate of 4.25% per year and is payable semiannually beginning on May 15, 2015 through November 15, 2019 and includes $7.2 million in costs through maturity date. Inventory related obligations for infrastructure development attached to the land are subject to a fixed interest rate generally ranging from 1.32% to 7.13%, typically payable over a 30 year period, and are ultimately assumed by the homebuyer when home sales are closed.
In connection with the Oakmont acquisition, we recorded an earnout obligation on the acquisition date which was determined based on the forecasted number of home closings. The actual amount of the earnout may be more or less than the estimated amount and will be based on the actual number of homes closed from the acquired assets and the timing of the home closings from the acquisition date through December 31, 2017. The earnout obligation is estimated to be $0.5 million at December 31, 2016. We have not included this obligation in the table above.
Critical Accounting Policies
Discussed below are accounting policies that we believe are critical because of the significance of the activity to which they relate or because they require the use of significant judgment in their application.
Revenue Recognition
Home Sales. In accordance with ASC Topic 360—20, Real Estate Sales, revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the buyer, and the Company has no significant continuing involvement with the home. Home sales proceeds are generally received from the title company within a few days from closing. Home sales are reported net of sales discounts and incentives granted to homebuyers, which are primarily seller-paid closing costs. The profit we record on each home sale is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in more detail in “—Real Estate Inventory and Cost of Home Sales” below.
Real Estate Inventory and Cost of Home Sales
Inventory consists of land, land under development, finished lots, information centers, homes in progress and completed homes. Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case inventory is written down to fair value.
Pre-acquisition costs, land, development and other project costs, including interest and property taxes, incurred during development and home construction, and net of expected reimbursements of development costs, are capitalized to real estate inventory. Pre-acquisition costs, land development and other common costs that benefit the entire community, including field construction supervision and related direct overhead, are allocated to individual lots or homes, as appropriate, on a pro rata basis which we believe approximates the costs that would be determined using an allocation method based on relative sales values since the individual lots or homes within a community are similar in value.
Changes to estimated total development costs subsequent to initial home closings in a community are allocated to the remaining unsold homes in the community on a prospective basis. Home construction costs and related carrying charges are allocated to the cost of individual homes using the specific identification method and are capitalized as they are incurred. Capitalized interest, property taxes, and other carrying costs are generally capitalized to real estate inventory from the point development begins to the point construction is completed. Costs associated with homes sold are charged to cost of sales simultaneously with revenue recognition.
Impairment of Real Estate Inventories. 
In accordance with ASC Topic 360, Property, Plant, and Equipment, real estate inventory is evaluated for indicators of impairment by each community during each reporting period. In conducting our review for indicators of impairment on a community level, we evaluate, among other things, the margins on homes that have been sold, communities with slow moving inventory, projected margins on future home sales over the life of the community, and the estimated fair value of the land. We pay particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales prices and/or margins are trending downward and are anticipated to continue to trend downward. Due largely to the relatively short development and construction periods for our communities and our growth, we have not experienced circumstances

40

during 2016 or 2015 that are indicators of impairment. Our future sales and margins may be impacted by our inability to realize continued growth, increased cost associated with holding and developing land, local economic factors, pressure on home sales prices, increased carrying costs, and insufficient access to labor and materials at reasonable costs. For individual communities with indicators of impairment, we perform additional analysis to estimate the community’s undiscounted future cash flows. If the estimated undiscounted future cash flows are greater than the carrying value of the asset, no impairment adjustment is required. If the undiscounted cash flows are less than the asset’s carrying value, the asset is impaired and is written down to its fair value. We estimate the fair value of communities using a discounted cash flow model; changes to the expected cash flows may lead to changes in the outcome of our impairment analysis.
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, sale, and delivery 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 we purchased the property as raw land or finished lots.
Impairment of land and land under development. 
For raw land, land under development and completed lots that our management anticipates will be utilized for future homebuilding activities or to be sold as finished lots to individuals, the recoverability of assets is measured by comparing the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets based on home or lot sales, consistent with the evaluation of operating communities discussed above. As of December 31, 2016, we had not identified any raw land, land under development or completed lots that management intends to market for sale in bulk to a third-party.
Pre-acquisition costs and controlled lots not owned. 
We enter into land purchase and option agreements in the ordinary course of business in order to secure land for the construction of homes in the future. Pursuant to these agreements, we typically provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. We do not have title to the property and our obligations with respect to the option contracts are generally limited to the forfeiture of the related nonrefundable cash deposits.
To the extent that any deposits are nonrefundable and the associated land acquisition process is terminated or no longer determined probable, the deposit and any related pre-acquisition costs (e.g. due diligence costs) are charged to other income, net. We review the likelihood of the acquisition of contracted lots in conjunction with our periodic real estate impairment analysis.
Warranty Reserves
We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements. Estimated future direct warranty costs are accrued and charged to cost of sales in connection with our home sales.
Our warranty liability is based upon historical warranty cost experience on a per house basis established based on (i) trends in historical warranty payment levels, (ii) the historical range of amounts paid per house, (iii) any warranty expenditures not considered to be normal and recurring, and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our expansion. Our analysis also considers improvements in quality control and construction techniques expected to impact future warranty expenditures and the expertise of our personnel. Our warranty reserves are reviewed quarterly to assess the reasonableness and adequacy and we make adjustments to the balance of the pre-existing reserves, as needed, to reflect changes in trends and historical data as information becomes available.
Business Combinations
We account for businesses we acquire in accordance with ASC 805. Under the purchase method of accounting, the assets acquired and liabilities assumed are recorded at their estimated fair values. Any excess of the purchase consideration over the net fair values of tangible and identified intangible assets acquired less liabilities assumed is recorded as goodwill. Our reported income from an acquired company includes the operations of the acquired company from the effective date of acquisition. Contingent consideration is recorded at fair value at the acquisition date; in subsequent periods any change in the fair value of the contingent consideration is recognized in the income statement as cost of sales.
Goodwill 
We record goodwill associated with our acquisitions of businesses when the consideration paid exceeds the fair value of the net tangible and identifiable intangible assets acquired. We evaluate our goodwill balances for potential impairment on an annual basis. The current guidance allows an entity to assess qualitatively whether it is necessary to perform step one of a prescribed two-step annual goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, the two-step goodwill impairment test is not required. We

41

determine the fair value of each reporting unit using accepted valuation methods, including the use of discounted cash flows supplemented by market-based assessments of fair value, and measure impairment as the difference between the resulting implied fair value of goodwill and the recorded carrying value.
Taxes
We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Our ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established, if required. We recognize the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. We recognize potential interest and penalties related to uncertain tax positions in income tax expense, as applicable.
Implications of Being an Emerging Growth Company
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we are an emerging growth company, unlike other public companies, we will not be required to:
•
provide an attestation and report from our auditors on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
•
comply with certain new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”);
•
comply with certain new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise;
•
provide disclosures regarding executive compensation required of larger public companies; and
•
obtain stockholder approval of any golden parachute payments not previously approved.
We intend to continue to take advantage of all of these exemptions.
We will cease to be an emerging growth company when any of the following conditions apply:
•
we have $1.0 billion or more in annual revenues;
•
at least $700 million in market value of our common stock are held by non-affiliates;
•
we issue more than $1.0 billion of non-convertible debt over a three-year period; or
•
the last day of the fiscal year following the fifth anniversary of our initial public offering has passed.
In addition, an emerging growth company can delay its adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with any new or revised accounting standards on the relevant dates on which non-emerging growth companies must adopt such standards. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
ITEM 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our operations are interest rate sensitive. As overall housing demand is adversely affected by increases in interest rates, a significant increase in mortgage interest rates may negatively affect the ability of homebuyers to secure adequate financing. Higher interest rates could adversely affect our revenues, gross margin and net income. 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 utilize both fixed-rate debt ($85.0 million aggregate principal amount of our 4.25% Convertible Notes due 2019 and certain inventory related obligations) and variable-rate debt (our $385.0 million revolving credit facility which may be increased to $400.0 million in accordance with the terms and conditions of the A&R Credit Agreement) as part of financing our operations. The conversion of our Convertible Notes can be settled using any combination of cash and shares of our common stock. We do not have the obligation to prepay the Convertible 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.
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 year ended December 31, 2016. 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

