CCS 03312016 Form 10-Q

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CENTURY COMMUNITIES, INC.

FORM 10-Q

For the three months ended March 31, 2016

Index


	Page No.
PART I
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	3
Unaudited Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2016 and 2015	4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2016 and, 2015	5
Notes to Unaudited Condensed Consolidated Financial Statements – March 31, 2016	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28
PART II
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults Upon Senior Securities	29
Item 4. Mine Safety Disclosures	29
Item 5. Other Information	29
Item 6. Exhibits	30
Signatures	31

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PART I

ITEM 1. FINANCIAL STATEMENTS.

Century Communities, Inc.

Unaudited Condensed Consolidated Balance Sheets

As of March 31, 2016 and December 31, 2015

(in thousands, except share amounts)



	March 31,		December 31,
	2016		2015
Assets
Cash and cash equivalents	$	11,437	$	29,287
Accounts receivable		17,192		17,058
Inventories		867,357		810,137
Prepaid expenses and other assets		26,147		26,735
Property and equipment, net		9,983		8,375
Amortizable intangible assets, net		4,140		4,784
Goodwill		21,365		21,365
Total assets	$	957,621	$	917,741
Liabilities and stockholders' equity
Liabilities:
Accounts payable	$	13,538	$	10,967
Accrued expenses and other liabilities		112,092		106,777
Deferred tax liability, net		411		275
Notes payable and revolving line of credit		415,051		390,243
Total liabilities		541,092		508,262
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none outstanding		—		—
Common stock, $0.01 par value, 100,000,000 shares authorized, 21,101,574 and 21,303,702 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively		211		213
Additional paid-in capital		340,022		340,953
Retained earnings		76,296		68,313
Total stockholders' equity		416,529		409,479
Total liabilities and stockholders' equity	$	957,621	$	917,741

See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2016 and 2015

(in thousands, except share and per share amounts)


	Three Months Ended
	March 31,
	2016		2015
Revenue
Home sales revenues	$	181,081	$	154,335
Land sales revenues		1,970		—
Golf course and other revenue		1,045		2,103
Total revenue		184,096		156,438
Costs and expenses
Cost of home sales revenues		144,353		124,806
Cost of land sales revenues		1,826		—
Cost of golf course and other revenue		716		1,506
Selling, general, and administrative		25,185		20,932
Total operating costs and expenses		172,080		147,244
Operating income		12,016		9,194
Other income (expense):
Interest income		40		16
Interest expense		(2)		(3)
Acquisition expense		(169)		—
Other income		324		317
Gain on disposition of assets		220		—
Income before income tax expense		12,429		9,524
Income tax expense		4,446		3,173
Net income	$	7,983	$	6,351

Earnings per share:
Basic and diluted	$	0.38	$	0.30
Weighted average common shares outstanding:
Basic		20,626,451		20,509,679
Diluted		20,645,247		20,509,679

See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2016 and 2015

(in thousands)



	Three Months Ended
	March 31,
	2016		2015
Operating activities
Net income	$	7,983	$	6,351
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,404		988
Stock-based compensation expense		1,715		1,056
Deferred income taxes		137		(453)
Gain on disposition of assets		(220)		—
Changes in assets and liabilities:
Accounts receivable		(134)		(5,005)
Inventories		(51,637)		(43,583)
Prepaid expenses and other assets		347		872
Accounts payable		2,571		(7,653)
Accrued expenses and other liabilities		270		9,654
Net cash used in operating activities		(37,564)		(37,773)
Investing activities
Purchases of property and equipment		(2,784)		(1,215)
Proceeds from sale of assets		636		—
Principal payments on notes receivable		24		—
Net cash used in investing activities		(2,124)		(1,215)
Financing activities
Borrowings under revolving credit facilities		50,000		35,000
Payments on revolving credit facilities		(25,000)		—
Principal payments from notes payable		(515)		(2,442)
Debt issuance costs		—		(385)
Repurchases of common stock upon vesting of restricted stock awards		(254)		—
Repurchases of common stock under our stock repurchase program		(2,393)		—
Net cash provided by financing activities		21,838		32,173
Net decrease in cash and cash equivalents	$	(17,850)	$	(6,815)
Cash and cash equivalents
Beginning of period		29,287		33,462
End of period	$	11,437	$	26,647
Supplemental cash flow disclosure
Cash paid for income taxes	$	582	$	3,483

