UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 20202021 or

 

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

 

For the transition period from ______to ______

 

Commission File Number 001-36283

 


 

logo.jpg
 

The New Home Company Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 


Delaware

 

27-0560089

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

85 Enterprise6730 N Scottsdale Rd.,, Suite 450290

Aliso Viejo, CaliforniaScottsdale, Arizona 9265685253

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (949382-7800(602) 767-1426

 

Not Applicable


(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value

 

NWHM

 

New York Stock Exchange

Series A Junior Participating Preferred Share Repurchase Rights--New York Stock Exchange

 


Securities registered pursuant to Section12(g) of the Act: None

 

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.  

 

Large accelerated filer

 ☐

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 ☒

Emerging growth company

 ☐

 

1

 

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

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

 

Registrant’s shares of common stock outstanding as of July 29, 202027, 2021: 18,231,95418,160,613

 

 

2

 

 

 

THE NEW HOME COMPANY INC.

FORM 10-Q

INDEX

 

 

 

Page

Number

 

PART I  Financial Information

 

 

 

Item 1.

Financial Statements

4

 

Condensed Consolidated Balance Sheets as of June 30, 20202021 (Unaudited) and December 31, 20192020

4

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 20202021 and 20192020

5

 

Unaudited Condensed Consolidated Statements of Equity for the Three and Six Months Ended June 30, 20202021 and 20192020

6

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 20202021 and 20192020

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

4437

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

6757

Item 4.

Controls and Procedures

6757

 

Part II   Other Information

 

 

 

Item 1.

Legal Proceedings

6858

Item 1A.

Risk Factors

6858

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

7059

Item 3.

Defaults Upon Senior Securities

7060

Item 4.

Mine Safety Disclosures

7060

Item 5.

Other Information

7160

Item 6.

Exhibits

7261

 

 

 

 

Signatures

7463

 

3


 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value amounts)

 

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 
 2020  2019  2021  2020 
 

(Unaudited)

    

(Unaudited)

   

Assets

            

Cash and cash equivalents

 $85,588  $79,314  $117,329 $107,279 

Restricted cash

 144  117  22 180 

Contracts and accounts receivable

 7,112  15,982  4,501 4,924 

Due from affiliates

 140  238  61 102 

Real estate inventories

 370,949  433,938  358,273 314,957 

Investment in and advances to unconsolidated joint ventures

 12,931  30,217 

Investment in unconsolidated joint ventures

 769 2,107 
Deferred tax asset, net 15,866 17,503  14,268 15,447 

Other assets

  48,864   25,880   50,263   50,703 

Total assets

 $541,594  $603,189  $545,486  $495,699 
          

Liabilities and equity

            

Accounts payable

 $16,112  $25,044  $16,084 $17,182 

Accrued expenses and other liabilities

 33,280  40,554  46,092 36,210 

Senior notes, net

  295,124   304,832   280,579   244,865 

Total liabilities

  344,516   370,430   342,755   298,257 

Commitments and contingencies (Note 11)

                

Equity:

     

Stockholders' equity:

          

Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding

    

Common stock, $0.01 par value, 500,000,000 shares authorized, 18,231,954 and 20,096,969, shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

 182  201 

Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding

 0 0 

Common stock, $0.01 par value, 500,000,000 shares authorized, 18,160,613 and 18,122,345, shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

 182 181 

Additional paid-in capital

 190,969  193,862  191,457 191,496 

Retained earnings

  5,815   38,584   11,092   5,765 

Total stockholders' equity

 196,966  232,647   202,731   197,442 

Non-controlling interest in subsidiary

  112   112 

Total equity

  197,078   232,759 

Total liabilities and equity

 $541,594  $603,189 

Total liabilities and stockholders' equity

 $545,486  $495,699 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.   

 

4


 

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 

Revenues:

                    

Home sales

 $77,757  $140,464  $173,416  $239,650  $135,940 $77,757 $229,795 $173,416 
Land sales 10  157   0 10 0 157 

Fee building, including management fees

  21,193   22,285   57,420   41,947   4,586   21,193   9,887   57,420 
 98,960  162,749  230,993  281,597  140,526  98,960  239,682  230,993 

Cost of Sales:

                    

Home sales

 66,216  123,525  150,938  210,094  112,453 66,216 190,301 150,938 
Home sales impairments 19,000  19,000   0 19,000 0 19,000 
Land sales 10  157   0 10 0 157 

Fee building

  20,985   21,770   56,482   41,038   4,494   20,985   9,691   56,482 
 106,211  145,295  226,577  251,132  116,947  106,211  199,992  226,577 

Gross Margin:

                    

Home sales

 (7,459) 16,939  3,478  29,556  23,487  (7,459) 39,494  3,478 
Land sales      0  0  0  0 

Fee building

  208   515   938   909   92   208   196   938 
 (7,251) 17,454  4,416  30,465  23,579  (7,251) 39,690  4,416 
          

Selling and marketing expenses

 (6,386) (9,683) (13,852) (18,362) (7,778) (6,386) (14,432) (13,852)

General and administrative expenses

 (6,892) (5,841) (12,915) (13,232) (9,453) (6,892) (17,724) (12,915)

Equity in net income (loss) of unconsolidated joint ventures

 (19,962) 185  (21,899) 369  0 (19,962) 174 (21,899)

Interest expense

  (1,271)     (1,989)    (91) (1,271) (445) (1,989)

Project abandonment costs

 (94) (14) (14,130) (19) (21) (94) (89) (14,130)

Gain on early extinguishment of debt

 702  552  579  969  0 702 0 579 

Other income (expense), net

  (68)  (88)  155   (276)  (116)  (68)  (50)  155 

Pretax income (loss)

 (41,222) 2,565  (59,635) (86) 6,120  (41,222) 7,124  (59,635)

(Provision) benefit for income taxes

  16,929   (974)  26,866   (310)  (1,346)  16,929   (1,797)  26,866 

Net income (loss)

 (24,293) 1,591  (32,769) (396) $4,774  $(24,293) $5,327  $(32,769)

Net income attributable to non-controlling interest

     (19)     (19)

Net income (loss) attributable to The New Home Company Inc.

 $(24,293) $1,572  $(32,769) $(415)
          

Earnings (loss) per share attributable to The New Home Company Inc.:

         

Earnings (loss) per share:

 

Basic

 $(1.32) $0.08  $(1.71) $(0.02) $0.26 $(1.32) $0.29 $(1.71)

Diluted

 $(1.32) $0.08  $(1.71) $(0.02) $0.26 $(1.32) $0.29 $(1.71)

Weighted average shares outstanding:

          
Basic 18,341,549 20,070,914 19,146,687 20,028,600  18,075,687 18,341,549 18,092,259 19,146,687 
Diluted 18,341,549 20,095,533 19,146,687 20,028,600  18,446,015 18,341,549 18,431,276 19,146,687 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5


 

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands)

(Unaudited)

 

 

Stockholders’ Equity Three Months Ended June 30

       

Stockholders’ Equity Three Months Ended June 30

       
 

Number of Shares of Common Stock

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Total Stockholders’ Equity

  

Non-controlling Interest in Subsidiary

  

Total Equity

 

Balance at March 31, 2019

 20,049,113  $200  $192,169  $44,634  $237,003  $76  $237,079 

Net income

       1,572  1,572  19  1,591 

Stock-based compensation expense

     523    523    523 

Shares issued through stock plans

  47,856   1   (1)            

Balance at June 30, 2019

  20,096,969  $201  $192,691  $46,206  $239,098  $95  $239,193 
  

Number of Shares of Common Stock

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Total Stockholders’ Equity

  

Non-controlling Interest in Subsidiary

  

Total Equity

 

Balance at March 31, 2020

 18,957,165  $190  $191,926  $30,108  $222,224  $112  $222,336  18,957,165  $190  $191,926  $30,108  $222,224  $112  $222,336 

Net loss

       (24,293) (24,293)   (24,293)   0  0  (24,293) (24,293) 0  (24,293)

Stock-based compensation expense

     521    521    521      0   521   0   521   0   521 
Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans (546)  (1)  (1)  (1) (546) 0 (1) 0 (1) 0 (1)
Shares issued through stock plans 92,635 1 (1)       92,635   1   (1)  0   0   0   0 
Repurchase of common stock  (817,300)  (9)  (1,476)     (1,485)     (1,485)  (817,300)  (9)  (1,476)  0   (1,485)  0   (1,485)

Balance at June 30, 2020

  18,231,954  $182  $190,969  $5,815  $196,966  $112  $197,078   18,231,954  $182  $190,969  $5,815  $196,966  $112  $197,078 
 

Balance at March 31, 2021

 18,080,002 $181 $191,068 $6,318 $197,567 $0 $197,567 

Net income

  0 0 4,774 4,774 0 4,774 

Stock-based compensation expense

  0 613 0 613 0 613 

Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans

 (532) 0 (3) 0 (3) 0 (3)

Shares issued through stock plans

 118,646 1 (1) 0 0 0 0 

Repurchase of common stock

  (37,503)  0   (220)  0   (220)  0   (220)

Balance at June 30, 2021

  18,160,613  $182  $191,457  $11,092  $202,731  $0  $202,731 

 

 

Stockholders’ Equity Six Months Ended June 30

        

Stockholders’ Equity Six Months Ended June 30

       
 

Number of Shares of Common Stock

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Total Stockholders’ Equity

  

Non-controlling Interest in Subsidiary

  

Total Equity

 

Balance at December 31, 2018

 20,058,904  $201  $193,132  $46,621  $239,954  $76  $240,030 

Net income (loss)

       (415) (415) 19  (396)

Stock-based compensation expense

     1,089    1,089    1,089 

Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans

 (85,420)   (488)   (488)   (488)

Shares issued through stock plans

 277,401  2  (2)        

Repurchase of common stock

  (153,916)  (2)  (1,040)     (1,042)     (1,042)

Balance at June 30, 2019

  20,096,969  $201  $192,691  $46,206  $239,098  $95  $239,193 
  

Number of Shares of Common Stock

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Total Stockholders’ Equity

  

Non-controlling Interest in Subsidiary

  

Total Equity

 

Balance at December 31, 2019

 20,096,969  $201  $193,862  $38,584  $232,647  $112  $232,759  20,096,969  $201  $193,862  $38,584  $232,647  $112  $232,759 

Net loss

       (32,769) (32,769)   (32,769)   0  0  (32,769) (32,769) 0  (32,769)

Stock-based compensation expense

     1,110    1,110    1,110    0  1,110  0  1,110  0  1,110 

Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans

 (58,644)   (304)   (304)   (304) (58,644) 0  (304) 0  (304) 0  (304)

Shares issued through stock plans

 244,812  2  (2)         244,812  2  (2) 0  0  0  0 

Repurchase of common stock

  (2,051,183)  (21)  (3,697)     (3,718)     (3,718)  (2,051,183)  (21)  (3,697)  0   (3,718)  0   (3,718)

Balance at June 30, 2020

  18,231,954  $182  $190,969  $5,815  $196,966  $112  $197,078   18,231,954  $182  $190,969  $5,815  $196,966  $112  $197,078 
 

Balance at December 31, 2020

 18,122,345 $181 $191,496 $5,765 $197,442 $ $197,442 

Net income

  0 0 5,327 5,327 0 5,327 

Stock-based compensation expense

  0 1,258 0 1,258 0 1,258 

Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans

 (62,084) 0 (320) 0 (320) 0 (320)

Shares issued through stock plans

 279,678 2 (2) 0 0 0 0 

Repurchase of common stock

  (179,326)  (1)  (975)  0   (976)  0   (976)

Balance at June 30, 2021

  18,160,613  $182  $191,457  $11,092  $202,731  $0  $202,731 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

6


 

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

Six Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 

Operating activities:

            

Net loss

 $(32,769) $(396)

Adjustments to reconcile net loss to net cash provided by operating activities:

     

Net income (loss)

 $5,327 $(32,769)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

     
Deferred taxes 1,637   1,179 1,637 

Amortization of stock-based compensation

 1,110  1,089  1,258 1,110 

Distributions of earnings from unconsolidated joint ventures

   279 
Inventory impairments 19,000   0 19,000 

Project abandonment costs

 14,130  19  89 14,130 

Equity in net (income) loss of unconsolidated joint ventures

 21,899  (369) (174) 21,899 

Depreciation and amortization

 3,623  5,042  2,727 3,623 

Gain on early extinguishment of debt

 (579) (969) 0 (579)

Net changes in operating assets and liabilities:

          

Contracts and accounts receivable

 8,870  2,152  527 8,870 

Due from affiliates

 98  975  41 98 

Real estate inventories

 30,579  24,970  (5,185) 30,579 

Other assets

 (31,133) (2,240) 840 (31,133)

Accounts payable

 (8,932) (12,762) (3,762) (8,932)

Accrued expenses and other liabilities

  (5,510)  1,102   2,122   (5,510)

Net cash provided by operating activities

  22,023   18,892   4,989   22,023 

Investing activities:

            

Purchases of property and equipment

 (143) (8) (130) (143)

Contributions and advances to unconsolidated joint ventures

 (3,847) (4,120)

Distributions of capital and repayment of advances from unconsolidated joint ventures

  2,370   4,928 

Net cash (used in) provided by investing activities

  (1,620)  800 

Contributions to unconsolidated joint ventures

 0 (3,847)

Distributions of capital from unconsolidated joint ventures

 1,512 2,370 

Cash paid for acquisition, net of cash acquired

  (6,477)  0 

Net cash used in investing activities

  (5,095)  (1,620)

Financing activities:

            

Borrowings from credit facility

   40,000 

Repayments of credit facility

   (41,500)

Proceeds from senior notes

 36,138 0 

Repurchases of senior notes

 (9,825) (10,856) 0 (9,825)
Proceeds from note payable 7,036  
Repayment of note payable (7,036)  

Proceeds from notes payable

 0 7,036 

Repayment of notes payable

 (23,848) (7,036)
Payment of debt issuance costs (255)   (996) (255)

Repurchases of common stock

 (3,718) (1,042) (976) (3,718)

Tax withholding paid on behalf of employees for stock awards

  (304)  (488)  (320)  (304)

Net cash used in financing activities

  (14,102)  (13,886)

Net cash provided by (used in) financing activities

  9,998   (14,102)

Net increase in cash, cash equivalents and restricted cash

 6,301  5,806  9,892  6,301 

Cash, cash equivalents and restricted cash – beginning of period

  79,431   42,542   107,459   79,431 

Cash, cash equivalents and restricted cash – end of period

 $85,732  $48,348  $117,351  $85,732 

 

See accompanying notes to the unaudited condensed consolidated financial statements. 

    

7


 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Organization and Summary of Significant Accounting Policies

 

Organization

 

The New Home Company Inc. (the "Company"), a Delaware corporation, and its subsidiaries are primarily engaged in all aspects of residential real estate development, including acquiring land and designing, constructing and selling homes in California, Arizona and Arizona.Colorado.

 

Based on our public float of $58.9$46.0 million at June 28, 2019,30, 2020, we are a smaller reporting company and are subject to reduced disclosure obligations in our periodic reports and proxy statements.  

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts have been eliminated upon consolidation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Regulation S-X and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 20192020. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring entries) necessary for the fair presentation of our results for the interim period presented. Results for the interim periods are not necessarily indicative of the results to be expected for the full year due to seasonal variations and other factors,factors, such as the effects of the novel coronavirus ("COVID-19") and its impact on our future results.  

 

Unless the context otherwise requires, the terms "we", "us", "our" and "the Company" refer to the Company and its wholly owned subsidiaries, on a consolidated basis.

 

Use of Estimates

 

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying condensed consolidated financial statements and notes. Accordingly, actual results could differ materially from these estimates.

 

Reclassifications

 

No items in the prior year condensed consolidated financial statements have been reclassified.

 

Segment Reporting

 

ASCAccounting Standards Codification ("ASC") 280, Segment Reporting ("ASC 280") established standards for the manner in which public enterprises report information about operating segments. The Company's reportable segments are Arizona homebuilding, California homebuilding, Colorado homebuilding and fee building. In accordance with ASC 280, our California homebuilding reportable segment aggregates the Southern California and Northern California homebuilding operating segments based on the similarities in long-term economic characteristics.

 

Cash and Cash Equivalents

 

We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short term liquid investments with a maturity date of less than three months from the date of purchase.

 

8

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Restricted Cash

 

Restricted cash of $0.1 million$22,000 and $0.1$0.2 million as of June 30, 20202021 and December 31, 20192020, respectively, is held in accounts for payments of subcontractor costs incurred in connection with various fee building projects.

 

The table below shows the line items and amounts of cash and cash equivalents and restricted cash as reported within the Company's condensed consolidated balance sheets for each period shown that sum to the total of the same such amounts at the end of the periods shown in the accompanying condensed consolidated statements of cash flows.  

 

 

Six Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Cash and cash equivalents

 $85,588  $48,224  $117,329  $85,588 

Restricted cash

  144   124   22   144 

Total cash, cash equivalents, and restricted cash shown in the statements of cash flows

 $85,732  $48,348  $117,351  $85,732 

 

Real Estate Inventories and Cost of Sales

 

We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect construction costs. Pre-acquisition costs, including nonrefundable land deposits, are expensed to project abandonment costs if we determine continuation of the prospective project is not probable.

 

Land, development and other common costs are typically allocated to real estate inventories using a methodology that approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost of sales for homes closed includes the estimated total construction costs of each home at completion and an allocation of all applicable land acquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value of the home within each project. Changes in estimated development and common costs are allocated prospectively to remaining homes in the project.

 

In accordance with ASC 360, Property, Plant and Equipment ("ASC 360"), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset on a quarterly basis or whenever indicators of impairment exist. Real estate assets include projects actively selling and projects under development or held for future development. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases in gross margins or sales absorption rates, costs significantly in excess of budget, and actual or projected cash flow losses.

 

If there are indicators of impairment, we perform a detailed budget and cash flow review of the applicable real estate inventories to determine whether the estimated future undiscounted cash flows of the project are more or less than the asset’s carrying value. If the estimated future undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. However, if the estimated future undiscounted cash flows are less than the asset’s carrying value then the asset is impaired. If the asset is deemed impaired, it is written down to its fair value in accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820").

 

When estimating undiscounted future cash flows of a project, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other projects, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

 

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, and the level of time sensitive costs (such as indirect construction, overhead and carrying costs). Depending on the underlying objective of the project, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase the velocity of sales. These objectives may vary significantly from project to project and change over time.  

 

9

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

If a real estate asset is deemed impaired, the impairment is calculated by determining the amount the asset's carrying value exceeds its fair value in accordance with ASC 820. We calculate the fair value of real estate inventories considering a land residual value analysis and a discounted cash flow analysis. Under the discounted cash flow method, the fair value is determined by calculating the present value of future cash flows using a risk adjusted discount rate. Some of the critical assumptions involved with measuring the asset's fair value include estimating future revenues, sales absorption rates, development and construction costs, and other applicable project costs. This evaluation and the assumptions used by management to determine future estimated cash flows and fair value require a substantial degree of judgment, especially with respect to real estate projects that have a substantial amount of development to be completed, have not started selling or are in the early stages of sales, or are longer in duration. Actual revenues, costs and time to complete and sell a community could vary from these estimates which could impact the calculation of fair value of the asset and the corresponding amount of impairment that is recorded in our results of operations.operations. For the three and six months ended June 30, 2021, the Company recorded 0 home sales impairment charges. For the three and six months ended June 30, 2020, the Company recorded $19.0 million in home sales impairment charges. For additional information regarding these impairment charges, please see Note 4.  No real estate impairments were recorded during the three and six months ended June 30, 2019.  In cases where we decide to abandon a project, we will fully expense all costs capitalized to such project and will expenseexpense and accrue any additional costs that we are contractually obligated to incur.  For the three and six months ended June 30, 20202021 and 20192020, $21,000, $0.1 million, $0.1 million and $14.1 million, $14,000 and $19,000million in project abandonment costs were incurred, respectively.  

 

Capitalization of Interest

 

We follow the practice of capitalizing interest to real estate inventories during the period of development and to investments in unconsolidated joint ventures, when applicable, in accordance with ASC 835, Interest ("ASC 835"). Interest capitalized as a cost component of real estate inventories is included in cost of home sales as related homes or lots are sold. To the extent interest is capitalized to investment in unconsolidated joint ventures, it is included as a reduction of equity in net income (loss) of unconsolidated joint ventures when the related homes or lots are sold to third parties. In instances where the Company purchases land from an unconsolidated joint venture, the pro rata share of interest capitalized to investment in unconsolidated joint ventures is added to the basis of the land acquired and recognized as a cost of sale upon the delivery of the related homes or land to a third-party buyer. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively selling or under development as well as investments in unconsolidated joint ventures accounted for under the equity method until such equity investees begin their principal operations.

 

Business Combinations

We account for business combinations in accordance with ASC Topic 805,Business Combinations ("ASC 805"), if the assets acquired and liabilities assumed constitute a business. For acquired companies constituting a business, we recognize the identifiable assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid over the fair value of the identifiable assets as goodwill.  On February 26, 2021, TNHC Colorado Inc., a wholly owned subsidiary of the Company, entered into and closed a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Christina D. Presley and CDP Holdings, LLC, as sellers pursuant to which we acquired all the membership interests of the Epic Companies, (as defined in the Purchase Agreement), a residential homebuilder based in Denver, Colorado known as Epic Homes (the “Epic Acquisition”).  The Epic Acquisition purchase price was approximately $8.5 million, $6.9 million of which was paid at closing with the balance to be paid in future installments. The purchase price was funded with cash on hand and is subject to adjustment based on net book value of the Epic Companies’ assets on the date of closing and certain other obligations. This transaction was accounted for as a business combination in accordance with ASC 805. For further details, see Note 4, Real Estate Inventories.

 Following the consummation of the Epic Acquisition, the Company repaid approximately $23.8 million of the Epic Companies’ third-party indebtedness.

Goodwill 

In accordance with ASC Topic 350,Intangibles-Goodwill and Other (“ASC 350”), we evaluate goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances between annual tests indicate that it is more likely than not that the asset is impaired.  The Company's goodwill impairment analysis takes place annually on September 30 and consists of a qualitative assessment to determine whether it is more likely than not its fair value is less than its carrying amount.  If the analysis indicates that the fair value of goodwill is less than its carrying value, an impairment loss equal to the difference between the fair value and carrying value (but not to exceed the carrying value) is recognized.

In conjunction with the Company's Epic Acquisition during the 2021first quarter, $2.0 million of goodwill was recorded within the Colorado homebuilding reporting segment and is included in other assets in the accompanying condensed consolidated balance sheets at June 30, 2021.  At June 30, 2021, there is no indication that the goodwill asset is impaired and we are not aware of any significant indicators of impairment that exist for our goodwill that would require additional analysis.

10

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To do this, the Company performs the following five steps as outlined in ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

 

Home Sales and Profit Recognition

 

In accordance with ASC 606, home sales revenue is recognized when our performance obligations within the underlying sales contracts are fulfilled. We consider our obligations fulfilled when closing conditions are complete, title has transferred to the homebuyer, and collection of the purchase price is reasonably assured. Sales incentives are recorded as a reduction of revenues when the respective home is closed. The profit we record is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales." When it is determined that the earnings process is not complete, the related revenue and profit are deferred for recognition in future periods.

 

Land Sales and Profit Recognition

 

In accordance with ASC 606, land sales revenue is recognized when our performance obligations within the underlying sales contracts are fulfilled.  The performance obligations in land sales contracts are typically satisfied at the point in time consideration and title is transferred through escrow at closing.  Total revenue is typically recognized simultaneously with transfer of title to the customer.  In instances where material performance obligations may exist after the closing date, a portion of the price is allocated to each performance obligation with revenue recognized as such obligations are completed.  Variable consideration, such as profit participation, may be included within the land sales transaction price based on the terms of a contract.  The Company includes the estimated amount of variable consideration to which it will be entitled only to the extent it is probable that a significant reversal in the amount of cumulative revenue will not occur when any uncertainty associated with the variable consideration is subsequently resolved.

 

10

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fee Building

 

The Company enters into fee building agreements to provide services whereby it builds homes on behalf of third-party property owners. The third-party property owner funds all project costs incurred by the Company to build and sell the homes. The Company primarily enters into cost plus fee contracts where it charges third-party property owners for all direct and indirect costs plus a fee. The fee is typically a per-unit fixed fee or based on a percentage of the cost or home sales revenue of the project, depending on the terms of the agreement with the third-party property owner. For these types of contracts, the Company recognizes revenue based on the actual total costs it has incurred plus the applicable fee. In accordance with ASC 606, we apply the percentage-of-completion method, using the cost-to-cost approach, as it most accurately measures the progress of our efforts in satisfying our obligations within the fee building agreements. Under this approach, revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred. In the course of providing fee building services, the Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are passed through to the property owners and, in accordance with GAAP, are included in the Company’s revenues and cost of sales.

 

The Company also provides construction management and coordination services and sales and marketing services as part of agreements with third parties and its unconsolidated joint ventures. In certain contracts, the Company also provides project management and administrative services. For most services provided, the Company fulfills its related obligations as time-based measures, according to the input method guidance described in ASC 606. Accordingly, revenue is recognized on a straight-line basis as the Company's efforts are expended evenly throughout the performance period. The Company may also have an obligation to manage the home or lot sales process or warranty service as part of providing sales and marketing services. ThisThe Company's obligation to manage the home or lot sales and marketing process is considered fulfilled when related homes or lots close escrow, as these events represent milestones reached according to the output method guidance described in ASC 606. Accordingly, revenue is recognized in the period that the corresponding lots or homes close escrow. Costs associated with these services are recognized as incurred.  The Company's obligations related to warranty services are considered fulfilled when the services are rendered with the revenue and costs associated with those services recognized in the period incurred.

 

The Company’s fee building revenues have historically been concentrated with a small number of customers. For the three and six months ended June 30, 20202021 and 20192020, one customer comprisecodmprised 0%, 18%, 94%, and 97%, 95%respectively, of fee building revenue and 93%a separate customer comprised 97%, 78%, 4% and 2%, respectively, of fee building revenue. The balance of the fee building revenues primarily represented management fees earned from unconsolidated joint ventures and third-party customers. As of June 30, 20202021 and December 31, 20192020, one customer comprised 51% 0% and 65%35% of contracts and accounts receivable, respectively, and a separate fee building customer comprised 46% and 25%, respectively, with the balance of contracts and accounts receivable primarily representingrepresenting escrow receivables from home sales.

 

11

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Variable Interest Entities

 

The Company accounts for variable interest entities in accordance with ASC 810, Consolidation ("ASC 810"). Under ASC 810, a variable interest entity ("VIE") is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights.

 

Once we consider the sufficiency of equity and voting rights of each legal entity, we then evaluate the characteristics of the equity holders' interests, as a group, to see if they qualify as controlling financial interests. Our real estate joint ventures consist of limited partnerships and limited liability companies. For entities structured as limited partnerships or limited liability companies, our evaluation of whether the equity holders (equity partners other than us in each our joint ventures) lack the characteristics of a controlling financial interest includes the evaluation of whether the limited partners or non-managing members (the non-controlling equity holders) lack both substantive participating rights and substantive kick-out rights, defined as follows:

 

 

Participating rights - provide the non-controlling equity holders the ability to direct significant financial and operational decision made in the ordinary course of business that most significantly influence the entity's economic performance.

 

 

Kick-out rights - allow the non-controlling equity holders to remove the general partner or managing member without cause.

 

If we conclude that any of the three characteristics of a VIE are met, including if equity holders lack the characteristics of a controlling financial interest because they lack both substantive participating rights and substantive kick-out rights, we conclude that the entity is a VIE and evaluate it for consolidation under the variable interest model.

 

If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE.

 

11

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Under ASC 810, a nonrefundable deposit paid to an entity may be deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller 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 takedown. Such costs are classified as real estate inventories, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a nonrefundable deposit, a VIE may have been created. At June 30, 20202021, the Company had outstanding nonrefundable cash deposits of $12.6 deposits of $12.2 million pertaining to land option contracts and purchase contracts.

 

As of June 30, 20202021 and December 31, 20192020, the Company was not required to consolidate any VIEs. In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.

 

Non-controlling Interest

 

During 2013, the Company entered into a joint venture agreement with a third-party property owner. In accordance with ASC 810, the Company analyzed this arrangement and determined that it was not a VIE; however, the Company determined it was required to consolidate the joint venture as the Company has a controlling financial interest with the powers to direct the major decisions of the entity.  AsDuring the third quarter of 2020, the Company and its partner dissolved the joint venture, and as of June 30, 20202021 and December 31, 20192020, the third-party investor had an equity balance of $0.1 million and $0.1 million, respectively. $0.

 

Investments in and Advances to Unconsolidated Joint Ventures

 

We use the equity method to account for investments in homebuilding and land development joint ventures when any of the following situations exist: 1) the joint venture qualifies as a VIE and we are not the primary beneficiary, 2) we do not control the joint venture but have the ability to exercise significant influence over its operating and financial policies, or 3) we function as the managing member or general partner of the joint venture and our joint venture partner has substantive participating rights or can replace us as managing member or general partner without cause.

 

As of June 30, 20202021, the Company concluded that none of its joint ventures were VIEs and accounted for these entities under the equity method of accounting.

 

12

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Under the equity method, we recognize our proportionate share of earnings and losses generated by the joint venture upon the delivery of lots or homes to third parties. Our proportionate share of intra-entity profits and losses are eliminated until the related asset has been sold by the unconsolidated joint venture to third parties. We classify cash distributions received from equity method investees using the cumulative earnings approach consistent with ASC 230, Statement of Cash Flows ("ASC 230"). Under the cumulative earnings approach, distributions received are considered returns on investment and isare classified as cash inflows from operating activities unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed cumulative equity in earnings. When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and is classified as cash inflows from investing activities. Our ownership interests in our unconsolidated joint ventures vary, but are generally less than or equal to 35%50%. The accounting policies of our joint ventures are consistent with those of the Company.

 

We review real estate inventory held by our unconsolidated joint ventures for impairment on a quarterly basis, consistent with how we review our real estate inventories as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales." We also review our investments in and advances to unconsolidated joint ventures for evidence of other-than-temporary declines in value.value in accordance with ASC 820.  To the extent we deem any declines in valueportion of our investment in and advances to unconsolidated joint ventures to be other-than-temporary,as not recoverable, we impair our investment accordingly. For the three and six months ended June 30, 20202021 and 20192020, the Company recorded other-than-temporary, noncash impairment charges of $0, $0, $20.0 million and $22.3 million,million, $0 and $0, respectively, related to our investment in and advances to unconsolidated joint ventures.  Joint venture impairment charges are included in equity in net income (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations. 

 

Selling and Marketing Expense

 

Costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and model landscaping and furnishings are capitalized to other assets in the accompanying condensed consolidated balance sheets under ASC 340, Other Assets and Deferred Costs ("ASC 340"). These costs are depreciated to selling and marketing expenses generally over the shorter of 30 months or the actual estimated life of the selling community. All other selling and marketing costs, such as commissions and advertising, are expensed as incurred.

 

12

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Warranty and Litigation Accruals

 

We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural construction defects for one year. In addition, we provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered by the applicable statute of repose, that covers certain defined construction defects. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts are accrued based upon the Company’s historical claim and expense rates. In addition, the Company has received warranty payments from third-party property owners for certain of its fee building projects that have since closed-out where the Company has the contractual risk of construction. These payments are recorded as warranty accruals. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets and adjustments to our warranty accrual are recorded through cost of sales.home sales or as an offset to warranty insurance receivables when covered by insurance.

 

While our subcontractors who perform our homebuilding work generally provide us with an indemnity for claims relating to their workmanship and materials, we also purchase general liability insurance that covers development and construction activity at each of our communities. Our subcontractors are usually covered by these programs through an owner-controlled insurance program, or "OCIP." Consultants such as engineers and architects are generally not covered by the OCIP but are required to maintain their own insurance. In general, we maintain insurance, subject to deductibles and self-insured retentions, to protect us against various risks associated with our activities, including, among others, general liability, "all-risk" property, construction defects, workers’ compensation, automobile, and employee fidelity. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insured retention requirements. We establish a separate reserve for warranty and for known and incurred but not reported (“IBNR”) construction defect claims based on our historical claim and expense data. Our warranty accrual and litigation reserves for construction defect claims are presented on a gross basis within accrued expenses and other liabilities in our condensed consolidated financialbalance sheets statements without consideration of insurance recoveries. Expected recoveries from insurance carriers are presented as warranty insurance receivables and insurance receivables within other assets in our condensed consolidated financial statementsbalance sheets and are recorded based on actual insurance claims and amounts determined using our construction defect claim and warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates.

 

13

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contracts and Accounts Receivable

 

Contracts and accounts receivable primarily represent the fees earned, but not collected, and reimbursable project costs incurred in connection with fee building agreements. The Company periodically evaluates the collectability of its contracts receivable, and, if it is determined that a receivable might not be fully collectible, an allowance is recorded for the amount deemed uncollectible. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts involved and the financial condition of its customers. Factors considered in such evaluations include, but are not limited to: (i) customer type; (ii) historical contract performance; (iii) historical collection and delinquency trends; (iv) customer credit worthiness; and (v) general economic conditions. In addition to contracts receivable, escrow receivables are included in contracts and accounts receivable in the accompanying condensed consolidated balance sheets. As of June 30, 20202021 and December 31, 20192020, no allowance was recorded related to contracts and accounts receivable.

 

Property, Equipment and Capitalized Selling and Marketing Costs

 

Property, equipment and capitalized selling and marketing costs are recorded at cost and included in other assets in the accompanying condensed consolidated balance sheets. Property and equipment are depreciated to general and administrative expenses using the straight-line method over their estimated useful lives ranging from three to five years. Leasehold improvements are stated at cost and are amortized to general and administrative expenses using the straight-line method generally over the shorter of either their estimated useful lives or the term of the lease. Capitalized selling and marketing costs are depreciated using the straight-line method to selling and marketing expenses over the shorter of either 30 months or the actual estimated life of the selling community.