42

should be read in conjunction with our disclosures under the heading “Cautionary Statement about Forward-Looking Statements” in Item 1A. Risk Factors.
As of December 31, 2016, we had $322.3 million of variable rate indebtedness outstanding under the A&R Credit Agreement. All of the outstanding borrowings under the A&R Credit Agreement are at variable rates based on LIBOR. The interest rate for our variable rate indebtedness as of December 31, 2016 was LIBOR plus 3.50%. A hypothetical 100 basis point increase in the average interest rate on our variable rate indebtedness would increase our annual interest expense by approximately $3.2 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.

43

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of LGI Homes, Inc.

We have audited the accompanying consolidated balance sheets of LGI Homes, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LGI Homes, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

/s/Ernst & Young LLP                        

Houston, Texas
March 7, 2017









44


LGI HOMES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 
 
December 31,
 
 
2016
 
2015
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
49,518

 
$
37,568

Accounts receivable
 
17,055

 
17,325

Real estate inventory
 
717,681

 
531,228

Pre-acquisition costs and deposits
 
10,651

 
7,001

Property and equipment, net
 
1,960

 
2,108

Other assets
 
5,631

 
11,238

Goodwill and intangible assets, net
 
12,018

 
12,234

Total assets
 
$
814,514

 
$
618,702

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Accounts payable
 
$
12,277

 
$
24,020

Accrued expenses and other liabilities
 
46,389

 
40,006

Deferred tax liabilities, net
 
164

 
2,726

Notes payable
 
400,483

 
304,561

Total liabilities
 
459,313

 
371,313

COMMITMENTS AND CONTINGENCIES
 
 
 
 
EQUITY
 
 
 
 
Common stock, par value $0.01, 250,000,000 shares authorized, 22,311,310 shares issued and 21,311,310 shares outstanding as of December 31, 2016 and 21,270,389 shares issued and 20,270,389 shares outstanding as of December 31, 2015
 
223

 
213

Additional paid-in capital
 
208,346

 
175,575

Retained earnings
 
163,182

 
88,151

Treasury stock, at cost, 1,000,000 shares
 
(16,550
)
 
(16,550
)
Total equity
 
355,201

 
247,389

Total liabilities and equity
 
$
814,514

 
$
618,702




See accompanying notes to the consolidated financial statements.

45

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

 

For the Year Ended December 31,
 

2016

2015

2014
 



 

 
Home sales revenues
 
$
838,320

 
$
630,236

 
$
383,268

Cost of sales
 
616,707

 
463,304

 
280,481

Selling expenses
 
66,984

 
52,998

 
36,672

General and administrative
 
43,158

 
34,260

 
23,744

   Operating income
 
111,471

 
79,674

 
42,371

Other income, net
 
(2,201
)
 
(606
)
 
(708
)
   Net income before income taxes
 
113,672

 
80,280

 
43,079

Income tax provision
 
38,641

 
27,450

 
14,868

   Net income
 
$
75,031

 
$
52,830

 
$
28,211

Earnings per share:






Basic

$
3.61

 
$
2.65

 
$
1.37

Diluted

$
3.41

 
$
2.44

 
$
1.33










Weighted average shares outstanding:








Basic

20,798,333

 
19,939,761

 
20,666,758

Diluted

22,024,091

 
21,740,719

 
21,202,967




See accompanying notes to the consolidated financial statements.

46

LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Treasury Stock
 
Total Equity
 
Shares
 
Amount
 
BALANCE—December 31, 2013
20,763,449

 
$
208

 
$
157,056

 
$
7,110

 
$
—

 
$
164,374

Net income
—

 
—

 
—

 
28,211

 
—

 
28,211

Issuance of restricted stock units in settlement of accrued bonuses
—

 
—

 
642

 
—

 
—

 
642

Compensation expense for equity awards
—

 
—

 
862

 
—

 
—

 
862

Stock issued under employee incentive plans
85,595

 
—

 
(240
)
 
—

 
—

 
(240
)
Issuance of Convertible Notes, equity portion, net of issuance costs of $297 and tax effect of $2,971
—

 
—

 
5,200

 
—

 
—

 
5,200

Repurchase of stock
—

 
—

 
—

 
—

 
(16,550
)
 
(16,550
)
BALANCE—December 31, 2014
20,849,044

 
$
208

 
$
163,520

 
$
35,321

 
$
(16,550
)
 
$
182,499

Net income
—

 
—

 
—

 
52,830

 
—

 
52,830

Issuance of shares, net of offering costs
345,760

 
4

 
9,492

 
—

 
—

 
9,496

Issuance of restricted stock units in settlement of accrued bonuses
—

 
—

 
238

 
—

 
—

 
238

Compensation expense for equity awards
—

 
—

 
2,279

 
—

 
—

 
2,279

Stock issued under employee incentive plans
75,585

 
1

 
46

 
—

 
—

 
47

BALANCE—December 31, 2015
21,270,389

 
$
213

 
$
175,575

 
$
88,151

 
$
(16,550
)
 
$
247,389

Net income
—

 
—

 
—

 
75,031

 
—

 
75,031

Issuance of shares, net of offering costs
993,554

 
10

 
28,467

 
—

 
—

 
28,477

Issuance of restricted stock units in settlement of accrued bonuses
—

 
—

 
138

 
—

 
—

 
138

Compensation expense for equity awards
—

 
—

 
3,396

 
—

 
—

 
3,396

Stock issued under employee incentive plans
47,367

 
—

 
770

 
—

 
—

 
770

BALANCE—December 31, 2016
22,311,310

 
$
223

 
$
208,346

 
$
163,182

 
$
(16,550
)
 
$
355,201




See accompanying notes to the consolidated financial statements.

47

LGI HOMES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
 
For the Year Ended December 31,
 
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
75,031

 
$
52,830

 
$
28,211

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
1,089

 
883

 
825

Loss on disposal of assets
 
1

 
—

 
14

Excess tax benefits from stock based compensation
 
(138
)
 
(47
)
 
(356
)
Compensation expense for equity awards
 
3,396

 
2,279

 
862

Deferred income taxes
 
(2,562
)
 
42

 
1

Changes in assets and liabilities:
 
 
 
 
 
 
Accounts receivable
 
270

 
(9,960
)
 
(1,963
)
Real estate inventory
 
(183,884
)
 
(151,707
)
 
(198,357
)
Pre-acquisition costs and deposits
 
(3,650
)
 
2,877

 
(6,066
)
Other assets
 
5,472

 
(4,795
)
 
(617
)
Accounts payable
 
(11,747
)
 
8,522

 
1,480

Accrued expenses and other liabilities
 
8,539

 
9,920

 
2,752

Net cash used in operating activities
 
(108,183
)
 
(89,156
)
 
(173,214
)
Cash flows from investing activities:
 
 
 
 
 
 
Payment for business acquisitions, net of cash acquired
 
—

 
—

 
(15,169
)
Purchases of property and equipment
 
(722
)
 
(1,117
)
 
(1,195
)
Net cash used in investing activities
 
(722
)
 
(1,117
)
 
(16,364
)
Cash flows from financing activities:
 
 
 
 
 
 
Proceeds from notes payable
 
140,000

 
245,382

 
232,400

Payments on notes payable
 
(45,000
)
 
(154,786
)
 
(43,531
)
Loan issuance costs
 
(2,684
)
 
(2,238
)
 
(5,200
)
Proceeds from sale of stock, net of offering expenses
 
29,448

 
9,593

 
—

Payment for offering costs
 
(204
)
 
(419
)
 
—

Payment for earnout obligation
 
(843
)
 
(1,108
)
 
—

Excess tax benefits (deficiencies) from equity awards
 
138

 
47

 
(240
)
Stock repurchases
 
—

 
—

 
(16,550
)
Net cash provided by financing activities
 
120,855

 
96,471

 
166,879

Net increase (decrease) in cash and cash equivalents
 
11,950

 
6,198

 
(22,699
)
Cash and cash equivalents, beginning of year
 
37,568

 
31,370

 
54,069

Cash and cash equivalents, end of year
 
$
49,518

 
$
37,568

 
$
31,370



See accompanying notes to the consolidated financial statements.

