The New Home Company
2015 Annual Report
E
H
T
N E W
HOME
C O M P A N Y
Six and a half years ago, we founded The New Home Company based upon the notion that we could build and
scale a premier, California-based homebuilder from scratch at the bottom of the biggest housing recession
in our lifetime. The foundation upon which we built our Company was simple – attract and retain the best
people our industry has to offer, leverage our relationships and reputation to gain access to some of the most
exclusive communities in the Western United States, and focus on customer satisfaction. We knew that it
would take some time to ramp our business to a level that would produce meaningful results, but we also
knew that if we stayed true to these core principles, success would come.
Fast forward to today, and you can see that The New Home Company has begun to realize the benefits of this
strategy. For fiscal 2015, The Company reported revenues of $430 million and earnings of $1.28 per share,
compared to revenues of $150 million and earnings of $0.30 per share last year. Our SG&A as a percent of
home sale revenues declined considerably to 10.4%, down from 27.8% in 2014, demonstrating our ability
to grow revenues without adding significant overhead. We also ended the year with $167 million in wholly
owned backlog. Two years ago, our year-end backlog totaled $12 million.
While the path to these accomplishments has not always been linear, it has been the direct result of our
consistent focus on our guiding principles. Thanks to our long standing reputation in the markets in which
we build and the relationships that we’ve forged, The New Home Company has carved out a unique business
that allows us to build incredible homes in highly desirable locations. Our talented team members support
a culture that emphasizes teamwork, collaboration and accountability, which resulted in construction
deadlines being met, and homes being delivered on time. This, in turn, led to some of the best customer
satisfaction scores in the industry, as measured by Eliant.
In summary, I am very pleased with the success we enjoyed in 2015, and feel that we are in a great position
to build on our accomplishments given the sizeable backlog we have to start the year, our current market
positioning, our pipeline of new communities and our well capitalized balance sheet. We have made great
strides since our humble beginnings in 2009, thanks to our commitment to our core principles. It is a
strategy that has served us well since our inception, and we believe it will continue to do so in the future.
As always, I want to thank our Board of Directors for their wisdom and guidance, our shareholders for their
support and our team members for all of their hard work. Each of you played a part in the great success
The New Home Company enjoyed in 2015, and I am appreciative of your efforts.
Sincerely,
H. Lawrence Webb
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2015 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
The New Home Company Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
27-0560089
(I.R.S. Employer
Identification No.)
85 Enterprise, Suite 450
Aliso Viejo, California 92656
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (949) 382-7800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
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 and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer (Do not check if smaller reporting company)
Smaller reporting company
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2015,
based on the closing price of $17.23 as reported by the New York Stock Exchange was $157,576,707.
There were 20,549,798 shares of the registrant's common stock were issued and outstanding as of February 24, 2016.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference
from the registrant’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held in 2016, which
definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the
fiscal year to which this Report relates.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15
Exhibits and Financial Statement Schedules
Signatures
Part IV
3
Page
Number
5
16
31
32
32
32
32
34
37
53
54
54
54
55
55
55
55
55
55
56
147
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. All statements contained in this annual report on Form 10-K other than statements of historical fact,
including statements regarding our future results of operations and financial position, our business strategy and plans, and our
objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,”
“anticipate,” “intend,” “expect,” “goal,” “plan” and similar expressions are intended to identify forward-looking statements. 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, and financial needs. 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 this annual report on Form 10-K. 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
economic changes either nationally or in the markets in which we operate, including declines in employment,
volatility of mortgage interest rates and inflation;
a downturn in the homebuilding industry;
continued volatility and uncertainty in the credit markets and broader financial markets;
our future operating results, financial condition and liquidity;
our business and investment strategy;
availability of land to acquire and our ability to acquire such land on favorable terms or at all;
availability, terms and deployment of capital;
shortages of or increased prices for labor, land or raw materials used in housing construction;
delays in land development or home construction resulting from adverse weather conditions or other events outside
our control;
issues concerning our joint venture partnerships;
the cost and availability of insurance and surety bonds;
changes in, or the failure or inability to comply with, governmental laws and regulations;
the timing of receipt of regulatory approvals and the opening of projects;
the degree and nature of our competition;
our leverage and debt service obligations;
restrictive covenants relating to our operations in our current or future financing arrangements; and
availability of qualified personnel and our ability to retain our key personnel.
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. 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 annual report on Form 10-K 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 annual report on Form 10-K speak only as of the date of this annual report on
Form 10-K, 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.
4
Item 1.
Business
PART 1
As used in this annual report on Form 10-K, unless the context otherwise requires or indicates, references to “the
Company,” “our company,” “we,” “our” and “us” (1) for periods prior to the completion of our formation transactions, refer
to The New Home Company LLC and its subsidiaries and affiliates, which we sometimes refer to as “TNHC LLC,” and
(2) following the completion of our formation transactions, refer to The New Home Company Inc. and its subsidiaries. On
January 30, 2014, The New Home Company LLC was converted into a Delaware corporation and renamed The New Home
Company Inc., which we refer to as our formation transaction.
Our Company
We are a new generation homebuilder focused on the design, construction and sale of innovative and consumer-driven
homes in major metropolitan areas within select growth markets in California and Arizona, including coastal Southern
California, the San Francisco Bay area, metro Sacramento and the greater Phoenix area. We also seek to create unique
communities via our significant land development expertise.
We were founded in August 2009, towards the end of an unprecedented downturn in the U.S. homebuilding industry
by Larry Webb, Wayne Stelmar, Joseph Davis and Tom Redwitz, who have worked together for over 25 years. In January
2014, we completed our initial public offering of shares of our common stock. We believe our management team has extensive
and complementary construction, design, marketing, development and entitlement expertise, as well as strong relationships
with key land sellers within each of our local markets, which provide a competitive advantage in being able to acquire land,
create masterplans, obtain entitlements and build quality homes.
In June 2015, Mr. Davis retired from his role as Chief Investment Officer, but was retained by the Company as a
consultant on a part-time basis. Concurrent therewith, Mr. Stelmar assumed the role of Chief Investment Officer and John M.
Stephens was hired as our Chief Financial Officer.
We employ a local market, consumer-driven approach to designing differentiated homes to meet the unique lifestyle
needs of homebuyers across a variety of demographics. We believe our approach to market research and construction expertise
across an extensive product offering allows us the flexibility to pursue a wide array of land acquisition opportunities and
appeals to a broad range of potential homebuyers, including entry-level, move-up, move-down and luxury customers. The
homes that we and our unconsolidated joint ventures are building range in price from approximately $300,000 to over $5
million, with home sizes ranging from approximately 800 to 5,400 square feet. We believe that customer-focused community
creation and product development, as well as exemplary customer service, are key components of the lifestyle connection we
seek to establish with each homebuyer.
Additionally, we strive to enhance the home-buying experience and buyers’ personal investment in their homes by
actively engaging them in the selection of design options and upgrades. We believe that our on-site design studios, which allow
buyers to personalize our home offerings are a key source of competitive differentiation, and contribute to greater profitability
through the sale of higher margin options. In addition to our on-site design studios, we also believe our emphasis on customer
care provides us a competitive advantage. In 2013, 2014 and 2015 we were awarded the Eliant Homebuyers’ Choice Award for
Best Overall Customer Care Experience and have also been awarded Best Design Selection Experience and Best Construction
Experience among mid-size builders. Our commitment to customer satisfaction is a key element of company culture, which
fosters an environment where team members can innovate. We believe our reputation for high quality, differentiated
architecture and design, as well as high customer satisfaction and company culture, enhances our overall financial performance
and generates increased customer loyalty.
Our Competitive Strengths and Strategy
We look to drive the success of the business through the following:
Focus on Attractive Growth Markets in California and Arizona
We are currently focused on identifying unique sites and creating communities that allow us to design, construct and sell
consumer-driven single-family detached and attached homes in major metropolitan areas in coastal Southern California, the
San Francisco Bay area, metro Sacramento and the greater Phoenix area. Given our existing land positions, strong local
relationships and reputation for quality building, we believe our business is well-positioned to capitalize on the housing market
5
expansion underway in these markets. Certain defining characteristics of our markets include barriers to entry, job growth and
increasing populations, which can create growing demand for new housing. Moreover, our management team has deep local
market knowledge of the California homebuilding and the land planning and development businesses. We believe this
experience and our strong relationships with local market participants enable us to source site acquisitions and achieve land
entitlements to fuel our growth.
Disciplined Acquisition of Attractive Land Positions
We believe that we own and control high-value land positions strategically located within our core markets. We
believe that our professional reputation and long-standing relationships with key land sellers, including master plan community
developers, brokers and other builders, as well as our institutional investors and joint venture partners, enable us to acquire
well-positioned land parcels in our existing markets as well as new target markets.
In addition, we intend to leverage the strength of our land planning and land development expertise in each local
market to add value to our land, capture incremental profit opportunities and provide a steady supply of lots to support the
planned growth of our homebuilding business. We seek to acquire land where we believe our development and entitlement
skills can help earn a risk-adjusted return that is accretive to our overall return profile and superior to other existing market
opportunities. We also have a meaningful fee building business that complements our wholly owned and joint venture business
in what we believe to be among the most attractive masterplan communities in coastal Southern California.
We further seek to reduce our exposure to land risk through the use of land options, joint ventures and other flexible
land acquisition arrangements. Our joint venture and lot option strategy has been instrumental in allowing us to leverage our
entity-level capital and returns on equity, participate in and develop larger masterplan communities, and establish a
homebuilding platform focused on high-growth, land-constrained markets.
Deliver a Diverse, Consumer-Driven Product Offering and a Superior Home Experience
We consider ourselves a local market, consumer-driven homebuilder with expertise across a wide variety of product types
and customer segments, including the entry-level, move-up, move-down and luxury-focused customer segments. In addition to
understanding the key economic drivers of demand in our markets, we focus on understanding the pool of potential buyers, the
product types sought by those buyers and the proper price point for the product types in each market. We perform extensive
consumer research that helps us create land plans and design homes that meet the needs and desires of our specific targeted
buyers. Our homes are competitively priced, but are not designed to be the lowest cost option in the market. Our core operating
philosophy is to provide a positive, memorable experience to our homeowners through active engagement in the building
process, tailoring our product to the buyer’s lifestyle needs and enhancing communication, knowledge and satisfaction.
A key element of our strategy is to allow all buyers to personalize their homes regardless of the price point. Unlike many
homebuilders with centralized locations where buyers must travel to select options and upgrades, each of our communities has
an on-site design center with dedicated designers who are knowledgeable about the attributes of the homes offered in the
community. The specific options and upgrades, both structural and finishes, available for the community are selected by our
buyers as they navigate the buying process. In many cases, these options and upgrades can form a substantial part of the total
purchase price of a home and are typically priced with profit margins in excess of the profit margins on the base home purchase
before the options and upgrades. We believe that the active participation of buyers in selecting options and upgrades results in
buyers becoming more personally invested in their homes, which leads to fewer cancellations. We also believe our diversified
product strategy enables us to better serve a wide range of buyers, adapt quickly to changing market conditions and improve
performance while strategically reducing portfolio risk.
Increase Active Community Count in Our Markets
Our belief that homebuilding is a local market business supports our strategy to pursue significant opportunities to
expand our business in our existing markets. We continually review the allocation of capital among our markets, based on both
aggregate demographic information and our own operating results. We use the results of these reviews to focus our investments
on those markets where we believe we can increase our profitability and return on capital. Additionally, we engage in limited
speculative building and proceed with community development in phases where we believe it is economically feasible to do so
with the goal of optimizing community design and increasing profits. We may explore expansion opportunities, including in
other markets, through organic growth or acquisitions, but our primary growth strategy is currently focused on increasing our
market position in our existing markets.
We recently purchased 68 lots through an unconsolidated joint venture in an infill location of Paradise Valley in the
metropolitan Phoenix area, and have hired an experienced local division president to establish our presence in the Phoenix
market.
6
Focus on Cost Structure
Cost control throughout our business permeates our corporate culture. Our management team maintains its focus on
controlling costs and implementing measures designed to ensure that our organization is efficient. We competitively bid each
community while maintaining strong relationships with our trade partners. We manage production schedules closely and, while
respecting our valued relationships, require accountability from our vendors and trade partners.
Description of Completed Projects and Communities under Development
Our homebuilding projects usually take approximately 24 to 48 months to complete from the initiation of homebuilding
activity. Our lot development projects usually take approximately 24 to 48 months to complete from the acquisition of land.
The following table presents project information relating to each of our markets as of December 31, 2015 and should be read in
conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results
of Operations.”