See Notes to Unaudited Condensed Consolidated Financial Statements

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Century Communities, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2016

1. Basis of Presentation

Century Communities, Inc. (which we refer to as “we,” “CCS” or the “Company”) is engaged in the development, design, construction, marketing and sale of single-family attached and detached homes in metropolitan areas in Colorado, Austin and San Antonio, Texas (which we refer to as “Central Texas”), Houston, Texas, Las Vegas, Nevada, and Atlanta, Georgia. Our homebuilding operations are organized into the following five operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Colorado, Houston and Nevada. In many of our projects, in addition to building homes, we are responsible for the entitlement and development of the underlying land.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (which we refer to as “GAAP”) for interim financial statements and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (which we refer to as the “SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of its financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2015, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 that was filed with the SEC on February 19, 2016.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, as well as all subsidiaries in which we have a controlling interest, and variable interest entities for which the Company is deemed to be the primary beneficiary. All intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

Recently Issued Accounting Standards

In August 2015, the Financial Accounting Standards Board (which we refer to as “FASB”) issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606).” ASU 2015-14 defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” for public entities by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact ASU 2015-14 will have on our consolidated financial statements. We do not intend to adopt ASU 2015-14 early.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. We are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. We are currently evaluating the impact ASU 2016-09 will have on our consolidated financial statements.

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2. Reporting Segments

Our homebuilding operations are organized into the following five operating segments based on the geographic markets in which we operate: Atlanta, Central Texas, Colorado, Houston and Nevada. Our Corporate operations are a non-operating segment, as it serves to support our homebuilding operations through functions such as our executive, finance, treasury, human resources, and accounting departments. In addition, our Corporate operations include certain assets and income produced from residential rental property in Colorado. Our homebuilding reportable segments are engaged in the development, design, construction, marketing and sale of single-family attached and detached homes.

The following table summarizes total revenue and income before income tax expense by operating segment (in thousands):


	Three Months Ended
	March 31,
	2016		2015

Revenue:
Atlanta	$	64,522	$	56,640
Central Texas		29,124		17,036
Colorado		68,846		55,819
Houston		7,475		10,405
Nevada		14,129		16,538
Total revenue	$	184,096	$	156,438

Income before income tax expense:
Atlanta	$	5,250	$	3,213
Central Texas		2,176		2,161
Colorado		10,843		7,895
Houston		(794)		(415)
Nevada		867		1,817
Corporate		(5,913)		(5,147)
Total income before income tax expense	$	12,429	$	9,524

The following table summarizes total assets by operating segment (in thousands):



	March 31,		December 31,
	2016		2015
Atlanta	$	216,729	$	185,331
Central Texas		121,748		117,037
Colorado		320,822		313,653
Houston		48,513		51,534
Nevada		236,330		220,209
Corporate		13,479		29,977
Total assets	$	957,621	$	917,741

Corporate assets include certain cash and cash equivalents, prepaid insurance, deferred financing costs, and certain property and equipment.