 

Income Taxes

 

Income taxes are accounted for in accordance with ASC 740, Income Taxes ("ASC 740"). The consolidated provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

13

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not (defined as a likelihood of more than 50%) unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the tax asset we conclude is more likely than not unrealizable.  In accordance with ASC 740, the determination of whether a valuation allowance for deferred tax assets is necessary requires an analysis of both positive and negative evidence regarding realization of the deferred tax assets and should be established based on the consideration of all available evidence.  Our assessment considers, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with net operating losses and tax credit carryforwards and the available tax planning alternatives, to the extent these items are applicable, and the availability of net operating loss carrybacks under certain circumstances. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible, as well as the ability to carryback net operating losses in the event that this option becomes available.  The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial statements. At June 30, 2021 and December 31, 2020,based on our analysis of all available positive and negative evidence, and other relevant factors, we did not establish a valuation allowance of $0.1 million was recordedexcept for $20,000 recorded against a capital loss and atloss.  Please refer to Note December 31, 201914, 0 valuation allowance was recorded.  for more information.

 

ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of the resulting tax benefits.  These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination.  In addition, these provisions provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. At June 30, 20202021, the Company has concluded that there were 0no significant uncertain tax positions requiring recognition in its financial statements.

 

The Company classifies any interest and penalties related to income taxes assessed as part of the provision/benefit for income tax expense.taxes. As of June 30, 20202021, the Company has not been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.

 

14

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

 

We account for share-based awards in accordance with ASC 718, Compensation – Stock Compensation ("ASC 718").  ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in a company's financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.  In 2018, the scope of ASC 718 was expanded to include to include share-based payments for acquiring goods and services from nonemployees, with certain exceptions.  The Company had one nonemployee equity award that was fully expensed during the 2019first quarter and was accounted for in accordance with ASC 718.  

 

Share Repurchase and Retirement

 

When shares are retired, the Company’s policy is to allocate the excess of the repurchase price over the par value of shares acquired to both retained earnings and additional paid-in capital. The portion allocated to additional paid-in capital is determined by applying a percentage, which is determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additional paid-in capital as of the retirement date. The residual, if any, is allocated to retained earnings as of the retirement date.

 

During the three and six months ended June 30, 2021, the Company repurchased and retired 37,503 and 179,326 shares of its common stock at an aggregate purchase price of $0.2 million and $1.0 million, respectively. During the three and six months ended June 30, 2020, the Company repurchased and retired 817,300 and 2,051,183 shares of its common stock at an aggregate purchase priceprice of $1.5 million and $3.7 million, respectively. During the six months ended June 30, 2019, the Company repurchased and retired 153,916 shares of its common stock at an aggregate purchase price of $1.0 million.  The purchases were made under a previously announced stock repurchase program thatprograms and the Company had a remaining purchase authorization of $1.7$8.5 million as of June 30, 2020.  2021.Repurchases fromJanuary 1, 2021 through February 16, 2021, March 11, 2021 through April 30, 2021 and March 20, 2020 through May 11, 2020 were made pursuant to the Company's Rule 10b5-1 plan.plans.  All repurchased shares were returned to the status of authorized but unissued. 

 

14

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Tax Benefit Preservation Plan

 

On May 8, 2020, the Company entered into a Tax Benefit Preservation Plan between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (as amended from time to time, the “Tax Plan”) to help preserve the value of certain deferred tax benefits, including those generated by net operating losses and certain other tax attributes (collectively,attributes.  The Company has been able to carryback its federal net operating losses realized during 2020 to offset U.S. federal income taxes paid in the “Tax Benefits”past five years due to the tax law changes arising from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").  As a result, the Board determined not to extend or renew the Tax Plan. The Tax Plan is intended to act as a deterrent to any person or entity acquiring shares of the Company equal to or exceeding 4.95%. The Tax Plan reduces the likelihood that changes in our investor base have the unintended effect of limiting the use of our Tax Benefits. In connection with its adoptionoriginal expiration date of the Tax Plan was May 7, 2021; however, in March 2021, the Board declared a dividenddetermined to accelerate the expiration of onethe Tax Plan by amending it to allow its expiration to occur on March 29, 2021. Accordingly, the preferred stockshare purchase right (individually, a “Right” and collectively,rights under the “Rights”Tax Plan (the "Rights") for each sharewhich were previously dividended to holders of Common Stock, par value $0.01 (“Common Stock”)record of the shares of common stock of the Company outstanding atrelated to the Series A Junior Participating Preferred Stock of the Company expired as of the close of business on May 20, 2020.March 29, 2021 As long as the Rights are attachedand no person has any rights pursuant to the Common Stock, the Company will issue one Right (subject to adjustment) with each new share of the Common Stock so that all such shares will have attached Rights.  Each Right has an exercise price of $11.50. Each Right, which is only exercisable if a person or group of affiliated or associated persons acquires beneficial ownership of 4.95% or more of the Common Stock, subject to certain limited exceptions (the “Acquiring Person”), when exercised will entitle the registered holder other than the Acquiring Person the right to acquire that number of shares of Common Stock having a market value of two times the $11.50 exercise price of the Right, or, at the election of the Board, to exchange each right for one share of Common Stock, in each case, subject to adjustment. Unless redeemed or exchanged earlier by the Company or terminated, the rights will expire upon the earliest to occur of (i) the close of business on May 7, 2021, (ii) the close of business on the effective date of the repeal of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) if the Board determines that the Tax Plan is no longer necessary or desirable for the preservation of the Tax Benefits or (iii) the time at which the Board determines that the Tax Benefits are fully utilized or no longer available under Section 382 of the Code or that an ownership change under Section 382 of the Code would not adversely impact in any material respect the time period in which the Company could use the Tax Benefits, or materially impair the amount of the Tax Benefits that could be used by the Company in any particular time period, for applicable tax purposes. Rights. 

 

Dividends

 

NaNNo dividends were paid on our common stock during the three and six months ended June 30, 20202021 and 20192020. We currently intend to retain our future earnings 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, compliance with Delaware law, restrictions contained in any financing instruments, including but not limited to, our unsecured credit facility and senior notes indenture, and such other factors as our board of directors deem relevant.

 

Recently Issued Accounting Standards

 

The Company's status as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") ended on December 31, 2019. Section 102 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 (the "Securities Act"), for complying with new or revised accounting standards. As previously disclosed and prior to the expiration of its "emerging growth company" status, the Company had chosen, irrevocably, to "opt out" of such extended transition period, and as a result, complied with new or revised accounting standards on the relevant dates on which adoption of such standards was required for non-emerging growth companies. 

In June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASUAccounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments(" ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology. The FASB followed up with ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments in April 2019, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326), in May 2019, ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Lossesin November 2019, and ASU 2020-02Financial Instruments - Credit Losses (Topic 326and Leases (Topic 842)in February 2020 to provide further clarification on this topic. The standard is effective for annual and interim periods beginning January 1, 2020, and requires full retrospective application upon adoption.  During November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates that provides for additional implementation time for smaller reporting companies with the standard being effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  Early adoption is permitted.  As a smaller reporting company, we are not adopting the requirements of ASU 2016-13 for the year beginning January 1, 2020,2021, however we do not anticipate a material impact to our consolidated financial statements as a result of adoption.adoption.

 

In August 2018, the FASB issued ASU 2018-13,Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify certain disclosure requirements of fair value measurements.  The Company adopted ASU 2018-13 in the 2020first quarter with no impact to the condensed consolidated financial statements as a result. 

15

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)-Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020,2020.  with early adoption permitted.  We are currently inThe Company adopted the processprovisions of evaluating the effects on our financial statements of adopting ASU 2019-12.12 effective January 1, 2021 and experienced no impact to our condensed consolidated financial statements as a result of adoption.

 

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815) ("ASU 2020-01").  ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.  The standard is effective for fiscal years beginning after December 31, 2020, and interim periods within those fiscal years, with early adoption permitted.years.  The Company expectsadopted the provisions of ASU 2020-01 effective January 1, 2021 and experienced no material impact to our condensed consolidated financial statements as a result of adoption.

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSIn October 2020, the FASB issued ASU 2020-10,Codification Improvements ("ASU 2020-10"). The amendments in ASU 2020-10 contain improvements to the Codification by including disclosure guidance for appropriate disclosure and ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the Disclosure Section of the Codification. The amendments are effective for public entities in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted the provisions of ASU 2020-10 effective January 1, 2021 and experienced no impact to our condensed consolidated financial statements as a result of adoption. 

 

 

2. Computation of Earnings (Loss) Per Share

 

The following table sets forth the components used in the computation of basic and diluted lossearnings (loss) per share for the three and six months ended June 30, 20202021 and 20192020:

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands, except per share amounts)

  

(Dollars in thousands, except per share amounts)

 

Numerator:

          

Net income (loss) attributable to The New Home Company Inc.

 $(24,293) $1,572  $(32,769) $(415)

Net income (loss)

 $4,774  $(24,293) $5,327  $(32,769)
  

Denominator:

          

Basic weighted-average shares outstanding

 18,341,549  20,070,914  19,146,687  20,028,600  18,075,687  18,341,549  18,092,259  19,146,687 

Effect of dilutive shares:

          

Stock options and unvested restricted stock units

     24,619         370,328   0   339,017   0 

Diluted weighted-average shares outstanding

  18,341,549   20,095,533   19,146,687   20,028,600   18,446,015   18,341,549   18,431,276   19,146,687 
  
Basic earnings (loss) per share attributable to The New Home Company Inc. $(1.32) $0.08 $(1.71) $(0.02)
Diluted earnings (loss) per share attributable to The New Home Company Inc. $(1.32) $0.08 $(1.71) $(0.02)

Basic earnings (loss) per share

 $0.26 $(1.32) $0.29 $(1.71)

Diluted earnings (loss) per share

 $0.26 $(1.32) $0.29 $(1.71)
  

Antidilutive stock options and unvested restricted stock units not included in diluted earnings (loss) per share

  1,897,100   1,349,106   1,841,463   1,292,726  1,204,108 1,897,100 1,220,695 1,841,463 

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. Contracts and Accounts Receivable

 

Contracts and accounts receivable consist of the following:

 

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Contracts receivable:

          

Costs incurred on fee building projects

 $56,482  $93,281  $9,691 $79,583 

Estimated earnings

  938   2,052   196   1,420 
 57,420  95,333  9,887  81,003 

Less: amounts collected during the period

  (53,642)  (84,979)  (7,802)  (77,861)

Contracts receivable

 $3,778  $10,354  $2,085  $3,142 
  

Contracts receivable:

          

Billed

 $  $  $0 $0 

Unbilled

  3,778   10,354   2,085   3,142 
 3,778  10,354  2,085  3,142 

Accounts receivable:

          

Escrow receivables

 3,151  5,392  2,028 1,782 

Other receivables

  183   236   388   0 

Contracts and accounts receivable

 $7,112  $15,982  $4,501  $4,924 

 

Billed contracts receivable represent amounts billed to customers that have yet to be collected. Unbilled contracts receivable represents the contract revenue recognized but not yet invoiced. All unbilled receivables as of June 30, 20202021 are expected to be billed and collected within 30 days. Accounts payable at June 30, 20202021 and December 31, 20192020 includesd $2.9 es $1.8million and $9.6$2.6 million, respectively, related to costs incurred under the Company’s fee building contracts.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

4. Real Estate Inventories

 

Real estate inventories are summarized as follows:

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Deposits and pre-acquisition costs

 $14,142  $17,865  $18,246  $12,202 

Land held and land under development

 146,859  180,823  115,099  127,807 

Homes completed or under construction

 154,547  183,711  196,788  133,567 

Model homes

  55,401   51,539   28,140   41,381 
 $370,949  $433,938  $358,273  $314,957 

 

All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0of $0.5 million and $0.1 million as of June 30, 20202021 and December 31, 20192020, respectively.

 

Land held and land under development includes land costs and costs incurred during site development such as development, indirects, and permits. Homes completed or under construction and model homes include all costs associated with home construction, including allocated land, development, indirects, permits, materials and labor (except for capitalized selling and marketing costs, which are classified in other assets).

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the 2021first quarter, the company completed the Epic Acquisition.  The purchase price was approximately $8.5 million, $6.9 million of which was paid at closing with the balance to be paid in future installments, and was funded with cash on hand.  This transaction was accounted for as a business combination in accordance with ASC 805.  Under ASC 805, the Company recorded the acquired assets and assumed liabilities at their estimated fair values with the excess allocated to goodwill.  We recorded approximately $37.0 million of real estate inventories owned, $2.0 million of goodwill, $1.2 million of other assets, $24.1 million of notes payable, and $7.6 million of accounts payable and other accrued liabilities. The Company determined the fair value of real estate inventories on an individual project level basis using a combination of a land residual analysis and a discounted cash flow analysis. These methods are significantly impacted by estimates relating to expected selling prices, anticipated sales pace, cost to complete estimates, and the highest and best use of projects prior to acquisition. These estimates were developed and used at the individual project level, and may vary significantly between projects. Other assets, accounts receivable, accounts payable, notes payable and accrued expenses and other liabilities were stated at historical value due to the short-term nature of these items. Goodwill represents the value the Company expects to achieve through the operational synergies and the expansion of the Company into the Colorado market.  It also represents the value we expect to receive through the use of the "Epic Homes" trade name which the Company will continue to use in the Colorado market.  The Company estimates that the entire $2.0 million of goodwill resulting from the Epic Acquisition will be tax deductible. Goodwill is included in the Colorado homebuilding reporting segment in Note 15.

In addition, we incurred approximately $1.0 million of transaction costs related to the Epic Acquisition, which are included in general and administrative expenses in the accompanying condensed consolidated statements of operations. Following the consummation of the Epic Acquisition, the Company repaid approximately $23.8 million of the Epic Companies’ third-party indebtedness. As of June 30, 2021, the purchase price accounting reflected in the accompanying condensed financial statements is preliminary and is based upon estimates and assumptions that may be subject to change within the measurement period (up to one year from the acquisition date pursuant to ASC 805). All net assets and operations acquired in this transaction are included in the Colorado homebuilding reporting segment. The supplemental pro forma information for revenue and earnings of the Company as though the business combination had occurred as of January 1, 2020 has not been presented as this pro forma information was not deemed material for the periods ended June 30, 2021 or 2020.

 

In accordance with ASC 360, inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset at the community-level on a quarterly basis or whenever indicators of impairment exist.  For the three and six months ended June 30, 2021, the Company recognized 0 real estate-related impairments. For the three and six months ended June 30, 2020,, the Company recognized inventory impairments of $19.0$19.0 million in cost of sales resulting in an increase of $17.8 million and $1.2 million in pretax loss for our California and Arizona homebuilding segments, respectively. The fair values for the homebuilding projects impaired were calculated under discounted cash flow models using discount rates ranging from 14%14%-26%. The following table summarizes inventory impairments recorded during the three and six months ended June 30, 20202021 and 2019:2020:

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

      

(Dollars in thousands)

 

Inventory impairments:

          

Home sales

 $19,000  $  $19,000  $  $0  $19,000  $0  $19,000 

Total inventory impairments

 $19,000  $  $19,000  $  $0  $19,000  $0  $19,000 
  

Remaining carrying value of inventory impaired at period end

 $79,033  $  $79,033  $  $0  $79,033  $0  $79,033 

Number of projects impaired during the period

 5    5    0  5  0  5 

Total number of projects subject to periodic impairment review during period (1)

 27  25  27  27  31  27  31  27 

 


(1)

Represents the peak number of real estate projects that we had during each respective period. The number of projects outstanding at the end of each period may be less than the number of projects listed herein.

 

The $17.8$17.8 million in California home sales impairments recorded in the 2020 second quarter related to four homebuilding communities. Of this total, $6.5 million in charges related to a condominium community in the Sacramento Area, $6.2 million in charges related to a townhome community within Southern California's Inland Empire, $4.5 million in charges related to a townhome community in San Diego, and $0.6 million in charges related to a condominium community in Los Angeles.  The $1.2 million in Arizona home sales impairments related to the Company's luxury condominium project in Scottsdale, Arizona.  Each of these projects experienced slower absorptions which resulted in increased sales incentives and holding costs for these projects for which the aggregate sales prices for remaining units at each community would be lower than their previous carrying values.  In addition, some of these communities experienced higher direct construction costs than originally underwritten and budgeted.

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the 2020 first quarter, the Company terminated its option agreement for a luxury condominium project in Scottsdale, Arizona. Due to the lower demand levels experienced at this community coupled with the substantial investment required to build out the remainder of the project, the Company decided to abandon the future acquisition, development, construction and sale of future phases of the project that were under option. In accordance with ASC 970-360-40-1, the capitalized costs related to the project are expensed and not allocated to other components of the project that the Company did develop. For the six months ended June 30, 2020,, the Company recorded an abandonment charge of $14.0 million representing the capitalized costs that havehad accumulated related to the portion of the project that is beingwas abandoned.  This charge is included within project abandonment costs in the accompanying condensed consolidated statementstatements of operations.

 

18

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Capitalized Interest

 

Interest is capitalized to inventory and investment in unconsolidated joint ventures during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales as related homes and land parcels are closed. Interest capitalized to investment in unconsolidated joint ventures is amortized to equity in net income (loss) of unconsolidated joint ventures as related joint venture homes or lots close, or in instances where lots are sold from the unconsolidated joint venture to the Company, the interest is added to the land basis and included in cost of sales when the related lots or homes are sold to third-party buyers. Interest expense is comprised of interest incurred but not capitalized and is reported as interest expense in our condensed consolidated statements of operations.  For the three and six months ended June 30, 20202021 and 20192020 interest incurred, capitalized and expensed was as follows:

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Interest incurred

 $6,150  $7,606  $12,530  $15,367  $5,751 $6,150 $11,082 $12,530 

Interest capitalized to inventory

  (4,879)  (7,606)  (10,541)  (15,367)  (5,660)  (4,879)  (10,637)  (10,541)

Interest expensed

 $1,271  $  $1,989  $  $91  $1,271  $445  $1,989 
  

Capitalized interest in beginning inventory

 $25,152  $28,600  $26,397  $25,681  $23,003 $25,152 $22,053 $26,397 

Interest capitalized as a cost of inventory

 4,879  7,606  10,541  15,367  5,660  4,879  10,637  10,541 

Capitalized interest transferred from investment in unconsolidated joint ventures to inventory upon lot acquisition

   3    13 

Previously capitalized interest included in cost of home and land sales

 (4,601) (6,301) (10,747) (11,153) (5,616) (4,601) (9,643) (10,747)

Previously capitalized interest included in project abandonment costs

        (761)     0   0   0   (761)

Capitalized interest in ending inventory

 $25,430  $29,908  $25,430  $29,908  $23,047  $25,430  $23,047  $25,430 
  

Capitalized interest in beginning investment in unconsolidated joint ventures

 $93  $672  $541  $713  $0 $93 $0 $541 

Capitalized interest transferred from investment in unconsolidated joint ventures to inventory upon lot acquisition

   (3)   (13)

Previously capitalized interest included in equity in net income (loss) of unconsolidated joint ventures

  (31)  (48)  (479)  (79)  0   (31)  0   (479)

Capitalized interest in ending investment in unconsolidated joint ventures

  62   621   62   621   0   62   0   62 

Total capitalized interest in ending inventory and investments in unconsolidated joint ventures

 $25,492  $30,529  $25,492  $30,529  $23,047  $25,492  $23,047  $25,492 
  
Capitalized interest as a percentage of inventory 6.9% 5.5% 6.9% 5.5% 6.4% 6.9% 6.4% 6.9%
Interest included in cost of home sales as a percentage of home sales revenue 6.0% 4.4% 6.2% 4.7% 4.1% 6.0% 4.2% 6.2%
  
Capitalized interest as a percentage of investment in and advances to unconsolidated joint ventures 0.5% 1.8% 0.5% 1.8%

Capitalized interest as a percentage of investment in unconsolidated joint ventures

 0% 0.5% 0% 0.5%

 

For the six months ended June 30, 2020,, the Company expensed $0.8 million in interest previously capitalized due to the abandonment of the future phases of one of its existing homebuilding communities.  For more information, please refer to Note 4.

 

For the six months ended June 30, 2020,, the Company expensed $0.4 million in interest previously capitalized to investments in unconsolidated joint ventures as the result of an other-than-temporary impairment to its investment in one joint venture. For more information, please refer to Note 6.

   

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

6. Investments in and Advances to Unconsolidated Joint Ventures

 

As of June 30, 20202021 and December 31, 20192020, the Company had ownership interests in 10nine unconsolidated joint ventures with ownership percentages that generally ranged from 5%10% to 35%50%. The condensed combined balance sheets for our unconsolidated joint ventures accounted for under the equity method were as follows:

 

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Cash and cash equivalents

 $28,375  $31,484  $14,422 $16,709 

Restricted cash

 13,250  13,852  250 611 

Real estate inventories

 221,972  241,416  0 3,172 

Other assets

  3,778   3,843   1,023   1,834 

Total assets

 $267,375  $290,595  $15,695  $22,326 
  

Accounts payable and accrued liabilities

 $11,100  $16,778  $12,624 $13,487 

Notes payable

  11,633   28,665   0   0 

Total liabilities

  22,733   45,443   12,624   13,487 

The New Home Company's equity(1)

 28,465  27,722  769 2,107 

Other partners' equity

  216,177   217,430   2,302   6,732 

Total equity

  244,642   245,152   3,071   8,839 

Total liabilities and equity

 $267,375  $290,595  $15,695  $22,326 
Debt-to-capitalization ratio 4.5% 10.5%
Debt-to-equity ratio 4.8% 11.7%

 


(1)

Balance represents the Company's interest, as reflected in the financial records of the respective joint ventures. This balance differs from the investment in and advances to unconsolidated joint ventures balance reflected in the Company's consolidated balance sheets by $15.5 million due to other-than-temporary impairment charges to the Company's investment, interest capitalized to the Company's investment in joint ventures and certain other differences in outside basis.

 

The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity method were as follows:

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

      

(Dollars in thousands)

 

Revenues

 $30,290  $59,078  $61,937  $101,365  $0 $30,290 $5,353 $61,937 

Cost of sales and expenses

  28,672   57,288   58,957   99,062   0   28,672   5,152   58,957 

Net income of unconsolidated joint ventures

 $1,618  $1,790  $2,980  $2,303  $0  $1,618  $201  $2,980 

Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations

 $(19,962) $185  $(21,899) $369  $0  $(19,962) $174  $(21,899)

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company reviews its investments in and advances to unconsolidated joint ventures for other-than-temporary declines in value. To the extent we deem any declines in value of our investment in and advances to unconsolidated joint ventures to be other-than-temporary, we impair our investment accordingly. For the three and six months ended June 30, 20202021 and 2019,2020, the Company recorded other-than-temporary, noncash impairment charges of $0, $0, $20.0 million and $22.3 million, $0 and $0, respectively. TheDuring the 2020second quarter, the Company plansmade the determination to exit from its TNHC Russell Ranch LLC ("Russell Ranch") venture due to low expected financial returns relative to the required future capital contributions and related risks, including the potential impact of COVID-19 on the economy, as well as the Company's opportunity to pursue federal tax loss carryback refund opportunities from the passage of the CARES Act. As a result, the Company determined that its investment in the joint venture was not recoverable.  The Companyrecoverable and recorded a $20.0$20.0 million other-than-temporary impairment charge during the 2020second quarter to write off its investment in Russell Ranch and to record a liability for its estimated costs to complete the Phase 1 backbone infrastuctureinfrastructure costs. The Company believes that exiting the venture preserves capital, reduces its investment concentration within one geographical location, and allows it to pursue federal tax loss carryback refunds.  This impairment charge reflects the Company's current estimates but actual losses associated with exiting the joint venture could differ materially based oncompleted a sale of substantially all of its underlying assets to a third-party during the ultimate sales price of the underlying asset. The 2020 firstfourth quarter that resulted in the Company recording income of $4.5 million to equity in net income (loss) of unconsolidated joint ventures, partially offsetting the other-than-temporary impairment recorded in the 2020second quarter. The remaining 2020 impairment charge of $2.3 million related to our investment in the Arantine Hills Holdings LP ("Bedford") joint venture.  Theventure and is included in equity in net income (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations.  During the 2020first quarter, the Company has agreed in principle to sell its interest in this joint venture to our partner for less than our currentits carrying value. This transaction is expected to closeclosed during the 2020 third quarter.  Pursuant to our agreement to sell our interest, the purchase price is approximately $5.1was $5.1 million forfor the sale of our partnership interest and we will have an option to purchase at market up to 30% of the total lots from the masterplan community.  Joint venture impairment charges are included in equity in net income (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations.

20

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As a smaller reporting company, the Company is subject to the provisions of Rule 8-03(b)(3) of Regulation S-X which requires the disclosure of certain financial information for equity investees that constitute 20% or more of the Company's consolidated net income (loss).  For the three and six months ended June 30, 2020,, the loss allocation from one of the Company's unconsolidated joint ventures accounted for under the equity method exceeded 20% of the Company's consolidated net loss. For the three and six months ended June 30, 2019,2021, incomeno profit or loss allocations fromtwo of the Company's unconsolidated joint ventures accounted for under the equity method each exceeded 20% of the Company's consolidated net loss.income. The table below presents select combined financial information for these threethis joint venturesventure for the three and six months ended June 30, 20202021 and 20192020

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Revenues

 $26,198  $45,167  $45,746  $77,463  $0 $0 $504 $0 

Cost of home and land sales

  24,012   41,352   41,314   70,686   0   0   0   0 

Gross margin

 $2,186  $3,815  $4,432  $6,777  $0  $0  $504  $0 

Expenses

  1,243   1,990   2,590   3,852   0   58   0   345 

Net income

 $943  $1,825  $1,842  $2,925 

Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying consolidated statements of operations

 $(19,926) $247  $(19,718) $486 

Net income (loss)

 $0  $(58) $504  $(345)

Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations (1)

 $0 $(20,000) $252 $(20,000)


(1)

Balance represents equity in net income (loss) of unconsolidated joint ventures included in the statements of operations related to the Company's investment in the unconsolidated joint ventures. The balance may differ from the amount of profit or loss allocated to the Company as reflected in the respective joint venture's financial records primarily due to basis differences such as other-than-temporary impairment charges, interest capitalized to the Company's investment in joint ventures, and/or profit deferral from lot sales from the joint ventures to the Company.

 

In the above table, the Company's net losses for the three and six months ended June 30, 2020 include a $20.0 million other-than-temporary impairment charge related to its interest in one land developmentRussell Ranch joint venture.venture discussed above. 

 

For the three and six months ended June 30, 20202021 and 20192020, the Company earned $0, $0.1 million, $0.2 million $0.6 million, $0.6 million and $1.2$0.6 million, respectively, in management fees from its unconsolidated joint ventures. For additional detail regarding management fees, please see Note 12.   

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Other Assets

 

Other assets consist of the following:   

 

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 
  

Capitalized selling and marketing costs, net(1)

 $6,758  $7,148  $5,076  $5,895 

Prepaid income taxes(2)

 29,328  1,032  25,465  27,866 
Insurance receivable(3) 6,000 10,900  5,166 4,816 

Warranty insurance receivable(4)

 1,782  1,852  2,960 2,480 

Prepaid expenses

 2,448  2,729  6,566  6,331 

Right-of-use lease assets

 2,277  1,988  2,670  2,997 

Goodwill

 2,000  0 
Other  271   231   360   318 
 $48,864  $25,880  $50,263  $50,703 

 


(1)

Capitalized selling and marketing costs includes costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and model furnishings, and also includes model landscaping costs which were. The Company depreciated $1.4 million, $2.6 million, $2.51.7 million and $2.6 million as of June 30, 2020 and December 31, 2019, respectively. The Company depreciated $1.7 million, $3.5 million, $2.3 million and $4.9 million of capitalized selling and marketing costs to selling and marketing expenses during the three and six months ended June 30, 20202021 and 20192020, respectively.

(2)The amount at June 30, 20202021 includes approximatelapproximatey $28.4ly $25.3 millionof expected federal income tax refunds due to the recent enactment of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") signed into law on March 27, 2020 which allowsCompany for net operating losses generated from 20182020 to be carried back five years.loss carrybacks.  

(3)

At December 31, 2019,2020, the Company recorded insurance receivables of $10.9$4.8 million which was related to expected insurance reimbursements for $1.0 million in connection with $10.9litigation reserves related to one claim and $3.8 million of IBNR litigation reserves recorded.reserves. During the six months ended June 30, 20202021$4.7the claim-specific litigation reserve was increased by $0.4 million, was paidall of which is expected to be reimbursed by insurance related to two claims and the Company also reduced its insurance receivable estimate by $0.2 million for one of these claims, resulting in an increase of the same amount to insurance receivable balance of $6.0 million at June 30, 2020, with a corresponding decrease recorded within litigation reserves.receivables.  For more information, please refer to Note 8.

(4)

During the three and six months ended June 30, 20202021, the Company adjusted its warranty insurance receivable upwardreceivable upward by $0.2$0.4 million and $0.3$0.6 million, respectively, to true-uptrue-up the receivable to its estimate of qualifying reimbursable expenditures which resulted in pretax incomeas a result of an increase of the same amount.  Duringamount to its warranty reserve.  Also during the six months ended June 30, 2021, the Company received $0.1 million in insurance reimbursements for warranty claims.  During the three and six months ended June 30, 2019,2020, the Company adjusted its warranty insurance receivable by $0.6$0.2 million and $0.3 million, respectively, to true-up the receivable to its estimate of qualifying reimbursable expenditures, which resulted in pretax income of the same amount. 

 

8.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

  

June 30,

  

December 31,

 
  

2021

  

2020

 
  

(Dollars in thousands)

 

Warranty accrual (1)

 $7,632  $7,276 

Litigation reserves (2)

  7,078   5,641 

Accrued interest

  4,305   3,172 

Accrued compensation and benefits

  6,198   7,106 

Completion reserve

  4,655   5,683 

Customer deposits

  10,281   2,898 

Lease liabilities

  2,886   3,180 

Other accrued expenses

  3,057   1,254 
  $46,092  $36,210 


(1)

Included in the amount at June 30, 2021 and December 31, 2020 is approximately $3.0 million and $2.5 million, respectively, of warranty liabilities estimated to be recovered by our insurance policies.

(2)

At December 31, 2020, litigation reserves of $5.6 million were recorded related to construction defect claim reserves which consisted of  $1.0 million for a claim-specific reserve and $4.6 million for IBNR construction defect claims.  During the six months ended June 30, 2021, the Company increased its claim-specific reserve by $0.4 million and recorded estimated insurance receivables of the same amount as the self-insured retention deductible has been met for this claim.  Also during the six months ended June 30, 2021, the Company recorded $1.1 million of additional IBNR reserves within litigation reserves. 

2122

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

  

June 30,

  

December 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

Warranty accrual (1)

 $6,740  $7,223 
Litigation reserves (2)  6,000   10,900 

Accrued interest

  5,605   5,796 

Accrued compensation and benefits

  4,216   5,350 

Completion reserve

  964   3,167 

Customer deposits

  3,608   3,574 

Lease liabilities

  2,434   2,243 

Other accrued expenses

  3,713   2,301 
  $33,280  $40,554 


(1)

Included in the amount at June 30, 2020 and December 31, 2019 is approximately $1.8 million and $1.9 million, respectively, of warranty liabilities estimated to be recovered by our insurance policies.

(2)

During 2019, we recorded litigation reserves totaling $5.9 million related to ordinary course litigation which developed and became probable and estimable within the 2019fourth quarter. Further, as a result of the development of the construction defect related claims within the litigation reserve and their impact to the Company’s litigation reserve estimates for IBNR future construction defect claims, we recorded an additional $5.0 million of IBNR construction defect claim reserves resulting in aggregate litigation reserves totaling $10.9 million as of December 31, 2019. Because the self-insured retention deductibles had been met for each claim covered by the $5.9 million reserve, and the self-insured retention deductibles are expected to be met for the $5.0 million IBNR construction defect claim reserves, the Company recorded estimated insurance receivables of $10.9 million offsetting the litigation reserves as of December 31, 2019. During the six months ended June 30, 2020, $4.7 million was paid by insurance related to two claims and the Company also reduced its litigation reserve estimate by $0.2 million for one of these claims, resulting in a litigation reserve balance of $6.0 million at June 30, 2020, with a corresponding decrease recorded within insurance receivables. Please refer to Note 7.

We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related warranty and construction defect claims. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insured retention requirements. We establish and track separately our warranty accrual and litigation reserves for both known and IBNR construction defect claims. Our warranty accrual and litigation reserves for construction defect claims are presented on a gross basis within accrued expenses and other liabilities in the accompanying condensed consolidated financial statementsbalance sheets without consideration of insurance recoveries. Expected recoveries from insurance carriers are tracked separately between warranty insurance receivables and insurance receivables related to litigated claims and are presented within other assets in the accompanying condensed consolidated financial statements.balance sheets. Our warranty accrual and related estimated insurance recoveries are based on historical warranty claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Our litigation reserves for both known and IBNR future construction defect claims based on historical claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our construction defect claim accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual costs and related insurance recoveries could differ significantly from amounts currently estimated.

 

Changes in our warranty accrual are detailed in the table set forth below:

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(Dollars in thousands)

 

Beginning warranty accrual for homebuilding projects

 $7,431  $6,836  $7,269  $7,195 

Warranty provision for homebuilding projects

  664   357   1,129   778 

Warranty payments for homebuilding projects

  (845)  (481)  (1,551)  (1,261)

Adjustment to warranty accrual(1)

  375   0   778   0 

Ending warranty accrual for homebuilding projects

  7,625   6,712   7,625   6,712 
                 

Beginning warranty accrual for fee building projects

  7   28   7   28 

Warranty provision for fee building projects

  0   0   0   0 

Warranty efforts for fee building projects

  0   0   0   0 

Ending warranty accrual for fee building projects

  7   28   7   28 

Total ending warranty accrual

 $7,632  $6,740  $7,632  $6,740 


(1)

During the three and six months ended June 30, 2021, the Company recorded an adjustment of $0.4 million and $0.6 million, respectively, to increase its warranty accrual for homebuilding projects.   The Company also recorded a corresponding increase of the same amount to its warranty insurance receivable included in other assets in the condensed consolidated balance sheets at June 30, 2021.  The adjustment for the six months ended June 30, 2021 also includes $0.2 million of warranty reserves related to the Epic Acquisition. 