Total
Number of
Homes or
Lots to
Be Built at
Completion(1)
Cumulative
Homes or
Lots
Delivered as
of December
31, 2015
Lots as of
December
31, 2015 (2)
Backlog at
December
31, 2015 (3)
Homes or
Lots
Delivered for
the Year
Ended
December 31,
2015
Sales Range of
Homes Delivered
or in Backlog
(in 000's)(4)
Project, City
Wholly-owned Projects
Southern California
Canyon Oaks, Calabasas (6)
Amelia, Irvine
Trevi, Irvine
Fiano, Newport Beach
Twenty Oaks, Thousand Oaks
Cressa, Portola Springs
Sherman Oaks 7, Sherman Oaks
Southern California Total
Northern California
Mission Blvd, Fremont
Woodbury Garden, Lafayette
Woodbury Terrace, Lafayette
Chaparral at Blackstone, El Dorado Hills
The Grove, Granite Bay
The Meadows, Folsom
Candela, Sacramento
Cannery Heirloom, Davis
Cannery Sage, Davis
Bayto, Santa Clara (6)
Shannon Townhomes, Fremont
Northern California Total
Wholly-owned Projects Total
69
70
82
39
20
95
7
382
33
36
20
72
14
40
10
72
73
33
25
428
810
95
99
99
22
72
79
40
—
39
35
11
—
—
—
85
—
26
—
—
10
40
5
15
5
—
—
101
186
92
83
86
21
—
77
2
69
8
8
8
20
3
7
123
33
10
20
72
4
—
5
57
30
33
25
289
412
3
16
13
1
72
2
38
—
6
6
25
8
—
—
45
—
—
3
6
4
—
1
6
2
—
—
22
67
1
3
2
—
14
1
10
31
—
33
30
11
Not Available
$1,850 - $2,650
$2,340 - $3,960
$3,270 - $5,770
— $1,140 - $1,400
—
—
74
—
26
Not Available
Not Available
Not Available
$1,170 - $2,020
— $1,100 - $1,190
—
8
15
5
15
5
—
—
74
148
20
28
26
13
$430 - $520
$930 - $1,800
$410 - $560
$280 - $320
$450 - $650
$990 - $1,290
Not Available
Not Available
$310 - $420
$360 - $480
$380 - $480
$360 - $520
— $1,270 - $1,650
$1,710 - $4,350
$1,780 - $2,540
56
2
145
Unconsolidated Homebuilding Joint Venture Projects(5)
Southern California
Aqua, Villa Metro, Valencia
Terra, Villa Metro, Valencia
Sol, Villa Metro, Valencia
Cielo, Villa Metro, Valencia
Avanti, Calabasas (6)
Meridian, Newport Beach
Oliva, San Juan Capistrano (7)
Southern California Total
506
361
145
7
Total
Number of
Homes or
Lots to
Be Built at
Completion(1)
Cumulative
Homes or
Lots
Delivered as
of December
31, 2015
Lots as of
December
31, 2015 (2)
Backlog at
December
31, 2015 (3)
Homes or
Lots
Delivered for
the Year
Ended
December 31,
2015
Project, City
Northern California
Garden House, Rose Lane, Larkspur
Terraces, Rose Lane, Larkspur(6)
Row Towns, Orchard Park, San Jose
Court Towns, Orchard Park, San Jose
Condo Flats, Orchard Park, San Jose
McKinley Village, Sacramento
Tidelands, San Mateo (6)
Northern California Total
Unconsolidated Homebuilding Joint Venture
Projects Total
Unconsolidated Land Joint Venture Projects(5)
Southern California
Bedford Ranch, Corona (8)
Southern California Total
Northern California
Russell Ranch, Folsom (8)
Foster Square, Foster City (8)
Cannery Park, Davis (8)(9)
Northern California Total
Unconsolidated Land Joint Venture Projects
Total
Fee Building Projects
Mendocino, Stonegate, Irvine
Mendocino Ext., Stonegate, Irvine
Strada, Orchard Hills, Irvine
Laurel, Cypress Village, Irvine
Jasmine, Cypress Village, Irvine
Jasmine Ext., Cypress Village, Irvine
Corte Bella, Orchard Hills, Irvine
Entrata, Orchard Hills, Irvine
Terrazza, Orchard Hills, Irvine
Vista Scena, Orchard Hills, Irvine
Avalon, Eastwood Village, Irvine
Belvedere, Eastwood Village, Irvine
Helena, Eastwood Village, Irvine
Marin, Eastwood Village, Irvine
Petaluma, Eastwood Village, Irvine
Piedmont, Eastwood Village, Irvine
29
42
107
60
72
336
76
722
1,228
1,435
1,435
870
421
547
1,838
3,273
133
114
224
120
102
126
118
123
149
195
156
134
142
157
106
159
29
42
48
38
29
—
—
186
547
—
—
—
421
277
698
698
133
114
105
89
102
46
109
48
43
47
—
—
—
—
—
—
—
—
59
22
43
336
76
536
681
1,200
1,200
870
—
270
1,140
2,340
—
—
119
31
—
80
9
75
106
148
156
134
142
157
106
159
—
—
21
20
33
—
4
78
109
—
—
—
—
84
84
84
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Sales Range of
Homes Delivered
or in Backlog
(in 000's)(4)
$1,650 - $3,490
$640 - $1,200
$690 - $1,010
$690 - $1,010
$730 - $1,070
Not Available
$750 - $1,360
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
12
15
39
29
25
—
—
120
265
—
—
—
155
277
432
432
7
37
96
72
70
46
106
34
33
36
—
—
—
—
—
—
537
Fee Building Projects Total
2,258
836
1,422
(1)
(2)
(3)
The number of homes or lots to be built at completion is subject to change, and there can be no assurance that we will build these homes or develop
these lots.
Consists of owned lots, fee building lots and unconsolidated joint venture lots as of December 31, 2015, including owned lots, fee building lots and
unconsolidated joint venture lots in backlog as of December 31, 2015. Of the foregoing lots, there were 23 completed and unsold homes other than
those being used as model homes.
Backlog consists of homes or lots under sales contracts that had not closed as of December 31, 2015. Delivery of sold homes or lots in backlog may
not occur. Backlog has not been reduced to reflect our historical cancellation rate. Backlog for fee building projects is not included as we are not
responsible for sales activities and do not record home sales revenues related to those projects.
8
(4)
Sales range of homes delivered or in backlog reflects actual total price for homes already sold, or that were in backlog as of December 31, 2015. The
actual prices at which homes are sold in the future may differ. Sales price range is not included for fee building projects where we are not responsible
for sales activities, nor our land development projects.
(5) We own economic interests in our unconsolidated joint ventures, which include our capital interests that generally range from 5% to 35% plus, in each
case, a share of the distributions from the joint ventures in excess of our capital interest. These economic interests vary among our different
unconsolidated joint ventures.
This project includes market-rate and below-market rate homes. The below-market rate homes are recognized as an affordable component by certain
agencies and jurisdictions. As such, the sales price range for these homes has been excluded from the table.
The Company purchased its partner's remaining membership interest in this joint venture in January 2016; following such purchase, this joint venture is
a wholly-owned project.
This project is anticipated to be a lot sale program, in which we may buy lots from the unconsolidated joint venture and/or sell lots to merchant
builders. As such, a sales range is not presented.
(6)
(7)
(8)
Summary of Owned and Controlled Lots
As of December 31, 2015, we owned or controlled, pursuant to option contracts, purchase contracts or non-binding letters
of intent, an aggregate of 1,318 lots. The following table presents certain information with respect to our unconsolidated joint
ventures, and our fee building projects owned and controlled lots(1) as of December 31, 2015.
Lots
Owned
Lots
Controlled(1)
Lots Owned
and
Controlled(1)
Wholly-Owned
Southern California
Northern California
Wholly-Owned Total
Unconsolidated Joint Ventures (2)
Homebuilding
Southern California
Northern California
Arizona
Homebuilding Total
Land Development
Southern California
Northern California
Land Development Total
Unconsolidated Joint Ventures Total
Fee Building
Southern California
Fee Building Total
123
289
412
145
536
—
681
1,200
1,140
2,340
3,021
—
—
754
152
906
—
—
68
68
235
—
235
303
1,422
1,422
877
441
1,318
145
536
68
749
1,435
1,140
2,575
3,324
1,422
1,422
(1)
(2)
Includes lots that we and our unconsolidated joint ventures control pursuant to option contracts, purchase contracts or non-binding letters of intent that
are subject to customary conditions and have not yet closed. There can be no assurance that such acquisitions will occur.
We own economic interests in our unconsolidated joint ventures, which include our capital interests that generally range from 5% to 35% plus, in each
case, a share of the distributions from the joint ventures in excess of our capital interest. These economic interests vary among our different
unconsolidated joint ventures.
9
Acquisition Process
Our land acquisition strategy is differentiated between homebuilding projects and lot development projects. For lot
development projects, we focus on developing entitled parcels that we can complete within approximately 24 to 48 months
from the date the property is acquired. For homebuilding projects, we focus on controlling development and market cycle risk
while maintaining an inventory of owned lots and lots under land option or purchase contracts sufficient for construction of
homes over a two- to three-year period from the initiation of homebuilding activity. Our acquisition process generally includes
the following steps aimed at reducing development and market cycle risk:
•
•
•
•
•
•
•
•
•
review of the status of entitlements and other governmental processing, including title reviews;
identification of target buyer and appropriate housing product;
determination of land plan to accommodate desired housing product;
completion of environmental reviews and third-party market studies;
preparation of detailed budgets for all cost categories;
completion of due diligence on the land parcel prior to committing to the acquisition;
utilization of options, joint ventures and other land acquisition arrangements, if necessary;
limitation on the size of an acquisition relative to the Company's pro forma capitalization; and
employment of centralized control of approval of all acquisitions through a tiered Corporate and Executive Committee
approval process.
Before purchasing a land parcel, we engage and work closely with outside architects and consultants to design our homes
and communities.
We also differentiate strategies depending on whether land is in a masterplan community or is not part of a larger
development. For land which is not part of a larger development, we enter into a purchase agreement with the land owner under
which we deliver a deposit which becomes non-refundable upon the expiration of a specified due diligence period. The closing
is generally tied to the date on which we have obtained development entitlements for the land. For land which is part of a larger
development being developed by a master developer, we enter into a purchase agreement with the master developer providing a
deposit that becomes non-refundable upon expiration of the due diligence period. The closing in master developments is
generally tied to issuance of final development entitlements for the land and completion by the master developer of certain
infrastructure and other improvements. In master developments we may acquire all of the land at the closing or we may
acquire the land in “phases”. In master developments we may be required to (a) pay to the master developer a share of our net
profit in excess of a specified margin and/or (b) grant the master developer the right to repurchase the land if we fail to develop
the land in accordance with applicable development requirements or wish to sell the land in bulk. Our acquisition-development
financing is generally acquired using one or more of the following: (i) through unsecured lines of credit; (ii) secured
acquisition-development loans; (iii) equity obtained from joint venture partners and/or (iv) land bank arrangements with lenders
who take title to the land at closing subject to agreements which obligate us to perform all development activities with respect
to the land and provide us with an option to purchase the land.
Homebuilding, Marketing and Sales Process
The homes that we and our unconsolidated joint ventures are building range in price from approximately $300,000 to
over $5 million, with home sizes ranging from approximately 800 to 5,400 square feet. For the years ended December 31,
2015, 2014 and 2013, the average sales price of homes delivered from our projects was approximately $1.9 million, $1.1
million and $0.4 million, respectively. The average sales price of homes delivered from our unconsolidated joint venture
projects was $1.3 million, $0.8 million and $1.2 million, for the years ended December 31, 2015, 2014 and 2013, respectively.
We typically develop communities in phases based upon projected sales. We seek to control the timing of construction of
subsequent phases in the same community based on demand as evidenced by sales of homes in prior phases and the number of
qualified potential homebuyers that exist on our priority buyer list. Our construction process is driven by sales contracts that
generally precede the start of the construction of homes. The determination that a potential home buyer is qualified to obtain
the financing necessary to complete the purchase is an integral part of our process. Once qualified, our on-site design centers,
with designers dedicated to a specific community, work with the buyer to tailor the home to meet the buyer’s needs. This
practice is designed to enhance the buyers’ design center experience and results in increased option sales.
The design of our homes must conform to zoning requirements, building codes and energy efficiency laws. As a result,
we contract with a number of architects and other consultants in connection with the design process. Substantially all of our
construction work is done by trade partners with us acting as the general contractor. We also enter into contracts as needed with
design professionals and other service providers who are familiar with local market conditions and requirements. We do not
10
have long-term contractual commitments with our trade partners, suppliers or laborers. We maintain strong and long-standing
relationships with many of our trade partners. We believe that our relationships with trade partners have been enhanced through
involving them prior to the start of a new community, maintaining our schedules and making timely payment. By dealing fairly,
we believe we are able to keep our key trade partners loyal to us.
Sales and Marketing
In connection with the sale and marketing of our homes, we make extensive use of advertising and other promotional
activities, including through our website (www.NWHM.com), social-media, brochures, direct mail and other community-
specific collateral materials. The information contained in, or that can be accessed through our website, is not incorporated by
reference and is not a part of this annual report on Form 10-K.