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3. Inventories

Inventories included the following (in thousands):



	March 31,		December 31,
	2016		2015
Homes under construction	$	469,355	$	374,274
Land and land development		373,156		414,330
Capitalized interest		24,846		21,533
Total inventories	$	867,357	$	810,137

4. Prepaid Expenses and Other Assets

Prepaid expenses and other assets included the following (in thousands):



	March 31,		December 31,
	2016		2015
Prepaid insurance	$	4,827	$	5,696
Lot option and escrow deposits		4,991		4,634
Performance deposits		1,412		1,404
Deferred financing costs, net		2,137		2,318
Restricted cash		1,200		360
Secured note receivable		2,923		2,947
Assets held for sale		5,839		5,797
Other		2,818		3,579
Total prepaid expenses and other assets	$	26,147	$	26,735

5. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities included the following (in thousands):



	March 31,		December 31,
	2016		2015
Earnest money deposits	$	8,424	$	6,717
Warranty reserve		2,542		2,622
Accrued compensation costs		3,773		8,114
Land development and home construction accruals		84,121		83,322
Accrued interest		7,267		2,651
Income taxes payable		2,863		374
Liabilities related to assets held for sale		298		223
Other		2,804		2,754
Total accrued expenses and other liabilities	$	112,092	$	106,777

6. Warranty Reserve

Estimated future direct warranty costs are accrued and charged to cost of home sales revenues in the period when the related home sales revenues are recognized. Amounts accrued, which are included in accrued expenses and other liabilities on the consolidated balance sheets, are based upon historical experience rates. We subsequently assess the adequacy of our warranty accrual on a quarterly basis through an internal model that incorporates historical payment trends and adjust the amounts recorded if necessary. Based on favorable warranty payment trends relative to our estimates at the time of home closing, we reduced our warranty reserve by $0.4 million during the three months ended March 31, 2016, which is included as a reduction to cost of homes sales revenues on our consolidated statement of operations.

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The following table summarizes the changes in our warranty accrual (in thousands):


	Three Months Ended
	March 31,
	2016		2015
Beginning balance	$	2,622	$	2,194
Warranty expense provisions		570		575
Payments		(265)		(242)
Warranty adjustment		(385)		—
Ending balance	$	2,542	$	2,527

7. Notes Payable and Revolving Line of Credit

Notes payable and revolving line of credit included the following (in thousands):



	March 31,		December 31,
	2016		2015
6.875% senior notes	$	252,139	$	251,815
Revolving line of credit		160,000		135,000
Land development notes		2,369		2,677
Insurance premium notes		543		751
Total notes payable and revolving line of credit	$	415,051	$	390,243

6.875% senior notes

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of senior unsecured notes due 2022 (which we refer to as the “Initial Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended (which we refer to as the “Securities Act”). The Initial Senior Notes were issued at a price equal to 99.239% of their principal amount, and we received net proceeds of approximately $193.3 million. In February 2015, we completed an offer to exchange $200.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “Initial Exchange Notes”), for all of the Initial Senior Notes. The terms of the Initial Exchange Notes are identical in all material respects to the Initial Senior Notes, except that the Initial Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Initial Senior Notes do not apply to the Initial Exchange Notes.

In April 2015, we completed a private offering of an additional $60 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “Additional Senior Notes”) in reliance on Rule 144A and Regulation S under the Securities Act. The Additional Senior Notes were issued at a price equal to 98.26% of their principal amount, and we received net proceeds of approximately $58.5 million. The Additional Senior Notes are additional notes issued under the indenture pursuant to which the initial $200 million in aggregate principal amount of Initial Senior Notes were issued. In October 2015, we completed an offer to exchange $60.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “Additional Exchange Notes”), for all of the Additional Senior Notes. The terms of the Additional Exchange Notes are identical in all material respects to the Additional Senior Notes, except that the Additional Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Additional Senior Notes do not apply to the Additional Exchange Notes.

The Initial Exchange Notes and the Additional Exchange Notes bear the same CUSIP number, are fungible with each other, and are treated as a single series of notes under the indenture. We refer to the Initial Exchange Notes and the Additional Exchange Notes, collectively, as the “Senior Notes.” The Senior Notes carry a coupon of 6.875% per annum. The Senior Notes are unsecured senior obligations which are guaranteed on an unsecured senior basis by certain of our current and future subsidiaries. The Senior Notes contain certain restrictive covenants on issuing future secured debt and other transactions. The aggregate principal balance of the Senior Notes is due May 2022, with interest only payments due semi-annually in May and November of each year.