48

LGI HOMES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.     ORGANIZATION AND BUSINESS
Organization and Description of the Business
LGI Homes, Inc. a Delaware corporation (the “Company”, “us,” “we,” or “our,”), was organized on July 9, 2013 as a holding company for the purposes of facilitating the initial public offering (the “IPO”) of its common stock in November 2013.
The Company’s principal business is the development of communities and the design, construction and sale of homes. At December 31, 2016, the Company had operations in Texas, Arizona, Florida, Georgia, New Mexico, Colorado, North Carolina, South Carolina, Washington and Tennessee.
Initial Public Offering and Reorganization Transactions
On November 13, 2013, we completed the IPO and received net proceeds of $102.6 million. In conjunction with the IPO, the Company completed the reorganization of LGI Homes Group, LLC and LGI Homes Corporate, LLC and their consolidated subsidiaries and variable interest entities, as well as LGI Homes II, LLC, LGI Homes - Sunrise Meadow, LLC, LGI Homes - Canyon Crossing, LLC, and LGI Homes - Deer Creek, LLC, into LGI Homes, Inc., and acquired certain joint venture interests.
2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and these differences could have a significant impact on the financial statements. The significant accounting estimates include real estate inventory and cost of sales, impairment of real estate inventory and property and equipment, goodwill, warranty reserves, our earnout liability, our liability under our self-funded health benefit plan, the fair value of the convertible debt, loss contingencies, incentive compensation expense, and income taxes.
Cash and Cash Equivalents and Concentration of Credit Risk
Cash and cash equivalents are defined as cash on hand, demand deposits with financial institutions, and short-term liquid investments with an initial maturity date of less than three months. Our cash in demand deposit accounts may exceed federally insured limits and could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or diminished access to cash in their demand deposit accounts.
Accounts Receivable
Accounts receivable consist primarily of proceeds due from title companies for sales closed prior to period end and are generally collected within a few days from closing.
Real Estate Inventory
Inventory consists of land, land under development, finished lots, information centers, homes in progress, and completed homes. Inventory is stated at cost unless the carrying amount is determined not to be recoverable, in which case 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 of 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 using either the lot size or relative sales value. Inventory costs for completed homes are expensed to cost of sales as homes are sold. Changes

49

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.
In accordance with the ASC Topic 360, Property, Plant, and Equipment, real estate inventory is evaluated for indicators of impairment by each community during each reporting period. In conducting its review for indicators of impairment on a community level, management evaluates, among other things, the margins on homes that have been sold, communities with slow moving inventory, projected margins on future home sales over the life of the community, and the estimated fair value of the land. For individual communities with indicators of impairment, additional analysis is performed to estimate the community’s undiscounted future cash flows. If the estimated undiscounted future cash flows are greater than the carrying value of the community group of assets, no impairment adjustment is required. If the undiscounted cash flows are less than the community’s carrying value, the asset group is impaired and is written down to its fair value. We estimate the fair value of communities using a discounted cash flow model. As of December 31, 2016 and 2015, the real estate inventory is stated at cost; there were no inventory impairment charges recorded during the years ended December 31, 2016, 2015 and 2014.
Capitalized Interest
Interest and other financing costs are capitalized as cost of inventory during community development and home construction activities, in accordance with ASC Topic 835, Interest and expensed in cost of sales as homes in the community are sold. To the extent the debt exceeds qualified assets, a portion of the interest incurred is expensed.
Pre-Acquisition Costs and Deposits
Amounts paid for land options, deposits on land purchase contracts, and other pre-acquisition costs are capitalized and classified as deposits to purchase. Upon execution of the purchase, these deposits are applied to the acquisition price of the land and recorded as a cost component of the land in real estate inventory. To the extent that any deposits are nonrefundable and the associated land acquisition process is terminated or no longer determined probable, the deposit and related pre-acquisition costs are charged to other income,net. Management reviews the likelihood of the acquisition of contracted lots in conjunction with its periodic real estate impairment analysis.
Under ASC Topic 810, Consolidation (“ASC 810”), a nonrefundable deposit paid to an entity is deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Non-refundable land purchase and lot option deposits generally represent our maximum exposure if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to close. Such costs are classified as preacquisition costs, which we would have to absorb should the option not be exercised. Therefore, whenever we enter into a land option or purchase contract with an entity and makes a nonrefundable deposit, it may have a variable interest in a variable interest entity (“VIE”). In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE and would consolidate the VIE if we are deemed to be the primary beneficiary. As of December 31, 2016 and 2015, we were not deemed to be the primary beneficiary for any VIEs associated with non-refundable land deposits.
Deferred Loan Costs
Deferred loan costs represent debt issuance costs related to a recognized debt liability and are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.
Property and Equipment
Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation. Depreciation expense is recorded in general and administrative expenses. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in other income, net. Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets, ranging from two to five years for property and equipment. Leasehold improvements are depreciated over the shorter of the asset life or the term of the lease. Maintenance and repair costs are expensed as incurred.
Impairments of long-lived assets are determined periodically when indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on judgments as to the future undiscounted operating cash flows to be generated from these assets throughout the remaining estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related asset, impairment is recognized for the excess of the carrying value over its fair value. There were no impairments of property, equipment and leasehold improvements recorded during the years ended December 31, 2016, 2015 and 2014.