We primarily sell our homes through our own sales representatives. Our in-house sales force works from sales offices
located in model homes close to, or in each community. Sales representatives assist potential buyers by providing them with
floor plan, price and community amenity information, construction timetables and tours of model homes. Sales personnel are
licensed by applicable real estate bodies in their respective markets and generally have had prior experience selling new homes
in the local market.
Generally, we build model homes at each project and have them professionally decorated to display design features and
options available for purchase in the design center. We believe that model homes play a significant role in helping homebuyers
understand the efficiencies and value provided by each floor plan type. Interior decorations vary among our models and are
selected based upon the lifestyles of our targeted homebuyers. Structural changes in design from the model homes, other than
those predetermined, are not generally permitted, but homebuyers may select various other optional construction and design
amenities. Our on-site design centers are an integral part of our sales process. Specific options are selected for each community
based upon the price of the home and anticipated buyer preferences. Options include structural (room configurations or pre-
determined additional square footage), electrical, plumbing and finish options (flooring, cabinets, fixtures). In certain
communities, we also offer turn-key landscape options. Each design center is managed by our own designers dedicated to the
specific community. We believe this approach enables us to create a strong relationship with our buyers that result in fewer
cancellations and increased revenue.
We typically sell homes using sales contracts that include cash deposits by the purchasers. Before entering into sales
contracts, we pre-qualify our customers through a preferred mortgage provider. However, purchasers can generally cancel sales
contracts if they are unable to sell their existing homes, if they fail to qualify for financing, or under certain other
circumstances. Although cancellations can delay the sale of our homes, they have historically not had a material impact on our
operating results. For our projects, the cancellation rate, excluding our unconsolidated joint ventures, of buyers who contracted
to buy a home but did not close escrow as a percentage of overall orders was 10%, 13% and 16% during the years ended
December 31, 2015, 2014 and 2013, respectively. For our unconsolidated joint venture projects, the cancellation rate was 8%,
9% and 5% during the years ended December 31, 2015, 2014 and 2013, respectively. Cancellation rates are subject to a variety
of factors, including those beyond our control, such as adverse economic conditions and increases in mortgage interest rates.
Customer Financing
At each of our communities, we seek to assist our homebuyers in obtaining financing by arranging with preferred
mortgage lenders to offer qualified buyers a variety of financing options. Most homebuyers utilize long-term mortgage
financing to purchase a home, and mortgage lenders will usually make loans only to qualified borrowers.
Quality Control and Customer Service
We pay particular attention to the product design process and carefully consider quality and choice of materials in order
to attempt to eliminate building deficiencies. The quality and workmanship of the trade partners we employ are monitored
using our personnel and third-party consultants. We make regular inspections and evaluations of our trade partners to seek to
ensure that our standards are met.
We maintain a quality control and customer service staff whose role includes providing a positive experience for each
customer throughout the pre-sale, sale, building, delivery and post-delivery periods. These employees are also responsible for
providing after-sales customer service. Our quality and service initiatives include taking homebuyers on a comprehensive tour
of their home during construction and prior to delivery and using a third party, Eliant, to survey our homebuyers in order to
improve our standards of quality and customer satisfaction.
We have consistently ranked at the top end of the survey results when compared to the other builders who participate in
the Eliant survey.
11
Warranty Program
We provide a limited one-year warranty covering workmanship and materials. In addition, our limited warranty, which
generally ranges from a minimum of two years up to the period covered by the applicable statute of repose, covers certain
defined construction defects. The limited warranty covering construction defects is transferable to subsequent buyers not under
direct contract with us and requires that homebuyers agree to the definitions and procedures set forth in the warranty, including
the submission of unresolved construction-related disputes to binding arbitration. Additionally, we have dedicated customer
service staff that work with our homebuyers and coordinate with trade partners, as necessary, during the warranty period. We
believe that our reserves are adequate to cover the ultimate resolution of our potential liabilities associated with known and
anticipated warranty and construction defect related claims and litigation.
We subcontract our homebuilding work to trade partners who generally provide us with an indemnity prior to receiving
payments for their work. Accordingly, claims relating to workmanship and materials are generally the primary responsibility of
our trade partners.
We purchase general liability insurance that covers development and construction activity at each of our communities.
Our trade partners are usually covered by these programs through an owner-controlled insurance program, or "OCIP."
See Item 1A - Risk Factors - "We are subject to product liability and warranty claims arising in the ordinary course of
business."
Seasonality
We have experienced seasonal variations in our quarterly operating results and capital requirements in each of our
reportable segments. We typically take orders for more homes in the first half of the fiscal year than in the second half, which
creates additional working capital requirements in the second and third quarters to build our inventories to satisfy the deliveries
in the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by
volatility in the homebuilding industry.
Raw Materials
Typically, all the raw materials and most of the components used in our business are readily available in the United
States. Most are standard items carried by major suppliers. However, a rapid increase in new home construction could cause
shortages in the availability of such materials or in the price of services, thereby leading to delays in the delivery of homes
under construction. We continue to monitor the supply markets to achieve favorable prices.
Joint Ventures
Our joint venture strategy has been instrumental in leveraging our entity-level capital and establishing a homebuilding
and land development platform focused on high-growth, land-constrained markets. We own economic interests in our
unconsolidated joint ventures, which include our capital interests that generally range from 5% to 35% plus, in each case, a
share of the distributions from the joint ventures in excess of our capital interest. These economic interests vary among our
different unconsolidated joint ventures. We also earn management fees from such joint ventures.
12
—
—
74
6
1
—
—
124
33
2
—
336
10
—
—
14
38
870
—
72
85
115
282
77
—
2
—
421
—
40
870
421
72
—
—
—
—
—
—
—
—
—
—
—
We serve as the administrative member, manager or managing member of each of our 10 homebuilding and four land
development joint ventures. We do not, however, exercise control over the joint ventures, as the joint venture agreements
generally provide our respective partners with the right to consent to certain actions. Under the joint venture agreements,
certain major decisions must be approved by the applicable joint venture’s executive committee, which is comprised of both
our representatives and representatives of our joint venture partners. In addition, some of our joint venture agreements grant
both partners a buy-sell right pursuant to which, subject to certain exceptions, either partner may initiate procedures requiring
the other partner to choose between selling its interest to the other partner or buying the other partner’s interest. Additional
information on our unconsolidated joint ventures is set forth below.
Entity Name (Project Name)
Location
Percent-
age of
Capital
Contri-
buted
by Us (1)
Our equity
balance as of
December
31,
2015 (2)
(in 000's)
Total Unconsolidated Joint Venture (in
000's)
Assets
Debt (3)
Equity (2)
Total
Number
of
Homes/
Lots
Opening/
Planned
Opening(4)
Cumulative
homes or
lots
delivered
as of
December
31,
2015
Backlog
as of
December
31,
2015 (5)
Lots
Owned
as of
December
31,
2015
Lots
Controlled
as of
December
31,
2015
Irvine, CA
5% $
61 $
2,443 $
— $
201
2012
169
169
LR8 Investors, LLC
(Lambert Ranch)
Larkspur Land 8
Investors, LLC (Rose
Lane)
TNHC-HW San Jose,
LLC (Orchard Park)
Larkspur,
CA
San Jose,
CA
TNHC-TCN Santa
Clarita LP (Villa Metro)
Santa
Clarita, CA
TNHC Newport LLC
(Meridian)
Newport
Beach, CA
Encore McKinley
Village, LLC (McKinley
Village)
TNHC San Juan LLC
(Oliva)(6)
TNHC Russell Ranch
LLC (Russell Ranch)(7)
Sacramento,
CA
San Juan
Capistrano,
CA
10%
15%
10%
12%
115
3,046
—
1,149
2013
7,346
72,807
19,305
48,974
2014
420
11,211
6,747
2,514
2013
2,022
16,270
—
8,544
2014
85
239
315
79
10%
4,770
51,986
774
47,670
2016
336
20%
12,954
42,462
14,104
26,539
2015
Folsom, CA 35%
8,233
44,189
20,000
23,525
2017
TNHC-HW Foster City
LLC (Foster Square)(7)
Foster City,
CA
Calabasas Village LP
(Avanti)
Calabasas,
CA
35%
10%
51
14,680
—
110
2014
2,883
52,170
19,855
28,831
2015
TNHC-HW Cannery
LLC (Cannery Park)(7)
Arantine Hills Holdings
LP (Bedford Ranch)(7)
Davis, CA
35%
11,119
43,064
Corona, CA
5%
4,509
90,637
—
—
90,170
2017
1,435
TNHC Tidelands LLC
(Tidelands)
San Mateo,
CA
TNHC Mountain
Shadows LLC
(Mountain Shadows)
Paradise
Valley, AZ
20%
4,589
37,883
14,105
20,947
2015
25%
1,500
3,069
—
3,000
2016
76
68
—
—
—
— 1,200
235
4
—
76
—
—
68
31,040
2014
547
277
84
270
Total Unconsolidated Joint Ventures
$ 60,572 $ 485,917 $ 94,890 $ 333,214
4,752
1,428
193
3,021
303
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Based on target capital contribution percentages.
Amounts reflect capital contributions, distributions and cumulative net income or loss.
Scheduled maturities of the unconsolidated joint venture debt as of December 31, 2015 are as follows: $16.4 million matures in 2016, $77.7 million
matures in 2017, $0 matures in 2018 and $0.8 million matures in 2019.
Represents planned year in which model homes will be open for sales at the communities, except for land development joint ventures where it
represents expected commencement date of lot sales.
Backlog consists of homes or lots under sales contracts that had not yet closed as of December 31, 2015, and there can be no assurance that delivery of
sold homes or lots will occur. Backlog has not been reduced to reflect our historical cancellation rate.
The Company purchased its partner's remaining membership interest in this joint venture in January 2016.
Land development joint ventures.
Fee Building Services
Although our primary business focus is building and selling homes for our own account, we also selectively provide
construction services to build homes for independent third-party property owners, some of which have been or may be
marketed under The New Home Company brand name. We refer to these projects as “fee building projects.” Our services with
13
respect to fee building projects may include design, development, construction and sale of the homes, and we may take a
project at any stage of development through its completion and sale. We earn revenue on our fee building projects either as a
flat fee for the project or as a percentage of the cost or revenue of the project depending upon the terms of the agreement with
our customer. The Company’s fee building revenues have historically been concentrated with a small number of customers.
We have several fee building agreements with Irvine Pacific, LP and revenues from this customer exceed 10% of our
consolidated revenues. See Item 1A - Risk Factors - "A large proportion of our fee building revenue is from one customer,"
Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Fee Building" and Note 1
"Revenue Recognition - Fee Building" to the Consolidated Financial Statements for further discussion of this revenue
concentration.
Segments
The Company’s operations are organized into two reportable segments: homebuilding and fee building. For financial
information about our segments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 14 to the Consolidated Financial Statements.
Government Regulation and Environmental Matters
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning,
development, building design, construction and similar matters, which impose restrictive zoning and density requirements, the
result of which is to limit the number of homes that can be built within the boundaries of a particular area. Projects that are not
entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in
certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely
from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be
implemented in the future. Local governments also have broad discretion regarding the imposition of development fees and
exactions for projects in their jurisdiction. Projects for which we have received land use and development entitlements or
approvals may still require a variety of other governmental approvals and permits during the development process and can also
be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their
development.
We are also subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the
environment. The particular environmental laws which apply to any given homebuilding site vary according to multiple factors,
including the site’s location, its environmental conditions and the present and former uses of the site, as well as adjoining
properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other
costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas. In addition, in
those cases where an endangered or threatened species is involved, environmental rules and regulations can result in the
restriction or elimination of development in identified environmentally sensitive areas. From time to time, the EPA and similar
federal or state agencies review homebuilders’ compliance with environmental laws and may levy fines and penalties for failure
to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of
past failures. Any such actions taken with respect to us may increase our costs. Further, we expect that increasingly stringent
requirements will be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the
availability and price of certain raw materials such as lumber. California is especially susceptible to restrictive government
regulations and environmental laws.
Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties,
may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held
liable to a governmental entity or to third parties for related damages, including for bodily injury, and for investigation and
clean-up costs incurred by such parties in connection with the contamination. A mitigation system may be installed during the
construction of a home if a cleanup does not remove all contaminants of concern or to address a naturally occurring condition
such as methane. Some buyers may not want to purchase a home with a mitigation system.
Refer to Part I, Item 1A. “Risk Factors” of this annual report on Form 10-K for risks related to government regulation and
environmental matters.
Competition
We believe our on-site design studios, our emphasis on customer care, and reputation for high quality, differentiated
architecture and design provides us a competitive advantage, however, competition in the homebuilding industry is intense, and
there are relatively low barriers to entry into our business. Homebuilders compete for, among other things, home-buying
14
customers, desirable land parcels, financing, raw materials and skilled labor. Increased competition could hurt our business, as
it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive,
hinder our market share expansion, and lead to pricing pressures on our homes that may adversely impact our margins and
revenues. If we are unable to successfully compete, our business, prospects, liquidity, financial condition and results of
operations could be materially and adversely affected. Our competitors may independently develop land and construct homes
that are superior or substantially similar to our products. Furthermore, a number of our primary competitors are significantly
larger, have a longer operating history and may have greater resources or lower cost of capital than us. Accordingly, they may
be able to compete more effectively in one or more of the markets in which we operate. Many of these competitors also have
longstanding relationships with trade partners and suppliers in the markets in which we operate. We also compete for sales with
individual resales of existing homes and with available rental housing.
