3. Business Combinations

On August 4, 2017, we acquired UCP, Inc., which was a homebuilder and land developer with expertise in residential land acquisition, development and entitlement, as well as home design, construction and sales, and with operations in the States of California, Washington, North Carolina, South Carolina, and Tennessee. The merger was unanimously approved by the board of directors of both the Company and UCP and was also approved by UCP stockholders on August 1, 2017. In connection with the merger, each share of UCP Class A common stock outstanding immediately prior to the closing was converted into $5.32 in cash and 0.2309 of a newly issued share of our common stock. No fractional shares were issued in connection with the merger, and UCP stockholders received cash in lieu of any fractional shares. Approximately 4.2 million shares of our common stock were issued in connection with the merger and $100.2 million was paid in cash in connection with the merger. Outstanding UCP restricted stock units were also converted into an aggregate of 0.2 million of Century Communities restricted stock units pursuant to the merger. We determined that the total fair value of these awards was $6.2 million, of which $1.1 million was attributable to services performed by UCP employees prior to the merger and, as such, was included as consideration. We incurred approximately $9.6 million in acquisition related expenses, presented as “Acquisition expense” on the Unaudited Condensed Consolidated Statement of Operations related to the acquisition of UCP, Inc. Total consideration of $209.0 million, inclusive of cash acquired of $20.3 million for this merger, is summarized as follows (in thousands, except per share amount):


UCP shares (including noncontrolling interest) as of August 3, 2017		18,085
Cash paid per share	$	5.32
Cash consideration	$	96,213
Cash consideration pertaining to stockholder exercising appraisal rights	$	3,937
Total cash consideration	$	100,150

UCP shares (including noncontrolling interest) as of August 3, 2017		18,085
Exchange ratio		0.2309
Number of CCS shares issued		4,176
Closing price of Century Communities common stock on August 3, 2017	$	25.80
Consideration attributable to common stock	$	107,737
Total replacement award value	$	1,149
Total equity consideration	$	108,886

Total consideration in cash and equity	$	209,036

The acquired assets consisted of approximately 4,199 owned lots within 43 total communities in California, Washington, North Carolina, South Carolina and Tennessee. The 4,199 lots included 346 homes in backlog and 59 model homes. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single family residences, we concluded that the acquisition represents a business combination.

The following table summarizes the initial estimate of the fair value of assets acquired and liabilities assumed as of the acquisition date (in thousands):


Cash and cash equivalents	$	20,264
Accounts receivable		7,248
Inventories		395,557
Prepaid expenses and other assets		6,988
Property and equipment, net		717
Deferred tax asset, net		7,931
Goodwill		5,092
Total assets	$	443,797

Accounts payable	$	10,712
Accrued expenses and other liabilities		71,130
Notes payable		152,919
Total liabilities		234,761
Purchase price/Net equity	$	209,036

The purchase price accounting reflected above is preliminary and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities including inventories and our deferred tax asset. We have not yet finalized the allocation of goodwill to our reporting units. During the three months ended March 31, 2018, we recognized $1.5 million of expense related to refinements in our estimated fair value of inventories, which occurred during the period. This measurement period adjustment is included in “Cost of home sales revenues” on our Consolidated Statements of Operations.

Acquired inventories consist of both acquired land and work in process inventories. We determined the estimate of fair value for acquired land inventory with the assistance of a third-party appraiser primarily using a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimate include future per lot development costs, construction and overhead costs, mix of products sold in each community, as well as average sales price, and absorption rates. We estimated the fair value of acquired work in process inventories based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. The stage of production, as of the acquisition date, ranged from recently started lots to fully completed single family residences. We estimated a market participant would require a gross margin ranging from 6% to 20% based upon the stage of production of the individual lot. Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. We expect that $6.5 million of Goodwill will be deductible for tax purposes. The purchase price accounting reflected in the accompanying financial statements is preliminary and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date).