2223

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Changes in our warranty accrual are detailed in the table set forth below:

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
  

(Dollars in thousands)

 

Beginning warranty accrual for homebuilding projects

 $6,836  $6,767  $7,195  $6,681 

Warranty provision for homebuilding projects

  357   627   778   1,054 

Warranty payments for homebuilding projects

  (481)  (581)  (1,261)  (922)
Adjustment to warranty accrual(1)     94      94 

Ending warranty accrual for homebuilding projects

  6,712   6,907   6,712   6,907 
                 

Beginning warranty accrual for fee building projects

  28   178   28   217 

Warranty provision for fee building projects

           9 

Warranty efforts for fee building projects

     (18)     (66)
Adjustment to warranty accrual for fee building projects(1)     (18)     (18)

Ending warranty accrual for fee building projects

  28   142   28   142 

Total ending warranty accrual

 $6,740  $7,049  $6,740  $7,049 


(1)

During the 2019 second quarter, we recorded an adjustment of $0.1 million to our warranty accrual for homebuilding projects due to higher expected warranty expenditures which is included in "Adjustment to warranty accrual" above and resulted in an increase of the same amount to cost of home sales in the accompanying condensed consolidated statement of operations. Also during the 2019 second quarter, the Company recorded an adjustment of $18,000 due to lower experience rate of expected warranty expenditures for fee building projects which is included in "Adjustment to warranty accrual for fee building projects" above and resulted in a reduction of the same amount to cost of fee building sales in the accompanying condensed consolidated statement of operations.

 

9. Senior Notes and Unsecured Revolving Credit Facility

 

Indebtedness consisted of the following:

  

June 30,

  

December 31,

 
  

2021

  

2020

 
  

(Dollars in thousands)

 

7.25% Senior Notes due 2025, net

 $280,579  $244,865 

Unsecured revolving credit facility

  0   0 

Total Indebtedness

 $280,579  $244,865 

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

7.25% Senior Notes due 2022, net

 $295,124  $304,832 

Unsecured revolving credit facility

      

Total Indebtedness

 $295,124  $304,832 

2022 Notes

 

On March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Notes due 2022 (the "Existing"2022 Notes"), in a private placement. The Existing Notes were issued at an offering price of 98.961% of their face amount, which represented a yield to maturity of 7.50%.  On May 4, 2017, the Company completed a tack-on private placement offering through the sale of an additional $75 million in aggregate principal amount of the 7.25% Senior Notes due 20222022.  ("Additional Notes"). The Additional Notes were issued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is paid semiannually in arrears on April 1 and October 1. The Notes were exchanged in an exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act, and are freely tradeable in accordance with applicable law.

The carrying amount of our Senior Notes listed above at June 30, 2020 is net of the unamortized discount of $0.8 million, unamortized premium of $0.6 million, and unamortized debt issuance costs of $2.2 million, each of which are amortized and capitalized to interest costs on a straight-line basis over the respective terms of the notes which approximates the effective interest method. The carrying amount for the Senior Notes listed above at December 31, 2019, is net of the unamortized discount of $1.1 million, unamortized premium of $0.9 million, and unamortized debt issuance costs of $3.0 million.

23

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Notes are general senior unsecured obligations that rank equally in right of payment to all existing and future senior indebtedness, including borrowings under the Company's senior unsecured revolving credit facility. The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. Exceptions to the limitation include, among other things, borrowings of up to $260 million under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2017 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of $15 million. The Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries. See Note 17 for information about the guarantees and supplemental financial statement information about our guarantor subsidiaries group and non-guarantor subsidiaries group.

During the three months ended June 30, 2020, the Company repurchased and retired approximately $5.8 million in face value of the 2022Notes for a cash payment of approximately $5.0 million.  Total repurchases ofof the2022 Notes for the six months ended June 30, 2020equaled approximately $10.5 million in face value of the2022 Notes for a cash payment of approximately $9.8 million. For the three and six months ended June 30, 2020, the Company recognized a gain on early extinguishment of debt of $0.7 million and $0.6 million, respectively, which included the write off of approximately $49,000 and $95,000, respectively, of unamortized discount, premium and debt issuance costs associated with the 2022Notes retired.  During

As discussed below, the three2022 months endedNotes were redeemed in full on November 12, 2020. 

2025 Notes

On October 28, 2020, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Notes due 2025 (the “Original 2025 Notes”), in a private placement to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 (the "Securities Act") and outside the United States in reliance on Regulation S under the Securities Act. The 2025 Notes were issued at an offering price of 100% of their face amount, which represents a yield to maturity of 7.25%.  Net proceeds from the offering of the Original 2025 Notes, together with cash on hand, were used to redeem all of the outstanding 2022 Notes at a redemption price of 101.813% of the principal amount thereof, plus accrued and unpaid interest to the redemption date.  On February 24, 2021, the Company completed a tack-on private placement offering through the sale of an additional $35 million in aggregate principal amount of the 7.25% Senior Notes Due 2025 ("Additional 2025 Notes" and together, with the Original 2025 Notes, the "2025 Notes").  The Additional 2025 Notes were issued at an offering price of 103.25% of their face amount, which represents a yield to maturity of 6.427%.  The carrying amount of the 2025 Notes listed above at June 30, 2019,2021 the Company repurchasedis net of unamortized premium of $1.0 million and retired approximately $7.0 million in face valueunamortized debt issuance costs of $5.4 million.  The carrying amount of the 2025Notes for a cash payment of approximately $6.3 million.  Total repurchases of the Notes for thelisted above at sixDecember 31, 2020  months ended June 30, 2019, equaled $12.0 million in face value of the Notes for a cash payment of approximately $10.9 million. For the three and six months ended June 30, 2019, the Company recognized a gain on early extinguishment of debt of $0.6 million and $1.0 million, respectively, which included the write off of approximately $90,000 and $160,000, respectively,is net of unamortized discount,debt issuance costs of $5.1 million.  Unamortized premium and debt issuance costs associatedare amortized and capitalized to interest costs using the effective interest method. Pursuant to the indenture governing our 2025 Notes (the "Indenture"), interest on the 2025 Notes is payable semiannually in arrears on April 15 and October 15 of each year, commencing on April 15, 2021. The 2025 Notes will mature on October 15, 2025.

The  2025 Notes are general senior unsecured obligations that rank equally in right of payment to all existing and future senior indebtedness, including borrowings under the Company's senior unsecured revolving credit facility. The Indenture contains certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on incurring or guaranteeing additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do  not satisfy either a leverage condition or an interest coverage condition. Exceptions to the limitation include, among other things, ( 1) borrowings under existing or future bank credit facilities of up to the greater of (i) $100 million and (ii)  20% of our consolidated tangible assets, ( 2) non-recourse indebtedness, and ( 3) indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do  not satisfy either the leverage condition or interest coverage condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things,  50% of consolidated net income from   January 1, 2021 forward and  100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to  15% of our consolidated tangible assets and a general basket of up to the greater of  $15 million and  3% of our consolidated tangible assets.  The Indenture contains certain other covenants, among other things, the ability of the Company and its restricted subsidiaries to issue certain equity interests, make payments in respect of subordinated indebtedness, make certain

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

investments, sell assets, incur liens, create certain restrictions on the ability of restricted subsidiaries to pay dividends or to transfer assets, enter into transactions with affiliates, create unrestricted subsidiaries, and consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of exceptions and qualifications as set forth in the Indenture.

On or after  October 15, 2022, the Company  may redeem all or a portion of the 2025Notes retired.   upon not less than 15 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of the principal amount on the redemption date) set forth below plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the 12-month period, as applicable, commencing on October 15 of the years as set forth below:

YearRedemption Price
2022103.625%
2023101.813%
2024100.000%

In addition, any time prior to  October 15, 2022, the Company may, at its option on one or more occasions, redeem the 2025 Notes (including any additional notes that may be issued in the future under the Indenture) in an aggregate principal amount not to exceed 40% of the aggregate principal amount of the 2025 Notes (including any additional notes that may be issued in the future under the Indenture) issued prior to such date at a redemption price (expressed as a percentage of principal amount) of 107.25%, plus accrued and unpaid interest, if any, to the redemption date, with an amount equal to the net cash proceeds from one or more equity offerings by the Company.

If the Company experiences a change of control triggering event (as described in the Indenture), holders of the 2025 Notes will have the right to require the Company to repurchase all or a portion of the 2025 Notes at 101% of their principal amount thereof on the date of repurchase, plus accrued and unpaid interest, if any, to the date of repurchase.  The Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal of and accrued interest on such 2025 Notes to be declared due and payable. In addition, if the 2025 Notes are assigned an investment grade rating by certain rating agencies and no default or event of default has occurred or is continuing, certain covenants related to the 2025 Notes would be suspended. If the rating on the 2025 Notes should subsequently decline to below investment grade, the suspended covenants would be reinstated.

 

The Company has2025 Notes and the guarantees are the Company’s and the Guarantors' senior unsecured obligations. The 2025 Notes and the guarantees rank equally in right of payment with all of the Company’s and the Guarantors’ existing and future unsecured senior debt, including borrowings under the Company's Credit Facility, and senior in right of payment to all of the Company’s and the Guarantors’ existing and future subordinated debt. The 2025 Notes and the guarantees will be effectively subordinated to any of the Company’s and the Guarantors’ existing and future secured debt. The 2025 Notes are guaranteed, on an unsecured revolving credit facility ("basis, jointly and severally, by all of the Company's wholly owned subsidiaries (collectively, the "Guarantors"). The guarantees are full and unconditional. The Indenture provides that the guarantee 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 is made in compliance with applicable provisions of the Indenture; (2) upon the proper designation of such Guarantor as an "Unrestricted Subsidiary" (as defined in the Indenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’ certificate provided to the trustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the Indenture), so long as such Guarantor would not otherwise be required to provide a guarantee pursuant to the Indenture; provided that, if immediately after giving effect to such release the consolidated tangible assets of all Immaterial Subsidiaries that are not Guarantors would exceed 5% of consolidated tangible assets, no such release shall occur, (4) 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; (5) 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 or any other Guarantor so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the Indenture; or (6) upon the full satisfaction of the Company’s obligations under the Indenture; provided that in each case 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.

The New Home Company Inc. operates as a holding company and all of its homebuilding construction, fee building, development and sales activities are conducted through its subsidiaries.  At June 30, 2021 and December 31, 2020, all of the Company's subsidiaries were 100% owned subsidiaries and Guarantors.  The New Home Company Inc. has no independent assets or operations and the guarantees of its subsidiaries are full unconditional and joint and several.  For more information regarding the Company's assets and operations, please see Note 15.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Credit Facility") with a bank group.  Facility

On  June 26,October 30, 2020, the Company entered into a Third ModificationCredit Agreement (the “Modification”“Credit Agreement” or “Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto. The Credit Agreement provides for a $60 million unsecured revolving credit facility, maturing April 30, 2023. The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate principal amount of revolving commitments up to its Amended an aggregate of $100 million.  As of June 30, 2021 and RestatedDecember 31, 2020, we had no outstanding borrowings under the Credit Agreement.Facility.

Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at the Company’s election, LIBOR plus a margin of 3.50% to 4.50% per annum, or base rate plus a margin of 2.50% to 3.50%, in each case depending on the Company’s leverage ratio.  As of June 30, 2021, the interest rate under the Credit Facility for the LIBOR-based rate was 5.00%  The Modification,covenants of the Credit Agreement include customary negative covenants that, among other things, (i) extendedrestrict the maturity date ofCompany’s ability to incur secured indebtedness, grant liens, repurchase or retire its senior unsecured notes, and make certain acquisitions, investments, asset dispositions and restricted payments, including stock repurchases. In addition, the revolving credit facility to September 30, 2021, (ii) decreased (A) the total commitments under the facility to $60 million from $130 million and (B) the accordion feature to $150 million from $200 million, subject toCredit Agreement contains certain financial conditions,covenants, including requiring that the availability of bank commitments, (iii) reduced the Company's minimumCompany to maintain (i) a consolidated tangible net worth covenant from $180 million tonot less than $150 million plus 50% of the cumulative consolidated net income earned by the Company and its guarantors from and after March 31, 2020 plus 50% of the aggregate proceeds received by the Company (net of reasonable fees and expenses) in connection with any offering of stock or equity infor each fiscal quarter commencing on or after March 31,June 30, 2020, (iv) reduced the maximumii) a net leverage ratio (subject to anot greater than 60%, (iii) minimum liquidity amount of at least $10 million, and (iv) an interest coverage ratio $10no million) ("net leverage ratio") from 65%less than 1.75 to 60%, (v) modified the restriction on secured indebtedness to an aggregate maximum of $10 million, and (vi) modified the restriction on repurchases of the Company's senior notes as follows:

Net Leverage RatioMaximum Repurchases per Quarter
Greater than 55%NaN permitted
Less than or equal to 55%$5,000,000
Less than or equal to 50%$10,000,000
Less than or equal to 45%No Restriction

 As of June 30, 2020, we had 0 borrowings outstanding under the credit facility. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin ranging from 3.50% to 4.50% depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter; provided that LIBOR shall be subject to a LIBOR floor. As of June 30, 2020, the interest rate under the Credit Facility was 5.00%. Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as defined in the Credit Facility, including (i) a minimum tangible net worth; (ii) maximum leverage ratios; (iii) a minimum liquidity covenant; and (iv) a minimum fixed charge coverage ratio based on EBITDA (as detailed in the Credit Facility) to interest incurred or, if this test is not met, the Company maintainsto maintain unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred. The Credit Agreement includes customary events of default, and customary rights and remedies upon the occurrence of any event of default thereunder, including rights to accelerate the loans and terminate the commitments thereunder.  As of June 30, 20202021, , the Company was in compliance with all financial covenants. 

 

24

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Credit Facility as amended by the Modification, also provides for a $10.0$30.0 million sublimitsublimit for letters of credit, subject to conditions set forth in the agreement.Credit Agreement.  As of June 30, 20202021 and December 31, 20192020 , the Company didhad notno have any outstanding letters of credit issued under the Credit Facility.  DebtDebt issuance costs for the unsecured revolving credit facility,Credit Facility, which totaledtotaled $1.2 mi $0.5 millionllion and $1.5 million as of June 30, 2021 and December 31, 2020,,respectively, are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement.

Other Notes Payable

On April 15, 2020, TNHC Realty and Construction, Inc., a wholly-owned operating subsidiary of the Company, received approval and funding pursuant to a promissory note evidencing an unsecured loan in the amount of approximately $7.0 million (the "Loan") under the Paycheck Protection Program (the "PPP").  The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration ("SBA").  The Company intended to use the Loan for qualifying expenses in accordance with the terms of the CARES Act.  On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification requirements for a PPP loan.  On April 24, 2020, out of an abundance of caution, the Company elected to repay the Loan and initiated a repayment of the full amount of the Loan to the lender.

In conjunction with the Epic Acquisition during the 2021first quarter, the Company recorded notes payable of $24.1 million related to Epic Companies’ third-party indebtedness.  The Company immediately repaid $23.8 million of this amount following the completion of the Epic Acquisition transaction during February 2021. One of the entities acquired in the Epic Acquisition had a PPP loan that was outstanding as of the closing of the Epic Acquisition. The majority of the $0.3 million PPP loan was forgiven during the 2021first quarter and the remainder was repaid from an escrow account that was created for the benefit of the PPP lender prior to closing. 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. Fair Value Disclosures

 

ASC 820 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

 

Fair Value of Financial Instruments

 

The following table presents an estimated fair value of the Company's Notes and Credit Facility.2025 Notes. The2025 Notes are classified as Level 2 and primarily reflect estimated prices obtained from outside pricing sources. The Company's Credit Facility is classified as Level 3 within the fair value hierarchy.  

 

  

June 30, 2020

  

December 31, 2019

 
  

Carrying Amount

  

Fair Value

  

Carrying Amount

  

Fair Value

 
  

(Dollars in thousands)

 

7.25% Senior Notes due 2022, net (1)

 $295,124  $274,458  $304,832  $298,775 

Unsecured revolving credit facility

 $  $  $  $ 
  

June 30, 2021

  

December 31, 2020

 
  

Carrying Amount

  

Fair Value

  

Carrying Amount

  

Fair Value

 
  

(Dollars in thousands)

 

7.25% Senior Notes due 2025, net (1)

 $280,579  $299,963  $244,865  $256,875 

 


(1)

The carrying value for the Senior2025 Notes, as presented at June 30, 20202021, is net of the unamortized discount of $0.8 million, unamortized premium of $0.6$1.0 million, and unamortized debt issuance costs of $2.25.4 million. The carrying value for the Senior2025 Notes, as presented at December 31, 20192020, is net of the unamortized discount of $1.1 million, unamortized premium of $0.9 million, and unamortized debt issuance costs of $3.0$5.1 million. The unamortized discount, unamortunamortized prized premiumemium and debt issuance costs are not factored into the estimated fair value.

 

The Company considers the carrying value of cash and cash equivalents, restricted cash, contracts and accounts receivable, accounts payable, and accrued expenses and other liabilities to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due from affiliates is not determinable due to the related party nature of such amounts.

 

25

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Non-Recurring Fair Value Adjustments

 

Nonfinancial assets and liabilities include items such as real estate inventory and long-lived assets that are measured at cost when acquired and adjusted for impairment to fair value, if deemed necessary. For the three and six months ended June 30, 2020, the Company recognized real estate-related impairment adjustments ofof $19.0 millionmillion related to five homebuilding communities. The impairment adjustments were made using Level 3 inputs and assumptions, and the remaining carrying value of the real estate inventories subject to the impairment adjustments waswas $79.0 million.million. For more information on real estate impairments, please refer to Note 4.

 

For the three and six months ended June 30, 2020, and 2019, the Company recognized other-than-temporary impairments for its investment in unconsolidated joint ventures of $20.0 million and $22.3 million, $0 and $0,million, respectively. TheImpairment charges of $20.0 million were recorded in the 2020 second quarter impairment charge recorded related to the Company's intent to exit from its interest in its Russell Ranch joint venture whereby the investment balance was written off.  Theoff, and in the 2020 first quarter, the Company recorded an impairment charge of $2.3 million related to ourthe Company's agreement to sell ourits interest in ourthe Bedford joint venture to ourits partner for less than its currentcurrent carrying value. ThisThe Bedford transaction is expected to closeclosed during the 2020 third quarter and the Russell Ranch joint venture liquidated substantially all of its underlying assets in the 2020fourthquarter. The 2020 impairment adjustmentsadjustments were made using Level 2 and Level 3 inputs and assumptions. For more information on the investment in unconsolidated joint ventures impairments, please refer to Note assumptions.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

11. Commitments and Contingencies

 

From time-to-time, the Company is involved in various legal matters arising in the ordinary course of business.business, including warranty and construction defect litigation. These claims and legal proceedings are of a nature that we believe are normal and incidental to a homebuilder. We make provisions for loss contingencies when they are probable and the amount of the loss can be reasonably estimated. Such provisions are assessed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. DuringAt 2019,December 31, 2020, we recordedour litigation reserves totaling $5.9 million related to ordinary course litigation which developed and became probable and estimable within the 2019fourth quarter. Further, as a result of the development of the construction defect related claims within the litigation reserve and their impact to the Company’s litigation reserve estimates for IBNR future construction defect claims we recorded an additional $5.0totaled $5.6 million which consisted of $1.0 million for a claim-specific reserve and $4.6 million for IBNR construction defect claim reserves resulting in aggregate litigation reserves totaling $10.9 million as of December 31, 2019. Because the self-insured retention deductibles had been met for each claim covered by the $5.9 million reserve, and the self-insured retention deductibles are expected to be met for the $5.0 million IBNR construction defect claim reserves, the Company recorded estimated insurance receivables of $10.9 million offsetting the related litigation reserves as of December 31, 2019.claims.  During the six months ended June 30, 20202021, , $4.7 million was paid by insurance related to two claims and the Company also reducedincreased its litigationclaim-specific reserve estimate by $0.2$0.4 million and recorded an additional $1.1 million toward its reserve for one of theseIBNR construction defect claims resulting in a total $7.1 million litigation reserve and insurance receivable balance of $6.0 million at June 30, 2021.  As of December 31, 2020,the Company's insurance receivable was $4.8 million, partially offsetting the related litigation reserves, based on our estimates of meeting the self-insured retention deductibles.  During the six months ended June 30, 2021, the Company increased its estimated insurance receivable by $0.4 million to offset the claim-specific reserve adjustment made to the litigation reserve during the quarter resulting in a total $5.2 million insurance receivable at June 30, 2021.  Due to the inherent uncertainty and judgement used in these assumptions, our actual costs and related insurance recoveries could differ significantly from amounts currently estimated. Please refer to Note 1, Note 7 and Note 8 for more information on litigation reserves for construction defect claims and related insurance recoveries.  In view of the inherent unpredictability of litigation, we generally cannot predict their ultimate resolution, related timing or eventual loss.

 

As an owner and developer of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of real estate in the vicinity of the Company’s real estate and other environmental conditions of which the Company is unaware with respect to the real estate could result in future environmental liabilities.

 

The Company has provided credit enhancements in connection with joint venture borrowings in the form of loan-to-value ("LTV") maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements include acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of June 30, 2020 and December 31, 2019, $11.6 million and $28.6 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was $2.6 million and $5.8 million, respectively, as of June 30, 2020 and December 31, 2019.

26

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion agreements. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion agreements to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from "bad boy acts" of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy.

We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. As of June 30, 20202021 and December 31, 20192020, the Company had outstanding surety bonds totaling $41.7$42.0 million and $47.6$44.0 million, respectively. The estimated remaining costs to complete of such improvements as of June 30, 20202021 and December 31, 20192020 were $12.9$21.1 million and $29.1$16.3 million, respectively. The beneficiaries of the bonds are various municipalities, homeowners'homeowners associations, and other organizations. In the event that any such surety bond issued by a third party is called because the required improvements are not completed, the Company could be obligated to reimburse the issuer of the bond.

 

The Company accounts for contracts deemed to contain a lease under ASC 842, Leases. At the inception of a lease, or if a lease is subsequently modified, we determine whether the lease is an operating or financing lease. Our lease population is fully comprised of operating leases and includes leases for certain office space and equipment for use in our operations. For all leases with an expected term that exceeds one year, right-of-use lease assets and lease liabilities are recorded within our condensed consolidated balance sheets. The depreciable lives of right-of-use lease assets are limited to the expected term which would include any renewal options we expect to exercise. The exercise of lease renewal options is generally at our discretion and we expect that in the normal course of business, leases that expire will be renewed or replaced by other leases. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.  Variable lease payments consist of non-lease services related to the lease.  Variable lease payments are excluded from the right-of-use assetlease assets and lease liabilities and are expensed as incurred.  Right-of-use lease assets are included in other assets and leasetotaled $2.7 million and $3.0 million, respectively, at June 30, 2021 and December 31, 2020.  Lease liabilities are recorded in accrued expenses and other liabilities within the accompanying condensed consolidated balance sheets and total $2.3totaled $2.9 million and $2.4 million, respectively,$3.2 million, respectively, at June 30, 20202021 and December 31, 2020.

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months endingended June 30, 20202021 and 20192020, lease costs and cash flow information for leases with terms in excess of one year was as follows:  

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Lease cost:

          

Lease costs included in general and administrative expenses

 $314  $265  $625  $620  $266 $314 $526 $625 

Lease costs included in real estate inventories

 111  207  208  369  90 111 153 208 

Lease costs included in selling and marketing expenses

  59   17   98   34   28   59   57   98 

Net lease cost (1)

 $484  $489  $931  $1,023  $384  $484  $736  $931 
  

Other Information:

          

Lease cash flows (included in operating cash flows)(1)

 $518  $563  $1,016  $1,053  $373 $518 $671 $1,016 

 


(1)

DoesAmount does not include the cost of short-term leases with terms of less than one year which totaled approximately imate$30,000,ly $0, $0, $30,000 and $0.1 million, $0.2 million and $0.5 millionfor the three and six months ended June 30, 20202021 and 2019,2020, respectively, or the benefit from a sublease agreement of one of our office spaces which totaled approximately $59,000, $118,000,$61,000, $122,000, $49,00059,000 and $98,000 $118,000 for the three and six months ended June 30, 20202021 and 20192020, respectively.

27

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Future lease payments under our operating leases are as follows (dollars in thousands):

 

Remaining for 2020

 $885 

2021

 852 

Remaining for 2021

 $611 

2022

 230  773 

2023

 220  631 

2024

 210  588 

2025

 479 

Thereafter

  124   0 

Total lease payments(1)

 $2,521  $3,082 

Less: Interest(2)

  87   196 
Present value of lease liabilities(3) $2,434  $2,886 

 


(1)

Lease payments include options to extend lease terms that are reasonably certain of being exercised.

(2)

Our leases do not provide a readily determinable implicit rate. Therefore, we utilized our incremental borrowing rate for such leases to determine the present value of lease payments at the lease commencement date.  There were no legally binding minimum lease payments for leases signed but not yet commenced at June 30, 2021 and December 31,2020.

(3)

The weighted average remaining lease term and weighted average incremental borrowing rate used in calculating our lease liabilities liabilities were 3.03.8 yyears and 4.7%, resprespectivelyectively at June 30, 20202021.

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12. Related Party Transactions

 

During the three and six months ended June 30, 20202021 and 20192020, the Company incurred construction-related costs on behalf of its unconsolidated joint ventures totalingventures totaling $0.1 million, $0.3 million, $1.0 million $2.2 million, $1.5 million and $3.2$2.2 million, respectively. As of June 30, 20202021 and December 31, 20192020, $0.1 million and $0.2$0.1 million, respectively, are included in due from affiliates in the accompanying condensed consolidated balance sheets related to such costs.

 

The Company has entered into agreements with its unconsolidated joint ventures to provide management services related to the underlying projects (collectively referred to as the "Management Agreements"). Pursuant to the Management Agreements, the Company receives a management fee based on each project’s revenues. During the three and six months ended June 30, 20202021 and 20192020, the Company earnedearned $0, $0.1 million, $0.2 million $0.6 million, $0.6 million and $1.2$0.6 million, respectively, in management fees, which have been recorded as fee building revenues in the accompanying condensed consolidated statements of operations. As of June 30, 20202021 and December 31, 20192020, $4,000 $0 and $0, respectively,$36,000 of managementmanagement fees are included in due from affiliates in the accompanying condensed consolidated balance sheets.

 

One member of the Company's board of directors beneficially owns more than 10% of the Company's outstanding common stock through an affiliated entity, IHP Capital Partners VI, LLC ("IHP"), and is also affiliated with entities that have investments in two of the Company's unconsolidated joint ventures, TNHC Meridian Investors LLC (which is owner of another entity, TNHC Newport LLC, which entity owned our "Meridian" project) and Russell Ranch. The Company's investment in these two joint ventures was $0.3was $0.1 million at June 30, 20202021 and $13.7$0.1 million at December 31, 20192020

During the 20192020 second quarter, the Company entered into a second amendment tomade the limited liability company agreement of Russell Ranch between the Company and IHP. Prior to the execution of the second amendment, each of IHP and the Company had contributed its maximum capital commitments pursuant to the joint venture agreement. Pursuant to the second amendment, the parties agreed to fund additional required capital in the aggregate amount of approximately $26 million for certain remaining backbone improvements for the Project (the “Phase 1 Backbone Improvements”) as follows: 50% by IHP and 50% by the Company (“Amendment Additional Capital”). The Amendment Additional Capital will be returned to IHP and the Company ahead of any other contributed capital; provided that none of the Amendment Additional Capital accrues a preferred return that base capital contributions are generally afforded under the joint venture agreement. To the extent of overruns on the Phase 1 Backbone Improvements, the Company is required to fund such overrun capital (“TNHC Overrun Capital”); provided that such contributions shall receive capital account credit. Pursuant to the second amendment, the distribution of cash flow under the agreement was amended to provide that Amendment Additional Capital would be returned prior to TNHC Overrun Capital, which would, in turn, be returned ahead of the base capital preferred return and base capital.  The Company previously purchased lots from the Russell Ranch joint venture as described below (the "Phase 1 Purchase"). The parties also amended the purchase and sale contract for the Phase 1 Purchase to provide relief from the profit participation provisions of this transaction under certain circumstances.  As discussed in Note 6, in connection with its plandecision to exit the Russell Ranch joint venture due to the low expected financial returns relative to future capital requirements and related risks, therisks.  The Company determined that the value of its investment in Russell Ranch declined beyond its current carrying value and recorded a $20.0 million other-than-temporary impairment charge to write off its investment balance and record its estimated remaining costs to complete.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TL Fab LP, an affiliate ofPhases one2 ofand 3, its remaining developable lots, to a third-party purchaser during the Company's non-employee directors, was engaged by2020fourth quarter that resulted in the Company and somerecording income of its$4.5 million to equity in income (loss) of unconsolidated joint ventures, partially offsetting the other-than-temporary impairment recorded during the 2020second quarter. The members agreed upon and distributed proceeds from the sale to the members less a reserve amount which is maintained by the joint venture to address close out matters, such as a trade contractorwarranty, contingent liabilities, remaining Phase 1 infrastructure improvements, and common amenity operations until turnover to provide metal fabrication services. Forhomeowners’ association. Due to the joint venture's close out status, the members confirmed that threeno further preferred return would accrue or be payable and future distributions would be made 50% to IHP and six50% months ended June 30, 2020 and 2019, the Company incurred $7,000, $7,000, $22,000 and $55,000, respectively, for these services.  Of these costs, none was due to TL Fab LP from the Company at June 30, 2020 and December 31, 2019.    TNHC.

 

In its ordinary course of business, the Company enters into agreements to purchase lots from unconsolidated land development joint ventures of which it is a member. In accordance with ASC 360-20,Property, Plant and Equipment - Real Estate Sales, the Company defers its portion of the underlying gain from the joint venture's sale of these lots to the Company. When the Company purchases lots directly from the joint venture, the deferred gain is recorded as a reduction to the Company's land basis on the purchased lots.  In this instance, the gain is ultimately recognized when the Company delivers homes on such lots to third-party home buyers at the time of the home closing.  In the instance where the Company no longer has an interest in the unconsolidated joint venture, the deferred gain related to lots purchased from the joint venture is recognized upon the Company's exit of the venture.  At June 30, 20202021 and December 31, 201921, 2020, , $0.2 mi$0.1llion and $0.2 million respectively, of deferred gain from lot transactions with the TNHC-HW Cannery LLC ("Cannery") and Bedford unconsolidated joint venturesventure remained unrecognized and included as a reduction to land basis in the accompanying condensed consolidated balance sheets.

  

The Company’s land purchase agreement with the Cannery provides for reimbursements of certain fee credits. The Company was reimbursed $15,000 in fee credits from the Cannery duringDuring the three and six months ended June 30, 20202021,  andthe Company was not reimbursed for any feesfee credits from Cannery. The Company was reimbursed $15,000 in fee credits from the Cannery during the three and six months ended June 30, 2019.2020.  As of June 30, 20202021 and December 31, 20192020, $0 and $15,000, respectively, in fee credits was due to the Company from the Cannery, which is included in due from affiliates in the accompanying condensed consolidated balance sheets.Cannery.  

 

On June 18, 2015, the Company entered into an agreement that effectively transitioned Joseph Davis' role within the Company from that of Chief Investment Officer to that of a non-employee consultant to the Company effective June 26, 2015 ("Transition Date").  Mr. Davis is party to that certain Investor Rights Agreement filed as an exhibit to this Form 10-Q.  As of the Transition Date, Mr. Davis ceased being an employee of the Company and became an independent contractor performing consulting services. For his services, Mr. Davis was compensated $5,000 per month through June 26, 2019 when his contract was amended to extend its term one year and reduce his scope of services and compensation to $1,000$1,000 per month. Mr. Davis' contract was amended on June 26, 2020and June 26, 2021 to extend the term one year with monthly compensation remaining $1,000 per month.  At June 30, 20202021, no fees were due to Mr. Davis for his consulting services. Additionally, the Company entered into a construction agreement effective September 7, 2017, with The Joseph and Terri Davis Family Trust Dated August 25, 1999 ("Davis Family Trust") of which Joseph Davis is a trustee. The agreement was a fee building contract pursuant to which the Company acted in the capacity of a general contractor to build a single family detached home on land owned by the Davis Family Trust. Construction of the home was completed during the 2019first quarter.  For its services, the Company received a contractor's fee and the Davis Family Trust reimbursed the Company's field overhead costs. During the three and six months ended June 30, 2019, the Company billed the Davis Family Trust $10,000 and $0.5 million, respectively, including reimbursable construction costs and the Company's contractor's fees which are included in fee building revenues in the accompanying condensed consolidated statements of operations. Contractor's fees comprised $0 and $15,000 of the total billings for the three and six months ended June 30, 2019, respectively. The Company recorded $13,000 and $0.5 million for the three and six months ended June 30, 2019, respectively, for the costs of this fee building revenue which are included in fee building cost of sales in the accompanying condensed consolidated statements of operations. At June 30, 2020 and December 31, 2019, the Company was due $0 from the Davis Family Trust for construction draws.  

On February 17, 2017, the Company entered into a consulting agreement that transitioned Wayne Stelmar's role from that of Chief Investment Officer to a non-employee consultant to the Company. While an employee of the Company, Mr. Stelmar served as an employee director of the Company's Board of Directors. The agreement provided that effective upon Mr. Stelmar's termination of employment, he became a non-employee director and received the compensation and was subject to the requirements of a non-employee director pursuant to the Company's policies. For his consulting services, Mr. Stelmar was compensated $0, $0, $18,000 and $36,000 for the three and six months ended June 30, 2020 and 2019, respectively.  Additionally, Mr. Stelmar's outstanding restricted stock unit equity award granted in 2016 continued to vest in accordance with its original terms based on his continued provision of consulting services rather than continued employment and fully vested during the 2019first quarter.  Mr. Stelmar's vested stock options remain outstanding based on Mr. Stelmar's continued service as a Board member.  The consulting contract expired in August 2019 and was not extended. 