Employees
As of December 31, 2015, we had 272 employees, 102 of whom were executive, management and administrative
personnel located in our offices, 60 of whom were sales and marketing personnel and 110 were involved in field construction.
Although none of our employees are covered by collective bargaining agreements, certain of the third party trade partners
engaged by us primarily as general contractors are represented by labor unions or are subject to collective bargaining
arrangements. We believe that relations with our employees and trade partners are good. See Item 1A, “Risk Factors—Our
business and results of operations depend on the availability and skill of trade partners.”
Our Offices
Our principal executive offices are located at 85 Enterprise, Suite 450, Aliso Viejo, California 92656. Our main telephone
number is (949) 382-7800. Our internet website is www.NWHM.com. We will make available through our website our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or
furnished pursuant to Section 13(d) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after
filing with, or furnishing to, the Securities and Exchange Commission. Copies of these reports, and any amendment to them,
are available free of charge upon request. The information contained in, or that can be accessed through our website is not
incorporated by reference and is not part of this annual report on Form 10-K.
15
Item 1A.
Risk Factors
You should carefully consider the following risk factors, which address the material risks concerning our business,
together with the other information contained in this annual report on Form 10-K. If any of the risks discussed in this annual
report on Form 10-K occur, our business, prospects, liquidity, financial condition and results of operations could be materially
and adversely affected, in which case the trading price of our common stock could decline significantly and you could lose part
or all of your investment. Some statements in this annual report, including statements in the following risk factors, constitute
forward-looking statements. Please refer to the initial section of this annual report entitled “Cautionary Note Concerning
Forward-Looking Statements.”
Risks Related to Our Business
Our long-term growth depends upon our ability to successfully identify and acquire desirable land parcels for residential
buildout for reasonable prices.
Our future growth depends upon our ability to successfully identify and acquire attractive land parcels for development of
our single-family homes at reasonable prices and with terms that meet our underwriting criteria. Our ability to acquire land
parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the
willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of
financing to acquire land parcels, zoning and other market conditions. We currently depend primarily on the California markets
and availability of land parcels in that market at reasonable prices is limited. If the supply of land parcels appropriate for
development of single-family homes is limited because of these factors, or for any other reason, our ability to grow could be
significantly limited, and the number of homes that we build and sell could decline. Additionally, our ability to begin new
projects could be impacted if we elect not to purchase land parcels under option contracts. To the extent that we are unable to
purchase land parcels timely or enter into new contracts for the purchase of land parcels at reasonable prices, our home sales
revenue and results of operations could be adversely impacted.
The homebuilding industry is cyclical and affected by changes in general economic, real estate and other business
conditions that could reduce the demand for new homes and, as a result, adversely impact our results of operations,
financial condition and cash flows.
The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic, real estate and
other business conditions such as levels of employment, consumer confidence and income, availability of mortgage financing
for acquisitions, construction and permanent mortgages, interest rate levels, demographic trends, homebuyer preferences for
specific designs or locations, real estate taxes, inflation and supply of and demand for new or existing homes. The foregoing
conditions, among others, are complex and interrelated. Periods of prolonged economic downturn, high unemployment levels,
increases in the rate of inflation and uncertainty in the U.S. economy, have contributed to decreased demand for housing,
declining sales prices and increasing pricing pressure. In the event that these economic and business trends occur, we could
experience declines in the market value of our inventory and demand for our homes, which could have a material adverse effect
on our business, prospects, liquidity, financial condition and results of operations. Adverse economic conditions outside the
U.S., such as Asia, India or Canada, may also adversely affect the demand for our homes to the extent such conditions impact
the amount of potential homebuyers from such regions in our markets.
In addition, an important segment of our customer base consists of first time and second time “move-up” buyers, who
often purchase homes contingent upon the sale of their existing homes. The difficulties facing these buyers in selling their
homes during recessionary periods may adversely affect our sales. Moreover, during such periods, we may need to reduce our
sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins.
Because most of our homebuyers finance the purchase of their homes, the terms and availability of mortgage
financing can affect the demand for and the ability to complete the purchase of a home, which could materially and
adversely affect us.
Our business depends on the ability of our homebuyers to obtain financing for the purchase of their homes. Many of our
homebuyers must sell their existing homes in order to buy a home from us. Since 2009, the U.S. residential mortgage market as
a whole has experienced significant instability due to, among other things, defaults on subprime and other loans, resulting in
the declining market value of such loans. In light of these developments, lenders, investors, regulators and other third parties
questioned the adequacy of lending standards and other credit requirements for several loan programs made available to
borrowers in recent years. This has led to tightened credit requirements and underwriting standards, and an increase in
16
indemnity claims for mortgages. Deterioration in credit quality among subprime and other nonconforming loans has caused
most lenders to eliminate subprime mortgages and most other loan products that do not conform to Federal National Mortgage
Association, or Fannie Mae, Federal Home Loan Mortgage Corporation, or Freddie Mac, Federal Housing Administration, or
FHA, or Veterans Administration, or the VA, standards. Fewer loan products and tighter loan qualifications, in turn, make it
more difficult for a borrower to finance the purchase of a new home or the purchase of an existing home from a potential
“move-up” buyer who wishes to purchase one of our homes. In general, these developments have delayed any general
improvement in the housing market. If our potential homebuyers or the buyers of our homebuyers’ existing homes cannot
obtain suitable financing, our business, prospects, liquidity, financial condition and results of operations could be materially
and adversely affected.
Changes in tax laws can increase the after tax cost of owning a home, and further tax law changes could adversely
affect demand for the homes we build.
Under current tax law certain significant expenses of owning a home, including mortgage loan interest costs and real
estate taxes, generally are deductible expenses for the purpose of calculating an individual’s federal, and in some cases state,
tax liability. However, the American Taxpayer Relief Act of 2012, which was signed into law in January 2013, resulted in
higher income tax rates and limits the amount of mortgage interest individuals can deduct in computing their income tax
liability. The limit on deductibility of mortgage interest can increase the after-tax cost of owning a home for some individuals.
Any additional increases in personal income tax rates and/or additional tax deduction limits could adversely impact demand for
new homes, including homes we build, which could adversely affect our results of operations.
Interest rate increases or changes in federal lending programs or other regulations could lower demand for our
homes, which could materially and adversely affect us.
Substantially all purchasers of our homes finance their acquisitions with mortgage financing. Rising interest rates,
decreased availability of mortgage financing or of certain mortgage programs, higher down payment requirements or increased
monthly mortgage costs may lead to reduced demand for our homes and mortgage loans. Increased interest rates can also
hinder our ability to realize our backlog because our home purchase contracts provide customers with a financing contingency.
Financing contingencies allow customers to cancel their home purchase contracts in the event that they cannot arrange for
adequate financing. As a result, rising interest rates can decrease our home sales. Any of these factors could have a material
adverse effect on our business, prospects, liquidity, financial condition and results of operations.
In addition, as a result of the turbulence in the credit markets and mortgage finance industry, the federal government has
taken on a significant role in supporting mortgage lending through its conservatorship of Fannie Mae and Freddie Mac, both of
which purchase home mortgages and mortgage-backed securities originated by mortgage lenders, and its insurance of
mortgages originated by lenders through the FHA and the VA. The availability and affordability of mortgage loans, including
interest rates for such loans, could be adversely affected by a curtailment or cessation of the federal government’s mortgage-
related programs or policies. The FHA may continue to impose stricter loan qualification standards, raise minimum down
payment requirements, impose higher mortgage insurance premiums and other costs, or limit the number of mortgages it
insures. Due to federal budget deficits, the U.S. Treasury may not be able to continue supporting the mortgage-related activities
of Fannie Mae, Freddie Mac, the FHA and the VA at present levels, or it may revise significantly the federal government’s
participation in and support of the residential mortgage market. Because the availability of Fannie Mae, Freddie Mac, FHA and
VA-backed mortgage financing is an important factor in marketing and selling many of our homes, any limitations, restrictions
or changes in the availability of such government-backed financing could reduce our home sales, which could have a material
adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Furthermore, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This
legislation provides for a number of new requirements relating to residential mortgages and mortgage lending practices, many
of which are to be developed further by implementing rules. These include, among others, minimum standards for mortgages
and lender practices in making mortgages, limitations on certain fees and incentive arrangements, retention of credit risk and
remedies for borrowers in foreclosure proceedings. The effect of such provisions on lending institutions will depend on the
rules that are ultimately enacted. However, these requirements, as and when implemented, are expected to reduce the
availability of loans to borrowers or increase the costs to borrowers to obtain such loans. Any such reduction could result in a
decline of our home sales, which could materially and adversely affect us.
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Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current
markets declines.
Our business strategy is focused on the design, construction and sale of innovative single-family detached and attached
homes in planned communities in major metropolitan areas in coastal Southern California, the San Francisco Bay area, metro
Sacramento and the greater Phoenix area and the potential entry into other markets. Because our operations are concentrated in
these areas, a prolonged economic downturn affecting one or more of these areas, or affecting any sector of employment on
which the residents of such area are dependent, could have a material adverse effect on our business, prospects, liquidity,
financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more
diversified operations. During the downturn from 2008 to 2011, land values, the demand for new homes and home prices
declined substantially in California. In addition, the state of California recently experienced severe budget shortfalls and has
raised taxes and increased fees to offset the deficit. Accordingly, our sales, results of operations, financial condition and
business could be negatively impacted by a decline in the economy, the job sector or the homebuilding industry in the Western
U.S. regions in which our operations are concentrated.
Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which
could materially and adversely affect us.
The residential construction industry experiences serious labor and raw material shortages from time to time, including
shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material
shortages can be more severe during periods of strong demand for housing or during periods where the regions in which we
operate experience natural disasters that have a significant impact on existing residential and commercial structures. The cost of
labor and raw materials may also increase during periods of shortage or high inflation. During past economic downturns, a
large number of qualified trade partners went out of business or otherwise exited the market. A reduction in available trade
partners will likely exacerbate labor shortages when demand for new housing increases. Shortages and price increases could
cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business,
prospects, liquidity, financial condition and results of operations.
Because of the seasonal nature of our business, our quarterly operating results fluctuate.
As discussed under “Management’s Discussion and Analysis of Financial Condition—Liquidity and Capital Resources—
Seasonality” we have experienced seasonal fluctuations in our quarterly operating results and capital requirements that can
have a material impact on our results and our consolidated financial statements. We typically experience the highest new home
order activity in spring and summer, 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 four to ten months to construct a new
home, we deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries.
Because of this seasonality, home starts, construction costs 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. We
expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding
industry. We expect the traditional seasonality cycle and its impact on our results to become more prominent if and as the
present housing recovery progresses and the homebuilding industry returns to a more normal operating environment, but we
can make no assurances as to the degree to which our historical seasonal patterns will occur in 2016 and beyond, if at all.
Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for
housing, all of which could materially and adversely affect us.
As a homebuilder and land developer, we are subject to the risks associated with numerous weather-related and geologic
events, many of which are beyond our control. These weather-related and geologic events include but are not limited to
droughts, floods, wildfires, landslides, soil subsidence and earthquakes. The occurrence of any of these events could damage
our land parcels and projects, cause delays in the completion of our projects, reduce consumer demand for housing and cause
shortages and price increases in labor or raw materials, any of which could harm our sales and profitability. Our California
markets are in areas which have historically experienced significant earthquake activity and seasonal wildfires. In addition to
directly damaging our land or projects, earthquakes, wildfires or other geologic events could damage roads and highways
providing access to those projects, thereby adversely affecting our ability to market homes in those areas and possibly
increasing the costs of completion.
There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated
with landslides, earthquakes and other geologic events may not be insurable, and other losses, such as those arising from
terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business,
prospects, liquidity, financial condition and results of operations.
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If the market value of our land or housing inventory decreases, our results of operations could be adversely affected
by impairments and write-downs.
The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into
new markets and for replacement of land inventory and expansion within our current markets. There is an inherent risk that the
value of the land owned or controlled by us may decline after purchase. The valuation of property is inherently subjective and
based on the individual characteristics of each property. We may have acquired options on or bought and developed land at a
cost we will not be able to recover fully or on which we cannot build and sell homes profitably. In addition, our deposits for
lots controlled under option or similar contracts may be put at risk. Factors such as changes in regulatory requirements and
applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of
financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax
consequences, and interest and inflation rate fluctuations subject the market value of land owned, controlled or optioned by us
to uncertainty. Moreover, all valuations are made on the basis of assumptions that may not prove to reflect economic or
demographic reality. If housing demand decreases below what we anticipated when we acquired our inventory, our results of
operations and financial conditions may be adversely affected and we may not be able to recover our costs when we sell and
build houses. We regularly review the value of our land holdings and continue to review our holdings on a periodic basis.