Revolving line of credit

On October 21, 2014, we entered into a credit agreement with Texas Capital Bank, National Association, as Administrative Agent and L/C Issuer, and the lenders from time to time party thereto (which, as modified as described below, we refer to as the “Credit

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Agreement”). The Credit Agreement provided us with a revolving line of credit of up to $120 million (which, as modified as described below, we refer to as the “Revolving Credit Facility”).

Under the terms of the Credit Agreement, we were entitled to request an increase in the size of the Revolving Credit Facility by an amount not exceeding $80 million. If the existing lenders elect not to provide the full amount of a requested increase, we may invite one or more other lender(s) to become a party to the Credit Agreement, subject to the approval of the Administrative Agent and L/C Issuer. The Credit Agreement includes a letter of credit sublimit of $20 million. The obligations under the Revolving Credit Facility were guaranteed by certain of our subsidiaries.

On July 31, 2015, we entered into a First Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which modified the Credit Agreement. The First Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $120 million to $200 million, (ii) extended the maturity date of the Revolving Credit Facility from October 21, 2017 to October 21, 2018, (iii) admitted Bank of America, N.A. as a new lender under the Revolving Credit Facility, and ( iv) increased the amount of the increase in the size of the Revolving Credit Facility that we had the option to request, from time to time, from an amount not exceeding $80 million to an amount not exceeding $100 million, subject to the terms and conditions of the First Modification Agreement and the Credit Agreement.

On December 22, 2015, we entered into a Second Modification Agreement with Texas Capital Bank, National Association, as Administrative Agent, the lenders party thereto, and our subsidiary guarantors party thereto, which further modified the Credit Agreement. The Second Modification Agreement, among other things, (i) increased the Revolving Credit Facility from $200 million to $300 million, and (ii) admitted Compass Bank, an Alabama Banking Corporation, and U.S. Bank National Association as new lenders under the Revolving Credit Facility.

Unless terminated earlier, the principal amount under the Revolving Credit Facility, together with all accrued unpaid interest and other amounts owing thereunder, if any, will be payable in full on October 21, 2018, the maturity date of the Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at a floating rate equal to the London Interbank Offered Rate plus an applicable margin between 2.75% and 3.25% per annum, or, in the Administrative Agent’s discretion, a base rate plus an applicable margin between 1.75% and 2.25% per annum. The “applicable margins” described above are determined by a schedule based on our leverage ratio, as defined in the Credit Agreement. The Credit Agreement also provides for fronting fees and letter of credit fees payable to the L/C Issuer and commitment fees payable to the Administrative Agent equal to 0.20% of the unused portion of the Revolving Credit Facility.

The Credit Agreement contains customary affirmative and negative covenants (including limitations on our ability to grant liens, incur additional debt, pay dividends, redeem our common stock, make certain investments, and engage in certain merger, consolidation or asset sale transactions), as well as customary events of default. The Credit Agreement also requires us to maintain (i) a leverage ratio of not more than 1.50 to 1.0 as of the last day of any fiscal quarter, based upon our and our subsidiaries’ (on a consolidated basis) ratio of debt to tangible net worth, (ii) an interest coverage ratio of not less than 1.50 to 1.0 for any four fiscal quarter period, based upon our and our subsidiaries’ (on a consolidated basis) ratio of EBITDA to cash interest expense, (iii) a consolidated tangible net worth of not less than the sum of $250 million, plus 50% of the net proceeds of any issuances of equity interests by us and the guarantors of the Revolving Credit Facility, plus 50% of the amount of our and our subsidiaries’ consolidated net income, (iv) liquidity of not less than $25 million, and (v) a risk asset ratio of not more than 1.25 to 1.0, based upon the ratio of the book value of all risk assets owned by us and our subsidiaries to our tangible net worth. As of March 31, 2016, we were in compliance with all covenants under the Credit Agreement.