 

On February 14, 2019, the Company entered into a consulting agreement that transitioned Thomas Redwitz's role from that of Chief Investment Officer to a non-employee consultant to the Company effective March 1, 2019. For his consulting services, Mr. Redwitz was compensatedcompensated $10,000 perper month. The agreement originally was set to expire on March 1, 2020 and was extended upon mutual consent of the parties on a month to month basis to a reduced consulting fee of $5,000 per month.  Mr. Redwitz's contract was amended on May 1, 2021 to increase his month to month consulting fee to $10,000 per month. At June 30, 20202021, 0no fees were due to Mr. Redwitz for his consulting services.

 

The Company entered into agreements during 2018 and 2017 to purchase land from affiliates of IHP, which owns more than 10% of the Company's outstanding common stock and is affiliated with one member of the Company's board of directors. Certain land takedowns pursuant to these agreements occurred during 2019 and 2020 or are scheduled to take place during the remainder 2020. Descriptions of these agreements and relevant takedown activity are described below. 

2930

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During 2017,2018, the Company entered into an agreement with an IHP affiliate to purchase lots in Northern California in a phased takedown for a gross purchase price of $16.1 million with profit participation and master marketing fees due to the seller as outlined in the contract.  The Company did not takedown any land pursuant to this contract during the three and six months ended June 30, 2020 and 2019.  At June 30, 2020, the Company has taken down all of the lots and paid $0.5 million in master marketing fees, and as of December 31, 2019, IHP was no longer affiliated with this development.  During 2017, the Company also contracted to purchase finished lots in Northern California from an IHP affiliate, which agreement included customary profit participation and was structured as an optioned takedown.  The total purchase price, including the cost for the finished lot development and the option, was expected to be approximately $56.3 million, dependent on the timing of takedowns, as well as our obligation to pay certain fees and costs during the option maintenance period.  The Company took down 10% of lots pursuant to this agreement during the three and six months ended June 30, 2019.  During the 2019second quarter, an unrelated third party entered into agreements to purchase from the IHP affiliate some of the lots under the Company's option.  The Company in turn entered into an arrangement pursuant to which it agreed to purchase such lots on a rolling take down basis from such unrelated third party. The unrelated third party purchased 67% of the lots originally under contract with the IHP affiliate. Following the purchase of the lots by the unrelated third party in 2019, the Company had 0 remaining lots to purchase from the IHP affiliate.  As of June 30, 2020, the Company (i) had 0 nonrefundable deposits with the IHP affiliate to be applied to the Company's takedown of lots from the unrelated third party and (ii) has paid (A) $0.2 million for fees and costs, (B) $3.0 million in option payments, and (C) $18.0 million for the purchase of lots directly from the IHP affiliate.  During 2018, the Company agreed to purchase land in a master-plan community in Arizona for an estimated purchase price of $3.8 million plus profit participation and marketing fees pursuant to contract terms. During the three and six months ended June 30, 2020, the Company took down approximately 11% of the option lots and as of June 30, 2020, had an outstanding, nonrefundable deposit of $0.3 million related to this contract.  As of December 31, 2019, IHP was no longer affiliated with this development.  The Company began taking down these lots during 2020.  The Company took down approximately 36% and 11% of the lots during the six months ended June 30, 2021 and 2020, respectively.  As of June 30, 2021 and December 31, 2020, the Company had an outstanding, nonrefundable deposit of $0.1 million and $0.2 million, respectively, related to this contract.  The Company paid $22,000, $0, $0 and $0 of master marketing fees to the seller during the three and six months ended June 30, 2021 and 2020, and has paid $44,000 in master marketing fees to date.  

 

In the first quarter 2018, the Company entered into an option agreement to purchase lots in phased takedowns with its Bedford joint venture.venture with profit participation and master marketing fees due to seller as outlined in the contract.  At the time of the initial agreement in 2018, the Bedford joint venture was affiliated with a former member of the Company's board of directors.  As of June 30, 2020, the Company has made a $1.5 million nonrefundable deposit as consideration for this option, with a portion of the deposit applied to the purchase price across the phases. The gross purchase price of the land was $10.0 million with profit participationdirectors, and master marketing fees due to seller as outlined in the contract. Duringsubsequently during the 20192020 third quarter, the Company entered into an amendmentsold its interest in this partnership to its joint venture partner.  Prior to 2020, the Company had taken down all lots pursuant to this agreement, to reduce the gross purchase price of the land to $9.3 million. Duringand for the three and six months ended June 30, 2021 and 2020,the Company did not take down any lots underlying this agreement.  The Company took down 12% of the lots underlying this agreement during the threepaid $0, $0, $8,000 and six months ended June 30, 2019.  At June 30, 2020, the Company has taken down all of the contracted lots and the deposit was fully applied to the purchase and has paid $0.1 million$17,000 in master marketing fees.fees to the seller, respectively.  During the fourth quarter 2018, the Company entered into a second option agreement with the Bedford joint venture to purchase lots in phased takedowns. The Company made a $1.4 million nonrefundable deposit as consideration for the option, with a portion of the deposit to be applied to the purchase price across the phases. The gross purchase price of the land is $10.5 milliontakedowns with profit participation and master marketing fees due to the seller pursuant to the agreement.  TheAs of December 31, 2020, the Company didhad taken down all the lots pursuant to this agreement, and for the notthree take down any optioned lots during theand six months ended June 30, 20202021 and took down 42% of the lots underlying this agreement during the six months ended June 30, 2019. At June 30, 2020,, the Company had taken down approximately 92% of the optioned lots, paid $0.2 million$22,000, $60,000, $17,000 and $42,000 in master marketingmarketing fees and 0 deposit remained outstanding.to the seller, respectively. 

 

The Company andsold its partnerinterest in the Bedford joint venture agreed in principle to a sale of the Company's interest in the joint venture to its partner during the 2020first quarter and entered into a purchase and sale agreement for this transaction during the 2020 third quarter.  Pursuant to the agreement, the purchase price is approximatelywas $5.1 million for the sale of the Company's partnership interest. During the six months ended June 30, 2020, the Company recorded a $2.3 million other-than-temporary impairment charge to its investment in the Bedford joint venture reflecting the expected sale of its joint venture investment for less than its current carrying value.  The sale is expected to close during the 2020third quarter and the agreement, among other things, allowsallowed for a continuation of the Company's option to purchase at market up to 30%30% of the remainingtotal lots from the joint venture.

The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. For more information regarding these agreements please refer to Note 11.

 

 

13. Stock-Based Compensation

 

The Company's 2014 Long-Term Incentive Plan (the "2014 Incentive Plan"), was adopted by our board of directors in January 2014. The 2014 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted stock awards, restricted stock units and performance awards. The 2014 Incentive Plan will automatically expire on the tenth anniversary of its effective date.

 

30

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The number of shares of our common stock authorized to be issued under the 2014 Incentive Plan is 1,644,875 shares. To the extent that shares of the Company's common stock subject to an outstanding award granted under the 2014 Incentive Plan or any predecessor plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of common stock generally shall again be available under the 2014 Incentive Plan.

    

At our 2016 Annual Meeting of Shareholders, on May 24, 2016, our shareholders approved the Company's 2016 Incentive Award Plan (the "2016 Incentive Plan"). The 2016 Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock- or cash-based awards. Non-employee directors of the Company and employees and consultants of the Company or any of its subsidiaries are eligible to receive awards under the 2016 Incentive Plan. On May 22, 2018, our shareholders approved the amended and restated 2016 Incentive Plan which increased the number of shares authorized for issuance under the plan from 800,000 to 2,100,000 shares. The amendedOn May 18, 2021, our shareholders approved the Second Amended and restatedRestated 2016 Incentive Award Plan will expire on(the "Amended Plan") which increased the number of shares available by 1,900,000 to an aggregate of 4,000,000 shares. The Amended Plan extended the plan expiration from April 4, 2028.2028 to May 18, 2031.

 

The Company has issued stock option and restricted stock unit awards under the 2014 Incentive Plan and stock options, restricted stock unit awards and performance share unit awards under the 2016 Incentive Plan. As of June 30, 20202021, 3,338 s61,443 shareshares remain available for grant under the 2014 Incentive Plan anPd 414,737lan and 1,955,714 shares remain available for grant under the 2016 Incentive Plan. The exercise price of stock option awards may not be less than the market value of the Company's common stock on the date of grant. The fair value for stock options is established at the date of grant using the Black-Scholes model for time-based vesting awards. The Company's stock options, restricted stock unit awards, and performance share unit awards typically vest over a one year to three years period and the stock options expire ten years from the date of grant.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of the Company’s common stock option activity as of and for the six months ended June 30, 20202021 and 20192020 is presented below:

 

 

Six Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 
 

Number of Shares

  Weighted-Average Exercise Price per Share  

Number of Shares

  Weighted-Average Exercise Price per Share  

Number of Shares

  

Weighted-Average Exercise Price per Share

  

Number of Shares

  

Weighted-Average Exercise Price per Share

 

Outstanding Stock Option Activity

                    

Outstanding, beginning of period

 1,068,017  $9.78  821,470  $11.00  1,220,695  $9.18  1,068,017  $9.78 

Granted

 161,479  $5.36  249,283  $5.76  0  $0  161,479  $5.36 

Exercised

   $    $  0  $0  0  $0 

Forfeited

    $   (2,736) $11.00   0  $0   0  $0 

Outstanding, end of period

  1,229,496  $9.20   1,068,017  $9.78   1,220,695  $9.18   1,229,496  $9.20 

Exercisable, end of period

  901,829  $10.52   818,734  $11.00   1,029,950  $9.86   901,829  $10.52 

 

A summary of the Company’s restricted stock unit activity as of and for the six months ended June 30, 20202021 and 20192020 is presented below:

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 
  

Number of Shares

  

Weighted-Average Grant-Date Fair Value per Share

  

Number of Shares

  

Weighted-Average Grant-Date Fair Value per Share

 

Restricted Stock Unit Activity

                

Outstanding, beginning of period

  592,116  $6.36   469,227  $10.75 

Granted

  358,869  $4.78   230,774  $5.28 

Vested

  (244,812) $7.61   (277,401) $10.50 

Forfeited

  (428) $11.68   (48,178) $10.91 

Outstanding, end of period

  705,745  $5.12   374,422  $7.54 

  

Six Months Ended June 30,

 
  

2021

  

2020

 
  

Number of Shares

  

Weighted-Average Grant-Date Fair Value per Share

  

Number of Shares

  

Weighted-Average Grant-Date Fair Value per Share

 

Restricted Stock Unit Activity

                

Outstanding, beginning of period

  704,890  $5.11   592,116  $6.36 

Granted

  432,617  $5.50   358,869  $4.78 

Vested

  (279,678) $5.47   (244,812) $7.61 

Forfeited

  (5,833) $5.46   (428) $11.68 

Outstanding, end of period

  851,996  $5.19   705,745  $5.12 

 

31

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

A summary of the Company’s performance share unit activity as of and for the six months ended June 30, 2020 and 2019 is presented below:

  

Six Months Ended June 30,

 
  

2020

  

2019

 
  

Number of Shares

  

Weighted-Average Grant-Date Fair Value per Share

  

Number of Shares

  

Weighted-Average Grant-Date Fair Value per Share

 

Performance Share Unit Activity

                

Outstanding, beginning of period

    $   125,422  $11.68 

Granted (at target)

    $     $ 

Vested

    $     $ 

Forfeited

    $   (26,882) $11.68 

Outstanding, end of period (at target)

    $   98,540  $11.68 

The expense related to the Company's stock-based compensation programs, included in general and administrative expense in the accompanying condensed consolidated statements of operations, was as follows:

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

     

Expense related to:

          

Stock options

 $81  $50  $145  $72  $77  $81  $168  $145 

Restricted stock units and performance share units

  440   473   965   1,017 

Restricted stock units

  536   440   1,090   965 
 $521  $523  $1,110  $1,089  $613  $521  $1,258  $1,110 

 

The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company in each year:period:

 

 

Six Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 

Expected term (in years)

 6.0  6.0  N/A  6.0 

Expected volatility

 41.8% 39.9% N/A  41.8%

Risk-free interest rate

 1.4% 2.5% N/A  1.4%

Expected dividends

     N/A  0 

Weighted-average grant date fair value per share

 $2.24  $2.43   N/A  $2.24 

 

We used the "simplified method" to establish the expected term of the common stock options granted by the Company. Our restricted stock unit awards and performance share unit awards are valued based on the closing price of our common stock on the date of grant.  The number of performance share units that would vest ranged from 50%-150% of the target amount awarded based on actual cumulative earnings per share and return on equity growth from 2018-2019, subject to initial achievement of minimum thresholds. We evaluated the probability of achieving the performance targets established under each of the outstanding performance share unit awards quarterly during 2018 and 2019 and estimated the number of underlying units that were probable of being issued. Compensation expense for restricted stock unit and performance share unit awards was beingis recognized using the straight-line method over the requisite service period, subject to cumulative catch-up adjustments required as a result of changes in the number shares probable of being issued for performance share unit awards.period.  Forfeitures are recognized in compensation cost during the period that the award forfeiture occurs. For the six months ended

At June 30, 2021, 2019, 0 expense was recognized for our performance share units. At December 31, 2019, the performance targets associated with the outstanding performance share unit awards were not met and all outstanding awards were forfeited.

At June 30, 2020, the amount of unearned stock-based compensation currently estimated to be expensed through 20232024 is $3.5 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 2.01.9 years. If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

 

3233

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14. Income Taxes

 

For the three and six months ended June 30, 2020,2021, the Company recorded an income tax provision of $1.3 million and $1.8 million, respectively, which includes a $0.2 million discrete provision for the six months ended June 30, 2021.  The Company's effective tax rate for the three and six months ended June 30, 2021, differs from the federal statutory rate primarily due to the discrete provision related to estimated blended state tax rate updates and stock compensation, as well as state income tax rates and tax credits for energy efficient homes.

For the three and six months ended June 30, 2020. the Company recorded an income tax benefit of $16.9 million and $26.9 million, respectively. The Company's effective tax rates for the three and six months ended June 30, 2020,include the benefit associated with net operating loss carrybacks to years when the Company was subject to a 35% federal tax rate. The effective tax rates for both 2020 periods differ from the federal statutory rate due the net operating loss carryback benefit, discrete items, state income tax rates and tax credits for energy efficient homes. The discrete benefit for the three months ended June 30, 2020 totaled $1.8 million and was primarily related to the CARES Act signed into law on March 27, 2020. Discrete items for the six months ended June 30, 2020 totaled a $9.9 million benefit, $5.8 million of which related to the $14.0 million project abandonment costsnoncash charge recorded during the 2020 first quarter and a $3.9 million benefit related to the CARES Act.  For more information on the abandonment costs, please refer to Note 4. The CARES Act allows companies to carry back net operating losses generated in 2018 through 2020 for five years. For the three and six months ended June 30, 2020, the Company recognized a $1.8$1.8 million and $3.9$3.9 million discrete benefit, respectively, related to the remeasurement of deferred tax assets originally valued at a 21% federal statutory tax rate which are now available to be carried back to tax years with a 35% federal statutory rate.

For the three and six months ended June 30, 2019, the Company recorded an income tax provision of $1.0 million and $0.3 million, respectively.  The Company's effective tax rates for 2019 periods differ from the federal statutory tax rates due to state income taxes, estimated deduction limitations for executive compensation and discrete items. The provision for discrete items totaled $0.3 million for the six months ended June 30, 2019 related to stock compensation and state income tax rate changes. 

 

The components of our deferred tax asset, net are as follows:

  

June 30,

  

December 31,

 
  

2021

  

2020

 
  

(Dollars in thousands)

 

Net operating loss carryforwards

 $5,808  $5,808 

Tax credit carryforwards

  2,202   2,401 

Reserves and accruals

  2,875   2,870 

Share based compensation

  1,524   1,441 

Inventory

  2,147   3,142 

Investments in joint ventures

  963   1,226 

Other

  180   26 

Depreciation and amortization

  (657)  (653)

Right-of-use lease asset

  (774)  (814)

Deferred tax asset, net

 $14,268  $15,447 

 

  

June 30,

  

December 31,

 
  

2020

  

2019

 
  

(Dollars in thousands)

 

Net operating loss

 $8,080  $3,848 

Reserves and accruals

  2,637   2,563 

Share based compensation

  1,479   1,392 

Inventory

  4,278   3,536 

Investments in joint ventures

  392   7,080 

Other

  23   27 
Capital loss  140    
Valuation allowance  (140)   

Depreciation and amortization

  (392)  (393)
Right of use asset  (631)  (550)

Deferred tax asset, net

 $15,866  $17,503 

 

 

15. Segment Information

 

The Company’s operations are organizedorganized into 3four reportable segments: twothree homebuilding segments (Arizona, California and California)Colorado) and fee building. In determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross margins, production processes, suppliers, subcontractors, regulatory environments, land position, and underlying demand and supply in accordance with ASC 280. Our California homebuilding reportable segment aggregates the Southern California and Northern California homebuilding operating segments.

 

Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached homes and may sell land. Our fee building operations build homes and manage construction and sales related activities on behalf of third-party property owners and our joint ventures. In addition,While our corporate operations conduct no independent construction, development, sales or land acquisition activities, our corporate operations develop and implement strategic initiatives and support our operating segments by centralizing key administrative functions such as accounting, finance and treasury, information technology, insurance and risk management, litigation, marketing and human resources. A portion of the expenses incurred by corporate are allocated to the fee building segment primarily based on its respective percentage of revenues and to each homebuilding segment based on its respective investment in and advances to unconsolidated joint ventures and real estate inventories balances. The assets of our fee building segment primarily consist of cash, restricted cash and contracts and accounts receivable. The majority ofof our corporate personnel and resources are primarily dedicated to activities relating to our homebuilding segment, and, therefore, the balance of any unallocated corporate expenses are allocated within our homebuilding reportable segments.

Corporate unallocated assets consists primarily of cash and cash equivalents, prepaid income taxes and our deferred tax asset.  For cash management efficiency and yield maximization reasons, cash is held at the corporate level.  All cash is held for the benefit of  the subsidiaries that comprise the homebuilding and fee building segments, and all operating cash flow is generated by these subsidiaries.  The majority of our prepaid taxes and deferred tax asset are recorded at the corporate level as The New Home Company Inc. is the tax-filing entity for the subsidiaries structured as pass-through entities.  Taxable income or loss and the resulting payment of income taxes is driven by the activities of the Company's subsidiaries.  All other corporate assets comprise less than 3% of the Company's consolidated total assets.  The assets of our fee building segment primarily consist of cash and cash equivalents, restricted cash and contracts and accounts receivable.

 

33

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 1. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.

    

Financial information relating to reportable segments was as follows:

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Homebuilding revenues:

          

California home sales

 $71,597  $132,830  $154,877  $216,162  $101,917 $71,597 $185,131 $154,877 

California land sales

 10    157    0 10 0 157 

Arizona home sales

  6,160   7,634   18,539   23,488  18,366 6,160 26,064 18,539 

Colorado home sales

  15,657   0   18,600   0 

Total homebuilding revenues

 77,767  140,464  173,573  239,650  135,940  77,767  229,795  173,573 

Fee building revenues, including management fees

  21,193   22,285   57,420   41,947   4,586   21,193   9,887   57,420 

Total revenues

 $98,960  $162,749  $230,993  $281,597  $140,526  $98,960  $239,682  $230,993 
  

Homebuilding pretax income (loss):

          

California

 $(38,238) $2,846  $(42,689) $279  $7,198 $(38,238) $11,085 $(42,689)

Arizona

  (3,192)  (796)  (17,884)  (1,274) (730) (3,192) (2,353) (17,884)

Colorado(1)

  (440)  0   (1,804)  0 

Total homebuilding pretax income (loss)

 (41,430) 2,050  (60,573) (995) 6,028  (41,430) 6,928  (60,573)

Fee building pretax income, including management fees

  208   515   938   909   92   208   196   938 

Total pretax income (loss)

 $(41,222) $2,565  $(59,635) $(86) $6,120  $(41,222) $7,124  $(59,635)

 

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Homebuilding assets:

          

California

 $379,199  $416,179  $287,008 $295,340 

Arizona

  64,690   82,234  82,484 70,457 

Colorado

  75,289   0 

Total homebuilding assets

 443,889  498,413  444,781  365,797 

Fee building assets

 4,492  11,193  2,574 3,756 

Corporate unallocated assets

  93,213   93,583   98,131   126,146 

Total assets

 $541,594  $603,189  $545,486  $495,699 


(1)

Includes $1.0 million of transaction costs, $0.8 million of which was tail insurance premiums and $0.2 million in professional fees, related to the acquisition of Epic Homes that were expensed in the period of acquisition during the 2021first quarter.  In addition, the Colorado pretax loss includes $0.7 million and $1.0 million in additional cost of sales related to purchase accounting adjustments for the three and six months ended June 30, 2021, respectively.

 

 

16. Supplemental Disclosure of Cash Flow Information

 

The following table presents certain supplemental cash flow information:   

 

Six Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Supplemental disclosures of cash flow information

            

Interest paid, net of amounts capitalized

 $1,398  $  $0  $1,398 

Income taxes paid

 $  $240  $185  $0 

Proceeds from income tax refunds

 $(1,981)  $(208) 

Supplemental disclosures of non-cash transactions

     

Assets acquired related to business combination, net of cash acquired

 $33,326 $0 

Liabilities assumed and incurred related to business combination, net of $280 PPP loan forgiven

 $33,046 $0 

 

3435

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   

 

17. Supplemental Guarantor InformationSubsequent Events

 

On July 23,2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Newport Holdings, LLC, a Delaware limited liability company (“Parent”) which is controlled by funds managed by affiliates of Apollo Global Management Inc., and Newport Merger Sub, Inc., a Delaware corporation and a wholly owned, direct subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will conduct a cash tender offer (the “Offer”) to acquire any and all of the issued and outstanding shares of our common stock at a price per share of $9.00, in cash, net to the holder thereof, without interest and subject to applicable withholding (the “Offer Price”).

Our Board of Directors (the “Board”) has unanimously determined that the transactions contemplated by the Merger Agreement, including the Offer and the Merger (as defined below), are advisable, fair to and in the best interests of the Company and our stockholders, and approved the Merger Agreement and the transactions contemplated thereby, and recommended that our stockholders accept the Offer and tender their shares of our common stock in the Offer.  The Company's Notes are guaranteed,Offer, once commenced, will initially remain open for a minimum of 20 business days, subject to certain possible extensions on an unsecured basis, jointlythe terms set forth in the Merger Agreement  (as extended, the “Expiration Time”). If at the scheduled Expiration Time any of the conditions to the Offer have not been satisfied or waived, then Merger Sub will extend the Offer for one or more consecutive periods of up to 5 business days to permit the satisfaction of all Offer conditions, except that if the sole remaining unsatisfied Offer condition is the Minimum Condition (as defined below), Merger Sub will only be required to extend the Offer on up to three occasions of 5 business days each, unless Parent and severally, by allthe Company otherwise agree. If the debt financing (other than with respect to any revolving credit facility thereunder) is not available at the scheduled Expiration Time of the Offer and the holders of a majority of the Company's 100%2025 Notes have not delivered consents to the waiver of the requirement of the Company to make a “Change of Control Offer” under the 2025 Notes Indenture, Merger Sub may, subject to certain conditions, extend the Offer on up to three occasions of 5 business days each.

Upon the consummation of the Offer, Merger Sub will merge with and into us (the “Merger”) pursuant to Section 251(h) of the Delaware General Corporation Law (“DGCL”) with us as the surviving corporation. At the effective time of the Merger (the “Effective Time”), each share of our common stock (other than shares (i) owned subsidiaries (collectively,directly by us (or any of our wholly owned subsidiaries), Parent, Merger Sub or any of their respective affiliates prior to the "Guarantors"). The guarantees are fullEffective Time or (ii) owned by any stockholder who is entitled to demand and unconditional. The Indenture governingproperly demands the Notes provides thatappraisal of such shares in accordance with, and in compliance in all respects with, the guarantees of a GuarantorDGCL) will be automatically cancelled and unconditionally releasedconverted into the right to receive an amount in cash equal to the Offer Price, without interest and discharged: (subject to applicable withholding.

Merger Sub’s obligation to purchase the shares of our common stock validly tendered and 1not) upon validly withdrawn pursuant to the Offer is subject to the satisfaction or waiver of customary conditions, including, among others, (i) there being validly tendered and not validly withdrawn immediately prior to the Expiration Time the number of shares of our common stock that, together with any sale, transfer, exchangeshares held by Parent, Merger Sub or any of their respective affiliates, represents at least a majority of all then outstanding shares of our common stock as of the Expiration Time (the “Minimum Condition”), (ii) the absence of any law, injunction, judgment or other disposition (by merger, consolidation or otherwise) of alllegal restraint that prohibits consummation of the equity interestsOffer or the Merger, (iii) the accuracy of such Guarantor after whichour representations and warranties contained in the applicable Guarantor is no longerMerger Agreement, subject to customary exceptions, (iv) our compliance in all material respects with our covenants and agreements contained in the Merger Agreement, (v) the absence of any event, development or circumstance that has had or would reasonably be expected to have a "Restricted Subsidiary"material adverse effect on us, (vi) the completion of the “Marketing Period” (as defined in the Indenture)Merger Agreement), which sale, transfer, exchange orand (vii) the provision of certain financial information required pursuant to Merger Sub’s debt commitments related to the Merger, as well as other disposition is madecustomary conditions set forth in compliance with applicable provisionsAnnex A to the Merger Agreement.

The Merger Agreement contains customary representations, warranties, covenants and termination rights in favor of each of us and Parent. Upon termination of the Indenture; (2) upon the proper designation of such Guarantor as an "Unrestricted Subsidiary" (as defined in the Indenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’ certificate provided to the trustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the indenture), so long as such Guarantor would not otherwiseMerger Agreement under specified circumstances, we will be required to providepay Parent a guarantee pursuant to the Indenture; providedtermination fee of $4.76 million. The Merger Agreement also provides that if immediately after giving effect to such release the consolidated tangible assets of all Immaterial Subsidiaries that are not Guarantors would exceed 5.0% of consolidated tangible assets, no such release shall occur, (4) 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; (5) 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 otherwiseParent will be required to providepay us a guarantee pursuant to the Indenture; or (6)reverse termination fee of $15.0 million upon the full satisfactiontermination of the Company’s obligationsMerger Agreement under the Indenture; provided that in each case 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. The Company has determined that separate, full financial statements of the Guarantors would not be material to investors and, accordingly, supplemental financial information for the guarantors is presented.specified circumstances.

 

 

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS

  

June 30, 2020

 
  

NWHM

  

Guarantor Subsidiaries

  

Non-Guarantor Subsidiaries

  

Consolidating Adjustments

  

Consolidated NWHM

 
  

(Dollars in thousands)

 

Assets

                    

Cash and cash equivalents

 $39,871  $45,543  $174  $  $85,588 

Restricted cash

     144         144 

Contracts and accounts receivable

  4   7,525      (417)  7,112 

Intercompany receivables

  259,822         (259,822)   

Due from affiliates

  1   139         140 

Real estate inventories

     370,949         370,949 

Investment in and advances to unconsolidated joint ventures

     12,931         12,931 

Investment in subsidiaries

  150,811         (150,811)   

Deferred tax asset, net

  15,237   629         15,866 

Other assets

  37,820   11,017   27      48,864 

Total assets

 $503,566  $448,877  $201  $(411,050) $541,594 
                     

Liabilities and equity

                    

Accounts payable

 $127  $15,985  $  $  $16,112 

Accrued expenses and other liabilities

  11,349   22,318   26   (413)  33,280 

Intercompany payables

     259,822      (259,822)   

Due to affiliates

     4      (4)   

Senior notes, net

  295,124            295,124 

Total liabilities

  306,600   298,129   26   (260,239)  344,516 

Total stockholders' equity

  196,966   150,748   63   (150,811)  196,966 

Non-controlling interest in subsidiary

        112      112 

Total equity

  196,966   150,748   175   (150,811)  197,078 

Total liabilities and equity

 $503,566  $448,877  $201  $(411,050) $541,594

 

36

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

December 31, 2019

 
  

NWHM

  

Guarantor Subsidiaries

  

Non-Guarantor Subsidiaries

  

Consolidating Adjustments

  

Consolidated NWHM

 
  

(Dollars in thousands)

 

Assets

                    

Cash and cash equivalents

 $66,166  $12,978  $170  $  $79,314 

Restricted cash

     117         117 

Contracts and accounts receivable

  3   16,403      (424)  15,982 

Intercompany receivables

  258,372         (258,372)   

Due from affiliates

     238         238 

Real estate inventories

     433,938         433,938 

Investment in and advances to unconsolidated joint ventures

     30,217         30,217 

Investment in subsidiaries

  198,448         (198,448)   
Deferred tax asset, net  17,003   500         17,503 

Other assets

  9,505   16,340   35      25,880 

Total assets

 $549,497  $510,731  $205  $(457,244) $603,189 
                     

Liabilities and equity

                    

Accounts payable

 $68  $24,973  $3  $  $25,044 

Accrued expenses and other liabilities

  11,950   28,999   26   (421)  40,554 

Intercompany payables

     258,372      (258,372)   

Due to affiliates

     3      (3)   

Senior notes, net

  304,832            304,832 

Total liabilities

  316,850   312,347   29   (258,796)  370,430 

Total stockholders' equity

  232,647   198,384   64   (198,448)  232,647 

Non-controlling interest in subsidiary

        112      112 

Total equity

  232,647   198,384   176   (198,448)  232,759 

Total liabilities and equity

 $549,497  $510,731  $205  $(457,244) $603,189 

37

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

  

Three Months Ended June 30, 2020

 
  

NWHM

  Guarantor Subsidiaries  

Non-Guarantor Subsidiaries

  

Consolidating Adjustments

  Consolidated NWHM 
  

(Dollars in thousands)

 

Revenues:

                    

Home sales

 $  $77,757  $  $  $77,757 
Land sales     10         10 

Fee building

     21,193         21,193 
      98,960         98,960 

Cost of Sales:

                    

Home sales

     66,216         66,216 
Home sales impairments     19,000         19,000 
Land sales     10         10 

Fee building

     20,985         20,985 
      106,211         106,211 
                     

Gross Margin:

                    

Home sales

     (7,459)        (7,459)
Land sales               

Fee building

     208         208 
      (7,251)        (7,251)

Selling and marketing expenses

     (6,386)        (6,386)

General and administrative expenses

  (960)  (5,932)        (6,892)

Equity in net loss of unconsolidated joint ventures

     (19,962)        (19,962)

Equity in net loss of subsidiaries

  (25,858)        25,858    
Interest expense     (1,271)        (1,271)
Project abandonment costs     (94)        (94)
Gain on early extinguishment of debt  702            702 

Other income (expense), net

  (38)  (30)        (68)

Pretax loss

  (26,154)  (40,926)     25,858   (41,222)

Benefit for income taxes

  1,861   15,068         16,929 

Net loss

  (24,293)  (25,858)     25,858   (24,293)

Net loss attributable to non-controlling interest in subsidiary

               

Net loss attributable to The New Home Company Inc.

 $(24,293) $(25,858) $  $25,858  $(24,293)

38

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

Three Months Ended June 30, 2019

 
  

NWHM

  Guarantor Subsidiaries  

Non-Guarantor Subsidiaries

  

Consolidating Adjustments

  Consolidated NWHM 
  

(Dollars in thousands)

 

Revenues:

                    

Home sales

 $  $140,464  $  $  $140,464 

Fee building

     22,285         22,285 
      162,749         162,749 

Cost of Sales:

                    

Home sales

     123,582   (57)     123,525 

Fee building

     21,770         21,770 
      145,352   (57)     145,295 
                     

Gross Margin:

                    

Home sales

     16,882   57      16,939 

Fee building

     515         515 
      17,397   57      17,454 

Selling and marketing expenses

     (9,683)        (9,683)

General and administrative expenses

  617   (6,458)        (5,841)

Equity in net income of unconsolidated joint ventures

     185         185 

Equity in net income of subsidiaries

  1,087         (1,087)   
Project abandonment costs     (14)        (14)
Gain on early extinguishment of debt  552            552 

Other income (expense), net

  (106)  18         (88)

Pretax income

  2,150   1,445   57   (1,087)  2,565 

Provision for income taxes

  (578)  (396)        (974)

Net income

  1,572   1,049   57   (1,087)  1,591 

Net income attributable to non-controlling interest in subsidiary

        (19)     (19)

Net income attributable to The New Home Company Inc.

 $1,572  $1,049  $38  $(1,087) $1,572 

39

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

Six Months Ended June 30, 2020

 
  

NWHM

  

Guarantor Subsidiaries

  

Non-Guarantor Subsidiaries

  

Consolidating Adjustments

  

Consolidated NWHM

 
  

(Dollars in thousands)

 

Revenues:

                    

Home sales

 $  $173,416  $  $  $173,416 

Land sales

     157         157 

Fee building

     57,420         57,420 
      230,993         230,993 

Cost of Sales:

                    

Home sales

     150,938         150,938 

Home sales impairments

     19,000         19,000 

Land sales

     157         157 

Fee building

     56,482         56,482 
      226,577         226,577 
                     

Gross Margin:

                    

Home sales

     3,478         3,478 

Land sales

               

Fee building

     938         938 
      4,416         4,416 

Selling and marketing expenses

     (13,852)        (13,852)

General and administrative expenses

  (739)  (12,176)        (12,915)

Equity in net loss of unconsolidated joint ventures

     (21,899)        (21,899)

Equity in net loss of subsidiaries

  (36,388)        36,388    
Interest expense     (1,989)        (1,989)
Project abandonment costs     (14,130)        (14,130)

Gain on early extinguishment of debt

  579            579 

Other income (expense), net

  155            155 

Pretax loss

  (36,393)  (59,630)     36,388   (59,635)

Benefit for income taxes

  3,624   23,242         26,866 

Net loss

  (32,769)  (36,388)     36,388   (32,769)

Net loss attributable to non-controlling interest in subsidiary

               

Net loss attributable to The New Home Company Inc.