Material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or
homes at a loss, which could adversely affect our results of operations and financial condition.
Any limitation on, or reduction or elimination of, tax benefits associated with owning a home would decrease the
demand for our home products and land, which could be material to our business.
Changes in federal income tax laws may affect the demand for new homes and land suitable for residential development.
Current tax laws generally permit significant expenses associated with owning a home, primarily mortgage interest expense and
real estate taxes, to be deducted for the purpose of calculating an individual’s federal, and in many cases, state, taxable income.
Various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gains from
the sale of a principal residence. For instance, under the American Taxpayer Relief Act of 2012, which was signed into law in
January 2013, the federal government enacted higher income tax rates and limits on the value of tax deductions for certain
high-income individuals and households. If the federal government or a state government changes or further changes its income
tax laws, as some lawmakers have proposed, by eliminating, limiting or substantially reducing these income tax benefits
without offsetting provisions, the after-tax cost of owning a new home would increase for many of our potential customers.
Enactment of any such proposal may have an adverse effect on the homebuilding industry in general, as the loss or reduction of
homeowner tax deductions could decrease the demand for new homes and adversely affect our business.
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.
The homebuilding and land development industry is capital-intensive and requires significant up-front expenditures to
acquire land parcels and begin development. If internally generated funds are insufficient to cover our liquidity needs, we may
seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank
financings, formation of joint venture relationships or securities offerings. The availability of borrowed funds, especially for
land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require
increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of
existing loans. The credit and capital markets have recently experienced significant volatility. If we are required to seek
additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such
financing. If we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be
unable to acquire land for our housing developments or to develop housing. Additionally, if we cannot obtain additional
financing to fund the purchase of land under our option contracts or purchase contracts, we may incur contractual penalties and
fees. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays, which
could increase our costs. Any one or more of the foregoing events could have a material adverse effect on our business,
prospects, liquidity, financial condition and results of operations.
Our current and future joint venture investments could be adversely affected by a lack of sole decision-making
authority and reliance on the financial condition and liquidity of our joint venture partners.
We own interests in projects through 15 joint ventures, 14 of which are unconsolidated. As of December 31, 2015, we had
investments in our unconsolidated joint ventures of $60.6 million. We have entered into joint ventures in order to acquire
attractive land positions, to manage our risk profile and to leverage our capital base. We may enter into additional joint
ventures in the future, thereby reducing the amount of capital required by us to make investments and diversifying our capital
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sources for growth. Such joint venture investments involve risks not otherwise present in wholly owned projects, including the
following:
• we do not have exclusive control over the development, financing, management and other aspects of the project or
joint venture, which may prevent us from taking actions that are in our best interest but opposed by our partners;
•
•
joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the
interest when we desire or on advantageous terms, which causes the investment to be very illiquid;
our existing joint venture agreements contain, and any future joint venture agreements may contain, buy-sell
provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying
the other partner’s interest or selling its interest to that partner; we may not have the capital to purchase our joint
venture parties’ interest under these circumstances even if we believe it would be beneficial to do so;
• we cannot exercise sole decision-making authority regarding the project or joint venture, which could create the
potential risk of creating impasses on decisions, such as acquisitions or sales;
•
•
•
•
a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with
our business interests or goals;
a partner may fail to fund its share of required capital contributions or may become bankrupt, which generally would
cause us and any other remaining partners to remain liable for the joint venture’s liabilities;
our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the
applicable joint venture agreements, and, in such event, we may not continue to own or operate the interests or assets
underlying such relationship or may need to purchase such interests or assets at a premium to the market price to
continue ownership;
disputes between us and our partners may result in litigation or arbitration that would increase our expenses and
prevent our officers and directors from focusing their time and efforts on our business and could result in subjecting
the projects owned by the joint venture to additional risk; or
• we may be liable for joint venture obligations where the joint venture is a partnership and we serve as a general
partner.
Additionally, our joint ventures typically obtain secured acquisition, development and construction financing. Generally,
we and our joint venture partners have provided varying levels of credit enhancements or other obligations of our
unconsolidated joint ventures. These arrangements include loan-to-value ("LTV") maintenance agreements in order to secure
performance under the loans and maintain certain LTV ratios, construction completion guaranties, repayment guaranties and
environmental indemnities. If one or more of the arrangements under these debt agreements were drawn upon or otherwise
invoked (for example, if there are not adequate funds available under the specific project loans, and we were to potentially
become subject to financial liability under a completion guaranty) our obligations could be significant, individually or in the
aggregate, which could have a material adverse effect on our financial position or results of operations. See Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Off-Balance Sheet Arrangements and Contractual Obligations” and Note 11 to the Consolidated Financial Statements for more
information on LTV maintenance agreements and completion guaranties.
Any of the above might subject a project to liabilities in excess of those contemplated and adversely affect the value of
our current and future joint venture investments.
We face potentially substantial risk with respect to our land and lot inventory.
We intend to acquire land parcels for replacement and expansion of land inventory within our current and any new
markets. The risks inherent in purchasing and developing land parcels increase as consumer demand for housing decreases. As
a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. The market value of land
parcels, building lots and housing inventories can fluctuate significantly as a result of changing market conditions, and the
measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory
values. When market conditions drive land values down, option agreements we have previously entered into may become less
desirable, at which time we may elect to forego deposits and pre-acquisition costs and terminate the agreements. Land parcels,
building lots and housing inventories are illiquid assets, and we may not be able to dispose of them efficiently or at all if we are
in financial distress. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing
project or market. In the event of significant changes in economic or market conditions, we may have to sell homes at
significantly lower margins or at a loss, if we are able to sell them at all.
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Our business and results of operations depend on the availability and skill of trade partners.
Substantially all of our construction work is done by third-party trade partners with us acting as the general contractor.
Accordingly, the timing and quality of our construction depend on the availability and skill of our trade partners. We do not
have long-term contractual commitments with any trade partners, and there can be no assurance that skilled subcontractors will
continue to be available at reasonable rates and in the areas in which we conduct our operations. Certain of the trade partners
engaged by us are represented by labor unions or are subject to collective bargaining arrangements that require the payment of
prevailing wages that are higher than normally expected on a residential construction site. A strike or other work stoppage
involving any of our subcontractors could also make it difficult for us to retain subcontractors for our construction work. In
addition, union activity could result in higher costs to retain our subcontractors. The inability to contract with skilled trade
partners at reasonable costs on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial
condition and results of operations.
In addition, despite our quality control efforts, we may discover that our trade partners were engaging in improper
construction practices or installing defective materials in our homes. When we discover these issues, we, generally through our
trade partners, repair the homes in accordance with our new home warranty and as required by law. Reserves are established
based on market practices, our historical experiences and our judgment of the qualitative risks associated with the types of
homes built. However, the cost of satisfying our warranty and other legal obligations in these instances may be significantly
higher than our reserves, and we may be unable to recover the cost of repair from such trade partners. Regardless of the steps
we take, we can in some instances be subject to fines, litigation, or other penalties, and our reputation and our financial
condition may be adversely affected.
New and existing 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.
We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning,
development, building design, construction and similar matters which impose restrictive zoning and density requirements,
which can limit the number of homes that can be built within the boundaries of a particular area. Projects that are not entitled
may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain
specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from
developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be
implemented in the future. Local governments also have broad discretion regarding the imposition of development fees,
assessments and exactions for projects in their jurisdiction. Projects for which we have received land use and development
entitlements or approvals may still require a variety of other governmental approvals and permits during the development
process and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these
projects or prevent their development. As a result, home sales could decline and costs could increase, which could have a
material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
We may not be able to compete effectively against competitors in the homebuilding industry.
We operate in a very competitive environment which is characterized by competition from a number of other
homebuilders in each market in which we operate. Additionally, there are relatively low barriers to entry into our business. We
compete with numerous large national and regional homebuilding companies and with smaller local homebuilders and land
developers for, among other things, home buyers, desirable land parcels, financing, raw materials and skilled management and
labor resources. Our competitors may independently develop land and construct homes that are superior or substantially similar
to our products. Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on
which to build homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase
our selling incentives and reduce our prices. An oversupply of homes available for sale and the heavy discounting of home
prices by some of our competitors have adversely affected demand for homes in the market as a whole and could do so again in
the future. We also compete with the resale, or “previously owned,” home market. If we are unable to compete effectively in
our markets, our business could decline disproportionately to our competitors, and our results of operations and financial
condition could be adversely affected.
We may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding
competitors whose operations are more geographically diversified than ours, as these competitors may be better able to
withstand any future regional downturn in the housing market. We compete directly with a number of large national and
regional homebuilders that may have longer operating histories and greater financial and operational resources than we do.
Many of these competitors also have longstanding relationships with subcontractors, local governments and suppliers in the
markets in which we operate or in which we may operate in the future. This may give our competitors an advantage in securing
materials and labor at lower prices, marketing their products and allowing their homes to be delivered to customers more
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quickly and at more favorable prices. This competition could reduce our market share and limit our ability to expand our
business as we have planned.
We may be unable to obtain suitable bonding for the development of our housing projects.
We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects.
As a result of market conditions, surety providers have been reluctant to issue new bonds and some providers are requesting
credit enhancements (such as cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. If we
are unable to obtain required bonds in the future for our projects, or if we are required to provide credit enhancements with
respect to our current or future bonds, our business, prospects, liquidity, financial condition and results of operations could be
materially and adversely affected.
We are subject to environmental laws and regulations, which may increase our costs, limit the areas in which we can
build homes and delay completion of our projects.
We are subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the
environment. The particular environmental laws which apply to any given property vary according to multiple factors,
including the property’s location, its environmental conditions, the present and former uses of the property, the presence or
absence of endangered plants or animals or sensitive habitats, as well as conditions at nearby properties. Environmental laws
and conditions may result in delays, may cause us to incur substantial compliance and other costs and can prohibit or severely
restrict development and homebuilding activity in environmentally sensitive regions or areas. In addition, in those cases where
an endangered or threatened species is involved and agency rulemaking and litigation are ongoing, the outcome of such
rulemaking and litigation can be unpredictable, and at any time can result in unplanned or unforeseeable restrictions on or even
the prohibition of development in identified environmentally sensitive areas. From time to time, the EPA and similar federal,
state or local agencies review land developers’ and homebuilders’ compliance with environmental laws and may levy fines and
penalties for failure to strictly comply with applicable environmental laws, including those applicable to control or storm water
discharges during construction, or impose additional requirements for future compliance as a result of past failures. Any such
actions taken with respect to us may increase our costs and result in project delays. We expect that increasingly stringent
requirements will be imposed on land developers and homebuilders in the future. Environmental regulations can also have an
adverse impact on the availability and price of certain raw materials such as lumber, and on other building materials.
California is especially susceptible to restrictive government regulations and environmental laws. For example, California
imposes notification obligations respecting environmental conditions, sometimes recorded on deeds, and also those required to
be delivered to persons accessing property or to home buyers or renters, which may cause some persons, or their financing
sources, to view the subject parcels as less valuable or as impaired. California has also enacted so-called “climate change”
legislation, which could result in additional costs to achieve energy use or energy efficiency mandates, alter community
layouts, meet “green building” standards and impose carbon or other greenhouse gas reductions or offset obligations, and could
result in other costs or obligations as well.
Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties,
may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held
liable to a governmental entity or to third parties for related damages, including for bodily injury, and for investigation and
clean-up costs incurred by such parties in connection with the contamination. A mitigation system may be installed during the
construction of a home if a cleanup does not remove all contaminants of concern or to address a naturally occurring condition
such as methane. Some buyers may not want to purchase a home with a mitigation system.
Ownership, leasing or occupation of land and the use of hazardous materials carries potential environmental risks
and liabilities.
We are subject to a variety of local, state and federal statutes, rules and regulations concerning land use and the protection
of health and the environment, including those governing discharge of pollutants to soil, water and air, including asbestos, the
handling of hazardous materials and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation
or remediation of man-made or natural hazardous or toxic substances located on, under or in a property currently or formerly
owned, leased or occupied by us, whether or not we caused or knew of the pollution. The costs of any required removal,
investigation or remediation of such substances or the costs of defending against environmental claims may be substantial. The
presence of such substances, or the failure to remediate such substances adequately, may also adversely affect our ability to sell
the land or to borrow using the land as security. Environmental impacts from historical activities have been identified at some
of the projects we have developed in the past and additional projects are located on land that was contaminated by previous use.