As of March 31, 2016, we had $160.0 million outstanding under the Credit Agreement.

Other financing obligations

As of March 31, 2016, the Company has three land development notes, two of which mature in May 2016 and one in December 2017, and one insurance premium note which matures in March 2017. These notes bear interest at rates ranging from 0.5% to 5.0%. As of March 31, 2016 and December 31, 2015, we had $2.9 million and $3.4 million, respectively, of outstanding land development notes and insurance premium notes.

8. Interest

Interest is capitalized to inventories while the related communities are being actively developed and until homes are completed. As our qualifying assets exceeded our outstanding debt during the three months ended March 31, 2016 and 2015, we capitalized all interest costs incurred during these periods, except for interest incurred on capital leases of equipment related to our golf course operations.

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Our interest costs are as follows (in thousands):


	Three Months Ended
	March 31,
	2016		2015
Interest capitalized beginning of period	$	21,533	$	11,302
Interest capitalized during period		6,380		3,919
Less: capitalized interest in cost of sales		(3,067)		(1,621)
Interest capitalized end of period	$	24,846	$	13,600

9. Income Taxes

At the end of each interim period we are required to estimate our annual effective tax rate for the fiscal year, and to use that rate to provide for income taxes for the current year-to-date reporting period. Accordingly, we recorded income tax expense of $4.4 million and $3.2 million for the three months ended March 31, 2016 and 2015, respectively. Our income tax expense for the three months ended March 31, 2016 is based on our estimated annual effective tax rate of approximately 34.5% and a discrete item related to vesting of restricted stock awards. Our effective tax rate is driven by our blended federal and state statutory rate of 37.2%. Our blended federal and state statutory tax rate is reflective of the states in which we operate, including Nevada and Texas which generally do not have corporate income tax. Our blended federal and state statutory tax rate is partially offset by benefits from additional deductions for tax related to domestic production activities allowed for under Section 199 of the Internal Revenue Code.

10. Fair Value Disclosures

Accounting Standards Codification Topic 820, Fair Value Measurement, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date.

Level 3 — Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date.

The following table presents carrying values and estimated fair values of financial instruments (in thousands):



		March 31, 2016				December 31, 2015
	Hierarchy	Carrying		Fair Value		Carrying		Fair Value
Secured note receivable(1)	Level 2	$	2,923	$	2,962	$	2,947	$	2,926

6.875% Senior Notes(2)	Level 2	$	252,139	$	242,492	$	251,815	$	232,503
Revolving Credit Facility(3)	Level 2		160,000		160,000		135,000		135,000
Land development notes(4)	Level 2		2,369		2,437		2,677		2,672
Insurance premium notes(3)	Level 2		543		543		751		751
Total notes payable and revolving line of credit		$	415,051	$	405,472	$	390,243	$	370,926

⁽¹⁾

The estimated fair value of the secured note received in connection with the disposition of the golf course in our Tuscany community in our Nevada operating segment as of March 31, 2016 was based on a cash flow model discounted at market interest rates that considered the underlying risks of the note.

⁽²⁾

Estimated fair value of the Senior Notes at March 31, 2016 and December 31, 2015 incorporated recent trading activity in inactive markets.

⁽³⁾

Carrying amount approximates fair value due to short-term nature and interest rate terms.

⁽⁴⁾

The estimated fair values of the land development notes at March 31, 2016 and December 31, 2015 were based on cash flow models discounted at market interest rates that considered underlying risks of the debt.

The carrying amount of cash and cash equivalents approximates fair value. Non-financial assets and liabilities include items such as inventory and long-lived assets that are measured at fair value when acquired and resulting from impairment, if deemed necessary.