 $(32,769) $(36,388) $  $36,388  $(32,769)

40

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

Six Months Ended June 30, 2019

 
  

NWHM

  

Guarantor Subsidiaries

  

Non-Guarantor Subsidiaries

  

Consolidating Adjustments

  

Consolidated NWHM

 
  

(Dollars in thousands)

 

Revenues:

                    

Home sales

 $  $239,650  $  $  $239,650 

Fee building

     41,947         41,947 
      281,597         281,597 

Cost of Sales:

                    

Home sales

     210,151   (57)     210,094 

Fee building

     41,038         41,038 
      251,189   (57)     251,132 
                     

Gross Margin:

                    

Home sales

     29,499   57      29,556 

Fee building

     909         909 
      30,408   57      30,465 

Selling and marketing expenses

     (18,362)        (18,362)

General and administrative expenses

  51   (13,283)        (13,232)

Equity in net income of unconsolidated joint ventures

     369         369 

Equity in net loss of subsidiaries

  (625)        625    
Project abandonment costs     (19)        (19)
Gain on early extinguishment of debt  969            969 

Other income (expense), net

  (168)  (108)        (276)

Pretax income (loss)

  227   (995)  57   625   (86)

(Provision) benefit for income taxes

  (642)  332         (310)

Net income (loss)

  (415)  (663)  57   625   (396)

Net income attributable to non-controlling interest in subsidiary

        (19)     (19)

Net income (loss) attributable to The New Home Company Inc.

 $(415) $(663) $38  $625  $(415)

41

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

  

Six Months Ended June 30, 2020

 
  

NWHM

  

Guarantor Subsidiaries

  

Non-Guarantor Subsidiaries

  

Consolidating Adjustments

  

Consolidated NWHM

 
  

(Dollars in thousands)

 

Net cash (used in) provided by operating activities

 $(23,225) $45,377  $4  $(133) $22,023 

Investing activities:

                    

Purchases of property and equipment

  (84)  (59)        (143)

Contributions and advances to unconsolidated joint ventures

     (3,847)        (3,847)

Contributions to subsidiaries from corporate

  (35,690)        35,690    

Distributions of capital from subsidiaries to corporate

  46,806         (46,806)   
Distributions of capital and repayment of advances from unconsolidated joint ventures     2,370         2,370 

Net cash provided by (used in) investing activities

 $11,032  $(1,536) $  $(11,116) $(1,620)

Financing activities:

                    

Repurchase of senior notes

  (9,825)           (9,825)

Contributions to subsidiaries from corporate

     35,690      (35,690)   

Distributions to corporate from subsidiaries

     (46,939)     46,939    
Proceeds from note payable  7,036            7,036 
Repayment of note payable  (7,036)           (7,036)
Payment of debt issuance costs  (255)           (255)

Repurchases of common stock

  (3,718)           (3,718)

Tax withholding paid on behalf of employees for stock awards

  (304)           (304)

Net cash used in financing activities

 $(14,102) $(11,249) $  $11,249  $(14,102)
Net (decrease) increase in cash, cash equivalents and restricted cash  (26,295)  32,592   4      6,301 

Cash, cash equivalents and restricted cash – beginning of period

  66,166   13,095   170      79,431 
Cash, cash equivalents and restricted cash – end of period $39,871  $45,687  $174  $  $85,732 

42

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

Six Months Ended June 30, 2019

 
  

NWHM

  Guarantor Subsidiaries  

Non-Guarantor Subsidiaries

  

Consolidating Adjustments

  

Consolidated NWHM

 
  

(Dollars in thousands)

 

Net cash (used in) provided by operating activities

 $(36,110) $54,970  $32  $  $18,892 

Investing activities:

                    

Purchases of property and equipment

  (1)  (7)        (8)

Contributions and advances to unconsolidated joint ventures

     (4,120)        (4,120)

Contributions to subsidiaries from corporate

  (66,575)        66,575    

Distributions of capital from subsidiaries to corporate

  91,700         (91,700)   

Distributions of capital and repayment of advances from unconsolidated joint ventures

     4,928         4,928 

Net cash provided by investing activities

 $25,124  $801  $  $(25,125) $800 

Financing activities:

                    

Borrowings from credit facility

  40,000            40,000 
Repayments of credit facility  (41,500)           (41,500)

Repurchase of senior notes

  (10,856)           (10,856)

Contributions to subsidiaries from corporate

     66,575      (66,575)   

Distributions to corporate from subsidiaries

     (91,700)     91,700    

Repurchases of common stock

  (1,042)           (1,042)

Tax withholding paid on behalf of employees for stock awards

  (488)           (488)

Net cash used in financing activities

 $(13,886) $(25,125) $  $25,125  $(13,886)

Net (decrease) increase in cash, cash equivalents and restricted cash

  (24,872)  30,646   32      5,806 

Cash, cash equivalents and restricted cash – beginning of period

  28,877   13,518   147      42,542 

Cash, cash equivalents and restricted cash – end of period

 $4,005  $44,164  $179  $  $48,348 

43

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements contained in this quarterly report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, our objectives for future operations, and potential adverse impacts of the COVID-19 pandemic are forward-looking statements. These forward-looking statements are frequently accompanied by words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "goal," "plan," "could," "can," "seeks," "might," "should," and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, financial needs, and the potential adverse impacts due to COVID-19.

 

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, 20192020 and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A, "Risk Factors" of this quarterly report on 10-Q. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements.

 

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 a global pandemic. We continue to be uncertain of the full magnitude or duration of the business and economic impacts resulting from the measures enacted to contain this outbreak as the impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the situation on its financial condition, liquidity, operations, suppliers, customers, industry, and workforce; however, the Company is not able to estimate all the effects the COVID-19 outbreak will have on its results of operations, financial condition or liquidity for the year-ended December 31, 2020 given the rapid evolution of this outbreak and related containment responses.  In addition to the following factors, reference is made to Part II, Item 1A of this this quarterly report on Form 10-Q for a discussion of material changes from the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2019.2021. 

 

 

Risks related to our business, including among other things:

 adverse impacts to our business due to the COVID-19 pandemic, including long-term economic impacts;

our geographic concentration primarily in California and Arizona and the availability of land to acquire and our ability to acquire such land on favorable terms or at all;

 

mortgage financing, as well as our customer’s ability to obtain such financing, interest rate increases or changes in federal lending programs;

the cyclical nature of the homebuilding industry which is affected by general economic real estate and other business conditions;

conditions
 the illiquid nature of real estate investments and the inventory risks related to declines in value of such investments which may result in significant impairment charges; 
 our ability to execute our business strategies is uncertain;
a reduction in our sales absorption levels may force us to incur and absorb additional community-level costs;
 

shortages of or increased prices for labor, land or raw materials used in housing construction;

availability and skill of subcontractors at reasonable rates;

construction defect, product liability, warranty, and personal injury claims, including the cost and availability of insurance;
 the degree and nature of our competition;
 inefficient or ineffective allocation of capital could adversely affect or operations and/or stockholder value if expected benefits are not realized;
 delays in the development of communities;communities or a reduction in sales absorption levels;
a reduction in our sales absorption levels may force us to incur and absorb additional community-level costs;  
 

increases in our cancellation rate;

 

a large proportion of our fee building revenue being dependent upon one customer;customer and the termination of this contract;

employment-related liabilities with respect to our contractors' employees;
 

increased costs, delays in land development or home construction and reduced consumer demand resulting from adverse weather conditions or other events outside our control;

increased cost and reduced consumer demand resulting from power, water and other natural resource shortages or price increases;

 

because of the seasonal nature of our business, our quarterly operating results fluctuate;

 

we may be unable to obtain suitable bonding for the development of our housing projects;

 

inflation could adversely affect our business and financial results;

 

a major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage;

 

negative publicity or poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or results of operations to decline; and 

failure to comply with privacy laws or information systems interruption or breach in security that releases personal identifying information or other confidential information.

 

Risks related to the proposed Merger, including among other things:

the successful completion of our acquisition by Parent and Merger Sub, or our failure to complete such acquisition;

the impact of the pendency of our acquisition by Parent and Merger Sub on our business and operations;

the timing and expected financing of the Offer and the Merger;

uncertainty surrounding how many of the our stockholders will tender their shares of our common stock in the Offer;

the possibility that any or all of the various conditions to the consummation of the Offer may not be satisfied or waived in a timely manner, if at all;

the possibility of business disruptions due to transaction-related uncertainty;

the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement;

 

 

Risks related to laws and regulations, including among other things:

 

mortgage financing, as well asconstruction defect, product liability, warranty, and personal injury claims, including the cost and availability of insurance; 

employment-related liabilities with respect to our customer’s ability to obtain such financing, interest rate increases or changes in federal lending programs;

contractors' em
ployees;
 

changes in tax laws can increase the after-tax cost of owning a home, and further tax law changes or government fees could adversely affect demand for the homes we build, increase our costs, or negatively affect our operating results;

 we may not be able to generate sufficient taxable income to fully realize our net deferred tax asset;asset or an ownership change could limit our operating loss carryforwards;
 

new and existing laws and regulations, including environmental laws and regulations, or other governmental actions may increase our expenses, limit the number of homes that we can build or delay the completion of our projects or otherwise negatively impact our operations;

 

changes in global or regional climate conditions and legislation relating to energy and climate change could increase our costs to construct homes;

failure to comply with privacy laws or information systems interruption or breach in security that releases personal identifying information or other confidential information;

 

 

Risks related to financing and indebtedness, including among other things:

 

difficulty in obtaining sufficient capital could prevent us from acquiring land for our developments or increase costs and delays in the completion of our development projects;

 

our level of indebtedness may adversely affect our financial position and prevent us from fulfilling our debt obligations, and we may incur additional debt in the future;

 

the significant amount and illiquid nature of our joint venture partnerships, in which we have less than a controlling interest;

 

our current financing arrangements contain and our future financing arrangements will likely contain restrictive covenants related to our operations;

a breach of the covenants under the Indenture or any of the other agreements governing our indebtedness could result in an event of default under the Indenture or other such agreements;

 

potential future downgrades of our credit ratings could adversely affect our access to capital and could otherwise have a material adverse effect on us;

 

interest expense on debt we incur may limit our cash available to fund our growth strategies;

 

we may be unable to repurchase the 2025 Notes upon a change of control as required by the Indenture;

 

 

Risks related to our organization and structure, including among other things:

 

our dependence on our key personnel;

 

the potential costly impact termination of employment agreements with members of our management that may prevent a change in control of the Company;

 

our charter and bylaws could prevent a third party from acquiring us or limit the price that investors might be willing to pay for shares of our common stock;

 

 

Risks related to ownership of our common stock, including among other things:

 that we are eligible to take advantage of reduced disclosure and governance requirements because of our status as a smaller reporting company;
 

the price of our common stock is subject to volatility and our trading volume is relatively low;

 

if securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our common stock adversely, our stock price and trading volume could decline;

 

we do not intend to pay dividends on our common stock for the foreseeable future;

 

certain stockholders have rights to cause our Company to undertake securities offerings;

 

our senior notes rank senior to our common stock upon bankruptcy or liquidation;

 

certain large stockholders own a significant percentage of our shares and exert significant influence over us; and

 

there is no assurance that the existence of a stock repurchase plan will enhance shareholder value;value.

non-U.S. holders of our common stock may be subject to United States income tax on gain realized on the sale of disposition of such shares.

 

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time, such as COVID-19. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this quarterly report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

The forward-looking statements in this quarterly report on Form 10-Q speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. 

 

Non-GAAP Measures

 

This quarterly report on Form 10-Q includes certain non-GAAP measures, including home sales gross margin before impairments (or homebuilding gross margin before impairments), home sales gross margin before impairments percentage, Adjusted EBITDA, Adjusted EBITDA margin percentage, ratio of Adjusted EBITDA to total interest incurred, net debt, ratio of net debt-to-capital, adjusted net income (loss), adjusted net income (loss) per diluted share, net debt, ratio of net debt-to-capital, general and administrative costs excluding acquisition transaction costs and severance charges, general and administrative costs excluding acquisition transaction costs and severance charges as a percentage of home sales revenue, selling, marketing and general and administrative costs excluding acquisition transaction costs and severance charges, selling, marketing and general and administrative costs excluding acquisition transaction costs and severance charges as a percentage of home sales revenue, adjusted homebuilding gross margin (or homebuilding gross margin before impairments and interest in cost of home sales) and, adjusted homebuilding gross margin percentage.percentage and homebuilding gross margin and margin percentage before purchase accounting adjustments.  For a reconciliation of home sales gross margin before impairments (or homebuilding gross margin before impairments),adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP measures, please see "--Overview."  For a reconciliation of adjusted homebuilding gross margin (or homebuilding gross margin before impairments and interest in cost of home sales), home sales gross margin before impairments percentage and adjusted homebuilding gross margin percentage, and homebuilding gross margin and margin percentage before purchase accounting adjustments to the comparable GAAP measures please see "-- Results of Operations - Homebuilding Gross Margin."  For a reconciliation of Adjusted EBITDA, Adjusted EBITDA margin percentage, and the ratio of Adjusted EBITDA to total interest incurred to the comparable GAAP measures please see "-- Selected Financial Information." For a reconciliation of net debt and ratio of net debt-to-capital to the comparable GAAP measures, please see "-- Liquidity and Capital Resources - Debt-to-Capital Ratios."  For a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP measure, please see "-- Overview."  For a reconciliation of general and administrative costs excluding acquisition transaction costs and severance charges, general and administrative expenses excluding acquisition transaction costs and severance charges as a percentage of homes sales revenue, selling, marketing and general and administrative expenses excluding acquisition transaction costs and severance charges and selling, marketing and general and administrative expenses excluding acquisition transaction costs and severance charges as a percentage of home sales revenue, please see "-- Results of Operations - Selling, General and Administrative Expenses."  

 

 

Selected Financial Information

 

 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Revenues:

                    

Home sales

 $77,757  $140,464  $173,416  $239,650  $135,940  $77,757  $229,795  $173,416 

Land sales

 10    157      10    157 

Fee building, including management fees

  21,193   22,285   57,420   41,947   4,586   21,193   9,887   57,420 
  98,960   162,749   230,993   281,597  140,526  98,960  239,682  230,993 

Cost of Sales:

                    

Home sales

 66,216  123,525  150,938  210,094  112,453  66,216  190,301  150,938 
Home sales impairments 19,000  19,000     19,000    19,000 

Land sales

 10    157      10    157 

Fee building

  20,985   21,770   56,482   41,038   4,494   20,985   9,691   56,482 
 106,211  145,295  226,577  251,132  116,947  106,211  199,992  226,577 

Gross Margin:

                    

Home sales

 (7,459) 16,939  3,478  29,556  23,487  (7,459) 39,494  3,478 

Land sales

                

Fee building

  208   515   938   909   92   208   196   938 
 (7,251) 17,454  4,416  30,465  23,579  (7,251) 39,690  4,416 
  
Home sales gross margin (9.6)% 12.1% 2.0% 12.3% 17.3% (9.6)% 17.2% 2.0%
Home sales gross margin before impairments(1) 14.8% 12.1% 13.0% 12.3% 17.3% 14.8% 17.2% 13.0%

Land sales gross margin

 % N/A  % 

N/A

  N/A  % 

N/A

  %
Fee building gross margin 1.0% 2.3% 1.6% 2.2% 2.0% 1.0% 2.0% 1.6%
  

Selling and marketing expenses

 (6,386) (9,683) (13,852) (18,362) (7,778) (6,386) (14,432) (13,852)

General and administrative expenses

 (6,892) (5,841) (12,915) (13,232) (9,453) (6,892) (17,724) (12,915)

Equity in net income (loss) of unconsolidated joint ventures

 (19,962) 185  (21,899) 369    (19,962) 174  (21,899)
Interest expense (1,271)  (1,989)   (91) (1,271) (445) (1,989)
Project abandonment costs (94) (14) (14,130) (19) (21) (94) (89) (14,130)

Gain on early extinguishment of debt

 702  552  579  969    702    579 

Other income (expense), net

  (68)  (88)  155   (276)  (116)  (68)  (50)  155 

Pretax income (loss)

 (41,222) 2,565  (59,635) (86) 6,120  (41,222) 7,124  (59,635)

(Provision) benefit for income taxes

  16,929   (974)  26,866   (310)  (1,346)  16,929   (1,797)  26,866 

Net income (loss)

 (24,293) 1,591  (32,769) (396) $4,774  $(24,293) $5,327  $(32,769)

Net income attributable to non-controlling interest

     (19)     (19)

Net income (loss) attributable to The New Home Company Inc.

 $(24,293) $1,572  $(32,769) $(415)
 

Earnings (loss) per share:

 

Basic

 $0.26 $(1.32) $0.29 $(1.71)

Diluted

 $0.26 $(1.32) $0.29 $(1.71)
  

Interest incurred

 $6,150  $7,606  $12,530  $15,367  $5,751  $6,150  $11,082  $12,530 

Adjusted EBITDA(2)

 $6,394  $11,071  $13,375  $17,946 
Adjusted EBITDA margin percentage(2) 6.5% 6.8% 5.8% 6.4%

Adjusted EBITDA(1)

 $13,932 $6,394 $22,095 $13,375 

Adjusted EBITDA margin percentage(1)

 9.9% 6.5% 9.2% 5.8%

 

 

LTM(3) Ended June 30,

  

LTM(2) Ended June 30,

 
 

2020

  

2019

  

2021

  

2020

 

Interest incurred

 $25,982  $30,416  $22,488  $25,982 

Adjusted EBITDA(2)(1)

 $36,859  $46,536  $46,045  $36,859 
Adjusted EBITDA margin percentage (2)(1) 6.0% 6.9% 8.9% 6.0%

Ratio of Adjusted EBITDA to total interest incurred (2)(1)

 

1.4x

 

1.5x

  

2.0x

 

1.4x

 

 



 

 

(1)

Home sales gross margin before impairments (also referred to as homebuilding gross margin before impairments) is a non-GAAP measure. The table below reconciles this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

%

  

2019

  

%

  

2020

  

%

  

2019

  

%

 
  

(Dollars in thousands)

 

Home sales revenue

 $77,757   100.0% $140,464   100.0% $173,416   100.0% $239,650   100.0%

Cost of home sales

  85,216   109.6%  123,525   87.9%  169,938   98.0%  210,094   87.7%

Homebuilding gross margin

  (7,459)  (9.6)%  16,939   12.1%  3,478   2.0%  29,556   12.3%

Add: Home sales impairments

  19,000   24.4%     %  19,000   11.0%     %

Homebuilding gross margin before impairments

 $11,541   14.8% $16,939   12.1% $22,478   13.0% $29,556   12.3%

(2)

Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred are non-GAAP measures. Adjusted EBITDA margin percentage is calculated as a percentage of total revenue. Management believes that Adjusted EBITDA which is a non-GAAP measure, assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, interest costs, tax position, inventory impairments and other non-recurring items. Due to the significance of the GAAP components excluded, Adjusted EBITDA should not be considered in isolation or as an alternative to net income (loss), cash flows from operations or any other performance measure prescribed by GAAP. The table below reconciles net income (loss), calculated and presented in accordance with GAAP, to Adjusted EBITDA.

 

             

LTM(3) Ended

                

LTM(2) Ended

 
 

Three Months Ended June 30,

  

Six Months Ended June 30,

  

June 30,

  

Three Months Ended June 30,

  

Six Months Ended June 30,

  

June 30,

 
 

2020

  

2019

  

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Net income (loss)

 $(24,293) $1,591  $(32,769) $(396) $(40,374) $(14,090) $4,774  $(24,293) $5,327  $(32,769) $5,227  $(40,374)

Add:

                               

Interest amortized to cost of sales excluding impairment charges, and interest expensed (4)

 5,872  6,301  12,736  11,153  28,817  23,317   5,707  5,872  10,088  12,736 24,871  28,817 

Provision (benefit) for income taxes

 (16,929) 974  (26,866) 310  (30,991) (4,972)  1,346  (16,929) 1,797  (26,866) 2,076  (30,991)

Depreciation and amortization

 1,778  2,386  3,623  5,042  7,538  9,027   1,471  1,778  2,727  3,623 5,825  7,538 

Amortization of stock-based compensation

 521  523  1,110  1,089  2,281  2,475   613  521  1,258  1,110 2,345  2,281 

Cash distributions of income from unconsolidated joint ventures

   19    279  95  279          110  95 

Severance charges

 1,091    1,091  1,788  1,091  1,788     1,091    1,091   1,091 

Acquisition transaction costs

      983   983   

Noncash inventory impairments and abandonments

 19,094  14  33,130  19  43,405  10,182   21  19,094  89  33,130 57  43,405 

Less:

                               

Gain on early extinguishment of debt

 (702) (552) (579) (969) (774) (969)

(Gain) loss on early extinguishment of debt

    (702)   (579) 7,833  (774)

Equity in net (income) loss of unconsolidated joint ventures

  19,962   (185)  21,899   (369)  25,771   19,499      19,962  (174)  21,899   (3,282)  25,771 

Adjusted EBITDA

 $6,394  $11,071  $13,375  $17,946  $36,859  $46,536  $13,932  $6,394  

$22,095

  $13,375  $46,045  $36,859 

Total Revenue

 $98,960  $162,749  $230,993  $281,597  $618,745  $670,377  $140,526  $98,960  $239,682  $230,993 $516,100  $618,745 
Adjusted EBITDA margin percentage 6.5% 6.8% 5.8% 6.4% 6.0% 6.9%  9.9% 6.5% 

9.2

% 5.8% 8.9% 6.0%

Interest incurred

 $6,150  $7,606  $12,530  $15,367  $25,982  $30,416  $5,751  $6,150  $11,082  $12,530 $22,488  $25,982 

Ratio of Adjusted LTM(3) EBITDA to total interest incurred

         

1.4x

 

1.5x

 

Ratio of Adjusted LTM(2) EBITDA to total interest incurred

              

2.0x

  

1.4x

 

 

(3)(2)

"LTM" indicates amounts for the trailing 12 months.

(4)Due to an inadvertent oversight in prior periods, interest amortized to certain inventory impairment charges and to equity in net income (loss) of unconsolidated joint ventures was duplicated in the Adjusted EBITDA calculation.  The prior periods have been restated to correct this duplication.

 

 

Overview

 

The robust housing demand that has been building since the second half of 2020 continued into the 2021 second quarter resulting in strong pricing power as the Company made solid progresscontinued to focus on managing sales price and pace. We continue to experience challenges related to cost increases and elongated construction cycle times, particularly in our Arizona and Colorado markets, but successfully raised prices to cover the majority of these costs during the quarter. We attribute the recent higher levels of demand to a number of frontsfactors, including low interest rates, a continued undersupply of both new and resale homes, consumers’ increased focus on the importance of home, and a general desire for more indoor and outdoor space.  This demand along with pricing power led to sequential improvement in our homebuilding gross margin for the 2021 second quarter to 17.3% as compared to 17.1% in the 2021 first quarter, and was up 250 basis points over the 2020 second quarter of 14.8%* after excluding $19.0 million of inventory impairment charges in the prior year period.  The strength in gross margins coupled with the SG&A leverage we experienced during the 2021 second quarter due to a 75% increase in home sales revenue resulted in a positive operating margin of 4.6% and pretax income of $6.1 million, a significant improvement as compared to the $41.2 million pretax loss in the 2020 second quarter as it generated positive order momentum as the quarter progressed, made additional improvements to its cost structure and improved its balance sheet leverage as compared to the prior year period and continued its pivot to more affordable price points.  The Company also addressed certain underperforming assets, which resulted in significant impairments and a loss for the quarter, but should provide a better path forward both from a financial and strategic standpoint.  

After experiencing unprecedented uncertainty during the month of April, our monthly absorption pace improved sequentially each month with June ending at 3.6 net orders per community for the month, a 33% increase compared to June 2019. We believe these results were driven by record-low interest rates and pent-up demand for new housing.  Year-over-year orders for April and May decreased 56% and 5%, respectively, before increasing 68% in June, marking the highest monthly net order total in our Company’s history. Our more-affordable communities led the way with an absorption pace 4.3 net orders per community for the month of June. Consistent with our strategic shift to more-affordable product, we opened three new entry-level communities in Gilbert, Arizona in May and ended the 2020 second quarter with 25 active selling communities, up 25% compared to the prior year. The stronger demand later in the quarter contributed to a 14% increase in homes in backlog compared to the 2019 second quarter and positioned us for a better second half of 2020.quarter.

 

Total revenues for the 20202021 second quarter were $99.0$140.5 million compared to $162.7$99.0 million in the prior year period. The year-over-year dropincrease in revenues was driven largely by a lower beginning backlog and slower75% increase in home sales during April resulting from a temporary drop in demand from the pandemic, which impacted our abilityrevenue to sell and deliver homes during the quarter.  During the 2020 second quarter, the Company realized a $41.2$135.9 million pretax loss as compared to pretax income of $2.6$77.8 million in the prior year period.  The 2020improvement in home sales revenue was the result of a 98% increase in deliveries, which was partially offset by a 12% decrease in average sales price per delivery consistent with our strategy to offer more affordable price points, including a significant increase in deliveries from our Arizona operation.  Net income for the 2021 second quarter included $19.0was $4.8 million, in inventory impairment charges, a $20.0 million joint venture impairment charge relatedor $0.26 per diluted share, compared to a land development joint venture in Northern California, and $1.1 million in severance charges. Netnet loss attributable to the Company for the 2020 second quarter wasof $24.3 million, or ($1.32) per diluted share compared to net income of $1.6 million, or $0.08 per diluted share, for the prior year period. Excluding the2020 second quarter, which included $39.0 million in impairment andcharges, $1.1 million in severance charges and a $1.8 million net deferred tax asset remeasurement benefit, adjustedbenefit. Adjusted net loss for the 2020 second quarter, after excluding impairments, severance charges and the net deferred tax asset remeasurement benefit was ($0.7)$0.7 million*, or ($0.04)* adjusted net loss per diluted share. Other factors contributingshare*.  

Despite the Company's efforts to meter sales and manage its homes in backlog, net new home orders for the 2021 second quarter increased 14% as compared to the year-over-yearprior year period to 187 homes. The increase in net lossnew home orders was driven primarily by a 50% increase in our monthly sales absorption rate to 3.3 net orders per community in the 2021 second quarter as compared to 2.2 net new home orders per community for the 2020 second quarter.  The 2020 second quarter includedabsorption rates were negatively impacted by slower sales activity and cancellations due to economic disruption and the initial loss in consumer confidence due to stay-at-home orders implemented related to COVID-19 during the latter part of the 2020 first quarter. The Company ended the 2021 second quarter with 632 homes in backlog, a 45% decrease169% increase as compared to the end of the 2020 second quarter (up 119% excluding backlog related to Colorado), with the dollar value in home sale revenues and a $1.3backlog of $439.4 million, increase in interest expense.up 160% as compared to the prior year.

 

The Company generated operating cash flow of $4.7$2.5 million forduring the 20202021 second quarter and ended the quarter with $85.6$117.3 million in cash and cash equivalents and had no borrowings outstanding under its revolving credit facility.  The Company also strengthened its balance sheet by extending the maturity date of its bank credit facility to September 30, 2021 and repurchased and retired $5.8 million in principal of its 7.25% Senior Notes due 2022 at a discount. The Company repurchased 817,300 shares of our common stock during the 2020 second quarter for $1.5 million, or an average price of $1.80 per share. At June 30, 2020,2021, the Company had a debt-to-capital ratio of 60.0%58.1% and a net debt-to-capitaldebt-to capital ratio of 51.5*%44.6%*, which represented a 620-basis690-basis point improvement in the net debt-to capital ratio compared to the 20192020 second quarter.

 

AsOn July 23, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Newport Holdings, LLC, a Delaware limited liability company (“Parent”) which is controlled by funds managed by affiliates of Apollo Global Management Inc., and Newport Merger Sub, Inc., a Delaware corporation and a wholly owned, direct subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will conduct a cash tender offer (the “Offer”) to acquire any and all of the COVID-19 pandemic is still impacting lives around the worldissued and in our markets, we continue to prioritize the health and safetyoutstanding shares of our employees, trade partnerscommon stock at a price per share of $9.00, in cash, net to the holder thereof, without interest and home buyers.  Despitesubject to applicable withholding (the “Offer Price”). Upon the uncertainty relatedconsummation of the Offer, Merger Sub will merge with and into us (the “Merger”) pursuant to Section 251(h) of the Delaware General Corporation Law (“DGCL”) with us as the surviving corporation. For a detailed discussion of the proposed Apollo Funds acquisition, please see Note 17, Subsequent Events to the accompanying notes to our condensed unaudited consolidated financial statements included in this pandemic, we believe pent up demand for housing continues to be strong and that The New Home CompanyQuarterly Report on Form 10-Q which is on more solid footing moving forward.incorporated herein by reference.

 



*NetAdjusted homebuilding gross margin percentage (or homebuilding gross margin percentage before impairments), adjusted net income (loss), adjusted net income (loss) per diluted share, and net debt-to-capital ratio are non-GAAP measures. For a reconciliation of adjusted homebuilding gross margin percentage, please see "-- Results of Operations - Homebuilding Gross Margin."  For a reconciliation of adjusted net lossincome (loss) and adjusted net lossincome (loss) per diluted share are non-GAAP measures. to the appropriate GAAP measures, please see the table below.  For a reconciliation of net debt-to-capital to the appropriate GAAP measure, please see "-- Liquidity and Capital Resources - Debt-to-Capital Ratios."  For a reconciliation of adjusted net loss and adjusted net loss per diluted share to the appropriate GAAP measures, please see below. 

 

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30,

  

June 30,

 
  

2021

  

2020

  

2021

  

2020

 
  

(Dollars in thousands, except per share amounts)

 

Net income (loss)

 $4,774  $(24,293) $5,327  $(32,769)

Acquisition transaction costs, net of tax

        765    

Inventory impairments, abandoned project costs, joint venture impairments and severance charges, net of tax

     25,414      34,847 

Noncash deferred tax asset remeasurement

     (1,827)  175   (3,941)

Adjusted net income (loss)

 $4,774  $(706) $6,267  $(1,863)
                 

Earnings (loss) per share:

                

Basic

 $0.26  $(1.32) $0.29  $(1.71)

Diluted

 $0.26  $(1.32) $0.29  $(1.71)
                 

Adjusted earnings (loss) per share:

                

Basic

 $0.26  $(0.04) $0.35  $(0.10)

Diluted

 $0.26  $(0.04) $0.34  $(0.10)
                 

Weighted average shares outstanding for adjusted earnings (loss) per share:

                

Basic

  18,075,687   18,341,549   18,092,259   19,146,687 

Diluted

  18,446,015   18,341,549   18,431,276   19,146,687 
                 

Inventory impairments

 $  $19,000  $  $19,000 

Abandoned project costs related to Arizona luxury condominium community

           14,000 

Joint venture impairments related to joint venture exits

     20,038      22,325 

Severance charges

     1,091      1,091 

Acquisition transaction costs

        983    

Less: Related tax benefit

     (14,715)  (218)  (21,569)

Acquisition transaction costs, inventory impairments, abandoned project costs, joint venture impairments and severance charges, net of tax

 $  $25,414  $765  $34,847 

Non-GAAP Footnote (continued)

Market Conditions and COVID-19 Impact

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
  

(Dollars in thousands, except per share amounts)

 
                 

Net income (loss) attributable to The New Home Company Inc.

 $(24,293) $1,572  $(32,769) $(415)

Inventory impairments, abandoned project costs, joint venture impairments and severance charges, net of tax

  25,414      34,847   1,113 

Noncash deferred tax asset remeasurement

  (1,827)     (3,941)   

Adjusted net income (loss) attributable to The New Home Company Inc.

 $(706) $1,572  $(1,863) $698 
                 

Earnings (loss) per share attributable to The New Home Company Inc.:

                
Basic $(1.32) $0.08  $(1.71) $(0.02)
Diluted $(1.32) $0.08  $(1.71) $(0.02)
                 

Adjusted earnings (loss) per share attributable to The New Home Company Inc.:

                

Basic

 $(0.04) $0.08  $(0.10) $0.03 

Diluted

 $(0.04) $0.08  $(0.10) $0.03 
                 

Weighted average shares outstanding:

                

Basic

  18,341,549   20,070,914   19,146,687   20,028,600 

Diluted

  18,341,549   20,095,533   19,146,687   20,082,018(1)
                 
Inventory impairments $19,000  $  $19,000  $ 

Abandoned project costs related to Arizona luxury condominium community

        14,000    

Joint venture impairments related to joint venture exits

  20,038      22,325    

Severance charges

  1,091      1,091   1,788 

Less: Related tax benefit

  (14,715)     (21,569)  (675)

Inventory impairments, abandoned project costs, joint venture impairments and severance charges, net of tax

 $25,414  $  $34,847  $1,113 

While the broader economic recovery following the nationwide COVID-19 related shutdown is ongoing, our business generally was only impacted from mid-March of 2020 through mid-second quarter 2020 when economic conditions in our markets started to improve. The Company has recently experienced very strong demand for its homes. This resurgence in demand began in the back half of the 2020 second quarter, following a significant drop in sales at the end of the 2020 first quarter through mid-second quarter 2020 as a result of the initial impact of the COVID-19 pandemic.  The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates, stability and growth in the equity markets, and overall housing affordability.  We attribute the recent higher levels of demand to a number of factors, including low interest rates, a continued undersupply of both new and resale homes, consumers’ increased focus on the importance of home, and a general desire for more indoor and outdoor space.  We believe these factors will continue to support demand in the near term but recognize our year-over-year order improvement is not necessarily indicative of future results due to various factors including seasonality, anticipated community openings and closeouts, and continued uncertainty surrounding the economic and housing market environments due to the impacts of the ongoing COVID-19 pandemic and the related COVID-19 control responses. The economy in the United States has continued to improve in the first half of 2021 with millions of American receiving COVID-19 vaccines and states and municipalities increasingly reopening. However, this favorable outlook could be affected materially by adverse developments, if any, related to the COVID-19 pandemic, including resurgence of COVID-19 cases due to more contagious variants, such as the Delta variant or new or more restrictive public health requirements recommended or imposed by federal, state and local authorities. Until the COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and more severe disruption of global and national economies, cause political uncertainty and civil unrest, and diminish consumer confidence, all of which could impact the U.S. housing market and our business, including our net orders, backlog and revenues. In addition, we are continuing to see building material cost pressures, particularly with respect to lumber, that could negatively impact our margins in future periods. Despite these challenges, and other factors, which may individually or in combination slow or reverse the current housing recovery from the COVID-19 pandemic-induced disruptions, we believe we are well-positioned to operate effectively through the present environment.