The particular impact and requirements of environmental laws that apply to any given community vary greatly according
to the community site, the site’s environmental conditions and the present and former uses of the site. We expect that
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increasingly stringent requirements may be imposed on land developers and homebuilders in the future. Environmental laws
may result in delays, cause us to implement time consuming and expensive compliance programs and prohibit or severely
restrict development in certain environmentally sensitive regions or areas, such as wetlands. We also may not identify all of
these concerns during any pre-acquisition or pre-development review of project sites, and concerns could arise due to post-
acquisition changes in laws or agency policies, or the interpretation thereof. Furthermore, we could incur substantial costs,
including cleanup costs, fines, penalties and other sanctions and damages from third-party claims for property damage or
personal injury, as a result of our failure to comply with, or liabilities under, applicable environmental laws and regulations. In
addition, under environmental laws and regulations, third parties, such as environmental groups or neighborhood associations,
may challenge the permits and other approvals required for our projects and operations. These matters could adversely affect
our business, prospects, liquidity, financial condition and results of operations.
We may be liable for claims for damages as a result of use of hazardous materials.
As a land development and homebuilding business with a wide variety of historic ownership, development, homebuilding
and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous
materials, including building materials or fixtures known or suspected to be hazardous or to contain hazardous materials or due
to use of building materials or fixtures which are associated with elevated mold. Many of the agreements pursuant to which we
purchase land for development provide that we purchase the land “as is” and that the seller of the land makes no representation
as to the existence of any environmental contaminants. Accordingly, we have to rely on our own investigation as to the
existence of environmental contaminants, and we may not be able to identify all pre-existing environmental contaminants at the
time we purchase the land. Any such claims may adversely affect our business, prospects, liquidity, financial condition and
results of operations. Insurance coverage for such claims may be limited or non-existent.
If we are unable to develop our communities successfully or within expected timeframes, our results of operations
could be adversely affected.
Before a community generates any revenue, time and material expenditures are required to acquire land, obtain
development approvals and construct significant portions of project infrastructure, amenities, model homes and sales facilities.
It can take several years from the time we acquire control of a property to the time we make our first home sale on the site.
Delays in the development of communities expose us to the risk of changes in market conditions for homes. A decline in our
ability to develop and market our communities successfully and to generate positive cash flow from these operations in a timely
manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and
to meet our working capital requirements.
Increases in our cancellation rate could have a negative impact on our home sales revenue and homebuilding
margins.
In connection with the sale of a home we collect a deposit from the homebuyer that is a small percentage of the total
purchase price. Upon a home order cancellation, the homebuyer’s escrow deposit is returned to the homebuyer (other than with
respect to certain design-related deposits, which we retain). Home order cancellations can result from a number of factors,
including declines or slow appreciation in the market value of homes, increases in the supply of homes available to be
purchased, increased competition, higher mortgage interest rates, and changes in homebuyers' financial condition. Home order
cancellations negatively impact our financial and operating results due to a negative impact on the number of closed homes, net
new home orders, home sales revenue and results of operations, as well as the number of homes in backlog.
We are subject to product liability and warranty claims arising in the ordinary course of business.
As a homebuilder, we are subject to construction defect, product liability and home warranty claims, including moisture
intrusion and related claims, arising in the ordinary course of business or otherwise. While we maintain general liability
insurance and generally seek to require our subcontractors and design professionals to indemnify us for some portion of the
liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be collectible or
adequate to cover any or all construction defect and warranty claims for which we may be liable. We may not be able to renew
our insurance coverage or renew it at reasonable rates and may incur significant costs or expenses (including repair costs and
litigation expenses) surrounding possible construction defects, soil subsidence or building related claims. Some claims may
arise out of uninsurable events or circumstances not covered by insurance not subject to effective indemnification agreements
with our trade partners.
In addition, we conduct all of our business in California, one of the most highly regulated and litigious jurisdictions in the
United States, which imposes a ten year, strict liability tail on many construction liability claims. As a result, our potential
losses and expenses due to litigation, new laws and regulations may be greater than those of our competitors who have smaller
California operations.
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Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for
reasonable prices in response to changing economic, financial and investment conditions may be limited and we may be
forced to hold non-income producing properties for extended periods of time.
Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more
properties in response to changing economic, financial and investment conditions is limited and we may be forced to hold non-
income producing assets for an extended period of time. We cannot predict whether we will be able to sell any property for the
price or on the terms that we set or whether any price or other terms offered by a prospective purchaser would be acceptable to
us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.
Fluctuations in real estate values may require us to write-down the book value of our real estate assets.
The homebuilding and land development industries are subject to significant variability and fluctuations in real estate
values. As a result, we may be required to write-down the book value of our real estate assets in accordance with U.S. generally
accepted accounting principles, or GAAP, and some of those write-downs could be material. Any material write-downs of
assets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Inflation could adversely affect our business and financial results.
Inflation could adversely affect us by increasing the costs of land, raw materials and labor needed to operate our business.
If our markets have an oversupply of homes relative to demand, we may be unable to offset any such increases in costs with
corresponding higher sales prices for our homes. Inflation typically also accompanies higher interests rates, which could
adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we
are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease.
Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease.
Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient
funds to operate our business.
A major health and safety incident relating to our business could be costly in terms of potential liabilities and
reputational damage.
Building sites are inherently dangerous, and operating in the homebuilding industry poses certain inherent health and
safety risks to those working at such sites. Due to health and safety regulatory requirements and the number of projects we
work on, health and safety performance is critical to the success of all areas of our business. Any failure in health and safety
performance may result in penalties for non-compliance with relevant regulatory requirements or litigation, and a failure that
results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a
result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our
relationships with relevant regulatory agencies, governmental authorities and local communities, and our ability to win new
business, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results
of operations.
An information systems interruption or breach in security could adversely affect us.
Privacy, security, and compliance concerns have continued to increase as technology has evolved. We rely on
accounting, financial and operational management information systems to conduct our operations. Any disruption in these
systems could adversely affect our ability to conduct our business. Furthermore, as part of our normal business activities, we
collect and store certain confidential information, including personal information of homebuyers/borrowers and information
about employees, vendors and suppliers. This information is entitled to protection under a number of regulatory regimes. We
may share some of this information with vendors who assist us with certain aspects of our business, particularly our mortgage
and title businesses. Our failure to maintain the security of the data which we are required to protect, including via the
penetration of our network security and the misappropriation of confidential and personal information, could result in business
disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private
litigation with potentially large costs, and also result in deterioration in customers confidence in us and other competitive
disadvantages, and thus could have a material adverse impact on our financial condition and results of operations.
Poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or
results of operations to decline.
Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the
operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed
unsatisfactory by the affected residents, and subsequent actions by these residents could adversely affect sales or our reputation.
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In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or to modify
our community development plans, which could adversely affect our results of operations.
We may incur a variety of costs to engage in future growth or expansion of our operations or acquisitions or disposals
of businesses, and the anticipated benefits may never be realized.
As a part of our business strategy, we may consider growth or expansion of our operations in our current markets or in
other areas of the country. Any such growth or expansion would be accompanied by risks such as:
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difficulties in assimilating the operations and personnel of acquired companies or businesses;
potential loss of key employees of the acquired companies or business;
diversion of our management’s attention from ongoing business concerns;
our potential inability to maximize our financial and strategic position through the successful incorporation or
disposition of operations;
impairment of existing relationships with employees, contractors, suppliers and customers as a result of the integration
of new management personnel and cost-saving initiatives; and
risks associated with entering markets in which we have limited or no direct experience.
The magnitude, timing and nature of any future acquisition or expansion will depend on a number of factors, including
our ability to identify suitable additional markets or acquisition candidates. We cannot guarantee that any expansion into a new
market will be successfully executed, and our failure to do so could harm our current business.
Utility shortages or price increases could adversely impact our operations.
Certain of the areas in which we operate, particularly in Southern California, Northern California and Arizona, have
experienced power shortages, including mandatory periods without electrical power, as well as significant increases in utility
costs, including water costs due to drought. We may incur additional costs and may not be able to complete construction on a
timely basis if such power shortages and utility rate increases continue. In addition, power shortages and rate increases may
adversely affect the local economies in which we operate, which may reduce demand for housing in our markets.
A large proportion of our fee building revenue is from one customer.
The Company’s fee building revenues have historically been concentrated with a small number of customers. We have
several fee building agreements with Irvine Pacific, LP and our billings to this customer are dependent upon such customer’s
decision to proceed with construction and the agreements can be canceled at any time. We cannot predict whether these
agreements will continue in the future or the current pace of construction, and the loss of these billings could have a material
adverse effect on our results of operations. See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Fee Building" and Note 1 "Revenue Recognition - Fee Building" to the accompanying notes to
consolidated financial statements included in this annual report on Form 10-K for further discussion of this revenue
concentration.
Risks Related to Our Indebtedness
Our level of indebtedness may adversely affect our financial position and prevent us from fulfilling our debt
obligations.
The homebuilding industry is capital intensive and requires significant up-front expenditures to secure land and pursue
development and construction on such land. Accordingly, we incur substantial indebtedness to finance our homebuilding
activities. As of December 31, 2015, we had approximately $208.9 million in loan commitments, of which $83.1 million was
outstanding. There can be no assurance we would be able to obtain such additional capital on terms acceptable to us, if at all.
Incurring substantial debt could subject us to many risks that, if realized, would adversely affect us, including the risk
that:
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our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt,
which is likely to result in acceleration of the maturity of such debt;
our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that
investment yields will increase with higher financing costs;
• we may be required to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing
funds available for other purposes such as land and lot acquisition, development and construction activities;
the terms of any refinancing may not be as favorable as the terms of the debt being refinanced; and
•
25
• we may be put at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing
conditions in our industry, including increased competition.
We expect to pay our expenses and to pay the principal and interest on our indebtedness with cash flow from operations
or from existing working capital. Our ability to meet our expenses depends, to a large extent, on our future performance, which
will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as
economic conditions in the markets where we operate and pressure from competitors. If we do not have sufficient funds, we
may be required to refinance all or part of our existing debt, sell assets or borrow additional funds. We cannot guarantee that we
will be able to do so on terms acceptable to us, if at all. If we are unable to refinance our debt on acceptable terms, we may be
forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any
future debt service obligations, we may lose some or all of our assets that may be pledged to secure our obligations to
foreclosure. Also, debt agreements may contain specific cross-default provisions with respect to specified other indebtedness,
giving the lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our
debt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition and results of
operations.
Access to financing sources may not be available on favorable terms, or at all, which could adversely affect our ability
to increase our returns.
Our growth strategy requires significant additional capital. Our access to additional third-party sources of financing will
depend, in part, on:
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general market conditions;
the market’s perception of our growth potential;
• with respect to acquisition or development financing, the market’s perception of the value of the land parcels to be
acquired or developed;
our debt levels;
any credit rating assigned to us or our existing debt by a rating agency or any indication that those ratings may be
lowered;
our expected results of operations;
our cash flow; and
the market price of our common stock.
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Recently, domestic financial markets have experienced unusual volatility, uncertainty and a tightening of liquidity in both
the investment grade debt and equity capital markets. Credit spreads for major sources of capital widened significantly during
the U.S. credit crisis as investors demanded a higher risk premium. Given the current volatility and weakness in the capital and
credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may charge
us prohibitively high fees in order to obtain financing. Consequently, there is greater uncertainty regarding our ability to access
the credit market in order to attract financing on reasonable terms. Investment returns on our assets and our ability to make
acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all.
Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings
or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing
funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or
debt capital on favorable terms at the desired times, or at all.
Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive
covenants relating to our operations.
Our current financing arrangements contain, and the financing arrangements we enter into in the future likely will
contain, covenants (financial and otherwise) affecting our ability to incur additional debt, make certain investments, reduce
liquidity below certain levels, make distributions to our stockholders and otherwise affect our operating policies. If we fail to
meet or satisfy any of these covenants in our debt agreements, we would be in default under these agreements, which could
result in a cross-default under other debt agreements, and our lenders could elect to declare outstanding amounts due and
payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests against
existing collateral. A default also could limit significantly our financing alternatives, which could cause us to curtail our
investment activities or dispose of assets when we otherwise would not choose to do so. A default on any of our debt
agreements could materially and adversely affect our business, prospects, liquidity, financial condition and results of
operations.
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Secured indebtedness exposes us to the possibility of foreclosure on our ownership interests in our land parcels.
Incurring mortgage and other secured indebtedness increases our risk of loss of our ownership interests in our land
parcels or other assets because defaults thereunder, and the inability to refinance such indebtedness, may result in foreclosure
actions initiated by lenders.
Interest expense on debt we incur may limit our cash available to fund our growth strategies.
As of December 31, 2015, we had approximately $208.9 million in loan commitments, of which $83.1 million was
outstanding. As part of our financing strategy, we may incur a significant amount of additional debt. Our current debt has, and
any additional debt we subsequently incur may have, a floating rate of interest. In addition, we may incur fixed rate debt in the
future which may be at a higher interest rate than our floating rate debt. Higher interest rates could increase debt service
requirements on our current floating rate debt and on any floating or fixed rate debt we subsequently incur, and could reduce
funds available for operations, future business opportunities or other purposes. If we need to repay existing debt during periods
of rising interest rates, we could be required to refinance our then-existing debt on unfavorable terms or liquidate one or more
of our assets to repay such debt at times which may not permit realization of a favorable return on such assets and could result
in a loss. The occurrence of either such event or both could materially and adversely affect our business, prospects, liquidity,
financial condition and results of operations.