On August 17, 2017, we sold BMCH South Carolina, LLC, a subsidiary of UCP that was acquired as part of our acquisition of UCP, Inc., to a third party for approximately $17.1 million. Accordingly, the estimated fair value of the acquired assets of BMCH South Carolina, LLC was determined to be equal to the disposal price given the proximity of the two transactions.

We determined that UCP’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.

UCP’s results of operations, which include homebuilding revenues of $103.4 million and income before income tax of $6.6 million, are included in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2018.

Sundquist Homes

On October 31, 2017, we acquired substantially all the assets and operations and assumed certain liabilities of Sundquist Homes and affiliates, a homebuilder with operations in the greater Seattle, Washington area, for approximately $50.2 million in cash. The acquired assets include owned and controlled land, homes under construction and model homes. As the acquired assets and processes have the ability to create outputs in the form of revenue from the sale of single family residences, we concluded that the acquisition represents a business combination.

The following table summarizes our preliminary estimates of the fair value of the assets acquired and liabilities assumed as of the acquisition date of Sundquist Homes (in thousands):


Accounts receivable	$	11
Inventories		55,077
Prepaid expenses and other assets		1,050
Property and equipment, net		142
Total assets	$	56,280

Accounts payable	$	3,646
Accrued expenses and other liabilities		2,431
Total liabilities		6,077
Purchase price/Net equity	$	50,203

Acquired inventories consist of both acquired land and work in process inventories. We determined the estimate of fair value for acquired land inventory with the assistance of a third-party appraiser primarily using a forecasted cash flow approach for the development, marketing, and sale of each community acquired. Significant assumptions included in our estimate include future per lot development costs, construction and overhead costs, mix of products sold in each community, as well as average sales price, and absorption rates. We estimated the fair value of acquired work in process inventories based upon the stage of production of each unit and a gross margin that we believe a market participant would require to complete the remaining development and requisite selling efforts. The stage of production, as of the acquisition date, ranged from recently started lots to fully completed single family residences. We estimated a market participant would require a gross margin ranging from 6% to 20% based upon the stage of production of the individual lot. The purchase price accounting reflected in the accompanying financial statements is preliminary and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date). We expect that $4.8 million of Goodwill will be deductible for tax purposes in connection with this acquisition.

We determined that Sundquist Homes’s carrying costs approximated fair value for all other acquired assets and assumed liabilities.

Sundquist Homes’s results of operations, which include homebuilding revenues of $21.4 million and income before tax of $4.1 million, are included in the accompanying Consolidated Statements of Operations for the three months ended March 31, 2018.

Unaudited Pro Forma Financial Information

Unaudited pro forma revenues and income before tax expense for the three months ended March 31, 2017 gives effect to including the results of the acquisitions of UCP and Sundquist Homes as of January 1, 2017. Unaudited pro forma income before tax expense adjusts the operating results of UCP and Sundquist Homes to reflect the additional costs that would have been recorded assuming the fair value adjustments had been applied as of the beginning of the period presented and excludes acquisition expense incurred related to the transactions. Pro forma basic and diluted earnings per share (which we refer to as “EPS”) gives effect to the issuance of approximately 4.2 million shares of common stock as consideration for the acquisition of UCP as though the acquisition had occurred on January 1, 2017 (in thousands, except share and per share information):


	Three months ended March 31,
	2017
Total revenues	$	337,934

Income before tax expense	$	15,908
Tax expense		(2,951)
Net income	$	12,957
Less: Undistributed earnings allocated to participating securities		(145)
Numerator for basic and diluted pro forma EPS	$	12,812

Pro forma weighted average shares-basic		25,688,143
Pro forma weighted average shares-diluted		25,898,394

Pro forma basic EPS	$	0.50
Pro forma diluted EPS	$	0.49

No pro forma financial information is required for the three months ended March 31, 2018 as our acquisitions of UCP Inc. and Sundquist Homes occurred in 2017.