50

Goodwill and Intangible Assets
The excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed is capitalized as goodwill in accordance with ASC Topic 805, Business Combinations. Goodwill and intangible assets that do not have finite lives are not amortized, but are assessed for impairment at least annually or more frequently if certain impairment indicators are present. The $12.0 million of goodwill is related to the GTIS Acquisitions. We determine the fair value of each reporting unit using accepted valuation methods, including the use of discounted cash flows supplemented by market-based assessments of fair value, and measure impairment as the difference between the resulting implied fair value of goodwill and the recorded carrying value. No goodwill impairment charges were recorded in 2016, 2015 and 2014.
Warranty Reserves
Future direct warranty costs are accrued and charged to cost of sales in the period when the related home is sold. Our warranty liability is based upon historical warranty cost experience and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built, the geographic areas in which they are built, and potential impacts of our continued expansion.
Warranty reserves are reviewed quarterly to assess the reasonableness and adequacy and adjusted, as needed, to reflect changes in trends and historical data as information becomes available.
Customer Deposits
Customer deposits are received upon signing a purchase contract and are generally $1,000 or less. Deposits are generally refundable if the customer is unable to obtain financing. Forfeited buyer deposits related to home sales are recognized in other income in the period in which it is determined that the buyer will not complete the purchase of the property and the deposit is nonrefundable to the buyer.
Home Sales
In accordance with ASC Topic 360—20, Real Estate Sales, revenues from home sales are recorded at the time each home sale is closed, title and possession are transferred to the buyer, and we have no significant continuing involvement with the home. Home sales proceeds are generally received from the title company within a few days after closing. Home sales are reported net of sales discounts and incentives granted to home buyers, which are primarily seller-paid closing costs.
Cost of Sales
As discussed under Real Estate Inventory above, cost of sales for homes closed include the construction costs of each home and allocable land acquisition and land development costs, capitalized interest, and other related common costs (both incurred and estimated to be incurred).
Selling and Commission Costs
Sales commissions are paid and expensed based on homes closed. Other selling costs are expensed in the period incurred.
Advertising Costs
Advertising and direct mail costs are expensed as incurred. Advertising and direct mail costs were $11.3 million, $9.3 million and $8.6 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Income Taxes
We are a taxable entity subject to federal and state taxes. We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Our ability to realize deferred tax assets is assessed throughout the year and a valuation allowance is established, if required. We recognize the impact of a tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. We recognize potential interest and penalties related to uncertain tax positions in income tax expense.
We file income tax returns in the U.S. federal jurisdiction and in various states and we do not have any unrecognized tax benefits. We are not presently under exam for income tax by any taxing jurisdiction, and no longer remain subject to exam for years before 2013 (2012 for Texas).
Earnings Per Share
Basic earnings per share is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding. Diluted earnings

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per share gives effect to all dilutive potential shares outstanding during the period using the treasury stock method and for our 4.25% Convertible Notes due 2019 (the “Convertible Notes”) using the if-converted method through April 30, 2015. On April 30, 2015, our stockholders approved the flexible settlement provisions of the Convertible Notes at our 2015 Annual Meeting of Stockholders which allows us to settle the conversion of the Convertible Notes using any combination of cash and shares of our common stock. Therefore, subsequent to April 30, 2015, the treasury stock method is used to calculate the dilutive effect of the Convertible Notes. Diluted earnings per share excludes all dilutive potential shares of common stock if their effect is antidilutive.
Stock-Based Compensation
Compensation costs for non-performance-based restricted stock awards are measured using the closing price of our common stock on the date of grant and are expensed on a straight-line basis over the vesting period of the award. Compensation costs for performance-based restricted stock awards are also measured using the closing price of our common stock on the date of grant but are expensed in accordance with ASC 718-10-25-20, Compensation - Stock Compensation, which requires an assessment of probability of attainment of the performance target. Once the performance target outcome is determined to be probable, the cumulative expense is adjusted, as needed, to recognize compensation expense on a straight-line basis over the award’s vesting period.
Recently Adopted Accounting Standards
The Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”) requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Effective January 1, 2016, we retrospectively adopted ASU 2015-03, and have reclassified $3.6 million of debt issuance costs from other assets to debt on our consolidated balance sheet at December 31, 2015.
Effective January 1, 2016, we adopted ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”), which amends the consolidation requirements in ASC 810, primarily related to limited partnerships and variable interest entities (“VIEs”). The adoption of ASU 2015-02 did not have an effect on our consolidated financial statements and disclosures.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to evaluate, at each reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. This ASU applies to all entities and is effective for periods ending after December 15, 2016. The adoption of ASU 2014-15 did not have any effect on our consolidated financial statements or disclosures.
Recently Issued Accounting Pronouncements    
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ ASU 2016-18”), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows by requiring it be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows, thereby reducing previous diversity in practice. This amendment will be effective for us in our fiscal year beginning January 1, 2018. We do not expect the adoption of ASU 2016-18 will have a material effect on our consolidated statement of cash flows or disclosures.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”), which addresses specific classification issues and is intended to reduce diversity in current practice regarding the manner in which certain cash receipts and cash payments are presented and classified in the cash flow statement. ASU 2016-15 will be effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2016-15 will have on our consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” (“ASU 2016-09”), which includes multiple amendments intended to simplify aspects of share-based payment accounting. ASU 2016-09 was effective for us beginning January 1, 2017. Amendments to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures will be applied using a modified retrospective transition method through a cumulative-effect adjustment to equity as of the beginning of the period of adoption. Amendments to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement will be applied retrospectively, and amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. We do not expect the adoption of ASU 2016-09 to have a material impact on our consolidated financial statements and disclosures.

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In February 2016, the FASB issued ASU No. 2016-02, “Leases,” (“ASU 2016-02”), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. Topic 842 “Leases,” will be effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. As part of our assessment work-to-date, we have formed an implementation work team and are continuing our contract review and documentation. ASU 2014-09 and related FASB updates are effective for us beginning January 1, 2018 and, at that time, we expect to adopt the new standard under the modified retrospective approach. We are continuing to evaluate the impact of this accounting pronouncement and do not expect the adoption of ASU 2014-09 to have a material impact on our consolidated financial statements and disclosures.
3.     REAL ESTATE INVENTORY
Our real estate inventory consists of the following (in thousands):
 
 
December 31,
   
 
2016
 
2015
Land, land under development, and finished lots
 
$
477,461

 
$
320,320

Information centers
 
13,589

 
8,083

Homes in progress
 
94,686

 
109,451

Completed homes
 
131,945

 
93,374

Total real estate inventory
 
$
717,681

 
$
531,228

Interest and financing costs incurred under our debt obligations, as more fully discussed in Note 7, are capitalized to qualifying real estate projects under development and homes under construction.
4.     PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
 
 
 
 
December 31,
   
 
Asset Life
 
2016
 
2015
   
 
(years)
 
   
 
   
Computer equipment
 
2-5
 
$
1,395

 
$
1,237

Machinery and equipment
 
5
 
117

 
53

Furniture and fixtures
 
2-5
 
2,629

 
2,132

Leasehold improvements
 
5
 
240

 
240

Total property and equipment
 
   
 
4,381

 
3,662

Less: Accumulated depreciation
 
   
 
(2,421
)
 
(1,554
)
Property and equipment, net
 
   
 
$
1,960

 
$
2,108

Depreciation expense incurred for the years ended December 31, 2016, 2015 and 2014 was $0.9 million, $0.6 million and $0.4 million, respectively.

53

5.     OTHER ASSETS
Other assets consist of the following (in thousands):   
 
 
December 31,
   
 
2016
 
2015
Prepaid insurance
 
1,338

 
1,301

Prepaid expenses
 
2,962

 
9,024

Security deposits
 
1,331

 
913

   Other assets
 
$
5,631

 
$
11,238

6.     ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued and other current liabilities consist of the following (in thousands):
 
 
December 31,
   
 
2016
 
2015
Inventory related obligations
 
$
16,352

 
$
17,389

Taxes payable
 
5,040

 
6,205

Retentions and development payable
 
8,506

 
3,748

Accrued compensation, bonuses and benefits
 
7,800

 
5,573

Warranty reserve
 
1,600

 
1,325

Accrued interest
 
1,645

 
1,249

Earnout liability
 
534

 
1,425

Other
 
4,912

 
3,092

Total accrued expenses and other liabilities
 
$
46,389

 
$
40,006

Inventory Related Obligations
We own lots in certain communities in Florida, Arizona, and Texas that have Community Development Districts (“CDD”) 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, 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. At December 31, 2016 and 2015, we had CDD and other utility development obligations of approximately $16.4 million and $17.4 million, respectively.
Estimated Warranty Reserve
We typically provide homebuyers with a one-year warranty on the house and a ten-year limited warranty for major defects in structural elements such as framing components and foundation systems.
Changes to our warranty accrual are as follows (in thousands):
 
 
December 31,
 
 
2016
 
2015
 
2014
Warranty reserves, beginning of period
 
$
1,325

 
$
900

 
$
630

Warranty provision
 
3,084

 
1,608

 
1,179

Warranty expenditures
 
(2,809
)
 
(1,183
)
 
(909
)
Warranty reserves, end of period
 
$
1,600

 
$
1,325

 
$
900

Earnout Liability
The purchase price for the acquisition of certain assets and liabilities from Oakmont Home Builder, Inc. (“Oakmont”) and certain land positions of EST Properties, LLC, an affiliate of Oakmont (the “Oakmont Acquisition”) during October 2014 included contingent consideration to be paid based on homes closed through December 2017 attributable to Oakmont assets. The earnout liability is subject to adjustment based on revisions to the forecasted absorption rate and the actual number of homes closed during the earnout period.