Risks Related to Our Organization and Structure
We have a limited operating history and we may not be able to successfully operate our business.
Our company was founded in August 2009, and through the year ended December 31, 2012, we incurred losses. In
connection with our initial public offering, TNHC LLC was converted from a Delaware limited liability company into a
Delaware corporation and renamed The New Home Company Inc. Given our limited operating history, you have limited
historical information upon which to evaluate our prospects, including our ability to acquire desirable land parcels, develop
such land and market our homes. In addition, we cannot assure you that our past experience will be sufficient to enable us to
operate our business successfully or implement our operating policies and business strategies as described in this annual report
on Form 10-K and in other public statements and filings made with the Securities and Exchange Commission. Furthermore, we
may not be able to generate sufficient operating cash flows to pay our operating expenses or service our indebtedness. You
should not rely upon the past performance of our management team, as past performance may not be indicative of our future
results.
We are and will continue to be dependent on key personnel and certain members of our management team.
Our success depends to a significant degree upon the contributions of certain key personnel including, but not limited to,
H. Lawrence Webb, our Chief Executive Officer, Wayne Stelmar, our Chief Investment Officer, Thomas Redwitz, our Chief
Operating Officer, and John M. Stephens, our Chief Financial Officer, each of whom would be difficult to replace. Although we
have entered into employment agreements with Messrs. Webb, Stelmar, Redwitz and Stephens, there is no guarantee that these
executives will remain employed with us and we have not adopted a succession plan. Our former Chief Investment Officer, Joe
Davis, retired in June 2015. While he was replaced and succeeded by Mr. Stelmar, and Mr. Stephens was hired as Chief
Financial Officer concurrently with Mr. Davis’ retirement, his retirement may nonetheless negatively impact our business
relationships and be viewed negatively by the market. If any of our key personnel were to cease employment with us, our
operating results could suffer. Our ability to retain our key personnel or to attract suitable replacements should any members of
our management team leave depends on the competitive nature of the employment market. The loss of services from key
personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial
condition and results of operations. Further, such a loss could be negatively perceived in the capital markets. We have not
obtained key person life insurance that would provide us with proceeds in the event of death or disability of any of our key
personnel.
Certain anti-takeover defenses and applicable law may limit the ability of a third-party to acquire control of us.
Our charter and bylaws and Delaware law contain provisions that may delay or prevent a transaction or a change in
control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests
of our stockholders, which could adversely affect the market price of our common stock. Certain of these provisions are
described below.
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Selected provisions of our charter and bylaws.
Our charter and/or bylaws contain anti-takeover provisions that:
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divide our directors into three classes, with the term of one class expiring each year, which could delay a change in our
control;
authorize our board of directors, without further action by the stockholders, to issue up to 50,000,000 shares of
preferred stock in one or more series, and with respect to each series, to fix the number of shares constituting that
series and establish the rights and other terms of that series;
require that actions to be taken by our stockholders may be taken only at an annual or special meeting of our
stockholders and not by written consent;
specify that special meetings of our stockholders can be called only by our board of directors pursuant to a resolution
adopted by a majority of the total number of directors then in office, the chairman of our board of directors or our
chief executive officer;
establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of
directors and other proposals to be brought before a stockholders meeting;
provide that our bylaws may be amended by our board of directors without stockholder approval;
allow our directors to establish the size of our board of directors by action of our board of directors, subject to a
minimum of three members;
provide that vacancies on our board of directors or newly created directorships resulting from an increase in the
number of our directors may be filled only by a majority of directors then in office, even if that majority is less than a
quorum;
do not give the holders of our common stock cumulative voting rights with respect to the election of directors; and
prohibit us from engaging in certain business combinations with any “interested stockholder” unless specified
conditions are satisfied as described below under “—Selected provisions of Delaware law.”
Selected provisions of Delaware law.
We have opted out of Section 203 of the Delaware General Corporation Law, or the DGCL, which regulates corporate
takeovers. However, our charter contains provisions that are similar to Section 203 of the DGCL. Specifically, our charter
provides that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period
following the time that the person became an interested stockholder, unless:
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prior to the time that person became an interested stockholder, our board of directors approved either the business
combination or the transaction which resulted in the person becoming an interested stockholder;
upon consummation of the transaction which resulted in the person becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction
commenced, excluding certain shares; or
at or subsequent to the time the person became an interested stockholder, the business combination is approved by our
board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder.
Generally, a business combination includes a merger, consolidation, asset or stock sale or other transaction resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions, an interested stockholder is a person who, together
with that person’s affiliates and associates, owns, or within the previous three years owned, 15% or more of our voting stock.
This provision could prohibit or delay mergers or other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us.
We may change our operational policies, investment guidelines and our business and growth strategies without
stockholder consent, which may subject us to different and more significant risks in the future.
Our board of directors will determine our operational policies, investment guidelines and our business and growth
strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines
and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making
investments or pursuing different business or growth strategies than those contemplated in this annual report on Form 10-K.
Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could
have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
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The obligations associated with being a public company require significant resources and management attention.
Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes Oxley Act, requires annual management assessments of
the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with the
SEC as a public company, and generally requires in the same report a report by our independent registered public accounting
firm on the effectiveness of our internal control over financial reporting. However, under the recently enacted JOBS Act, our
independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over
financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an "emerging growth company."
We could be an "emerging growth company" until the end of our 2019 fiscal year. The rules governing the standards that must
be met for our management to assess our internal control over financial reporting are complex and require significant
documentation, testing and possible remediation.
We may encounter problems or delays in completing the implementation of any necessary improvements and receiving
an unqualified opinion on the effectiveness of the internal controls over financial reporting in connection with the attestation
provided by our independent registered public accounting firm. If we cannot favorably assess the effectiveness of our internal
control over financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified
attestation report on our internal controls, investors could lose confidence in our financial information and the price of our
common stock could decline.
These reporting and other obligations place significant demands on our management, administrative, operational and
accounting resources and cause us to incur significant expenses that we were not incurring prior to becoming a public company.
As we transition from our status as “an emerging growth company,” we may need to upgrade our systems or create new
systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an
internal audit function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a
timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to
reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have a
material adverse effect on our business, prospects, liquidity, financial condition and results of operations.
Failure of our internal control over financial reporting could adversely affect our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting under
Section 404 of the Sarbanes-Oxley Act. Internal control over financial reporting is a process to provide reasonable assurance
regarding the reliability of financial reporting for external purposes in accordance with GAAP. Because of its inherent
limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or
detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over
financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud.
The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements
that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We cannot assure
you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of
the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled
finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded
companies.
We are an “emerging growth company”, and, as a result of the reduced disclosure and governance requirements
applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain
exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies,
including, but not limited to, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act,
reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies
and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We have
elected to adopt these reduced disclosure requirements. We could be an emerging growth company until the last day of the
fiscal year following the fifth anniversary of the completion of our initial public offering, although a variety of circumstances
could cause us to lose that status earlier. We cannot predict whether investors will find our common stock less attractive as a
result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our
choices, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the
extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial
accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until
those standards would otherwise apply to private companies. However, we have determined to opt out of such extended
29
transition period, and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on
which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that
our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is
irrevocable.
Risks Related to Ownership of Our Common Stock
The price of our Common Stock is subject to volatility related or unrelated to our operations.
The market price of our common stock may be highly volatile and subject to wide fluctuations. Our financial
performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant
impact on the future market price of our common stock.
Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include:
actual or anticipated variations in our quarterly operating results;
changes in market valuations of similar companies;
changes in interest rates, mortgage regulations or land and home prices in the areas in which we operate;
adverse market reaction to the level of our indebtedness;
additions or departures of key personnel;
actions by stockholders;
speculation in the press or investment community;
general market, economic and political conditions, including an economic slowdown or dislocation in the global credit
markets and in California in particular;
our operating performance and the performance of other similar companies;
changes in accounting principles and tax laws; and
passage of legislation or other regulatory developments that adversely affect us or the homebuilding and land
development industry.
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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.
The trading market for our common stock is influenced by whether industry or securities analysts publish research and
reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in
those reports. We may not maintain analyst coverage in the future. Any analysts who do cover us may make adverse
recommendations regarding our common stock, adversely change their recommendations from time to time or provide more
favorable relative recommendations about our competitors. If any analyst who cover us now or may cover us in the future were
to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets,
which in turn could cause our stock price or trading volume to decline.
We do not intend to pay dividends on our common stock for the foreseeable future.
We currently intend to retain our future earnings, if any, to finance the development and expansion of our business and,
therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations,
capital requirements, restrictions contained in any financing instruments and such other factors as our board of directors deems
relevant. Accordingly, stockholders may need to sell their shares of our common stock to realize a return on investment, and
may not be able to sell shares at or above the price paid for them.
Future sales of our common stock or other securities convertible into our common stock could cause the market value
of our common stock to decline and could result in dilution of your shares.
Our board of directors is authorized, without stockholder approval, to cause us to issue additional shares of our common
stock or to raise capital through the issuance of preferred stock, securities (including debt securities) convertible into common
stock, options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may
determine. Sales of substantial amounts of our common stock could cause the market price of our common stock to decrease
significantly. We cannot predict the effect, if any, of future sales of our common stock, or other securities on the value of our
common stock. Sales of substantial amounts of our common stock by a large stockholder or otherwise, or the perception that
30
such sales could occur, may adversely affect the market price of our common stock. We filed a Form S-3 “Shelf” Registration
Statement, which was declared effective on June 15, 2015. This “Shelf” Registration Statement provides for the public offer
and sale of certain securities of the Company from time to time, at our discretion, up to an aggregate offering amount of $400
million, of which a total of 4,025,000 shares of Common Stock at a public offering price of $12.50 per share was issued in
connection with the Company’s public offering on December 9, 2015. We have also filed a registration statement on Form S-8
to register the offer and sale of the total number of shares of our common stock that may be issued under our 2014 Long-Term
Incentive Plan, including the restricted stock units to be granted to our management team, other officers, employees and
directors, as well as the options to purchase shares of our common stock to be granted to the members of our management
team, other officers and employees, in each case pursuant to our 2014 Long-Term Incentive Plan. In the event that any future
financing should be in the form of, be convertible into or exchangeable for, equity securities, and upon the conversion or
exercise of such securities, investors may experience additional dilution.
We entered into a registration rights agreement with the members of TNHC LLC, including the members of our
management team and the institutional investors in TNHC LLC, with respect to the shares of our common stock that they
received as part of our formation transactions. We refer to these shares collectively as the “registrable shares.” Pursuant to the
registration rights agreement, we have granted the members of TNHC LLC and their direct and indirect transferees shelf
registration rights requiring us to file a shelf registration statement and to maintain the effectiveness of such registration
statement so as to allow sales thereunder from time to time, demand registration rights to have the registrable shares registered
for resale, and, in certain circumstances, the right to “piggy-back” the registrable shares in registration statements we might file
in connection with any future public offering.
Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation,
and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and
liquidating distributions, may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources by conducting offerings of debt securities or additional
offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and
lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common
stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our
common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on
dividend payments or both that could limit our ability to make a dividend distribution to the holders of our common stock. Our
decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a
result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our common stock
bear the risk of our future offerings reducing the market price of our common stock and diluting their ownership interest in our
company.
Non-U.S. holders may be subject to U.S. federal income tax on gain realized on the sale or disposition of shares of our
common stock.
We believe we are and will remain a “United States real property holding corporation”, or USRPHC, for U.S. federal
income tax purposes. As a result, certain beneficial owners of our common stock that are non-U.S. persons, may be subject to
U.S. federal income tax in the same manner as a taxable U.S. person on any gain realized on a sale or disposition of shares of
our common stock if (i) our common stock is not regularly traded on an established securities market (such as the New York
Stock Exchange) or (ii) our common stock is regularly traded on an established securities market and such non-U.S. holder
actually or constructively owns or owned more than 5% of our common stock at any time during the shorter of the five-year
period preceding the date of the sale or disposition and the non-U.S. holder’s holding period in such stock. A non-U.S. holder
also will be required to file a U.S. federal income tax return for any taxable year in which it realizes a gain from the disposition
of our common stock that is subject to U.S. federal income tax under these rules. We anticipate that our common stock will
continue to be regularly traded on an established securities market. However, if our stock is not treated as regularly traded for
purposes of these rules, a purchaser of the stock may be required to withhold and remit to the Internal Revenue Service, or the
IRS, 15% of the purchase price, unless an exception applies.
No assurance can be given that our common stock will remain regularly traded in the future. Non-U.S. holders should
consult their tax advisors concerning the consequences of disposing of shares of our common stock.
Item 1B.
Unresolved Staff Comments
Not Applicable.
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Item 2.