(1)

Applicable only for diluted earnings per share for adjusted earning per share calculation.

 

 

Results of Operations

 

Net New Home Orders

 

  

Three Months Ended

          

Six Months Ended

         
  

June 30,

  

Increase/(Decrease)

  

June 30,

  

Increase/(Decrease)

 
  

2020

  

2019

  

Amount

  

%

 

2020

  

2019

  

Amount

  

%

                                 

Net new home orders:

                                

Southern California

  75   90   (15)  (17)%  137   148   (11)  (7)%

Northern California

  60   53   7   13%  128   98   30   31%

Arizona

  29   11   18   164%  31   20   11   55%

Total net new home orders

  164   154   10   6%  296   266   30   11%
                                 

Monthly sales absorption rate per community: (1)

                                

Southern California

  2.3   2.5   (0.2)  (8)%  2.1   2.0   0.1   5%

Northern California

  1.9   2.3   (0.4)  (17)%  2.1   2.2   (0.1)  (5)%

Arizona

  3.2   1.8   1.4   78%  2.2   1.7   0.5   29%

Total monthly sales absorption rate per community (1)

  2.2   2.4   (0.2)  (8)%  2.1   2.0   0.1   5%
                                 

Cancellation rate

  11%  11%  % 

NA

   14%  12%  2% 

NA

 
                                 

Selling communities at end of period:

                                

Southern California

                  11   11      %

Northern California

                  10   7   3   43%

Arizona

                  4   2   2   100%

Total selling communities

                  25   20   5   25%
                                 

Average selling communities:

                                

Southern California

  11   12   (1)  (8)%  11   12   (1)  (8)%

Northern California

  11   8   3   38%  10   8   2   25%

Arizona

  3   2   1   50%  2   2      %
Total average selling communities  25   22   3   14%  23   22   1   5%
                                 


  

Three Months Ended

          

Six Months Ended

         
  

June 30,

  

Increase/(Decrease)

  

June 30,

  

Increase/(Decrease)

 
  

2021

  

2020

  

Amount

  

%

  

2021

  

2020

  

Amount

  

%

 
                                 

Net new home orders:

                                

Southern California

  40   75   (35)  (47)%  97   137   (40)  (29)%

Northern California

  75   60   15   25%  204   128   76   59%

Arizona

  51   29   22   76%  133   31   102   329%

Colorado

  21      21  N/A   36      36  N/A 

Total net new home orders

  187   164   23   14%  470   296   174   59%
                                 

Monthly sales absorption rate per community: (1)

                                

Southern California

  5.7   2.3   3.4   148%  4.4   2.1   2.3   110%

Northern California

  4.2   1.9   2.3   121%  4.7   2.1   2.6   124%

Arizona

  2.6   3.2   (0.6)  (19)%  3.2   2.2   1.0   45%

Colorado

  1.9      N/A   N/A   2.6      N/A   N/A 

Total monthly sales absorption rate per community (1)

  3.3   2.2   1.1   50%  3.9   2.1   1.8   86%
                                 

Cancellation rate

  7%  11%  (4)% 

N/A

   7%  14%  (7)% 

N/A

 
                                 

Selling communities at end of period:

                                

Southern California

                  2   11   (9)  (82)%

Northern California

                  6   10   (4)  (40)%

Arizona

                  7   4   3   75%

Colorado

                 4      4  N/A 

Total selling communities

                  19   25   (6)  (24)%
                                 

Average selling communities:

                                

Southern California

  2   11   (9)  (82)%  4   11   (7)  (64)%

Northern California

  6   11   (5)  (45)%  7   10   (3)  (30)%

Arizona

  7   3   4   133%  7   2   5   250%

Colorado

  4      4  N/A   2      2  N/A 

Total average selling communities

  19   25   (6)  (24)%  20   23   (3)  (13)%
                                 

(1)

Monthly sales absorption represents the number of net new home orders divided by the number of average selling communities for the period.

 

Net

Homebuyer demand remained strong during the 2021 second quarter which resulted in a 14% increase in net new home orders for the 2020 second quarter increased 6% as compared to the same period in 20192020 primarily due to a 14%50% increase in total average selling communities, partially offset by a decline in theour monthly sales absorption rate to 3.3 net orders per community in the 2021 first quarter. The Company intentionally limited sales releases during the 2021 second quarter to balance sales pricing with sales pace in order to better manage unstarted homes in backlog and to help offset construction cost increases and improve gross margins. We continue to attribute the higher level of demand to a number of factors, including low interest rates, an undersupply of both new and resale homes, consumers’ increased focus on the importance of the home and strong equity markets. The 2020 second quarter absorption rates were negatively impacted by slower sales activity and cancellations due to slow sales activity in the early part of the quarter as a result of theeconomic disruption and weaker consumer confidence resulting from stay-at-home orders implemented inrelated to COVID-19 during the latter part of the 2020 first quarter related to COVID-19.quarter.  However, sales increased substantiallydemand improved beginning in June 2020 and continued throughout the balance of 2020 and into 2021 as COVID-19 restrictions eased, andwith February reaching the 2020highest monthly absorption rate in the Company's history coming in at 4.8 net orders per community. 

Monthly absorption pace at our more-affordable, entry-level product continued to out-pace the Company average for the 2021 second quarter.  For the 2021 second quarter, monthly absorption pace increased 10% sequentially over the 2020 first quarter. Historically low interest rates and a shortage of resale inventory due to restricted accessibility from the pandemic contributed to increased buyer demand and the Companyentry-level communities recorded the highest sales month in its history during June 2020 with net new orders up 68%of 3.9 sales per month per actively selling community compared to June 2019.  The Company has also benefited from the success of its enhanced virtual selling platform from which a large portion of our net new orders generated during the 2020 second quarter.  Home buyers are demonstrating an increased level of comfort with shopping for homes online allowing our sales team to identify qualified, motivated buyers and convert those leads into sales in a much more cost-effective way versus the traditional sales model.  

Partially offsetting the decline in the monthly sales absorption pace for our California communities was a 78% increase in the monthly sales pace for Arizona, attributable to the successful opening of its entry-level masterplan community in Gilbert, Arizona during the 20202021 second quarter which had a combinedcompanywide monthly sales pace of 4.03.3 per community.  Orders from entry-level communities grew to total approximately 55% of total net new orders for its three selling communities. The decline in monthly sales absorption pace for Southern California was primarily due to the 20192021 second quarter benefiting from strong order volume from our communityapproximately 47% of attached court homes located in the Inland Empire, which experienced its highest sales pace since its opening during that prior period. Northern California sales pace also decreased in the 2020 second quarter compared tototal net new orders for the prior year period, due to weakened demand for some of our Sacramento communities, especially early in the quarter. Notwithstanding the decrease in sales pace for Northern California, the increase in average selling communities contributed to an increase in net new home orders for the 2020 second quarter.period.

51

 

Net new home orders for the six months ended June 30, 20202021 increased 11%59% as compared to the same period in 2019, as a pick up in demand during the latter part of the 2020 second quarter resulted in a 5%primarily due to an 86% increase in theour monthly sales absorption rate. A 5% year-over-year increase in average selling communities also contributedrate to the increase in3.9 net orders per community for the 2020 year-to-date period and resulted in an ending community count of 25 compared to 20 for the prior year period.

six months ended June 30, 2021. Demand was strongest during the six months ended June 30, 20202021 for our more-affordable, entry-level product, which averaged a monthly sales pace of 2.64.7 per community compared to a companywide average of 3.9 per community. Orders from entry-level communities grew to total approximately 57% of 2.1 per communitytotal net new orders for the company wide average. We opened six months ended June 30, 2021 from approximately 44% of total net new communities duringorders for the 2020 the majority of which fall under our entry-level product category. The sales pace for our entry-level product benefited the most from an existing Northern California masterplan community in Vacaville as well as a popular community of paired homes in Rancho Mission Viejo in Southern California. In addition to the success with our entry-level product, the sales pace for our first time move up product increased 38% year-over-year, primarily due to strong order volume from our recently opened single family detached community in Rancho Mission Viejo, as each phase release continues to sell well.period.

 

The Company’sCompany experienced modest cancellation activity with a cancellation rate of 7% for the 2021 second quarter compared to 11% in the 2020 second quarter was flat with the prior year at 11%.quarter.  The cancellation rate for the six months ended June 30, 20202021 was 7% compared to 14%, a modest increase from 12% for in the comparable prior year period.  The increasehigher cancellation rate in the cancellation rateprior year was due to increased cancellations occurring in March and April as a result of the economic impact COVID-19 had on our buyers' confidence.buyers.

 

Backlog

 

As of June 30,

  

As of June 30,

 
 

2020

  

2019

  

% Change

  

2021

  

2020

  

% Change

 
 

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Southern California

 91  $74,547  $819  86  $92,438  $1,075  6% (19)% (24)% 59  $45,601  $773  91  $74,547  $819  (35)% (39)% (6)%

Northern California

 117  81,909  700  85  71,648  843  38% 14% (17)% 227  166,041  731  117  81,909  700  94% 103% 4%
Arizona  27   12,337  457   36   37,503  1,042  (25)% (67)% (56)% 229 97,684 427 27 12,337 457 748% 692% (7)%

Colorado

  117   130,110  1,112       N/A N/A N/A N/A 

Total

  235  $168,793  $718   207  $201,589  $974  14% (16)% (26)%  632  $439,436  $695   235  $168,793  $718  169% 160% (3)%

 

Backlog reflects the number of homes, net of cancellations, for which we have entered into sales contracts with customers, but for which we have not yet delivered the homes. The number of homes in backlog as of June 30, 20202021 was up 14%169% as compared to the prior year period primarily due to a higher number of beginning backlog units, the 14% increase in net new orders during the quarter, a lower quarterly backlog conversion rate for the 20202021 second quarter, coupled with a 6% increaseand the acquisition of 102 homes in net orders resulting from a higher average community count. The decrease inbacklog related to the acquisition of Epic Homes during the 2021 first quarter. Our backlog conversion rate to 59%was 31% for the 20202021 second quarter as compared to 74%59% in the prior year period resulted fromperiod. The decrease in the 2021 conversion rate was due tolower273% increase in beginning backlog to startfor the 20202021 second quarter as a result of increased presold homes during the fourth quarter of 2020 and first quarter of 2021 due to weakerstrong demand trends across all our markets as well as fewer speculative homes available to sell and higher cancellations in March and April stemming from economic volatility from COVID-19, including severe job losses and turmoildeliver than in the financial and mortgage markets, which resulted in a temporary decline in consumer confidence and housing demand.prior year period. The dollar value of backlog at the end of the 20202021 second quarter was down 16%up 160% year-over-year to $168.8$439.4 million, primarily due to the higher number of homes in backlog resulting from higher sales absorption rates and the acquired backlog from Epic Homes, which was partially offset by a 26%3% decrease in average selling price of homes in backlog as the Company continues to diversify its pivot to more-affordable product.product offerings, including its expansion into more affordable communities in Arizona.

 

The year-over-year decline inIn Southern California, the total backlog dollar value and average price was greatest in Arizona, due to the 2020 second quarter opening of a mini masterplan in Gilbert consisting of an entry-level neighborhood with three distinct selling communities, which have average base selling prices starting around $300,000. Prior year backlog units for Arizona were mainly comprised of homes from our higher-end, closed-out community in Gilbert, Arizona where the average price of homes in backlog was $1.0 million at June 30, 2019. The 25% decrease in the number of homes in backlog for Arizona wasdecreased year-over-year primarily due to a low beginning backlog as a result of two nearly closed-out communities with limited inventorya 35% decrease in ending backlog units and low order volume.  Northern California’s 38% increasea 6% decrease in average selling price for the 2021 second quarter. The year-over-year decrease in backlog units was the highest of the divisions due to higher beginningthe division closing out of five communities in 2021, four of which closed out during the 2021 second quarter.

Northern California's ending backlog units increased 94% year-over-year due to a decrease in backlog conversion rate to 46% for the 2020 second quarter from 62% in the prior year period, and a 13%25% increase in orders fromduring the 2021 second quarter and a higher number of average selling communities.beginning backlog units to start the quarter. The increase in the number of homes in Northern California backlog contributed to a 14%103% increase in backlog dollar value, which was partially offset by a 17% decrease in the average price as the division's community growth has been concentrated within the more-affordable Sacramento region. In Southern California, the increase in ending backlog units for the 2020 second quarter was offset by a decrease in total backlog dollar value as a result of the 24% decrease in average selling price.  The mix of homes in Southern California ending backlog shifted to more-affordable communities, as the prior year had a higher number of homes in backlog with average selling prices over $1.0 million, including a large concentration at a luxury community in south Orange County which was near close-out at June 30, 2020.

Due to the uncertainty surrounding the COVID-19 pandemic, we could experience higher cancellation rates compared to prior periods related to homes within our backlog as of June 30, 2020.value.

 

 

In Arizona, the 748% year-over-year increase in backlog dollar value was due to the division opening seven new communities in 2020, of which, three opened in the middle of the 2020 second quarter and the remaining four opened in the third quarter.

In Colorado, the 117 homes in backlog as of June 30, 2021 were comprised of 38 homes from a first time move community in Aurora with an average selling price of homes in backlog of approximately $625,000, and 79 homes from three second move-up communities with average selling prices of homes in backlog ranging from $1.2 million to $1.7 million.

Lots Owned and Controlled

 

 

As of June 30,

  

Increase/(Decrease)

  

As of June 30,

  

Increase/(Decrease)

 
 

2020

  

2019

  

Amount

  %  

2021

  

2020

  

Amount

  

%

 

Lots Owned:

  

Southern California

 397  581  (184) (32)% 186  397  (211) (53)%

Northern California

 558  729  (171) (23)% 511  558  (47) (8)%

Arizona

  397   294   103  35%  499   397   102  26%

Colorado

  191      191  N/A 

Total

  1,352   1,604   (252) (16)%  1,387   1,352   35  3%

Lots Controlled:(1)

  

Southern California

 415  200  215  108% 589  415  174  42%

Northern California

 210  503  (293) (58)% 175  210  (35) (17)%

Arizona

  262   477   (215) (45)%  63   262   (199) (76)%

Colorado

  84      84  N/A 

Total

  887   1,180   (293) (25)%  911   887   24  3%

Total Lots Owned and Controlled - Wholly Owned

  2,239   2,784   (545) (20)%  2,298   2,239   59  3%

Fee Building Lots(2)

  892   1,231   (339) (28)%  38   892   (854) (96)%

 



(1)

Includes lots that we control under purchase and sale agreements or option agreements with nonrefundable deposits and certain agreements with refundable deposits that we have a high degree of confidence that we will pursue, all of which are subject to customary conditions and have not yet closed. This table excludes 2,511 lots controlled through purchase and sale agreements or option agreements with refundable deposits totaling $0.4 million that are still undergoing due diligence. There can be no assurance that suchany of the foregoing acquisitions will occur.

(2)

Lots owned by third party property owners for which we perform general contracting or construction management services.

 

The Company's wholly owned lots owned and controlled decreased 20%as of June 30, 2021 increased 3% year-over-year to 2,2392,298 lots, of which 40% were controlled through option contracts compared to 42% optioned in the prior year period.both periods. The decreaseslight increase in wholly owned lots owned and controlled was due to 275 lots we assumed control of in connection with the acquisition of Epic Homes in Denver, Colorado, partially offset by more deliveries in the last twelve months ended June 30, 20202021 than lots contracted during the same period, the sale of certain lots in Northern California as part of a strategic decision to generate cash flow and reduce our concentration of capital investments in certain markets, and the termination of a purchase contract for lots in Northern California that theperiod.  The Company decided to no longer pursue. The Companyhad reduced the level of land acquisition over the last yeartwo years as a result of its focus to generate cash flows and reduce its leverage.leverage, however, during the latter part of 2020 and into 2021, the Company has been actively evaluating new land opportunities to rebuild its pipeline.

 

The decrease in fee building lots at June 30, 20202021 as compared to the prior year period was primarily attributable to the delivery of 377 homes to customers during the last twelve months ended June 30, 2020, partially offset31, 2021, and as a result of the decision made by a new contract for 38 lots located in Irvine CaliforniaPacific, previously our largest customer, to wind down its fee building arrangement with the Company, which ceased in the same period. 2021 first quarter.  Please see “Fee Building” section below for additional information.

 

Home Sales Revenue and New Homes Delivered

 

 

Three Months Ended June 30,

  

Three Months Ended June 30,

 
 

2020

  

2019

  

% Change

  

2021

  

2020

  

% Change

 
 

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Southern California

 50  $41,440  $829  91  $95,534  $1,050  (45)% (57)% (21)% 62  $49,399  $797  50  $41,440  $829  24% 19% (4)%

Northern California

 48  30,156  628  53  37,296  704  (9)% (19)% (11)% 79  52,518  665  48  30,156  628  65% 74% 6%
Arizona  5   6,161  1,232   7   7,634  1,091  (29)% (19)% 13%  46   18,366  399   5   6,161  1,232  820% 198% (68)%

Colorado

  17   15,657  921       N/A N/A N/A N/A 

Total

  103  $77,757  $755   151  $140,464  $930  (32)% (45)% (19)%  204  $135,940  $666   103  $77,757  $755  98% 75% (12)%

 

  

Six Months Ended June 30,

 
  

2020

  

2019

  

% Change

 
  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

 
  

(Dollars in thousands)

 

Southern California

  118  $104,457  $885   152  $160,127  $1,053   (22)%  (35)%  (16)%

Northern California

  77   50,420   655   81   56,035   692   (5)%  (10)%  (5)%
Arizona  15   18,539   1,236   17   23,488   1,382   (12)%  (21)%  (11)%

Total

  210  $173,416  $826   250  $239,650  $959   (16)%  (28)%  (14)%

  

Six Months Ended June 30,

 
  

2021

  

2020

  

% Change

 
  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

  

Homes

  

Dollar Value

  

Average Price

 
  

(Dollars in thousands)

 

Southern California

  114  $86,940  $763   118  $104,457  $885   (3)%  (17)%  (14)%

Northern California

  149   98,191   659   77   50,420   655   94%  95%  1%

Arizona

  66   26,064   395   15   18,539   1,236   340%  41%  (68)%

Colorado

  21   18,600   886         N/A   N/A   N/A   N/A 

Total

  350  $229,795  $657   210  $173,416  $826   67%  33%  (20)%

 

New home deliveries decreased 32%increased 98% for the 20202021 second quarter as compared to the prior year period. The decreaseincrease in deliveries was the result of lower beginning backlog coupled with a lower backlog conversion rate during the 2020 second quarter as a result of the slowdown in sales at the beginning of the quarter which led to fewer speculative homes sold and delivered during the quarter.  The 2019 second quarter had a higher backlog conversion rate due to success with selling and delivering more speculativenumber of homes during this quarter.in beginning backlog.  Home sales revenue for the three months ended June 30, 2020 declined 45% compared to the same period in 2019,2021 increased 75% year-over-year, primarily due to the decreaseincrease in new home deliveries, and towhich was partially offset by a lesser extent, a 19%12% decrease in average sales price per delivery for the period.delivery. The decrease in average selling price for the period was consistent with the Company's strategic shift to more-affordable product.product and increased deliveries from the Company's Arizona operations, where its average selling price was $399,000 during the 2021 second quarter.

 

The decreaseincrease in home sales revenue for the 2021 second quarter compared to the prior year period was primarily driven byspread across all divisions. Southern California where homes sales revenue was down 57%increased 19% year-over-year due to 45% less deliveriesas a result of a 24% increase in the 2020 second quarter andhomes delivered, partially offset by a 21% decline in average selling price.  Southern California deliveries were down due to lower beginning backlog, a 17% year-over-year decrease in orders and a lower backlog conversion rate compared to the 2019 second quarter.  A product mix shift in our 2020 second quarter deliveries to our more-affordable Inland Empire communities from higher-priced, close-out communities in Orange County and Los Angeles during the 2019 second quarter drove the4% decrease in average selling price for Southern California.due to the prior year period including deliveries from several higher-priced, closed-out Orange County communities. In Northern California, 2020 second quarter home sales revenue was down 19%for the 2021 second quarter increased 74% due to a 9% decrease65% increase in homes delivered and a 6% increase in average selling price. Arizona homes sales revenue increased 198% year-over-year as a result of an 11% decline820% increase in homes delivered, partially offset by a 68% decrease in average selling price relateddue to a shift inthe 2020 period exclusively including deliveries from the higher-priced Bay Area to the more-affordable Sacramento region.a second move-up and a luxury condominium project, both of which closed-out during 2020. The decreaseColorado division also contributed $15.7 million in home sales revenue for Arizona was primarily due to fewer units delivered, but was partially offset by a 13% increase in average sales price due to product mix.from the delivery of 17 homes from the acquired backlog from the Epic Acquisition on February 26, 2021.

 

New home deliveries decreased 16%increased 67% for the six months ended June 30, 20202021 compared to the prior year period due to a lowerhigher number of homes in backlog at the beginning of the period. Home sales revenue for the six months ended June 30, 2020 decreased 28%2021 increased 33% compared to the same period in 2019,2020, due to the decreaseincrease in new home deliveries, andwhich was partially offset by a 14%20% decrease in average sales price per delivery for the period. Average selling price was down in Southern California due to the 20192020 period including deliveries from several higher-priced, closed-out Orange County and Los Angeles communities. Average selling price in Northern California slightly declined due to the increase in deliveries from more-affordable communities and fewer Bay Area deliveries, which generally are high-priced, during the first half of 2020 as compared to the prior year period. In Arizona, the decrease in average sales price was primarily due to the decline in average sales price for our luxury condominium project in Scottsdale, Arizona as a result of significantly higher sales incentives during the 2020 period. product mix shift.

Homebuilding Gross Margin

 

Homebuilding gross margin for the 20202021 second quarter was (9.6%)17.3% compared to 12.1%(9.6%) for the prior year period. Homebuilding gross margin for the 2020 second quarter included $19.0 million in noncash inventory impairment charges related to five homebuilding communities experiencingthat had experienced slower sales pace due to the COVID-19 pandemic, resulting in higher incentives and carrying costs for these projects. No inventory impairment chargesimpairments were recorded during the 20192021 second quarter. For more information on these impairments, please refer to Note 4 of the Notes to our condensed consolidated financial statements. Excluding impairment charges, homebuilding gross margin was 14.8%17.3% for the 20202021 second quarter as compared to 12.1%14.8% for the prior year period. The 270250 basis point increase was primarily due to a product mix shift, home price increases and a 190 basis point decrease in interest costs included in cost of home sales, partially offset by the prior year period including a $2.2 million benefit from a profit participation settlement related to two communities during the 2020 second quarter and a product mix shift.communities. The positive product mix shift was driven by a higher percentage of our total homes sales revenue generated atfrom more affordably-priced communities, which have had higher gross margins. These items were partially offset by a 160 basis point increase in interest costs included  inThe 2021 second quarter cost of home sales.sales included $730,000 of purchase accounting adjustments related to the fair value write-up of inventory in connection with the acquisition of Epic Homes. Excluding these adjustments, gross margin from home sales for the 2021 second quarter was 17.8%.  Adjusted homebuilding gross margin, which excludes homes sales impairmentsimpairment charges and interest in cost of home sales, was 20.8%21.4% and 16.5%20.8% for the 20202021 and 20192020 second quarters, respectively. Adjusted homebuilding gross margin is a non-GAAP measure. See the table below reconciling this non-GAAP measure to homebuilding gross margin, the nearest GAAP equivalent. Excluding the impact of impairment charges and interest in cost of sales, the 43060 basis point improvement in the 20202021 second quarter was aprimarily the result of a product mix shift and improved pricing power experienced over the last four quarters, which was partially offset by the profit participation settlement and a product mix shift.in the 2020 second quarter.

 

Homebuilding gross margin for the six months ended June 30, 2021 and 2020 was 17.2% and 2019 was 2.0% and 12.3%, respectively. The 2020 period included $19.0 million in inventory impairment charges as discussed above while the 20192021 period included no impairments. Excluding impairments, homebuilding gross margin was 13.0%17.2% compared to 12.3%13.0% for the six months ended June 30, 20202021 and 2019,2020, respectively. The 70420 basis point increase was due to a product mix shift and lower interest in cost of home sales, partially offset by a $2.2 million benefit from a profit participation settlement during the 2020 second quarter and a product mix shift, partially offset by higher interest in cost of home sales.quarter. Adjusted homebuilding gross margin, which excludes impairments and interest in cost of home sales, was 19.2%21.4% and 17.0%19.2% for the six months ended June 30, 20202021 and 2019,2020, respectively. The 220 basis point increase in adjusted homebuilding gross margin for the 20202021 period was primarily a result of a product mix shift, partially offset by the profit participation settlement and a product mix shift. settlement.

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

%

  

2019

  

%

  

2020

  

%

  

2019

  

%

 
  

(Dollars in thousands)

 

Home sales revenue

 $77,757   100.0% $140,464   100.0% $173,416   100.0% $239,650   100.0%

Cost of home sales

  85,216   109.6%  123,525   87.9%  169,938   98.0%  210,094   87.7%

Homebuilding gross margin

  (7,459)  (9.6)%  16,939   12.1%  3,478   2.0%  29,556   12.3%
Add: Home sales impairments  19,000   24.4%     %  19,000   11.0%     %
Homebuilding gross margin before impairments(1)  11,541   14.8%  16,939   12.1%  22,478   13.0%  29,556   12.3%

Add: Interest in cost of home sales

  4,601   6.0%  6,301   4.4%  10,747   6.2%  11,153   4.7%

Adjusted homebuilding gross margin(1)

 $16,142   20.8% $23,240   16.5% $33,225   19.2% $40,709   17.0%

 


  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2021

  %  

2020

  

%

  

2021

  

%

  

2020

  

%

 
  

(Dollars in thousands)

 

Home sales revenue

 $135,940   100.0% $77,757   100.0% $229,795   100.0% $173,416   100.0%

Cost of home sales

  112,453   82.7%  85,216   109.6%  190,301   82.8%  169,938   98.0%

Homebuilding gross margin

  23,487   17.3%  (7,459)  (9.6)%  39,494   17.2%  3,478   2.0%

Add: Home sales impairments

     %  19,000   24.4%     %  19,000   11.0%

Homebuilding gross margin before impairments(1)

  23,487   17.3%  11,541   14.8%  39,494   17.2%  22,478   13.0%

Add: Interest in cost of home sales

  5,616   4.1%  4,601   6.0%  9,643   4.2%  10,747   6.2%

Adjusted homebuilding gross margin(1)

 $29,103   21.4% $16,142   20.8% $49,137   21.4% $33,225   19.2%
                                 

Home sales revenue

 $135,940   100.0% $77,757   100.0% $229,795   100.0% $173,416   100.0%

Cost of home sales

  112,453   82.7%  85,216   109.6%  190,301   82.8%  169,938   98.0%

Homebuilding gross margin

  23,487   17.3%  (7,459)  (9.6)%  39,494   17.2%  3,478   2.0%

Add: Purchase accounting adjustments

  730   0.5%     N/A   1,025   0.4%     N/A 

Homebuilding gross margin before purchase accounting adjustments(1)

 $24,217   17.8% $(7,459)  (9.6)% $40,519   17.6% $3,478   2.0%


(1)

Homebuilding gross margin and margin percentage before impairments (also referred to as homebuilding gross margin excluding impairments) and adjusted homebuilding gross margin and margin percentage (or homebuilding gross margin excluding impairments and interest in cost of homes sales) and homebuilding gross margin and margin percentage before purchase accounting adjustments are non-GAAP financial measures. We believe this information is meaningful as it isolates the impact that impairments, leverage, and our cost of debt capital and purchase accounting have on homebuilding gross margin and permits investors to make better comparisons with our competitors who also break out and adjust gross margins in a similar fashion.

 

Land Sales

 

During the three and six months ended June 30, 2020, the Company recognized $10,000 and $157,000 of deferred revenue, respectively, for the remaining completed work on a land sale that initially occurred in the 2019 third quarter.  There was noThe Company did not record any land sales revenue forduring the same period in 2019. three and six months ended June 30, 2021.

 

Fee Building

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

%

  

2019

  

%

  

2020

  

%

  

2019

  

%

 
  

(Dollars in thousands)

 

Fee building revenues

 $21,193   100.0% $22,285   100.0% $57,420   100.0% $41,947   100.0%

Cost of fee building

  20,985   99.0%  21,770   97.7%  56,482   98.4%  41,038   97.8%

Fee building gross margin

 $208   1.0% $515   2.3% $938   1.6% $909   2.2%

 

In the 20202021 second quarter, fee building revenues decreased 5%78% from the 2020 second quarter, and for the six months ended June 30, 2021, fee building revenues decreased 83% from the prior year period, driven byperiod. The decrease in fee revenues for both periods resulted primarily from a slowdowndecrease in construction activity at fee building communities in Irvine, California asCalifornia. In August 2020, Irvine Pacific, previously our largest customer, made a resultdecision to begin building homes using their own general contractor’s license, effectively terminating our fee building arrangement with them moving forward. During the 2021 first quarter, we completed the transition of lower demand levels in that market. Additionally, management fees from joint ventures andour construction management fees from third parties, which are included inresponsibilities to Irvine Pacific and the recognition of all revenues related to the contract. The Company is actively seeking and entering into new fee building revenue, decreased year-over-year by $0.7 million foropportunities with other land developers with the 2020 second quarter. Includedobjective of at least partially offsetting the reduction in Irvine Pacific business in future years, such as our new fee building revenues for the three months ended June 30, 2020 and 2019 were (i) $20.8 million and $21.2 million of billings to land owners, respectively, and (ii) $0.4 million and $1.1 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively.relationship with FivePoint in Irvine, California. Our fee building revenues have historically been concentrated with a small number of customers. For the three months ended June 30, 2021 and 2020, together, Irvine Pacific and 2019, one customerFivePoint comprised 94%97% and 95%, respectively,98% of total fee building revenue.revenue, respectively.  For the six months ended June 30, 2021 and 2020, together, Irvine Pacific and FivePoint comprised 96% and 99% of total fee building revenue, respectively.

 

The cost of fee building decreased 4%79% in the 20202021 second quarter and decreased 83% in the six months ended June 30, 2021 compared to the corresponding prior year period primarily due to lower allocated G&A expenses, and to a lesser extent,periods, respectively, consistent with the decrease in fee building activity, which was partially offset by accrued severance for a reduction in force of fee building personnel dueand to a production slowdown.lesser extent, lower allocated G&A expenses. The amount of G&A expenses included in the cost of fee building was $0.8$0.1 million and $1.5$0.8 million for the 20202021 and 20192020 second quarters, respectively. Fee building gross margin decreased to $0.2 million for the three months ended June 30, 2020 from $0.5 million in the prior year period primarily due to $0.2 million of severance charges included in the cost of fee building during the 2020 second quarter.

For the six months ended June 30, 2020, fee building revenues increased 37% from the prior year period, due to an increase in construction activity at fee building communities in Irvine, California during the 2020 first quarter, which subsequently slowed due to COVID-19 in the 2020 second quarter. Included in fee building revenues for the six months ended June 30, 2020 and 2019 were (i) $56.5$0.3 million and $39.6 million of billings to land owners, respectively, and (ii) $0.9 million and $2.3 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively. Our fee building revenues have historically been concentrated with a small number of customers. For the six months ended June 30, 2020 and 2019, one customer comprised 97% and 93%, respectively, of fee building revenue.

The cost of fee building increased for the six months ended June 30, 2020 compared to the same period in 2019 primarily due to the increase in fee building activity and severance costs mentioned above, partially offset by lower allocated G&A expenses due to lower joint venture activity and management fees. The amount of G&A expenses included in the cost of fee building was $1.8 million and $3.0 million for the six months ended June 30, 2021 and 2020, and 2019, respectively. Fee building gross margin percentage decreased to 1.6% for the six months ended June 30, 2020 from 2.2% in the prior year period primarily due to the decrease in management fees from unconsolidated joint ventures and third-party land owners and the $0.2 million of severance charges included in the 2020 second quarter, as previously mentioned, partially offset by the decrease in allocated G&A expenses.