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11. Stock-Based Compensation

Our authorized capital stock consists of 100.0 million shares of common stock, par value $0.01 per share, and 50.0 million shares of preferred stock, par value $0.01 per share. As of March 31, 2016 and December 31, 2015, there were 20.6 million and 20.6 million shares of common stock issued and outstanding, respectively, exclusive of the restricted common stock issued. During the three months ended March 31, 2016 we repurchased 0.2 million shares of our common stock at a weighted average price of $15.03 per share. We also issued 0.2 million shares of common stock related to the vesting of restricted stock awards during the same period. We had reserved a total of 1.8 million shares of our common stock for issuance under our First Amended & Restated 2013 Long-Term Incentive Plan, of which, as of March 31, 2016, 0.6 million shares remain available for issuance.

During the three months ended March 31, 2016, we granted 0.5 million shares of restricted stock units with a weighted average grant date fair value of $14.17 per share. Such restricted stock units vest over a three year period from the grant date. Previously, we had issued awards of restricted common stock under our First Amended & Restated 2013 Long-Term Inventive Plan.

A summary of our outstanding awards of restricted common stock and restricted stock units are as follows (in thousands, except years):


	As of
	March 31, 2016
	Restricted Common Stock	Restricted Stock Units
Unvested shares/units	517	492
Unrecognized compensation cost	$6,805	$6,648
Period to recognize compensation cost	1.6 years	2.9 years

During the three months ended March 31, 2016 and 2015, we recognized stock-based compensation expense of $1.7 million and $1.1 million, respectively. Stock-based compensation expense is included in selling, general, and administrative on our consolidated statements of operations.

12. Earnings Per Share

We use the two-class method of calculating earnings per share (which we refer to as “EPS”) as our non-vested restricted stock awards have non-forfeitable rights to dividends and, accordingly, represent a participating security. The two-class method is an earnings allocation method under which EPS is calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period. We use the treasury stock method to calculate the dilutive effect of our restricted stock units as the restricted stock units do not have participating rights.

The following table sets forth the computation of basic and diluted EPS for the three months ended March 31, 2016 and 2015 (in thousands, except share and per share information):


	Three Months Ended
	March 31,
	2016		2015
Numerator
Net income	$	7,983	$	6,351
Less: Undistributed earnings allocated to participating securities		(232)		(185)
Net income allocable to common stockholders	$	7,751	$	6,166
Denominator
Weighted average common shares outstanding - basic		20,626,451		20,509,679
Dilutive effect of restricted stock units		18,796		—
Weighted average common shares outstanding - diluted		20,645,247		20,509,679
Earnings per share:
Basic and diluted	$	0.38	$	0.30

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13. Commitments and Contingencies

Letters of Credit and Performance Bonds

In the normal course of business, the Company posts letters of credit and performance bonds related to our land development performance obligations with local municipalities. As of March 31, 2016 and December 31, 2015, we had $63.7 million and $63.6 million, respectively, in letters of credit and performance bonds issued and outstanding.

Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business, which consist primarily of construction defect claims. It is the opinion of our management that if the claims have merit, parties other than the Company would be, at least in part, liable for the claims, and eventual outcome of these claims will not have a material adverse effect upon our consolidated financial condition, results of operations, or cash flows. When we believe that a loss is probable and estimable, we record a charge to selling, general, and administrative on our consolidated statements of operations for our estimated loss.

We do not believe that the ultimate resolution of any claims and lawsuits will have a material adverse effect upon our consolidated financial position, results of operations, or cash flow.

14. Disposition of Golf Courses

On May 26, 2015, we disposed of the operations of the golf course in our Tuscany community in our Nevada operating segment for total consideration of $4.0 million, which included $1.0 million in cash and a $3.0 million secured note, and resulted in a gain on sale of $2.0 thousand. The secured note accrues interest at rates ranging from 4.5% to 5.5% per annum and requires monthly payments of principal and interest with a balloon payment of $2.5 million of principal in May of 2020.