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7.     NOTES PAYABLE
Revolving Credit Agreement
In May 2015, we entered into a Credit Agreement (the “Credit Agreement”) with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent. The Credit Agreement provided for a revolving credit facility up to $300.0 million. On May 27, 2016, we entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) with several financial institutions, and Wells Fargo Bank, National Association, as administrative agent. The A&R Credit Agreement has substantially similar terms and provisions as the Credit Agreement but provides for a $360.0 million revolving credit facility, which can be increased by our request up to $400.0 million, subject to the terms and conditions of the A&R Credit Agreement. On September 12, 2016, the A&R Credit Agreement was amended to permit up to $4.0 million of deferred purchase price indebtedness related to land purchases at any given time. On December 28, 2016, the A&R Credit Agreement was increased by $25.0 million to $385.0 million in accordance with the accordion feature of the A&R Credit Agreement.
The A&R Credit Agreement matures on May 27, 2019. Prior to each annual anniversary of the A&R Credit Agreement, we may request a one-year extension of the maturity date. The A&R Credit Agreement is guaranteed by each of our subsidiaries having gross assets equal to or greater than $0.5 million. Prior to the occurrence of a trigger event under the A&R Credit Agreement, the revolving credit facility is unsecured except that the facility is secured by a first priority lien in certain land held for development, lots under development and/or finished lots with an aggregate land value of at least $35.0 million. As of December 31, 2016, the borrowing base under the A&R Credit Agreement was $385.0 million, of which $325.0 million was outstanding, $6.3 million represented letter of credit assurances, and $53.7 million was available to borrow.
Interest is paid monthly on borrowings under the A&R Credit Agreement at LIBOR plus 3.50%. The A&R Credit Agreement applicable margin for LIBOR loans ranges from 3.00% to 3.50% based on our leverage ratio. At December 31, 2016, LIBOR was 0.72%.
The A&R Credit Agreement contains various financial covenants, including a tangible net worth ratio, a leverage ratio, a minimum liquidity amount, and an EBITDA to interest expense ratio. The A&R Credit Agreement contains various covenants that, among other restrictions, limit the amount of our additional debt and our ability to make certain investments. At December 31, 2016, we were in compliance with all of the covenants contained in the A&R 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. The Convertible Notes mature on November 15, 2019. Interest on the Convertible Notes is payable semiannually in May and November at a rate of 4.25%. 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, note holders can convert their Convertible Notes at any time at their option.
When issued, the conversion of the Convertible Notes could only be settled in shares of our common stock. Our stockholders approved the flexible settlement provisions of the Convertible Notes on April 30, 2015, which allows us to 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.
At December 31, 2016, the Convertible Notes are 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, 2016. As a result, the holders of the Convertible Notes may 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, 2017 through March 31, 2017 (inclusive). As of the date of the filing of this Annual Report on Form 10-K, none of the holders of the Convertible Notes have elected to convert their Convertible Notes.
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.

55

Notes payable consist of the following (in thousands):
 
 
December 31,
   
 
2016
 
2015
Notes payable under revolving credit facility ($385.0 million revolving credit facility at December 31, 2016) maturing on May 27, 2019; interest paid monthly at LIBOR plus 3.50%; net of approximately $2.7 million of debt issuance costs at December 31, 2016 and $1.5 million at December 31, 2015; collateralized by certain land, land under development, and finished lots (carrying value of $57.5 million at December 31, 2016)
 
$
322,253

 
$
228,470

4.25% Convertible Notes due November 15, 2019; interest paid semi-annually at 4.25%; net of debt issuance costs of approximately $1.6 million and $2.1 million at December 31, 2016 and December 31, 2015, respectively; and approximately $5.2 million and $6.8 million in unamortized discount at December 31, 2016 and December 31, 2015, respectively
 
78,230

 
76,091

Total notes payable
 
$
400,483

 
$
304,561

As of December 31, 2016, the annual aggregate maturities of our notes payable during each of the next five fiscal years are as follows (in thousands):
 
 
Amount
2017 (a)
 
$
85,000

2018
 
—

2019
 
325,000

2020
 
—

2021
 
—

Total notes payable
 
410,000

  Less: Convertible Notes discount
 
(5,210
)
Less: Debt issuance costs
 
(4,307
)
           Net notes payable
 
$
400,483

(a)
Represents $85.0 million aggregate principal amount of our Convertible Notes which mature on November 15, 2019. Based on the terms of the Convertible Notes, the holders may elect to convert all or a portion of the Convertible Notes owned during the period January 1, 2017 through March 31, 2017 (inclusive) therefore are reflected above with a maturity date in 2017. As of the date of the filing of this Annual Report on Form 10-K, none of the holders of the Convertible Notes have elected to convert their Convertible Notes.
Capitalized Interest
Interest activity, including other financing costs, for notes payable for the periods presented is as follows (in thousands):
   
 
Year Ended December 31,
   
 
2016
 
2015
 
2014
Interest incurred
 
$
18,457

 
$
14,198

 
$
6,026

Less: Amounts capitalized
 
(18,457
)
 
(14,198
)
 
(6,026
)
Interest expense
 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
Cash paid for interest
 
$
14,339

 
$
9,766

 
$
4,109

Included in interest incurred was amortization of deferred financing costs for notes payable and amortization of Convertible Notes discount of $3.6 million, $3.9 million, and $1.3 million for the years ended December 31, 2016, 2015, and 2014 respectively.

56

8.     INCOME TAXES
All Company operations are domestic. The provision for income taxes consisted of the following (in thousands):
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Current:
 
 
 
 
 
 
  Federal
 
$
37,751

 
$
24,990

 
$
13,266

  State
 
3,452

 
2,419

 
1,606

Current tax provision
 
41,203

 
27,409

 
14,872

Deferred:
 
 
 
 
 
 
  Federal
 
(2,451
)
 
33

 
—

  State
 
(111
)
 
8

 
(4
)
Deferred tax provision (benefit)
 
(2,562
)
 
41

 
(4
)
Total income tax provision
 
$
38,641

 
$
27,450

 
$
14,868

 Income taxes paid were $42.4 million, $23.7 million and $15.2 million for the years ended December 31, 2016, 2015, and 2014, respectively.
A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate of 35% to income before provision for income taxes for the years ended December 31, 2016, 2015 and 2014 (in thousands):
 
 
Year Ended December 31,
 
 
2016
 
2015
2014
Tax at federal statutory rate
 
$
39,791

 
35.0
 %
 
$
28,098

 
35.0
 %
 
$
15,078

 
35.0
 %
State income taxes (net of federal benefit)
 
2,143

 
1.9

 
1,568

 
2.0

 
1,037

 
2.4

Domestic production activity deduction
 
(3,727
)
 
(3.3
)
 
(2,462
)
 
(3.1
)
 
(1,294
)
 
(3.0
)
Non deductible expenses and other
 
435

 
0.4

 
237

 
0.3

 
47

 
0.1

Change in tax status of entity - deferred taxes
 
(1
)
 