 

 

Selling, General and Administrative Expenses

 

 

Three Months Ended

 

As a Percentage of

 

Six Months Ended

 

As a Percentage of

  

Three Months Ended

 

As a Percentage of

 

Six Months Ended

 

As a Percentage of

 
 

June 30,

  

Home Sales Revenue

  

June 30,

  

Home Sales Revenue

  

June 30,

  

Home Sales Revenue

  

June 30,

  

Home Sales Revenue

 
 

2020

  

2019

  

2020

  

2019

  

2020

  

2019

  

2020

  

2019

  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Selling and marketing expenses

 $6,386  $9,683  8.2% 6.9% $13,852  $18,362  8.0% 7.7% $7,778  $6,386  5.7% 8.2% $14,432  $13,852  6.3% 8.0%

General and administrative expenses ("G&A")

  6,892   5,841   8.9%  4.2%  12,915   13,232   7.4%  5.5%  9,453   6,892   7.0%  8.9%  17,724   12,915   7.7%  7.4%

Total selling, marketing and G&A ("SG&A")

 $13,278  $15,524   17.1%  11.1% $26,767  $31,594   15.4%  13.2% $17,231  $13,278   12.7%  17.1% $32,156  $26,767   14.0%  15.4%
                  

G&A

 $6,892  $5,841  8.9% 4.2% $12,915  $13,232  7.4% 5.5% $9,453  $6,892  7.0% 8.9% $17,724  $12,915  7.7% 7.4%

Less: Severance charges

  (873)     (1.2)%  %  (873)  (1,788)  (0.5)%  (0.8)%

G&A, excluding severance charges

 $6,019  $5,841   7.7%  4.2% $12,042  $11,444   6.9%  4.7%

Less: Acquisition expenses and severance charges

     (873)     (1.2)%  (983)  (873)  (0.4)%  (0.5)%

G&A, excluding acquisition expenses and severance charges

 $9,453  $6,019   7.0%  7.7% $16,741  $12,042   7.3%  6.9%
                  

Selling and marketing expenses

 $6,386  $9,683  8.2% 6.9% $13,852  $18,362  8.0% 7.7% $7,778  $6,386  5.7% 8.2% $14,432  $13,852  6.3% 8.0%

G&A, excluding severance charges

  6,019   5,841   7.7%  4.2%  12,042   11,444   6.9%  4.7%

SG&A, excluding severance charges

 $12,405  $15,524   15.9%  11.1% $25,894  $29,806   14.9%  12.4%

G&A, excluding acquisition expenses and severance charges

  9,453   6,019   7.0%  7.7%  16,741   12,042   7.3%  6.9%

SG&A, excluding acquisition expenses and severance charges

 $17,231  $12,405   12.7%  15.9% $31,173  $25,894   13.6%  14.9%

 

During the 20202021 second quarter, our SG&A rate as a percentage of home sales revenue was 17.1% as12.7% compared to 11.1%17.1% in the prior year period. The 600440 basis point increasedecrease was primarily due to a 45% drop75% increase in home sales revenue during the 20202021 second quarter and to a lesser extent, $0.9 million in pretax severance charges in the 2020 second quarter related to staffing reductions made to lower headcount as a result of lower revenue volumes which were negatively impacted by COVID-19. Excluding severance charges, the Company’s SG&A rate for the 20202021 second quarter was 15.9%12.7% as compared to 11.1%15.9% in the prior year period.2020 second quarter. The 480320 basis point increaseimprovement was primarily due to the declineincrease in home sales revenue, as overall SG&A spend was down year-over-year,well as well aslower amortization of capitalized selling and marketing costs and model operation cost savings. These items were partially offset by a $0.7 million reduction in G&A expenses allocated to fee building cost of sales during the 20202021 second quarter.  These items were partially offset by lower amortization of capitalized sellingquarter and marketing costs, advertising and model operation cost savings, and a reductionan increase in personnel costs.    incentive compensation.

 

During the six months ended June 30, 2020,2021, our SG&A rate as a percentage of home sales revenue was 15.4%14.0%, up 220down 140 basis points from the comparable prior year period. The 2021 period included $1.0 million in pretax acquisition related expenses, which included tail insurance expenses and professional fees, incurred in connection with our acquisition of Epic Homes in the 2021 first quarter. The 2020 period included $0.9 million in pretax severance charges, as mentioned above. The 2019 period included $1.8 million in pretax severance charges taken in the 2019 first quarter related to reducing headcount, including the departure of one of our executive officers. Excluding these severance charges,expenses, the Company’s SG&A rate for the six months ended June 30, 20202021 was 14.9%13.6% compared to 12.4%14.9% in the prior year period. The 250130 basis point increasedecrease was due to the decreasea 33% increase in home sales revenue, as well as lower amortization of capitalized selling and marketing costs and advertising and model operation cost savings. These items were partially offset by a $1.2$1.5 million year-over-year reduction in G&A expenses allocated to fee building cost of sales which was partially offset by lower amortization of capitalized sellingduring the six months ended June 30, 2021 and marketing costs, advertising and model operation cost savings, and a reductionan increase in personnel costs.    incentive compensation.

 

SG&A excluding acquisition related expenses and severance charges as a percentage of home sales revenue is a non-GAAP measure. See the table above reconciling this non-GAAP financial measure to SG&A as a percentage of home sales revenue, the nearest GAAP equivalent. We believe removing the impact of these chargesexpenses from our SG&A rate is relevant to provide investors with a better comparison to rates that do not include these charges. expenses.

 

Equity in Net Income (Loss) of Unconsolidated Joint Ventures

 

As of June 30, 20202021 and 2019,2020, we had ownership interests in 10nine and ten unconsolidated joint ventures, fiverespectively, none of which havehad active homebuilding or land development operations.operations as of June 30, 2021.  We consider a joint venture to be "active" if active homebuilding or land development activities are ongoing and the entity continues to own homebuilding lots or homes remaining to be sold. Joint ventures that are not "active" are considered "inactive" and generally only have warranty or limited close-out management and development obligations ongoing. We own interests in our unconsolidated joint ventures that generally range from 5%10% to 35%50% and these interests vary by entity.

 

The Company’sCompany's joint venture activity for the three months ended June 30, 2020 and 2019 resulted in pretax loss of $20.0 million and pretax income of $0.2 million, respectively. For the for the six months ended June 30, 2020 and 2019, the Company’s joint venture activity2021 resulted in $21.9 million of pretax loss and $0.4$0.2 million of pretax income respectively.  The year-over-year decrease in joint venture incomeas compared to a $21.9 million pretax loss for the 2020 second quarter and year-to-date periods wasprior year period. The 2021 income related primarily related to other-than-temporary impairment charges taken by the Company related to its investments in two unconsolidatedrelease of reserves from a land development joint ventures.  Duringventure for which stated completion obligations were completed and released during the first quarter.  In addition, during the 2021 first quarter we delivered the last two homes remaining within our Mountain Shadows luxury community in Paradise Valley, Arizona, which recognized total home sales revenues of $4.8 million. The Company's joint venture loss in 2020 second quarter,was primarily the Company recognizedresult of a $20.0 million other-than-temporary impairment charge recognized by the Company in the 2020 second quarter in connection with its intentdetermination to exit the Russell Ranch land development joint venture in Folsom, California. The Company determined that the expected financial returns relative to the required future capital contributions did not outweigh the related marketCalifornia, and cost risks for this development.  In addition, exiting the venture allows the Company to pursue certain federal tax loss carryback refund opportunities form the passage of the CARES Act as well as preserve future capital. As a result, the Company determined that the value of its investment is not recoverable and wrote off its investment balance and recorded its remaining costs to complete. Thisan other-than-temporary noncash impairment charge reflects the Company's current estimates but actual losses associated with exiting the joint venture could differ materially based on the ultimate sales price of the underlying asset. In addition, the Company recorded a $2.3 million impairment charge duringrecognized in the 2020 first quarter related to its investment in the Bedford joint venture as the result of an agreement by the Company to sell its interest in this joint venture to ourits partner for less than our current carrying value.

The following sets forth supplemental operational andthe Notes to our condensed consolidated financial information about our unconsolidated joint ventures. Such information is not included in our financial data for GAAP purposes, but is reflected in our results as a component of equity in net income (loss) of unconsolidated joint ventures. This data is included for informational purposes only.statements.

  

Three Months Ended

          

Six Months Ended

         
  

June 30,

  

Increase/(Decrease)

  

June 30,

  

Increase/(Decrease)

 
  

2020

  

2019

  

Amount

  %  

2020

  

2019

  

Amount

  % 
  

(Dollars in thousands)

 

Unconsolidated Joint Ventures - Operational Data

                                

Net new home orders

  3   28   (25)  (89)%  15   64   (49)  (77)%

New homes delivered

  30   53   (23)  (43)%  50   90   (40)  (44)%
Average sales price of homes delivered $873  $954  $(81)  (8)% $915  $985   (70)  (7)%
                                 

Home sales revenue

 $26,198  $50,567  $(24,369)  (48)%��$45,746  $88,694  $(42,948)  (48)%

Land sales revenue(1)

  4,092   8,511   (4,419)  (52)%  16,191   12,671   3,520   28%

Total revenues

 $30,290  $59,078  $(28,788)  (49)% $61,937  $101,365  $(39,428)  (39)%

Net income

 $1,618  $1,790  $(172)  (10)% $2,980  $2,303  $677   29%
                                 

Selling communities at end of period

                  2   6   (4)  (67)%

Backlog (dollar value)

                 $11,683  $44,775  $(33,092)  (74)%

Backlog (homes)

                  14   50   (36)  (72)%
Average sales price of backlog                 $835  $896  $(61)  (7)%
                                 

Homebuilding lots owned and controlled

                  24   121   (97)  (80)%

Land development lots owned and controlled

                  1,768   1,924   (156)  (8)%

Total lots owned and controlled

                  1,792   2,045   (253)  (12)%


(1)

Land sales revenue for the six months ended June 30, 2020 includes $7.0 million of revenues related to the sale of a mixed use building sold by a homebuilding joint venture.

 

Interest Expense

 

During the three and six months ended June 30, 2021 and 2020, we expensed $0.1 million, $0.4 million, $1.3 million and $2.0 million, respectively, of interest costs related to the portion of our debt in excess of our qualified assets in accordance with ASC 835, Interest.  To the extent our debt exceeds our qualified inventory in the future, we will expense a portion of the interest related to such debt.

 

Project Abandonment Costs

 

During the prior year 2020 first quarter, the Company terminated its option agreement for a luxury condominium project in Scottsdale, Arizona due to lower demand levels experienced at this community, substantial investment required to build out the remainder of the project, uncertainty associated with the economic impacts of COVID-19, and the opportunity to recognize a tax benefit from the resulting net operating loss carrybacks. As a result of this strategic decision made in the 2020 first quarter to forgo developing the balance of the property, we recorded a project abandonment charge of $14.0 million related to the capitalized costs, including interest, associated with the portion of the project that was abandoned.

 

Gain on Early Extinguishment of Debt

 

During the three months ended June 30, 2020, the Company repurchased and retired approximately $5.8 million in face value of its 7.25% Senior Notes due 2022 for a cash payment of approximately $5.0 million.  During the six months ended June 30, 2020, the Company repurchased and retired approximately $10.5 million of its Notes for a cash payment of approximately $9.8 million.  The Company recognized a gain on early extinguishment of debt of $0.7 million and $0.6 million for the three and six months ended June 30, 2020, respectively, which included the respective write-offwrite-off of approximatelyapproximately $49,000 and $95,000 of unamortized discount, premium and debt issuance costs associated with the Notes retired.  During the three months ended June 30, 2019, the Company repurchased and retired approximately $7.0 million in face value of the Notes for a cash payment of approximately $6.3 million.  During the six months ended June 30, 2019, the Company repurchased and retired approximately $12.0 million of its Notes for a cash payment of approximately $10.9 million. For the three and six months ended June 30, 2019, the Company recognized a total gain on early extinguishment of debt of $0.6 million and $1.0 million, respectively, which included the write-off of approximately $90,000 and $160,000, respectively, of unamortized discount, premium and debt issuance costs associated with the Notes retired.

 

Provision/Benefit for Income Taxes

For the three and six months ended June 30, 2021, the Company recorded an income tax provision of $1.3 million and $1.8 million, respectively, which includes a $0.2 million discrete provision for the six months ended June 30, 2021.  The Company's effective tax rate for the three and six months ended June 30, 2021, differs from the federal statutory rate primarily due to the discrete provision related to estimated blended state tax rate updates and stock compensation, as well as state income tax rates and tax credits for energy efficient homes.   

 

For the three and six months ended June 30, 2020. the Company recorded an income tax benefit of $16.9 million and $26.9 million, respectively. The Company's effective tax rates for the three and six months ended June 30, 2020, include the benefit associated with net operating loss carrybacks to years when the Company was subject to a 35% federal tax rate. The effective tax rates for both 2020 periods differ from the federal statutory rate due the net operating loss carryback benefit, discrete items, state income tax rates and tax credits for energy efficient homes. The discrete benefit for the three months ended June 30, 2020 totaled $1.8 million and was primarily related to the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") signed into law on March 27, 2020. Discrete items for the six months ended June 30, 2020 totaled a $9.9 million benefit, $5.8 million of which related to the $14.0 million project abandonment noncash charge recorded during the 2020 first quarter and a $3.9 million benefit related to the CARES Act. For more information on the abandonment costs, please refer to Note 4 of the Notes to our condensed consolidated financial statements.  The CARES Act allows companies to carry back net operating losses generated in 2018 through 2020 for five years. For the three and six months ended June 30, 2020, the Company recognized a $1.8 million and $3.9 million discrete benefit, respectively, related to the remeasurement of deferred tax assets originally valued at a 21% federal statutory tax rate which are now available to be carried back to tax years with a 35% federal statutory rate.

For the three and six months ended June 30, 2019, the Company recorded an income tax provision of $1.0 million and $0.3 million, respectively.  The Company's effective tax rates for 2019 periods differ from the federal statutory tax rates due to state income taxes, estimated deduction limitations for executive compensation and discrete items. The provision for discrete items totaled $0.3 million for the six months ended June 30, 2019 related to stock compensation and state income tax rate changes. 

Trends and Uncertainties

On March 11, the World Health Organization characterized the outbreak of COVID-19 a global pandemic.  There continues to be uncertainty regarding the impact and the duration of disruption that the COVID-19 outbreak and related containment and economic relief efforts will have on the economy, capital markets, consumer confidence, buyer demand for homes and availability of mortgage lending.  The magnitude to which these factors will impact our business and results of operations is highly uncertain and cannot be predicted. 

The health and safety of our employees remains our primary focus during this pandemic.  We have implemented the following actions in response to the pandemic: several health and safety protocols to protect our employees, trade partners and customers as required by state and local government agencies and taking into consideration the CDC and other public health authorities’ guidelines.  While over the past several months, state and local governments began to relax certain "stay-at-home" and similar public health mandates that were implemented in response to the COVID-19 pandemic, with the resurgence of COVID-19 cases in many of the markets in which we operate, there is no assurance as to what level of activity may be permitted to continue.  We have been able to continue most of our homebuilding operations during the government-mandated "stay-at-home" orders as residential construction was designated as an essential business as part of critical infrastructure in most jurisdictions in which we operate and homebuilding operations are continuing at all of our jobsites with appropriate safety measures in place.  In late June 2020, our model home sales offices reopened to the public with appropriate enhanced sanitation and social-distancing measures in place.  While appointments are not necessary, they are still encouraged, and our sales operations continue to leverage our virtual sales tools to connect with our customers online.  Our customer care warranty activities are limited to emergency and urgent work orders as well as request for exterior work to limit public contact.  Although we allowed our corporate and divisional offices to reopen at limited capacity during June 2020, we actively encourage our employees to utilize a work-from-home model where practicable to further limit capacity.  During the reopening process, we instituted several safety protocols, such as distancing and personal protective equipment requirements and enhanced premises cleaning, all in accordance with applicable public health orders and advice.

While all of the above-referenced steps are necessary and appropriate in light of the COVID-19 pandemic, they do impact our ability to operate our business in its ordinary and traditional course.  These actions, combined with a reduction in the availability, capacity, and efficiency of municipal and private services necessary to progress land development, homebuilding, mortgage loan originations, and home sales, which in each case has varied by market depending on the scope of the restrictions local authorities have established, have tempered our sales pace and delayed home construction and deliveries for certain projects during the latter part of March and through much of the second quarter.  The potential magnitude or duration of the business, operational and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19 are uncertain and include, among other things, significant volatility in financial markets and a sharp decrease in the value of equity securities, including our common stock. In addition, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent that we will not be able to conduct any business operations in certain of our served markets or at all for an indefinite period.

 

 

We are, however, encouraged by our ability at the end of the 2020 second quarter to effectively resume nearly all of our operations and the recent improvements in net new orders and our cancellation rate, which we believe are indicators of underlying strength in the overall housing market and the markets in which we operate. During the 2020 second quarter, net new orders increased 6% on a year-over-year basis.  This increase was led by June new orders which were driven by a 33% increase in sales pace.  Our cancellation rate for the 2020 second quarter also returned closer to a more normalized level of 11%, which is even with the 2019 second quarter rate and down sequentially from 16%  for the 2020 first quarter.  Our year-over-year order improvement and even cancellation rate for the 2020 second quarter are not necessarily indicative of future results due to various factors including seasonality, anticipated community openings and closeouts, and continued uncertainty surrounding the economic and housing market environments due to the impacts of the ongoing COVID-19 pandemic and the related COVID-19 control responses, as further discussed below under Part II, Item 1A - Risk Factors.

As the economy and housing markets continue to recover from the severe impacts of the pandemic and related COVID-19 control responses, we hope employment, consumer confidence and other fundamental business factors will also improve. However, the speed, trajectory and strength of any such recovery remains highly uncertain, and could be slowed or reversed by a number of factors, including a possible widespread resurgence in COVID-19 infections in many states, including the markets in which we operate without the availability of generally effective therapeutics or a vaccine for the disease. Given this uncertainty, the Company has taken steps to preserve capital by implementing additional cost cutting measures, curtailing the acquisition and development of land, renegotiating lot takedown arrangements and limiting the number of speculative homes under construction.  Additionally, during the six months ended June 30, 2020, strategic decisions were made to (i) structure an exit from a land development joint venture in Northern California which resulted in a $20.0 million other-than-temporary impairment charge in 2020 second quarter, (ii) to walk away from further development at a wholly owned community in Scottsdale, Arizona resulting in a $14.0 million project abandonment charge during the 2020 first quarter, and (iii) agree to exit a land development joint venture in Southern California which resulted in a $2.3 million other-than-temporary impairment charge in the 2020 first quarter.  By not continuing with these projects, the Company will avoid significant capital outlays and help preserve capital for the future, as well as be able to seek federal tax refunds and receive a payment of approximately $5.1 million in the case of our Southern California joint venture exit.    

Further discussion of the potential impacts on our business, results of operations, financial condition and cash flows from the COVID-19 pandemic is provided below under Part II, Item 1A “Risk Factors.”

We will continue to closely monitor any updates from the CDC and guidance from federal and local and government and public health agencies and adjust our operations accordingly.   While we cannot reasonably estimate the length or severity of this pandemic, an extended economic slowdown in the U.S. could materially impact our results of operations in fiscal 2020 and potentially beyond.

Liquidity and Capital Resources

 

Overview

 

Our principal sources of capital for the six months ended June 30, 20202021 were cash generated from home sales activities, proceeds from the tack-on offering of our 2025 Notes, and distributions from our unconsolidated joint ventures, and management fees from our fee building agreements.ventures. Our principal uses of capital for the six months ended June 30, 20202021 were land purchases, land development, home construction, the acquisition of Epic Homes and repayment of the acquired company's third-party debt, repurchases of the Company's common stock, and bonds, contributions and advances to our unconsolidated joint ventures, and payment of operating expenses, interest and routine liabilities.

 

Cash flows for each of our communities depend on their stage in the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our real estate inventories and not recognized in our consolidated statement of operations until a home is delivered, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with home and land construction were previously incurred. From a liquidity standpoint, we are generally active in acquiring and developing lots to maintain or grow our lot supply and community count. We are focused on rebuilding our land pipeline to meet surging housing demand driven by improved economic conditions.  We expect cash outlays for land purchases, land development and home construction at times to exceed cash generated by operations. We are currently focused on reducing our debt levels and leverage and are reducing spend in response to the economic uncertainty produced by the COVID-19 pandemic and therefore expect to spend less on land purchases than we have over the last few years.

 

During the six months ended June 30, 2020,2021, we generated cash flows from operating activities of $22.0$5.0 million. Also during the 2021 first quarter, the Company completed a tack-on offering of its 2025 Notes generating proceeds of $36.1 million. We ended the second quarter of 20202021 with $85.6$117.3 million of cash and cash equivalents, a $6.3$10.1 million increase from December 31, 2019.2020. Generally, we intend to continue reducingmaintain our debt levels within our target net leverage ranges in the near term, and then to deploy a portion of our cash on hand and cash generated from the sale of inventoryhome sales to acquire and develop strategic, well-positioned lots that represent opportunities to generate future income and cash flows. However, the uncertainty of the COVID-19 pandemic may impact our ability to generate cash flows from operations which may limit our debt reductionOur investments in land and land acquisition effortsdevelopment in the nearfuture will depend significantly on market conditions and available opportunities that meet our investment return standards.

During the 2021 first quarter, the Company completed the sale of $35 million in aggregate principal amount of its 7.25% Senior Notes due 2025 (the "Additional 2025 Notes").  The Additional 2025 Notes were issued at an offering price of 103.25% of their face amount, which represents a yield to mid-term. maturity of 6.427%.

    

As of June 30, 20202021 and December 31, 2019,2020, we had $2.9 million$1.8 million and $9.6$2.6 million, respectively, in accounts payable that related to costs incurred under our fee building agreements. Funding to pay these amountsamounts is the obligation of the third-party land owner, which is generally funded on a monthly basis. Similarly, contracts and accounts receivable as of the same dates included $3.8 million$2.1 million and $10.4$3.1 million, respectively, related to the payment of the above payables.

 

We intend to utilizehave utilized both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from operations, to operate our business. As of June 30, 2020,2021, we had outstanding borrowings of $297.5$285 million in aggregate principal related to our 2025 Notes and no borrowings outstanding under our $60 million unsecured credit facility. We 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, 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. In addition, our debt contains certain financial covenants, among others, that limit the amount of leverage we can maintain, and minimum tangible net worth and liquidity requirements.

 

We intend to finance future acquisitions and developments with what we believe to be the most advantageous source of capital available to us at the time of the transaction, which may include, amongst other things, unsecured corporate level debt, property-level debt, and other public, private or bank debt, selleror land banking arrangements, or common and preferred equity.arrangements.

 

While the COVID-19 pandemic and related mitigation efforts have created significantcontinues to create uncertainty as to general economic and housing market conditions for the remainder of 20202021 and beyond, we believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand,hand, cash generated from operations, and cash expected to be available from our revolving line of credit facility or, to the extent available, through accessing debt or equity capital, as needed, although no assuranceassurances can be provided that such additional debt or equity capital will be available or on acceptable terms, especially in lightterms. 

 

SeniorThe 2025 Notes Due 2022

 

On March 17, 2017,October 28, 2020, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Unsecured Notes due 20222025 (the "Existing Notes"“Original 2025 Notes”), in a private placement.placement to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and outside the United States in reliance on Regulation S under the Securities Act. The 2025 Notes were issued at an offering price of 98.961%100% of their face amount, which representedrepresents a yield to maturity of 7.50%7.25%.  Net proceeds from the offering of the Original 2025 Notes, together with cash on hand, were used to redeem all of the outstanding 2022 Notes at a redemption price of 101.813% of the principal amount thereof, plus accrued and unpaid interest to the redemption date.  On May 4, 2017,February 24, 2021, the Company completed a tack-on private placement offering through the sale of an additional $75$35.0 million in aggregate principal amount of Additional 2025 Notes (together, with the 7.25% SeniorOriginal 2025 Notes, due 2022 ("Additionalthe "2025 Notes").  The Additional 2025 Notes were issued at an offering price of 102.75%103.25% of their face amount, plus accrued interest since March 17, 2017, which representedrepresents a yield to maturity of 6.438%6.427%Net proceeds fromUnamortized premium and debt issuance costs are amortized and capitalized to interest costs using the Existingeffective interest method.  The 2025 Notes were usedare general senior unsecured obligations that rank equally in right of payment to repay all existing and future senior indebtedness, including borrowings outstanding under the Company’sCompany's senior unsecured revolving credit facility withfacility. The 2025 Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the remainder used for general corporate purposes. Net proceeds fromCompany's 100% owned subsidiaries. Pursuant to the Additionalindenture governing our 2025 Notes were used for working capital, land acquisition and general corporate purposes. Interest(the "Indenture"), interest on the Existing2025 Notes and the Additional Notes (together, the "Notes") is payable semiannually in arrears on April 115 and October 1.15 of each year, commencing on April 15, 2021. The maturity date of the2025 Notes is April 1, 2022. The Notes were exchanged in an exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act of 1933 and are freely tradeable in accordance with applicable law. During the six months ended June 30, 2020,will mature on October 15, 2025.

On or after October 15, 2022, the Company repurchased approximately $10.5 million of the Notes at 93.57% of face value reducing the outstanding aggregate principal amount to $297.5 million.

The Company is entitled at its option tomay redeem all or a portion of the 2025 Notes at any time on and after October 1, 2019, upon not less than 3015 nor more than 60 days’ notice, at the redemption prices (expressed inas percentages of the principal amount on the redemption date), set forth below plus accrued and unpaid interest, if any, to the applicable redemption date, (subject to the right of holders of record of the Notes on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12 or 6 month12-month period, as applicable, commencing on eachOctober 15 of the datesyears as set forth below:

 

PeriodRedemption Price
October 1, 2019103.625%
October 1, 2020101.813%
April 1, 2021100.000%
   

Year

  

            Redemption Price             

2022

  

103.625%

2023

  

101.813%

2024

  

100.000%

 

The 2025 Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on incurring or guaranteeing additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. The leverage and interest coverage conditions are summarized in the table below, as described and defined further in the indenture for the Notes. Exceptions to the additional indebtedness limitation include, among other things, (1) borrowings of up to $260 million under existing orof future bank credit facilities of up to the greater of (i) $100 million and (ii) 20% of our consolidated tangible assets, (2) non-recourse indebtedness, and (3) indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either the leverage condition or interest coverage condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 20172021 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of up to the greater of $15 million.million and 3% of our consolidated tangible assets. The Notes are guaranteed byIndenture contains certain other covenants, among other things, the ability of the Company and its restricted subsidiaries to issue certain equity interests, make payments in respect of subordinated indebtedness, make certain investments, sell assets, incur liens, create certain restrictions on the ability of restricted subsidiaries to pay dividends or to transfer assets, enter into transactions with affiliates, create unrestricted subsidiaries, and consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of exceptions and qualifications as set forth in the Company's 100% owned subsidiaries, for more information about these guarantees, please see Note 17 ofIndenture. The leverage and interest coverage conditions are summarized in the Notes to our condensed consolidated financial statements.table below, as described and defined further in the Indenture.

 

  

June 30, 20202021

 

Financial Conditions

 

Actual

  

Requirement

 
        

Fixed Charge Coverage Ratio: EBITDA to Consolidated Interest Incurred; or

 1.41.8  

> 2.0 : 1.0

 

Leverage Ratio: Indebtedness to Tangible Net Worth

 1.501.40  

< 2.25 : 1.0

 

 

As of June 30, 2020,2021, we were able to satisfy the leverage ratio condition.

 

Senior Unsecured Revolving Credit Facility

 

The Company has an unsecured revolving credit facility ("Credit Facility") with a bank group.  On June 26,October 30, 2020, the Company entered into a Third ModificationCredit Agreement (the “Modification”“Credit Agreement”) to its Amendedwith JPMorgan Chase Bank, N.A., as administrative agent, and Restatedthe lenders party thereto. The Credit Agreement.  The Modification, among other things, (i) extended the maturity date of theAgreement provides for a $60 million unsecured revolving credit facility, to Septembermaturing April 30, 2021, (ii) decreased (A) the total commitments2023 (the "Credit Facility"). The Credit Agreement also provides that, under the facility to $60 million from $130 million and (B) the accordion feature to $150 million from $200 million, subject to certain financial conditions, including the availability of bank commitments, (iii) reduces the Company's minimum consolidated tangible net worth covenant from $180 million to $150 million plus 50% of the cumulative consolidated net income earned bycircumstances, the Company and its guarantors from and after March 31, 2020 plus 50% ofmay increase the aggregate proceeds received by the Company (net of reasonable fees and expenses) in connection with any offering of stock or equity in each fiscal quarter commencing on or after March 31, 2020, (iv) reduces the maximum net leverage ratio (subject to a minimum liquidityprincipal amount of $10 million) ("net leverage ratio") from 65% to 60%, (v) modifies the restriction on secured indebtednessrevolving commitments up to an aggregate maximum of $10 million, and (vi) modifies the restriction on repurchases of the Company's senior notes as follows:$100 million.  

 

Net Leverage Ratio

Maximum Repurchases per Quarter

Greater than 55%

None permitted

Less than or equal to 55%

$5,000,000

Less than or equal to 50%

$10,000,000

Less than or equal to 45%

No Restriction

 

As of June 30, 2020,2021, we had no outstanding borrowings under the Credit Facility. Amounts outstanding under the Credit Facility. Interest is payable monthly and is chargedAgreement accrue interest at a rate of 1-monthequal to either, at the Company’s election, LIBOR plus a margin ranging fromof 3.50% to 4.50% per annum, or base rate plus a margin of 2.50% to 3.50%, in each case depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter; provided that LIBOR shall be subject to a LIBOR floor.ratio.  As of June 30, 2020,2021, the interest rate under the Credit Facility was 5.00%. Pursuant to  The covenants of the Credit Facility,Agreement include customary negative covenants that, among other things, restrict the Company is requiredCompany’s ability to maintainincur secured indebtedness, grant liens, repurchase or retire its senior unsecured notes, and make certain acquisitions, investments, asset dispositions and restricted payments, including stock repurchases. In addition, the Credit Agreement contains certain financial covenants, as defined in the Credit Facility, including, but not limited to, those listed in the following table:table.

 

 

June 30, 2020

 

June 30, 2021

 
    

Covenant

   

Covenant

 

Financial Covenants

 

Actual

 

Requirement

 

Actual

 

Requirement

 
 

(Dollars in thousands)

 

(Dollars in thousands)

 

Unencumbered Liquid Assets (Minimum Liquidity Covenant)(1)

 $85,588  $10,000 (1) $117,329 $10,000 (1) 

EBITDA to Interest Incurred(2)

 1.41  

> 1.75 : 1.0

 1.80 > 1.75 : 1.0 

Tangible Net Worth(3)

 $196,966  $150,000 $200,731 $152,639 

Net Leverage Ratio

 52.7% 

< 60%

 46.3% < 60% 

 



(1)

So long as the Company is in compliance with the interest coverage test (see Note 2 below), the minimum unencumbered liquid assets that the Company must maintain as of the quarter end measurement date is $10 million.

(2)

If the EBITDA to Interest Incurred test is not met, it will not be considered an event of default so long as the Company maintains unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred (as defined in the Credit Facilityexisting credit facility agreement) whwhich waich was s$26.022.5 milmillionlion as of June 30, 2020.2021. The Company was in compliance with this requirement with an unrestricted cash balance of $85.6 millioncovenant at June 30, 2020.

(3)

Our consolidated tangible net worth is reduced by an adjustment equal to the aggregate amount of investments in and advances to unconsolidated joint ventures that exceed 35% of consolidated tangible net worth as calculated without giving effect to this adjustment (the "Adjustment Amount"). The Adjustment Amount was considered in the calculation of consolidated tangible net worth.2021.

 

The Credit Facility also contains certain restrictive covenants including limitations on incurrence of liens, dividends and other distributions, asset dispositions and investments in entities that are not guarantors, and limitations on fundamental changes. The Credit Facility contains customary events of default, subject to cure periods in certain circumstances, that would result in the termination of the commitments and permit the Lenders to accelerate payment on outstanding borrowings and require cash collateralization of letters of credit. These events of default include nonpayment of principal, interest and fees or other amounts; violation of covenants; inaccuracy of representations and warranties; cross default to certain other indebtedness; unpaid judgments; change in control; and certain bankruptcy and other insolvency events.  As of June 30, 2020,2021 we were in compliance with all covenants under our Credit Facility.

 

credit, subject to conditions set forth in the Credit Agreement.  As of June 30, 2021, the Company had no outstanding letters of credit issued under the Credit Agreement.  Debt issuance costs for the Credit Agreement, which totaled $1.2 million as of June 30, 2021 are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement.  

 

Letters of Credit and Surety Bonds

 

In connection with the development of our communities, we are frequently required to provide performance, maintenance, and other bonds and letters of credit in support of our related obligations with respect to such developments. 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 surety bonds or letters of credit. The following table summarizes our letters of credit and surety bonds as of the dates indicate:indicated:

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Letters of credit(1)

 $  $  $ $ 

Surety bonds(2)

  41,711   47,593   42,032  44,045 

Total outstanding letters of credit and surety bonds

 $41,711  $47,593  $42,032  $44,045 

 



(1)

As of June 30, 2020,2021, there is a $10.0$30.0 million sublimit for letters of credit available under our Credit Facility.

(2)The estimated remaining costs to complete as of June 30, 20202021 and December 31, 20192020 were $12.9$21.1 million and $29.1$16.3 million, respectively. 

 

Stock Repurchase Program

 

On May 10, 2018, our boardNovember 18, 2020, the Company’s Board of directors approvedDirectors (the “Board”) authorized a new stock repurchase program (the "Repurchase Program") authorizingpursuant to which the repurchaseCompany may purchase up to $10.0 million shares of the Company'sits common stock with an aggregate value of up to $15 million.(the “New Repurchase Program”).  Repurchases of the Company'sCompany’s common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934.1934, as amended. The New Repurchase Program does not obligate the Company to repurchase any particular amount or number of shares of common stock, and it may be modified, suspended or discontinued at any time. The timing and amount of repurchases, areif any, is determined byby the Company’s management at its discretion and beis based on a variety of factors, such as the market price of the Company’s common stock, corporate and contractual requirements, general market and economic conditions and legal requirements.  

During the three and six months ended June 30, 2020,2021, the Company repurchased and retired 817,30037,503 and 2,051,183179,326 shares of its common stock at an aggregate purchase price of $1.5$0.2 million and $3.7$1.0 million, respectively.  During the six months ended June 30, 2019, the Company repurchasedor $5.85 and retired 153,916 shares of its common stock at an aggregate purchase price of $1.0 million.  The purchases were made under a previously announced stock repurchase program that had a remaining purchase authorization of $1.7 million as of June 30, 2020.$5.43 per share, respectively.   Repurchases made from January 1, 2021 through February 16, 2021 and March 20, 202011, 2021 through May 11, 2020April 30, 2021 were made pursuant to the Company's Rule 10b5-1 plan.plans.  All repurchased shares were returned to the status of authorized but unissued. 

 

Debt-to-Capital Ratios

 

We believe that debt-to-capital ratios provide useful information to the users of our financial statements regarding our financial position and leverage. Net debt-to-capital ratio is a non-GAAP financial measure. See the table below reconciling this non-GAAP measure to debt-to-capital ratio, the nearest GAAP equivalent.