On May 19, 2015, we initiated our rights under a fixed price put option to dispose of the golf course in our Rhodes Ranch community in our Nevada operating segment for $5.9 million. The fixed price put option requires closing to occur on or before June 1, 2016. Accordingly, the assets and liabilities of the Rhodes Ranch golf course have been classified as held for sale and presented in prepaid expenses and other assets and accrued expenses and other liabilities on the consolidated balance sheet as of March 31, 2016.

15. Supplemental Guarantor Information

In May 2014, we completed a private offering of $200.0 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “Initial Senior Notes”). In February 2015, we completed an offer to exchange $200.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “Initial Exchange Notes”), for all of the Initial Senior Notes sold and issued in the May 2014 private offering. The terms of the Initial Exchange Notes are identical in all material respects to the Initial Senior Notes, except that the Initial Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Initial Senior Notes do not apply to the Initial Exchange Notes.

In April 2015, we completed a private offering of an additional $60 million in aggregate principal amount of our 6.875% senior notes due 2022 (which we refer to as the “Additional Senior Notes”). In October 2015, we completed an offer to exchange $60.0 million in aggregate principal amount of our 6.875% senior notes due 2022, which are registered under the Securities Act (which we refer to as the “Additional Exchange Notes”), for all of the Additional Senior Notes. The terms of the Additional Exchange Notes are identical in all material respects to the Additional Senior Notes, except that the Additional Exchange Notes are registered under the Securities Act and the transfer restrictions, registration rights, and additional interest provisions applicable to the Additional Senior Notes do not apply to the Additional Exchange Notes.

The Additional Senior Notes and the Additional Exchange Notes are additional notes issued under the indenture pursuant to which the Initial Senior Notes and Initial Exchange Notes were issued. The Initial Exchange Notes and the Additional Exchange Notes bear the same CUSIP number, are fungible with each other, and are treated as a single series of notes under the indenture. We refer to the Initial Exchange Notes and the Additional Exchange Notes, collectively, as the “Senior Notes.”

The Senior Notes are our unsecured senior obligations, and are fully and unconditionally guaranteed on an unsecured basis, jointly and severally, by substantially all of our direct and indirect wholly-owned operating subsidiaries (which we refer to as “Guarantors”).

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The Indenture governing the Senior Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the Indenture), which sale, transfer, exchange or other disposition does not constitute an “Asset Sale” (as defined in the Indenture) or is made in compliance with applicable provisions of the Indenture; (2) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the assets of such Guarantor, which sale, transfer, exchange or other disposition does not constitute an Asset Sale or is made in compliance with applicable provisions of the Indenture; provided, that after such sale, transfer, exchange or other disposition, such Guarantor is an “Immaterial Subsidiary” (as defined in the Indenture); (3) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the Indenture; provided that if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the Indenture; (4) upon the designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the Indenture), in accordance with the Indenture; (5) if the Company exercises its legal defeasance option or covenant defeasance option under the Indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the Indenture, upon such exercise or discharge; or (6) in connection with the dissolution of such Guarantor under applicable law in accordance with the Indenture.

As the guarantees were made in connection with the February 2015 exchange offer for the Initial Exchange Notes and the October 2015 exchange offer for the Additional Exchange Notes, the Guarantors’ condensed financial information is presented as if the guarantees existed during the periods presented. If any Guarantors are released from the guarantees in future periods, the changes are reflected prospectively.