—

 
9

 
—

 
—

 
—

Tax at effective rate
 
$
38,641

 
34.0
 %
 
$
27,450

 
34.2
 %
 
$
14,868

 
34.5
 %
The components of net deferred tax assets and liabilities at December 31, 2016 and 2015, are as follows (in thousands):
 
 
December 31
 
 
2016
 
2015
Deferred tax assets:
 
 
 
 
   Accruals and reserves
 
$
2,422

 
$
1,741

   Inventory
 
532

 
536

   Stock-based compensation
 
392

 
176

   Deferred loan costs
 
62

 
84

   Deferred rent
 
43

 
44

Total deferred tax assets
 
3,451

 
2,581

Deferred tax liabilities:
 
 
 
 
   Discount on Convertible Notes
 
(1,897
)
 
(2,486
)
   Prepaids
 
(911
)
 
(2,078
)
   Tax depreciation in excess of book depreciation
 
(396
)
 
(441
)
   Goodwill and other assets amortized for tax
 
(411
)
 
(302
)
Total deferred tax liability
 
$
(3,615
)
 
$
(5,307
)
Total net deferred tax liability
 
$
(164
)
 
$
(2,726
)
The Company has not recorded any accruals related to uncertain tax positions as of December 31, 2016 and 2015, respectively.

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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.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
9.     EQUITY
We are authorized to issue 250,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. As of December 31, 2016 and 2015, no shares of preferred stock were issued or outstanding.
At December 31, 2015 we had 21,270,389 shares of common stock issued and 20,270,389 shares of common stock outstanding, including 1,000,000 treasury shares of our common stock purchased November 21, 2014 at $16.55 per share. At December 31, 2016 we had 22,311,310 shares of common stock issued and 21,311,310 shares of common stock outstanding.
Shelf Registration Statement and ATM Offering Programs
We have a shelf registration statement on Form S-3 (the “Registration Statement”), declared effective in August 2015, to offer and sell from time to time various securities with a maximum offering price of $300.0 million. As of December 31, 2016, we have an at the market common stock offering program (the “2016 ATM Program”) under the Registration Statement, which enables us to offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $25.0 million in accordance with the terms and provisions of the Equity Distribution Agreement dated September 7, 2016 between us and the sales agents named therein. During 2016, we issued and sold 250,000 shares of our common stock under the 2016 ATM Program and received net proceeds of approximately $9.0 million. At December 31, 2016, we have the ability to sell up to $15.8 million of additional shares of our common stock under the 2016 ATM Program. In June 2016, we concluded our prior $30.0 million at the market common stock offering program (the “2015 ATM Program”). During the years ended December 31, 2016 and 2015, we issued and sold 743,554 and 345,760 shares of our common stock under the 2015 ATM Program and received net proceeds of approximately $19.8 million and $9.6 million, respectively. During the life of the 2015 ATM Program, we issued and sold a total of 1,089,314 shares of our common stock and received net proceeds of approximately $29.4 million.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2016, 2015, and 2014.
 
 
For the Year Ended December 31,
 
 
2016
 
2015
 
2014
Numerator (in thousands):
 
 
 
 
 
 
Net income for basic earnings per share
 
$
75,031

 
$
52,830

 
$
28,211

Effect of dilutive securities:
 
 
 
 
 
 
Interest expense associated with Convertible Notes, net of taxes
 
—

 
190

 
7

Numerator for diluted earnings per share
 
$
75,031

 
$
53,020

 
$
28,218

Denominator:
 
 
 
 
 
 
Basic weighted average shares outstanding
 
20,798,333

 
19,939,761

 
20,666,758

Effect of dilutive securities:
 
 
 
 
 
 
   Convertible Notes - treasury stock method
 
1,044,519

 
463,609

 
—

   Convertible Notes - if-converted method
 
—

 
1,298,871

 
432,957

Stock-based compensation units
 
181,239

 
38,478

 
103,252

Diluted weighted average shares outstanding
 
22,024,091

 
21,740,719

 
21,202,967

 
 
 
 
 
 
 
Basic earnings per share
 
$
3.61

 
$
2.65

 
$
1.37

Diluted earnings per share
 
$
3.41

 
$
2.44

 
$
1.33

Antidilutive non-vested restricted stock units excluded from calculation of diluted earnings per share
 
13,613

 
23,201

 
3,022


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In accordance with ASC 260-10, Earnings Per Share, we calculated the dilutive effect of the Convertible Notes using the “if-converted” method through April 30, 2015. The interest expense related to the Convertible Notes through April 30, 2015 was included in cost of sales. On April 30, 2015, our stockholders approved the flexible settlement provisions of the Convertible Notes which allows us to settle the conversion of the Convertible Notes using any combination of cash and shares of our common stock. Therefore, subsequent to April 30, 2015, the treasury stock method is used to calculate the dilutive effect of the Convertible Notes, since we have the intent and ability to settle the principal amount of the outstanding Convertible Notes in cash. Under the treasury stock method, the Convertible Notes have a dilutive impact on diluted earnings per share to the extent that the average market price of our common stock for a reporting period exceeds the conversion price of $21.52 per share.
During the year ended December 31, 2016, the average market price of our common stock exceeded the conversion price of $21.52 per share, therefore the calculation of diluted earnings per share for the year ended December 31, 2016 includes the effect of approximately 1.0 million shares of our common stock related to the conversion spread of the Convertible Notes. During the year ended December 31, 2015, the average market price of our common stock exceeded the conversion price of $21.52 per share, therefore the calculation of diluted earnings per share for the year ended December 31, 2015 includes the effect of approximately 0.5 million shares of our common stock related to the conversion spread of the Convertible Notes.
10.    STOCK-BASED COMPENSATION
Non-performance Based Restricted Stock Units
As approved by our stockholders, we adopted the LGI Homes, Inc. 2013 Equity Incentive Plan (the “2013 Incentive Plan”) to reward, retain and attract key personnel. At December 31, 2016, 2,000,000 shares of our common stock had been reserved for issuance pursuant to the 2013 Incentive Plan.
The following table summarizes the activity of our time-vested restricted stock units (“RSUs”):
 
 
Shares
 
Weighted Average Grant Date Fair Value
Balance at January 1, 2014
 
140,222

 
$
11.00

Granted
 
82,441

 
$
16.52

Vested
 
(116,543
)
 
$
11.00

Forfeited
 
(3,334
)
 
$
11.00

Balance at December 31, 2014
 
102,786

 
$
15.43

   Granted
 
85,184

 
$
17.40

   Vested
 
(75,687
)
 
$
16.12

   Forfeited
 
(4,469
)
 
$
15.85

Balance at December 31, 2015
 
107,814

 
$
16.48

   Granted
 
62,453

 
$
23.66

   Vested
 
(29,010
)
 
$
14.73

   Forfeited
 
(7,404
)
 
$
17.97

Balance at December 31, 2016
 
133,853

 
$
20.13

In 2016, we issued 21,905 RSUs to senior management for the time based portion of our 2016 long-term incentive compensation program and 22,059 RSUs for 2015 bonuses to managers under the Annual Bonus Plan, which generally cliff vest on the third anniversary of the grant date. In March 2015, we issued 56,611 RSUs for 2014 bonuses to certain officers and managers under the Annual Bonus Plan, which vest over three years. In March 2014, we issued 37,307 RSUs to certain officers and managers under the Annual Bonus Plan; the RSUs had a one-year vesting period. In addition, during the years ended December 31, 2016, 2015 and 2014, we issued 18,489, 28,573 and 45,134 RSUs, respectively, to certain employees, executives and non-employee directors which vest over periods ranging from one to three years. Under the terms of the grant award agreements, all of the RSUs may only be settled in shares of our common stock.
We recognized $0.8 million of stock-based compensation expense related to outstanding RSUs grants for the year ended December 31, 2016 and $0.5 million for both the years ended December 31, 2015 and 2014. At December 31, 2016, we had unrecognized compensation cost of $1.7 million related to unvested RSUs, which is expected to be recognized over a weighted average period of 2.1 years.