 

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 
 

2020

  

2019

  

2021

  

2020

 
 

(Dollars in thousands)

  

(Dollars in thousands)

 

Total debt, net of unamortized discount, premium and debt issuance costs

 $295,124  $304,832 

Equity, exclusive of non-controlling interest

  196,966   232,647 

Total debt, net of unamortized premium and debt issuance costs

 $280,579  $244,865 

Equity

  202,731   197,442 

Total capital

 $492,090  $537,479  $483,310  $442,307 
Ratio of debt-to-capital(1) 60.0% 56.7% 58.1% 55.4%
  

Total debt, net of unamortized discount, premium and debt issuance costs

 $295,124  $304,832 

Total debt, net of unamortized premium and debt issuance costs

 $280,579  $244,865 

Less: Cash, cash equivalents and restricted cash

  85,732   79,431   117,351   107,459 
Net debt 209,392 225,401  163,228 137,406 

Equity, exclusive of non-controlling interest

  196,966   232,647 

Equity

  202,731   197,442 
Total capital $406,358  $458,048  $365,959  $334,848 
Ratio of net debt-to-capital(2) 51.5% 49.2% 44.6% 41.0%

 



(1)

The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt, net of unamortized discount, premium and debt issuance costs by total capital (the sum of total debt, net of unamortized discount, premium and debt issuance costs plus equity), exclusive of non-controlling interest..  

(2)

The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is total debt, net of unamortized discount, premium and debt issuance costs less cash, cash equivalents and restricted cash to the extent necessary to reduce the debt balance to zero) by total capital, exclusive of non-controlling interest.capital. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We believe that by deducting our cash from our debt, we provide a measure of our indebtedness that takes into account our cash liquidity. We believe this provides useful information as the ratio of debt-to-capital does not take into account our liquidity and we believe that the ratio net of cash provides supplemental information by which our financial position may be considered. Investors may also find this to be helpful when comparing our leverage to the leverage of our competitors that present similar information.

 

Cash Flows — Six Months Ended June 30, 20202021 Compared to Six Months Ended June 30, 20192020

 

For the six months ended June 30, 20202021 as compared to the six months ended June 30, 20192020, the comparison of cash flows is as follows:

 

Net cash provided by operating activities was $5.0 million for the six months ended June 30, 2021 compared to $22.0 million for the six months ended June 30, 2020 compared2020. The year-over-year change was primarily due to $18.9an increase in land acquisition and development spend for the 2021 period.

Net cash used in investing activities was $5.1 million for the six months ended June 30, 2019. The year-over-year change was primarily a result of a net increase in cash inflow related to contracts and accounts receivable collected of $6.7 million and the reduction in real estate inventories resulting in a cash inflow of $30.6 million as2021 compared to $25.0 million for the 2019 period. The change in real estate inventories cash flow was driven by a decrease in land acquisition and development spend. The year-over year decrease in net income reduced cash inflow by $32.4 million, but was offset by $19.0 million of noncash inventory impairments, noncash project abandonment costs of $14.0 million, and $22.3 million of noncash impairments to the Company’s investment in two unconsolidated joint ventures recorded during the six months ended June 30, 2020.

Net cash used in investing activities was $1.6 million for the six months ended June 30, 2020 compared2020. The increase in cash used was primarily related to $0.8the $6.5 million of net cash payment the Company made in the 2021 first quarter to complete the Epic Homes acquisition.
Net cash provided by investingfinancing activities was $10.0 million for the six months ended June 30, 2019.2021 and represented $36.1 million in proceeds from the Company's tack-on offering of its 2025 Notes partially offset by a $23.8 million repayment of debt the Company assumed as part of the Epic Homes acquisition. For the six months ended June 30, 2020, net contributions and advances to unconsolidated joint ventures were $1.5 million compared to net distributions from unconsolidated joint ventures of $0.8 million for the six months ended June 30, 2019. The increase in net contributions for the 2020 period was primarily due to a year-over-year reduction in joint venture distributions from our Avanti and Mountain Shadows joint ventures.
Net cash used in financing activities was $14.1 million forand primarily consisted of $9.8 million in repurchases of the six months ended June 30, 2020 compared to $13.9 million for the six months ended June 30, 2019. The increased outflow in 2020 is primarily related toCompany's 2022 Notes and $3.7 million for the repurchase of the Company’s commonin stock compared to $1.0 million of common stock repurchases in the prior year period. The increase in cash outflow was partially offset by a decrease in cash paid during 2020 to repurchase and retire our notes and a decrease in net repayments on the Company’s credit facility.repurchases. 

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

Option Contracts

 

In the ordinary course of business, we enter into land option contracts in order to procure 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 a cash deposit and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and financial intermediaries as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, to reduce the use of funds from our corporate financing sources, and to enhance our return on capital. Option contracts generally require a nonrefundable deposit for the right to acquire 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 by forfeiting our cash deposit with no further financial responsibility to the land seller or financial intermediary. In some instances, we may also expend funds for due diligence and development activities with respect to our option contracts prior to purchase which we would have to write off should we not purchase the land. As of June 30, 2020,2021, we had $12.6$12.2 million of nonrefundable and $0$0.5 million of refundable cash deposits pertaining to land option contracts and purchase contracts with an estimated aggregate remaining purchase price of $65.9$71.7 million and $163.6 million, respectively, net of deposits. These cash deposits are included as a component of our real estate inventories in ourthe accompanying condensed consolidated balance sheets.

 

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

 

Joint Ventures

 

We enter into land development and homebuilding joint ventures from time to time as means of:

 

leveraging our capital base

 

accessing larger lot positions

 

expanding our market opportunities

 

managing financial and market risk associated with land holdings

 

These joint ventures have historically obtained secured acquisition, development and/or construction financing which reduces the use of funds from our corporate financing sources.

 

We are subject to certain contingent obligations in connection with our unconsolidated joint ventures. The Company has provided credit enhancements in connection with joint venture borrowings in the form of loan-to-value ("LTV") maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements include acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of June 30, 2020 and December 31, 2019, $11.6 million and $28.6 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was $2.6 million and $5.8 million as of June 30, 2020 and December 31, 2019, respectively.

In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion guaranties. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion guaranties to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from customary "bad boy acts" of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy. Additionally, in some cases, under our joint venture agreements, our shares of profits and losses are greater than our contribution percentage.

For more information about our off-balance sheet arrangements, please see Note 11 of the Notes to our condensed consolidated financial statements.

As of June 30, 2020,2021, we held membership interests in 10nine unconsolidated joint ventures, six of which related to homebuilding activities and fourthree related to land development as noted below.development. Of the 10nine joint ventures, fivenone have active homebuilding or land development activities ongoing and the balance are effectively inactive with only warranty activities.activities or limited close-out management and development obligations ongoing.  We wereconsider a partyjoint venture to two loan-to-value maintenance agreements relatedbe "active" if homebuilding or land development activities are ongoing and the entity continues to unconsolidated joint ventures as of June 30, 2020.own homebuilding lots or homes remaining to be delivered.  The following table reflects certain financial and other information related to our unconsolidated joint ventures as of June 30, 2020: 

   

June 30, 2020

 
 Year Contribution Total Joint Venture NWHM Debt-to-Total  Loan-to-Value Maintenance Estimated Future Capital Lots Owned and 
Joint Venture (Project Name)FormedLocation%(1) Assets Debt(2) Equity Equity(3) Capitalization  Agreement Commitment(4) Controlled 
   

(Dollars in 000's)

 

TNHC-HW San Jose LLC (Orchard Park)

2012

San Jose, CA

15% $2,105 $ $330 $99  % N/A $   

TNHC-TCN Santa Clarita LP (Villa Metro)(5)

2012

Santa Clarita, CA

10%  851    205  51  % N/A     

TNHC Newport LLC (Meridian)(5)

2013

Newport Beach, CA

12%  1,198    1,072  254  % N/A     

Encore McKinley Village LLC (McKinley Village)

2013

Sacramento, CA

10%  16,667  1,740  11,869  1,188  13% 

Yes

    12 

TNHC Russell Ranch LLC (Russell Ranch)(5)(6)(7)

2013

Folsom, CA

35%  64,773    63,902  13,682  % N/A  1,100  631 

TNHC-HW Foster City LLC (Foster Square)(6)

2013

Foster City, CA

35%  323    322  150  % N/A     

Calabasas Village LP (Avanti)(5)

2013

Calabasas, CA

10%  4,937    3,594  359  % N/A     

TNHC-HW Cannery LLC (Cannery)(6)

2013

Davis, CA

35%  1,790    1,788  626  % N/A    3 

Arantine Hills Holdings LP (Bedford)(5)(6)(8)

2014

Corona, CA

5%  143,579    141,742  7,087  % 

N/A

    1,134 

TNHC Mountain Shadows LLC (Mountain Shadows)

2015

Paradise Valley, AZ

25%  31,152  9,893  19,818  4,969  33% 

Yes

    12 

Total Unconsolidated Joint Ventures

   $267,375 $11,633 $244,642 $28,465  5%   $1,100  1,792 


(1)

Actual equity interests may differ due to current phase of underlying project's life cycle. The contribution percentage reflects the percentage of capital we are generally obligated to contribute (subject to adjustment under the joint venture agreement) and generally (subject to waterfall provisions) aligns with our percentage of distributions. In some cases our share of profit and losses may be greater than our contribution percentage.

(2)

Scheduled maturities of the unconsolidated joint venture debt as of June 30, 2020 are as follows: $9.9 million matures in 2020 and $1.7 million matures in 2021. The $9.9 million of Mountain Shadows debt was due December 14, 2019; however, pursuant to the loan agreement, advances made related to the construction of a presold home shall be due and payable 12 months after the initial advance of such loan with the option to extend an additional three months (provided no event of default has occurred). During July 2020, the Bedford loan (of which there was no balance outstanding at June 30, 2020) was modified to extend the maturity date to January 27, 2021 and release the Company from all obligations associated with this loan in connection with our closing the sale of our joint venture interest at Bedford.

(3)

Represents the Company's equity in unconsolidated joint ventures, as reflected in the financial records of the respective joint ventures. Equity does not include $15.5 million of other-than-temporary impairment charges to the Company's investment, interest capitalized to certain investments in unconsolidated joint ventures and certain basis differences, which along with equity, are included in investment in and advances to unconsolidated joint ventures in the accompanying condensed consolidated balance sheets.

(4)

Estimated future capital commitment represents our proportionate share of estimated future contributions to the respective unconsolidated joint ventures as of June 30, 2020. Actual contributions may differ materially.

(5)

Certain current and former members of the Company's board of directors are affiliated with entities that have an investment in these joint ventures. See Note 12 to the Notes to our condensed consolidated financial statements.

(6)

Land development joint venture.

(7)

The Company's share of capital contributions for certain improvements in the aggregate maximum amount of approximately $26 million is 50%, or $13 million, of which the Company has funded $9.7 million as of June 30, 2020.

(8)The Company has agreed to sell our interest in this joint venture to our partner and exit the joint venture. This transaction is expected to close during the 2020 third quarter.  The purchase price is approximately $5.1 million for the sale of our partnership interest and we will have an option to purchase at market  up to 30% of the lots from this masterplan community.

As of June 30, 2020, the unconsolidated joint ventures were in compliance with their respective loan covenants, where applicable, and we were not requiredexpect to make any loan-to-value maintenance related payments during the three and six months ended June 30, 2020.future contributions to any of its unconsolidated joint ventures.  

 

 

Inflation

 

Our homebuilding and fee building segments can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we may be unable to offset cost increases with higher selling prices.

 

Seasonality

 

Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity in late winter and spring, although this activity also highly depends on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes five to nineten months to construct a new home, depending on the nature of the product and whether it is single-family detached or multi-family attached, we typically deliver more homes in the second half of the year as late winter and spring home orders convert to home deliveries. Because of this seasonality, home starts, construction costsexpenditures and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year, particularly in the fourth quarter. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility inthe evolution of COVID-19 and its impact on the homebuilding industry and the opening and closeout of communities.  In addition,For example, we experienced high demand during the fourth quarter of 2020, which we attribute to market factors including low interest rates, a continued undersupply of both new and resale homes, and consumers’ increased focus on the importance of home amid the COVID-19 pandemic.  Accordingly, as a result of the ongoing uncertainties and evolution of COVID-19, our traditional seasonal pattern is expected to bewas significantly impacted during 2020, (which, depending on the long-term impacts of the pandemic, may continuewhich trend continued into 2021 and beyond).2021. 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future.

 

Our critical accounting estimatespolicies and policiesestimates have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.

 

Recently Issued Accounting Standards

 

The portion of Note 1 to the accompanying notes to unaudited condensed consolidated financial statements under the heading "Recently Issued Accounting Standards" included in this quarterly reportQuarterly Report on Form 10-Q is incorporated herein by reference.

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

This item has been omitted as we qualify as a smaller reporting company as defined by Rule 12b-2 of the Exchange Act.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and other procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC'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 based on the definition of "disclosure controls and procedures" in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives. In designing controls and procedures specified in the SEC's rules and forms, and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 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.

 

At the end of the period being reported upon, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2020.2021.

 

Changes in Internal Controls

 

There was no change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

We are involved in various claims, legal and regulatory proceedings, and litigation arising in the ordinary course of business, including, without limitation warranty claims and litigation and arbitration proceedings alleging construction defects. We do not believe that any such claims and litigation will materially affect our results of operations or financial position. For a discussion of our legal matters and associated reserves, please see Note 11, Commitments and Contingencies to the accompanying notes to our condensed unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q which is incorporated herein by reference.10-Q.

 

Item 1A. Risk Factors

 

Except as set forth below, as of the date of this report, there have been no material changes to the risk factors set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2019.  

2020.  The following risk factor is added tofactors should be read in conjunction with the Risk Factorsrisk factors set forth in Part I, Item 1A of the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2019 under2020. Capitalized terms used in the heading “Risksfollowing risk factors and not otherwise defined within the risk factors shall have the meanings ascribed to such terms as defined elsewhere in this Quarterly Report on Form 10-Q.

Risks Related to Our Business.”the Potential Merger

 

OurFailure to complete the Merger could negatively impact our business, has been materiallyfinancial results and adversely disruptedstock price.

On July 23, 2021, we entered into the Merger Agreement with Parent and Merger Sub, pursuant to which Merger Sub will acquire any and all of the outstanding shares of our common stock for $9.00 per share in cash through a tender offer and second-step merger. Merger Sub’s obligation to purchase the shares validly tendered and not validly withdrawn pursuant to the Offer is subject to the satisfaction or waiver of customary conditions, including, among others, (i) there being validly tendered and not validly withdrawn immediately prior to the expiration of the Offer the number of shares of our common stock that, together with any shares held by Parent, Merger Sub or any of their respective affiliates, represents at least a majority of all then outstanding shares of our common stock, (ii) the present COVID-19 outbreakabsence of any law, injunction, judgment or other legal restraint that prohibits consummation of the Offer or the Merger, (iii) the accuracy of our representations and could be materially and adversely disrupted by another pandemic, epidemic or outbreak of infectious disease, or similar public health threat, or fear of such an event,warranties contained in the United States or elsewhere,Merger Agreement, subject to customary exceptions; (iv) our compliance in all material respects with our covenants and the measures implemented to address such an event by government agencies and authorities.   

A pandemic, epidemic or similar serious public health issue, such as the present outbreak of COVID-19, and the measures taken by international, federal, state and local governments, and other authorities to address it, could significantly disrupt our businessagreements contained in the ordinary course for an extended period.  Further,Merger Agreement (v) the absence of any event, development or circumstance that has had or would reasonably be expected to have a significant outbreakmaterial adverse effect on us, (vi) the completion of contagious diseases, suchthe “Marketing Period” (as defined in the Merger Agreement), and (vii) the provision of certain financial information required pursuant to Merger Sub’s debt commitments related to the Merger, as COVID-19, could resultwell as other customary conditions set forth in a widespread health crisis that could adversely affect the global economyMerger Agreement.  In addition, each of Parent and financial markets, resulting in an economic downturn.us have the right to terminate the Merger Agreement under certain circumstances, including if the Offer has not been consummated by January 23, 2022. As a result, consumer confidence may wane and demand for our homes may decline having a material adverse impactwe cannot assure you that the Merger will be completed, or that, if completed, it will be on our consolidated financial statements.

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak, and most states and municipalities have declared public health emergencies including the states in which we operate, California and Arizona. Along with these declarations, California and Arizona have enacted, at various times, “stay-at-home”, "shelter-in-place" and other restrictive orders to contain and combat the outbreak and spread of COVID-19 that substantially restricted daily activities for individuals and many businesses to curtail or cease normal operations.   

In response to the stay-at-home and shelter-in-place orders in California and Arizona, our model homes and design studios were closed to the public and operated on an appointment-only basis, as permitted, following recommended distancing and other health and safety protocols when meeting in person with a customer.  Associates at our corporate and divisional offices moved to a work-from-home model for nearly all employees.  Construction activities at our job sites within most of the jurisdictions in which we operate were permitted to continue during the stay-at-home and shelter-in-place orders, however, careful protocols wereterms set in place to protect our employees and trade partners that impacted operational efficiency.  The restrictions the Company has taken to contain outbreak as well as a reductionforth in the availability, capacity and efficiency of municipal and private services necessary to operations has and may continue to temper our sales pace and delayMerger Agreement or within the delivery of our homes at certain communities.   

As conditions started to improveexpected time frame. If the Merger is not completed in late May as state and local governments in our markets began relaxing the public health restrictions described above and we began to gradually take steps to effectively resume nearly all of our operations (with enhanced safety measures), including reopening our model homes and design studios and expanding construction and customer care service activities to the extent permitted.  However, in late May, the states in which we operate each began to experience a severe spike in transmissions of COVID-19.  Since this time, state and local authorities in California and Arizona have taken various actions to pause the relaxation on restrictions and in some cases re-implement similar restrictive measures and closure orders.  Accordingly, we remain uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, which include, among other things, a recession, high unemployment levels, and significant volatility in financial markets and the price of our common stock. In addition, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent, particularly in response to the current or any resurgence in infections, that we will not be able to conduct any business operations in certain of our marketstimely manner, or at all, for an indefinite period. our business, financial results and stock price may be adversely affected and we will be subject to certain risks and consequences, including the following:

 

The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed;

Our business can be negatively impacted as a result of a number of additional factors influenced by the COVID-19 pandemic, including as a result of an unwillingness of customers to visit model homes or employees to return to work due to fears about illness, school closures or other concerns; disruptions to the supply chain for building materials; disruptions in the mortgage financing markets; illness of key executives; inefficiencies due to safety protocols and social distancing; and costs incurred to disinfect contaminated employee work spaces, model homes or construction work sites. 

If the Merger Agreement is terminated under specified circumstances, we may be required to pay Parent a termination fee of $4.76 million;

We will be required to pay various costs relating to the pending transaction regardless of whether it is completed, such as significant fees and expenses for legal, accounting, financial advisory, and printing services;

Matters relating to the pending transaction may require substantial time and effort from our management team and other employees, which time and effort distracts from our core business and could have otherwise been devoted to other opportunities that might have been beneficial to us;

We may experience negative reactions from the financial markets and from our employees, customers, partners, and vendors if the transaction is not completed; and

Shareholder litigation challenging the proposed Merger may be commenced against us and may delay completion of the Merger in the expected timeframe or altogether. If the plaintiffs in any such litigation are successful in obtaining an injunction prohibiting the parties from consummating the Merger on the terms contemplated by the Merger Agreement, the injunction may prevent the completion of the Merger in the expected timeframe or altogether. In addition, litigation challenging the Merger may result in significant defense costs and serve as a distraction to management and directors.

 

 

We are uncertain ofsubject to business uncertainties and contractual restrictions while the potential full magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, which include, among other things, significant volatility in financial markets and a sharp decrease in the value of equity securities, including our common stock. In addition, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent that we will no longer be designated an essential business or that we will not be able to conduct any business operations in certain of our served markets or at all for an indefinite period.Merger is pending.

 

OurUncertainty about the effect of the pending Merger on our employees, customers, partners and vendors may have an adverse effect on our business, financial condition and results of operations. These uncertainties may impair our ability to retain and motivate key personnel and could also be negatively impacted over the medium-to-longer term if the disruptions relatedcause customers, partners, vendors, and others that deal with us to COVID-19 decrease consumer confidencedefer entering into contracts with, or making other decisions concerning, us or to seek to change existing business relationships with us.

The loss or deterioration of relationships with significant customers, partners, vendors and employees could have a material adverse effect on us. The Merger Agreement generally or with respectrequires us to purchasing a home; cause civil unrest, similar to what arose at the end of May related to efforts to institute law enforcement and other social and political reforms and which may also affectoperate our business in the short and/or medium-to-longer term; negatively impact mortgage availability orordinary course of business consistent with past practice, but restricts us from taking specified actions while the federal government's mortgage loan-related programs; or precipitate a prolonged economic downturn and/or an extended rise in unemployment or temperingtransaction is pending without the consent of wage growth, any of which could lower demand for our products as occurred during the later part of the 2020 first quarter and earlier months of the 2020 second quarter; impairParent, including, among other things, restrictions on our ability to sellacquire other businesses and build homes in a typical manner,assets, dispose of our assets, enter into, modify, or at all, generate revenuesterminate certain contracts, repurchase or issue securities, make capital expenditures, incur indebtedness, or hire, promote, terminate, alter, or accelerate the compensation of certain employees. These restrictions may prevent us from pursuing attractive business opportunities or responding effectively and/or timely to competitive pressures and cash flows, and/industry developments that may arise prior to the completion of the pending transaction or access capital or lending markets (or significantly increase the costs of doing so), as may be necessaryotherwise adversely affect our ability to sustainexecute on our business; increase our use of sales incentives and concessionsbusiness strategy, which could adversely affect our margins; increasebusiness or financial condition.

The Merger Agreement limits our ability to pursue alternative transactions, which could deter a third party from proposing an alternative transaction.

The Merger Agreement contains provisions that, subject to certain exceptions, limit our ability to solicit, initiate, knowingly facilitate or encourage the costssubmission or decreaseannouncement of any acquisition proposals from third parties or take certain other restricted actions in connection therewith. The Merger Agreement requires us to pay Parent a termination fee equal to $4.76 million, under specified circumstances, including termination of the supply of building materials or the availability of subcontractors and other talent, includingMerger Agreement by Parent as a result of infectionsthe Board changing its recommendation that stockholders tender their shares of our common stock in the Offer, or medically necessaryby us in order to enter into a Superior Company Proposal (as such term is defined in the Merger Agreement) with a third party, in each case, as further described in the Merger Agreement. It is possible that these or recommended self-quarantining,other provisions in the Merger Agreement might discourage a potential competing acquirer that might have an interest in acquiring all or governmental mandates to direct production activities to support public health efforts; and/a significant part of our outstanding common stock from considering or proposing an acquisition or might result in our recognizing charges in current and future periods, which may be material, for inventory impairments or land option contract abandonments, or both, related to our current inventory assets. For example, during the 2020 first quarter, the Company decided to terminate its option contract for a luxury condominium project in Scottsdale, Arizona in large part due to significant economic uncertainty related to COVID-19 and recorded an abandonment charge of $14.0 million related to the capitalized costs that have accumulated to the portion of the project that is being abandoned.  Circumstances related to the COVID-19 pandemic and associated economic relief measures were considered in the Company’s 2020 second quarter decision to exit its Russell Ranch joint venture which resulted in a $20.0 million other-than-temporary impairment charge for the period.  The long-term economic impact and near-term financial impacts may cause us to incur other abandonment or impairment charges in the future, but the impact of COVID-19 cannot be reliably quantified or estimated at this time.

Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, decreases in our net orders, homes delivered, average selling prices, revenues and profitability, as we have in the 2020 second quarter, and such impacts could be material to our financial statements in the third quarter and beyond. In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our served markets, we could generate few or no orders and deliver few, if any, homes during the applicable period, which could be prolonged. Along with a potential increase in cancellations of home purchase contracts, if there are prolonged government restrictions on our business and our customers, and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business; meet the terms of our covenants and other requirements under the Credit Facility and Notes.  Such a circumstance could, among other things, exhaust our available liquidity (and ability to access liquidity sources) and/or trigger an accelerationcompeting acquirer proposing to pay a significant portion or all oflower per share price to acquire our then-outstanding debt obligations, which we may be unablecommon stock than it might otherwise have proposed to do.

The following Risk Factor under the heading “Risks Related to Our Business” below amends and restates the Risk Factor set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Failure to comply with privacy laws or an information systems interruption or breach in security that releases personal identifying information or other confidential information could adversely affect us.”

Failure to comply with privacy laws or an information systems interruption or breach in security that releases personal identifying information or other confidential information could adversely affect us.

Privacy, security, and compliance concerns have continued to increase as technology has evolved.  We use information technology and other computer resources to carry out important operational and marketing activities and to maintain our business records. Furthermore, as part of our normal business activities, we collect and store personal identifying information, including information about employees, homebuyers, customers, vendors and suppliers and may share information with vendors who assist us with certain aspects of our business. The regulatory environment in California and throughout the U.S. surrounding information security and privacy is increasingly demanding. We may share some of this confidential information with our vendors, such as escrow companies and related title services enterprises, who partner with us to support certain aspects of our business. The information technology systems we use are dependent upon global communications providers, web browsers, third-party software and data storage providers and other aspects of the Internet infrastructure that have experienced security breaches, cyber-attacks, ransomware attacks, significant systems failures and service outages in the past. A material breach in the security of our information technology systems or other data security controls could include the theft or release of customer, employee, vendor or company data. A data security breach, a significant and extended disruption in the functioning of our information technology systems or a breach of any of our data security controls could disrupt our business operations, damage our reputation and cause us to lose customers, adversely impact our sales and revenue and require us to incur significant expense to address and remediate or otherwise resolve these kinds of issues. The release of confidential information as a result of a security breach could also lead to litigation or other proceedings against us by affected individuals or business partners, or by regulators, and the outcome of such proceedings, which could include penalties or fines, could have a significant negative impact on our business. We may also be required to

incur significant costs to protect against damages caused by information technology failures or security breaches in the future. We provide employee awareness training of cybersecurity threats and routinely utilize information technology consultants to assist us in our evaluations of the effectiveness of the security of our information technology systems, and we regularly enhance our security measures to protect our systems and data. However, because methods used to obtain unauthorized access, disable or degrade systems evolve frequently and often are not recognized until launched against a target, we may be unable to anticipate these attacks or to implement adequate preventative measures. Consequently, we cannot eliminate the risk that a security breach, cyber-attack, ransomware attack, data theft or other significant systems or security failures will occur in the future, and such occurrences could have a material and adverse effect on our consolidated results of operations or financial position. In addition, the cost and operational consequences of implementing further data or system protection measure could be significant and our efforts to deter, identify, mitigate and/or eliminate any security breaches or incidents may not be successful.

With the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, we have taken steps to allow our workforce to perform critical business functions remotely. Many of these measures are being deployed for the first time and there is no guarantee the data security and privacy safeguards we have put in place will be completely effective or that we will not encounter some of the common risks associated with employees accessing Company data and systems remotely. Despite our implementation of security measures, techniques used to obtain unauthorized access or to sabotage systems change frequently.  As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures.  Any compromise or perceived compromise of our security could damage our reputation and our relationship with our customers, could reduce demand for our services and could subject us to significant liability as well as regulatory action.

In addition to the risks described above, the COVID-19 pandemic may also have the effect of heightening other risks disclosed in the Risk Factors section of our Annual Report on Form 10-K, including, but not limited to, risks related to deterioration in homebuilding and general economic conditions, our geographic concentration, competition, availability of mortgage financing, inventory risks and impairments, supply and/or labor shortages, access to capital markets (including the debt and secondary mortgage markets), impact on joint ventures, compliance with the terms of our indebtedness (including the Credit Facility and the indenture governing our Notes), potential downgrades of credit ratings, and our leverage.pay.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Issuer Purchases of Equity Securities by the Issuer

 

              

Approximate

              

dollar value of

          

Total number of

  

shares that may

          

shares purchased

  

yet be purchased

  

Total number

      

as part of publicly

  

under the plans or

  

of shares

  

Average price

  

announced plans

  

programs

  

purchased

  

paid per share

  

or programs(1)

  

(in thousands)(1)

April 1, 2020 to April 30, 2020(2)

  652,300  $1.68   652,300  $2,099

May 1, 2020 to May 31, 2020(2)

  165,000  $2.25   165,000  $1,728

June 1, 2020 to June 30, 2020

    $     $1,728
   817,300  $1.80   817,300    
              

Approximate

 
              

dollar value of

 
          

Total number of

  

shares that may

 
          

shares purchased

  

yet be purchased

 
  

Total number

of shares

purchased

      

as part of publicly

  

under the plans or

programs

(in thousands)(1)

 
    

Average price

paid per share

  

announced plans

or programs(1)

   
         

April 1, 2021 to April 30, 2021 (2)

  37,503  $5.85   37,503  $8,468 

May 1, 2021 to May 31, 2021

    $     $8,468 

June 1, 2021 to June 30, 2021

    $     $8,468 
   37,503  $5.85   37,503  $8,468 

 



(1)

On May 10, 2018, our boardNovember 19, 2020, the Company announced that the Board of directors approvedDirectors (the “Board”) authorized a stock repurchase program (the "Repurchase Program") authorizingpursuant to which the repurchaseCompany may purchase up to $10.0 million of the Company'sshares of its common stock with an aggregate value of up to $15 million. The(the “New Repurchase Program was announced on May 14, 2018.Program”).  Repurchases of the Company'sCompany’s common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934.1934, as amended.  The board of directorsBoard did not fix any expiration date for the New Repurchase Program.

(2)

Starting

Repurchases made from March 20, 2020, our repurchases made11, 2021 through April 30, 2021 were done pursuant to aRule 10b5-1 planplans entered into by the Company which coveredcovers the period from March 20, 2020 through May 11, 2020.2021 to April 30, 2021.

 

Item 3.    Defaults Upon Senior Securities

 

None.

 

Item 4.    Mine Safety Disclosures

 

Not applicable.

 

Item 5.    Other Information   

 

None.

 

 

Item 6.    Exhibits

 

Exhibit

Number

Exhibit Description

2.1#Agreement and Plan of Merger, dated as of July 23, 2021, by and among Newport Holdings LLC, Newport Merger Sub, Inc. and The New Home Company Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K filed on July 26, 2021)

 

 

3.1

Amended and Restated Certificate of Incorporation of The New Home Company Inc. (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013)

 

 

3.2

State of Delaware Certificate of Change of Registered Agent and/or Registered Office (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on August 1, 2016)

 

 

3.3

Amended and Restated Bylaws of The New Home Company Inc. (incorporated by reference to Exhibit 3(ii) of the Company’s Current Report on Form 8-K filed on November 1, 2019)

  
3.4Certificate of Designations of Series A Junior Participating Preferred Stock of The New Home Company Inc., filed with the Secretary of State of Delaware on May 8, 2020 (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on May 8, 2020).
3.5Certificate of Elimination of Series A Junior Participating Preferred Stock of The New Home Company Inc. filed with the Secretary of State of Delaware on March 29, 2021 (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on March 30, 2021)

 

 

4.1

Specimen Common Stock Certificate of The New Home Company Inc. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1 (Amendment No. 10, filed on January 24, 2014))

 

 

4.2

Investor Rights Agreement among The New Home Company Inc., TNHC Partners LLC, IHP Capital Partners VI, LLC, WATT/TNHC LLC, TCN/TNHC LP and collectively H. Lawrence Webb, Wayne J. Stelmar, Joseph D. Davis and Thomas Redwitz (incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013)

 

 

4.3

Amendment No. 1 to Investor Rights Agreement among The New Home Company Inc., TNHC Partners LLC, IHP Capital Partners VI, LLC, WATT/TNHC, LLC, TCN/TNHC LP and collectively H. Lawrence Webb, Wayne J. Stelmar, Joseph D. Davis and Thomas Redwitz (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on May 23, 2018)

  
4.4Amendment No. 2 to Investor Rights Agreement among The New Home Company Inc., TNHC Partners LLC, IHP Capital Partners VI, LLC, WATT/TNHC, LLC, TCN/TNHC LP and collectively H. Lawrence Webb, Wayne J. Stelmar, Joseph D. Davis and Thomas Redwitz (incorporated by reference to Exhibit 4.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020).
  
4.5*10.1Sixth Supplemental Indenture dated as of July 16, 2020, among TNHC Holdings LLC, TNHC Holdings 1 LLC and U.S. Bank National Association
4.6Tax Benefit Preservation Plan, dated as of May 8, 2020, between The New Home Company Inc. Second Amended and American Stock Transfer & Trust Company, LLC, which includes the Form of Certificate of Designations of Series A Junior Participating Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit CRestated 2016 Incentive Award Plan (incorporated by reference to Exhibit 4.110.1 of the Company's Current Report on Form 8-K filed on May 8, 2020)18, 2021)
  
10.1*10.2Third Modification Agreement, dated asForm of June 26, 2020, among The New Home Company Inc., U.S. Bank National Association, d/b/a Housing Capital Company, and 2016 Incentive Award Plan Cash Performance Award Agreement (incorporated by reference to Exhibit 10.1 to the lenders party thereto.Company's Current Report on Form 8-K filed on February 12, 2021)

10.3*Form of The New Home Company Inc. 2016 Incentive Award Plan Restricted Stock Unit Grant Notice

31.1*

Chief Executive Officer Section 302 Certification of Periodic Report

 

 

31.2*

Chief Financial Officer Section 302 Certification of Periodic Report

 

 

32.1**

Chief Executive Officer Section 906 Certification of Periodic Report

 

 

32.2**

Chief Financial Officer Section 906 Certification of Periodic Report

 

101*

The following materials from The New Home Company Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020,2021, formatted in Inline eXtensible Business Reporting Language (XBRL)(iXBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

101.INS

XBRLiXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRLiXBRL tags are embedded within the Inline XBRL document.

  
104*Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

 

*

Filed herewith

**

Furnished herewith. The information in Exhibits 32.1 and 32.2 shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act, or the Exchange Act (including this Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.

#Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted exhibits and schedules upon request by the SEC; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any exhibits or schedules so furnished.

 

 

SIGNATURES

 

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

 

 
   

 

 

 

 

The New Home Company Inc.

 

 

 

 

By:

/s/ Leonard S. Miller

 

 

Leonard S. Miller

 

 

President and Chief Executive Officer

 

 

 

 

By:

/s/ John M. Stephens

 

 

John M. Stephens

 

 

Executive Vice President and Chief Financial Officer

Date: July 30, 202029, 2021

 

 

7463