We have determined that separate, full financial statements of the Guarantors would not be material to investors and, accordingly, supplemental financial information is presented below:



	Supplemental Condensed Consolidated Balance Sheet
	As of March 31, 2016 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS
Assets
Cash and cash equivalents	$	7,986	$	3,451	$	—	$	—	$	11,437
Accounts receivable		3		17,189		—		—		17,192
Investment in subsidiaries		829,122		—		—		(829,122)		—
Inventories		—		867,357		—		—		867,357
Prepaid expenses and other assets		3,170		22,977		—		—		26,147
Property and equipment, net		1,003		8,980		—		—		9,983
Amortizable intangible assets, net		—		4,140		—		—		4,140
Goodwill		—		21,365		—		—		21,365
Total assets	$	841,284	$	945,459	$	—	$	(829,122)	$	957,621
Liabilities and stockholders’ equity
Liabilities:
Accounts payable	$	—	$	13,538	$	—	$	—	$	13,538
Accrued expenses and other liabilities		12,206		99,886		—		—		112,092
Deferred tax liability, net		411		—		—		—		411
Notes payable and revolving line of credit		412,138		2,913		—		—		415,051
Total liabilities		424,755		116,337		—		—		541,092
Stockholders’ equity:		416,529		829,122		—		(829,122)		416,529
Total liabilities and stockholders’ equity	$	841,284	$	945,459	$	—	$	(829,122)	$	957,621

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	Supplemental Condensed Consolidated Balance Sheet
	As of December 31, 2015 (in thousands)
			Guarantor		Non Guarantor		Elimination		Consolidated
	CCS		Subsidiaries		Subsidiaries		Entries		CCS
Assets
Cash and cash equivalents	$	22,002	$	7,285	$	—	$	—	$	29,287
Accounts receivable		1,239		15,819		—		—		17,058
Investment in subsidiaries		777,898		—		—		(777,898)		—
Inventories		—		810,137		—		—		810,137
Prepaid expenses and other assets		3,727		23,008		—		—		26,735
Property and equipment, net		857		7,518		—		—		8,375
Amortizable intangible assets, net		—		4,784		—		—		4,784
Goodwill		—		21,365		—		—		21,365
Total assets	$	805,723	$	889,916	$	—	$	(777,898)	$	917,741
Liabilities and stockholders’ equity
Liabilities:
Accounts payable	$	—	$	10,967	$	—	$	—	$	10,967
Accrued expenses and other liabilities		9,154		97,623		—		—		106,777
Deferred tax liability, net		275		—		—		—		275
Notes payable and revolving line of credit		386,815		3,428		—		—		390,243
Total liabilities		396,244		112,018		—		—		508,262
Stockholders’ equity:		409,479		777,898		—		(777,898)		409,479
Total liabilities and stockholders’ equity	$	805,723	$	889,916	$	—	$	(777,898)	$	917,741



		Supplemental Condensed Consolidated Statement of Operations
	For the Three Months Ended March 31, 2016 (in thousands)
				Guarantor		Non Guarantor		Elimination		Consolidated
		CCS		Subsidiaries		Subsidiaries		Entries		CCS
Revenue
Home sales revenues		$	—	$	181,081	$	—	$	—	$	181,081
Land sales revenues			—		1,970		—		—		1,970
Golf course and other revenue			—		1,045		—		—		1,045
Total revenue			—		184,096		—		—		184,096
Costs and expenses
Cost of homes sales revenues			—		144,353		—		—		144,353
Cost of land sales revenues			—		1,826		—		—		1,826
Cost of golf course and other revenue			—		716		—		—		716
Selling, general and administrative			5,392		19,793		—		—		25,185
Total operating costs and expenses			5,392		166,688		—		—		172,080
Operating income (loss)			(5,392)		17,408		—		—		12,016
Other income (expense)
Equity in earnings from consolidated subsidiaries			11,689		—		—		(11,689)		—
Interest income			7		33		—		—		40
Interest expense			—		(2)		—		—		(2)
Acquisition expense			(169)		—		—		—		(169)
Other income			—		324		—		—		324
Loss on disposition of assets			—		220		—		—		220
Income before income tax expense			6,135		17,983


Delaware		68-0521411
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer identification No.)

8390 East Crescent Parkway, Suite 650 Greenwood Village, Colorado		80111
(Address of principal executive offices)		(Zip code)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934