59

Performance Based Restricted Stock Units
The Compensation Committee of our Board of Directors has granted awards of Performance-Based RSUs (“PSUs”) under the 2013 Incentive Plan to certain members of senior management for each of the three-year performance cycles: 2014 - 2016, 2015 - 2017 and 2016 - 2018. The PSUs provide for shares of our common stock to be issued based on the attainment of certain performance metrics over the applicable three year period. 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 PSUs vest upon the determination date for the actual results at the end of the three-year period and require that the recipients continue to be employed by us through the determination date. The PSUs will be settled in shares of our common stock.
Period Granted
 
Target PSUs Outstanding December 31, 2015
 
Target PSUs Granted
 
Target PSUs Vested
 
Target PSUs Forfeited
 
Target PSUs Outstanding at December 31, 2016
 
Weighted Average Grant Date Fair Value
2014
 
62,906

 
—

 
—

 
(2,926
)
 
59,980

 
$
17.09

2015
 
127,111

 
—

 
—

 
(6,140
)
 
120,971

 
$
13.34

2016
 
—

 
87,605

 
—

 
—

 
87,605

 
$
21.79

Total
 
190,017

 
87,605

 
—

 
(9,066
)
 
268,556

 
 
At December 31, 2016, management estimates that the recipients will receive approximately 200%, 200%, and 144.7% of the 2014, 2015, and 2016 target number of PSUs, respectively, at the end of the applicable three-year performance cycle based on projected performance compared to the target performance metrics. We recognized $2.6 million, $1.8 million, and $0.3 million of total stock-based compensation expense related to outstanding PSUs grants for the years ended December 31, 2016, 2015, and 2014, respectively. At December 31, 2016, we had unrecognized compensation cost of $3.3 million, based on the target amount, related to unvested PSUs, which is expected to be recognized over a weighted average period of 1.4 years.
Employee Stock Purchase Plan
In May 2016, we adopted the LGI Homes, Inc. Employee Stock Purchase Plan (the “ESPP”). The ESPP provides for employees to make quarterly elections for payroll withholdings to purchase shares of our common stock at a 15% discount from the closing price of our common stock on the purchase date, which is the last business day of each calendar quarter. During the year ended December 31, 2016, we issued 19,398 shares of our common stock to the ESPP participants. We received net proceeds of approximately $0.6 million and recognized $0.1 million in stock compensation expense related to the ESPP for 2016. The ESPP contributions are not refundable (other than in the case of termination of employment) and, therefore, the shares purchasable with the amounts withheld are included in weighted-average shares outstanding for both basic and diluted earnings per share. The maximum aggregate number of shares of our common stock which may be issued pursuant to the ESPP is 500,000 shares and as of December 31, 2016, 480,602 shares of our common stock remain available for issuance under the ESPP.
11.    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.

60

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 and accounts receivable and accounts payable, approximate their carrying amounts due to the short term nature of these instruments. As of December 31, 2016, the revolving credit facility’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.
The Convertible Notes, as discussed in Note 7, were initially recorded at estimated fair value determined using Level 2 measurements. The fair value of the assets acquired and liabilities assumed as part of the Oakmont Acquisition, including the related earnout, as discussed in Note 6, were determined using Level 3 measurements.
The following table below shows the level and measurement of liabilities at December 31, 2016 and 2015 (in thousands):
 
 
 
 
December 31, 2016
 
December 31, 2015
 
 
Fair Value Hierarchy
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
 
 
 
 
 
 
 
 
 
 
 
Convertible Notes
 
Level 2
 
$
78,230

 
$
79,514

 
$
76,091

 
$
74,449

Earnout liability
 
Level 3
 
$
534

 
$
534

 
$
1,425

 
$
1,425

12.    RELATED PARTY TRANSACTIONS
Magnolia Reserve
We have an option contract to purchase 106 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 $8.0 million. The lots are being purchased in takedowns of at least 21 lots during successive six month periods, subject to 5% annual price escalation and certain price protection terms. During the year ended December 31, 2016, we purchased 42 lots for $3.2 million. As of December 31, 2016, we have 64 finished lots remaining under the option contract, to be purchased in takedowns of at least 21 lots during each six-month period, for a total base purchase price of approximately $4.8 million. We have a $100,000 non-refundable deposit at December 31, 2016 related to this option contract.
Consulting Fees
We had a three-year consulting agreement with a family member of our chief executive officer for $100,000 per year payable on a monthly basis, which was set to expire in November 2016. The agreement was terminated in June 2016 by mutual agreement of the parties. Consulting fees were $83,333 for the year ended December 31, 2016 and $100,000 for each of the years ended December 31, 2015 and 2014, respectively.
Home Sales to Affiliates
In 2016, we sold two homes to an affiliate of one of our directors for approximately $461,000. In 2017, we sold three homes to an affiliate of one of our directors for approximately $692,000.
13.     RETIREMENT BENEFITS
Our employees are eligible to participate in a 401(k) savings plan. Employees are eligible to participate after completing ninety days of service and having attained the age of 21. Salary deferrals are allowed in amounts up to 100% of an eligible employee’s salary, not to exceed the maximum allowed by law. A discretionary match may be made by us of up to 100% of the first 3% of an eligible employee’s deferral, not to exceed $3,000. For each of the years ended December 31, 2016, 2015 and 2014, our matching contributions were $0.8 million, $0.5 million and $0.3 million, respectively.
14.     COMMITMENTS AND CONTINGENCIES
Contingencies
In the ordinary course of doing business, we become subject to claims or proceedings from time to time relating to the purchase, development, and sale of real estate. Management believes that these claims include usual obligations incurred by real estate developers and home builders in the normal course of business. In the opinion of management, these matters will not have a material effect on our combined financial position, results of operations or cash flows.

61

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 the Company 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, the Company 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 financial position, results of operations, or cash flows.
Land Deposits
We have land purchase option 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 option contracts which are generally limited to the forfeiture of the related nonrefundable cash deposits. The following is a summary of our land purchase deposits and option contracts included in pre-acquisition costs and deposits (in thousands, except for lot count):
 
 
December 31,
 
 
2016
 
2015
Land deposits and option payments
 
$
9,954

 
$
6,406

Commitments under the land purchase option and deposit contracts if the purchases are consummated
 
$
234,198

 
$
155,548

Lots under land options and land purchase contracts
 
8,462

 
6,318

As of December 31, 2016 and 2015, approximately $2.9 million and $0.3 million of the land deposits are related to purchase contracts to deliver finished lots that are refundable under certain circumstances and secured by mortgages, letters of credit, or guaranteed by the seller or its affiliates.
Leasing Arrangements
We lease office facilities and certain equipment under non-cancellable operating lease agreements. Rent escalation provisions are accounted for using the straight-line method. Rent expense includes common area maintenance costs. Rent expense totaled $0.8 million, $0.8 million and $0.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Future minimum lease payments under non-cancellable operating lease agreements are as follows at December 31, 2016 (in thousands):
2017
 
$
742

2018
 
456

2019
 
14

2020
 
—

2021
 
—

Thereafter
 
—

Total
 
$
1,212

Bonding and Letters of Credit
We have outstanding letters of credit and performance and surety bonds totaling $29.8 million (including $6.3 million under our revolving credit facility), $20.8 million and $7.7 million at December 31, 2016, 2015 and 2014, 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.
15.     SEGMENT INFORMATION
We operate one principal homebuilding business which is organized and reports by division. We have five operating segments at December 31, 2016: our Texas, Southwest, Southeast, Florida, and Northwest divisions. The Texas division is our largest division and it comprised approximately 51.2%, 55.6% and 66.6% of total home sales revenues for the years ended December 31, 2016, 2015 and 2014, respectively.
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-maker (“CODM”) in

62

deciding how to allocate resources and in assessing performance. The CODM primarily evaluates performance based on the number of homes sold, gross margin and average sales price.
The operating segments qualify for aggregation as one reporting segment. In determining the reportable segment, we concluded that all operating segments have similar economic and other characteristics, including similar home floor plans, average selling prices, gross margin percentage, production construction processes, suppliers, subcontractors, regulatory environments, customer type, and underlying demand and supply. Each operating segment follows the same accounting policies and is managed by our management team. We have no inter-segment sales, as all sales are to external customers.
16.     SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results are as follows (in thousands, except per share data):
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
 
2016
 
2016
 
2016
 
2016
Total home sales revenue
 
$
162,463

 
$
222,723

 
$
216,304

 
$
236,830

Gross margin
 
41,369

 
59,095

 
56,821

 
64,328

Income before income taxes
 
17,829

 
31,408

 
29,488

 
34,947

Net income
 
11,700

 
20,659

 
19,467

 
23,205

Basic earnings per share
 
0.58

 
1.01

 
0.92

 
1.09

Diluted earnings per share
 
0.57

 
0.96

 
0.86

 
1.01

 
 
 
 
First
Quarter
 
Second
Quarter
 
Third Quarter
 
Fourth
Quarter
 
 
2015
 
2015
 
2015
 
2015
Total home sales revenue
 
$
120,690

 
$
158,826

 
$
173,956

 
$
176,764

Gross margin
 
31,462

 
42,573

 
46,007

 
46,890

Income before income taxes
 
11,721

 
21,246

 
23,221

 
24,092

Net income
 
7,702

 
13,977

 
15,420

 
15,731

Basic earnings per share
 
0.39

 
0.70

 
0.77

 
0.79

Diluted earnings per share
 
0.33

 
0.66

 
0.76

 
0.75

17.     SUBSEQUENT EVENT
On February 28, 2017, borrowing commitments of our lender group under the A&R Credit Agreement were increased by $15.0 million to $400.0 million in accordance with the accordion feature of the A&R Credit Agreement.
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.    
ITEM 9A.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2016. 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.

63

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 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.
Management’s Assessment on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of senior management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on the evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of December 31, 2016.
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 year ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.    OTHER INFORMATION
None.


64

PART III
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by Item 10, to the extent not set forth in “Business—Executive Officers” in Item 1, will be set forth in the definitive proxy statement relating to the 2017 annual meeting of stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions thereof called for by Item 10 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
ITEM 11.     EXECUTIVE COMPENSATION
The information called for by Item 11 will be set forth in the definitive proxy statement relating to the 2017 annual meeting of stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions thereof called for by Item 11 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by Item 12 will be set forth in the definitive proxy statement relating to the 2017 annual meeting of stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions thereof called for by Item 12 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
ITEM 13.     CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information called for by Item 13 will be set forth in the definitive proxy statement relating to the 2017 annual meeting of stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions thereof called for by Item 13 are incorporated herein by reference pursuant to Instruction G to Form 10-K.
ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by Item 14 will be set forth in the definitive proxy statement relating to the 2017 annual meeting of stockholders of LGI Homes, Inc. pursuant to SEC Regulation 14A. Such definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions thereof called for by Item 14 are incorporated herein by reference pursuant to Instruction G to Form 10-K.


65

PART IV
ITEM 15.    EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(1)
The following Consolidated Financial Statements as set forth in Item 8 of this report are filed herein.
 
 
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Equity from January 1, 2014 to December 31, 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to the Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014
 
 
 
 
(2)
 
Financial Statement Schedules
All schedules are omitted because the required information is not present, in amounts sufficient to require submission of the schedule, or because the required information is included in the financial statements and related notes thereto.
 
 
 
(3)
 
Exhibits
The exhibits filed or furnished as part of this annual report on Form 10-K are listed in the Index to Exhibits immediately preceding those exhibits, which Index is incorporated in this Item by reference.


66

SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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:
March 7, 2017
/s/    Eric Lipar
   
   
Eric Lipar
   
   
Chief Executive Officer and Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date
/s/ Eric Lipar
 
Chief Executive Officer and Chairman of the Board
 
March 7, 2017
Eric T. Lipar
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/s/ Charles Merdian
 
Chief Financial Officer and Treasurer
 
March 7, 2017
Charles Merdian
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
/s/ Ryan Edone
 
Director
 
March 7, 2017
Ryan Edone
 
 
 
 
 
 
 
 
 
/s/ Duncan Gage
 
Director
 
March 7, 2017
Duncan Gage
 
 
 
 
 
 
 
 
 
/s/ Bryan Sansbury
 
Director
 
March 7, 2017
Bryan Sansbury
 
 
 
 
 
 
 
 
 
/s/ Steven Smith
 
Director
 
March 7, 2017
Steven Smith
 
 
 
 
 
 
 
 
 
/s/ Robert Vaharadian
 
Director
 
March 7, 2017
Robert Vaharadian
 
 
 
 



EXHIBIT INDEX
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. 333-190853) of LGI Homes, Inc. filed 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 on August 28, 2013).
4.1
 
Indenture dated as of November 21, 2014, by and between LGI Homes, Inc. and Wilmington Trust, National Association, as trustee, governing LGI Homes, Inc.’s 4.25% Convertible Notes due 2019, including a form of note (incorporated by reference to Exhibit 4.01 to the Current Report on Form 8-K (File No. 1-36126) of LGI Homes, Inc. filed on November 26, 2014).
10.1
 
Employment Agreement, dated as of August 23, 2013, between LGI Homes, Inc. and Eric Lipar (incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form S-1 (File No. 333-190853) of LGI Homes, Inc.
filed on August 28, 2013).

10.2
 
LGI Homes, Inc. 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-190853) of LGI Homes, Inc. filed on September 20, 2013).
10.3
 
Amended and Restated Credit Agreement, dated as of May 27, 2016, 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 Deutsche Bank Securities Inc. and Fifth Third Bank, as Documentation Agents (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 1-36126) of LGI Homes, Inc. filed on June 2, 2016).
10.4
 
First Amendment to Amended and Restated Credit Agreement, dated as of September 12, 2016, by and among LGI Homes, Inc., each of the financial institutions signatory thereto, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 1-36126) of LGI Homes, Inc. filed on September 13, 2016).
10.5
 
Lender Addition and Acknowledgement Agreement dated as of December 28, 2016 by and among LGI Homes, Inc., Texas Capital Bank, National Association and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 1-36126) of LGI Homes, Inc. filed on January 4, 2017).
10.6
 
LGI Homes, Inc. 2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form S-8 (File No. 1-36126) of LGI Homes, Inc. filed June 3, 2016).
10.7
 
Lender Acknowledgement Agreement dated as of February 28, 2017 by and among LGI Homes, Inc., Flagstar Bank, FSB, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 1-36126) of LGI Homes, Inc. filed on March 3, 2017.)
21.1*
 
List of Subsidiaries of LGI Homes, Inc.
23.1*
 
Consent of Independent Registered Public Accounting Firm
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†
 
XBRL Instance Document.
101.SCH†
 
XBRL Taxonomy Extension Schema Document.
101.CAL†
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF†
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB†
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE†
 
XBRL Taxonomy Extension Presentation Linkbase Document.
*
Filed herewith.
†
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.