Properties
We lease our corporate headquarters in Aliso Viejo, California. The lease on this facility consists of approximately
18,700 square feet and expires in November 2020. In addition, we lease divisional offices in Northern California, Southern
California and Arizona, including approximately 6,800 square feet through April 2017 in Roseville, approximately 6,100 square
feet through May 2018 in Walnut Creek, approximately 1,400 square feet through July 2018 in Agoura Hills and approximately
2,000 square feet through January 2018 in Scottsdale. For information on land owned and controlled by us for use in our
homebuilding activities, please refer to Item 1 - “Business.”
Item 3.
Legal Proceedings
We are involved in various claims and litigation arising in the ordinary course of business. We do not believe that any
such claims and litigation will have a material adverse effect upon our results of operations or financial position.
Item 4.
Mine Safety Disclosures
Not Applicable.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
PART II
Our common stock is listed on the New York Stock Exchange under the ticker symbol “NWHM” and began trading on
January 31, 2014. The following table sets forth the high and low intra-day sales prices per share of our common stock for the
periods indicated, as reported by the NYSE.
Fiscal Year 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2014
First Quarter (from January 31, 2014)
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$16.49
$17.88
$17.97
$16.55
$15.93
$15.21
$14.98
$15.96
$12.91
$14.03
$12.59
$11.95
$11.26
$11.50
$12.50
$12.80
The following performance graph shows a comparison of the cumulative total returns to stockholders of the
Company’s common stock from January 31, 2014 (using the price of which our shares of common stock were initially sold to
the public) to December 31, 2015, as compared with the Standard & Poor’s 500 Composite Stock Index and the Dow Jones
Industry Group-U.S. Home Construction Index. The comparison assumes $100 was invested in our common stock on January
31, 2014 and in each of the forgoing indices on January 31, 2014 and assumes the reinvestment of dividends.
The performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with
the Securities and Exchange Commission, nor shall such information be incorporated by reference into any filing under the
Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically
incorporate it by reference.
32
The above graph is based upon common stock and index prices calculated as of the end of each period. The stock
price performance of the Company’s common stock depicted in the graph above represents past performance only and is not
necessarily indicative of future performance.
As of February 24, 2016, we had 19 holders of record of our common stock. The number of holders of record is based
upon the actual numbers of holders registered at such date and does not include holders of shares in "street name" or persons,
partnerships, associates, corporations or other entities in security position listings maintained by depositories.
Dividends
We currently intend to retain our future earnings, if any, to finance the development and expansion of our business
and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to
pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of
operations, capital requirements, compliance with Delaware law, restrictions contained in any financing instruments and such
other factors as our board of directors deems relevant. See Item 1A, “Risk Factors—Risks Related to Ownership of Our
Common Stock—We do not intend to pay dividends on our common stock for the foreseeable future.”
Under the Delaware General Corporation Law, we may only pay dividends from legally available surplus or, if there is
no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
Surplus is defined as the excess of the fair value of our total assets over the sum of the fair value of our total liabilities plus the
par value of our outstanding capital stock. Capital stock is defined as the aggregate of the par value of all issued capital stock.
Further, the Company's credit facility currently contains provisions that limit its ability to pay dividends on its common stock.
Issuer Share Repurchases
We had no share repurchases during the fourth quarter 2015 or during the year ended December 31, 2015.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities during the year ended December 31, 2015.
33
Item 6.
Selected Financial Data
The following sets forth our selected financial data and other operating data on a historical basis. You should read the
following selected financial data in conjunction with our consolidated financial statements and the related notes, “Risk
Factors” and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are
included elsewhere in this annual report on Form 10-K. The historical results presented below are not necessarily indicative of
the results to be expected for any future period.
Our historical consolidated balance sheet information as of December 31, 2015, 2014, 2013, 2012 and 2011, and
consolidated statement of operations information for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 have
been derived from the historical consolidated financial statements audited by Ernst & Young LLP, independent registered
public accounting firm.
As of December 31,
2015
2014
2013
2012
2011
(Dollars in thousands)
Consolidated Balance Sheet Data
Cash, cash equivalents and restricted cash
$
46,254
$
44,341
$
9,671
$
6,152
$
Real estate inventories
Investment in unconsolidated joint ventures
Total assets
Total debt
Stockholders’ equity
Members’ equity
Noncontrolling interest in subsidiary
Total equity
209,918
60,572
351,270
83,082
220,775
—
922
163,564
60,564
291,958
113,751
148,084
—
2,342
221,697
150,426
45,350
32,270
98,949
17,883
—
64,356
1,171
65,527
39,269
12,424
64,511
16,722
—
35,575
—
35,575
5,524
28,891
4,855
39,762
9,383
—
27,852
—
27,852
34
Consolidated Statement of Operations Data:
Home sales revenue(1)
Cost of home sales(1)
Homebuilding gross margin
Fee building revenue
Cost of fee building
Fee building gross margin
Land gross margin
Selling and marketing expenses
General and administrative expenses
Equity in net income (loss) of unconsolidated joint ventures
Guaranty fee income
Other expense, net
Income (loss) before taxes
Provision for taxes
Net income (loss)
Net loss attributable to noncontrolling interests
Net income (loss) attributable to The New Home Company Inc.
Earnings (loss) per share attributable to The New Home Company Inc.
Basic
Diluted
Operating Data - Wholly-owned Projects
Net new home orders
New homes delivered
Average sales price of homes delivered
Average selling communities
Selling communities at end of period
Backlog at end of period, number of homes
Backlog at end of period, aggregate sales value
Average sales price of backlog
Operating Data – Fee Building Projects
Homes started
Homes delivered
Homes under construction at end of period
TNHC Inc.
Year Ended
December 31,
TNHC LLC
Year Ended
December 31,
2015
2014
2013
2012
2011
(Dollars in thousands, except per share amounts)
$
280,209
$
56,094
$
35,663
$
24,198
$
240,030
40,179
149,890
139,677
10,213
—
8,943
20,278
21,171
13,767
—
(1,027)
33,911
(12,533)
21,378
310
21,688
1.29
1.28
174
148
$
$
$
47,660
8,434
93,563
89,057
4,506
—
3,166
12,420
(2,646)
8,443
19
(813)
5,003
(246)
4,757
30
4,787
0.30
0.30
79
53
$
$
$
1,893
$
1,058
$
7.2
10
67
3.4
4
41
28,980
6,683
47,565
42,317
5,248
—
1,772
7,107
3,052
4,735
114
(905)
6,996
(290)
6,706
—
6,706
0.85
0.85
72
82
435
3.0
3
15
166,567
2,486
$
$
86,711
2,115
$
$
11,867
791
$
$
$
$
$
$
20,779
3,419
28,269
26,505
1,764
(322)
1,677
4,475
(1,291)
349
85
(424)
(1,281)
(71)
(1,352)
—
25,624
21,774
3,850
16,523
16,763
(240)
—
1,748
3,998
(2,136)
(39)
—
(143)
(2,318)
(10)
(2,328)
—
$
$
$
$
$
$
(1,352) $
(2,328)
(0.27) $
(0.27) $
(0.66)
(0.66)
72
53
457
4.0
3
26
10,593
407
$
$
$
45
49
523
4.0
4
7
5,074
725
Year Ended December 31,
2015
2014
2013
2012
2011
513
537
446
550
206
470
215
194
126
114
50
105
88
47
41
35
Operating and Financial Data – Unconsolidated Joint Ventures(2)
Net income (loss)
The Company's equity in net income (loss) of unconsolidated joint
ventures
Management fees earned by the Company(3)
Homebuilding
Home sales revenue
Homebuilding gross margin
Net new home orders
New homes delivered
Average sales price of homes delivered
Average selling communities
Selling communities at end of period
Backlog at end of period, number of homes
Backlog at end of period, aggregate home sales value
Average home sales price of backlog
Land
Land sales revenue
Land gross margin
Backlog at end of period, aggregate land sales value
Balance Sheet Data – Unconsolidated Joint Ventures
Total assets, primarily real estate inventories
Total liabilities, primarily accounts payable and notes payable
The Company’s equity
Other partners’ equity
Total equity
Total liabilities and equity
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
65,194
13,767
12,426
335,515
76,537
299
265
1,266
$
9.6
8
109
117,936
1,082
74,366
15,613
33,534
2015
485,917
152,703
60,572
272,642
333,214
$
$
$
$
$
$
$
Year Ended December 31,
2015
2014
2013
2012
2011
(Dollars in thousands)
41,174
8,443
9,582
224,498
50,196
288
275
816
8.5
8
75
114,988
1,533
46,888
11,922
89,103
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
35,434
4,735
8,251
183,038
49,728
156
148
$
$
$
$
$
8,653
349
2,949
56,019
14,470
96
42
1,237
$
1,334
$
3.6
6
62
3.0
3
54
42,570
687
$
$
72,921
1,350
$
$
— $
— $
— $
— $
— $
— $
(767)
(39)
844
—
—
—
—
—
—
—
—
—
—
—
—
—
As of December 31,
2014
2013
2012
2011
(Dollars in thousands)
$
$
521,610
140,595
60,564
320,451
381,015
$
$
287,690
83,658
32,270
171,762
204,032
$
$
173,256
44,674
12,424
116,158
128,582
92,622
21,611
4,855
66,156
71,011
92,622
$
485,917
$
521,610
$
287,690
$
173,256
$
(1)
(2)
(3)
During the year ended December 31, 2011, the Company entered into a fee building services agreement that allowed us to independently operate a
design center and directly market upgrade options to the landowners’ homebuyers. We recognized revenue for these option upgrades in accordance with
ASC 360-20, "Property, Plant and Equipment, Real Estate Sales", as more fully described in the notes to the consolidated financial statements. During
the year ended December 31, 2011, we recognized revenue for these option upgrades of $3.2 million, which is included above in home sales. The cost
of these option upgrades, included above in cost of home sales was $2.5 million during the year ended December 31, 2011. These revenues and costs
were for the delivery of option upgrades on 47 homes, which are included in the operating data for fee building services.
“Operating and Financial Data – Unconsolidated Joint Ventures” reflects the data for the ventures and not our share thereof. We own economic interests
in our unconsolidated joint ventures, which include our capital interests that generally range from 5% to 35% plus, in each case, a share of the
distributions from the joint ventures in excess of our capital interest. These economic interests vary among our different unconsolidated joint ventures.
A description of such share of distributions in excess of our capital interest for each of our joint ventures is described under “Business—Joint
Ventures.” Such financial data is not included in our financial data for GAAP purposes, but is recognized in our results of operations as a component of
equity in net income (loss) of unconsolidated joint ventures. We have interests in several unconsolidated joint ventures and this information has been
included to provide additional information about the operations and financial condition of our unconsolidated joint ventures. This data is included for
informational purposes only.
We have entered into agreements with our unconsolidated joint ventures to provide management services related to the underlying projects. Pursuant to
the agreements, we receive a management fee based on each project’s revenues. During the years ended December 31, 2015, 2014, 2013, 2012 and
2011, we earned $12.4 million, $9.6 million, $8.3 million, $2.9 million and $0.8 million, respectively, in management fees, which have been recorded
as fee building revenue.
36
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following in conjunction with the sections of this annual report on Form 10-K entitled “Risk
Factors,” “Cautionary Note Concerning Forward-Looking Statements,” “Selected Financial Data” and “Business” and our
historical financial statements and related notes thereto included elsewhere in this annual report on Form 10-K. This
discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual
results and the timing of events may differ materially from those contained in these forward-looking statements due to a number
of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this annual report on Form 10-K.
Consolidated Financial Data
Revenues:
Home sales
Fee building, including management fees from unconsolidated joint
ventures of $12,426, $9,582 and $8,251, respectively
Expenses:
Cost of homes sales
Cost of fee building
Selling and marketing
General and administrative
Equity in net income of unconsolidated joint ventures
Guaranty fee income
Other expense, net
Income before taxes
Provision for taxes
Net income
Net loss attributable to noncontrolling interest
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
280,209
$
56,094
$
35,663
149,890
430,099
240,030
139,677
8,943
20,278
408,928
13,767
—
(1,027)
33,911
(12,533)
21,378
310
93,563
149,657
47,660
89,057
3,166
12,420
152,303
8,443
19
(813)
5,003
(246)
4,757
30
47,565
83,228
28,980
42,317
1,772
7,107
80,176
4,735
114
(905)
6,996
(290)
6,706
—
6,706
Net income attributable to The New Home Company Inc.
$
21,688
$
4,787
$
Overview
During 2015, the Company made substantial strides in shifting a significant portion of its business to wholly-owned
operations by growing its community count, revenues and operating profits. During the year, the Company opened eight new
wholly-owned communities, growing its year-over-year community count by 150% to 10 communities, increased its total
revenues by 187% to $430.1 million, and generated pretax income of $33.9 million, a 578% year-over-year increase. For the
year ended December 31, 2015, the Company generated net income of $21.7 million, or $1.28 per diluted share, compared to
$4.8 million, or $0.30 per diluted share, in the year earlier period. The improvement in net income was primarily due to an
increase in total revenues, a 1,740 basis point improvement in SG&A expenses as a percentage of home sales revenue to 10.4%
as compared to 27.8% in prior year, and a $5.3 million increase in income from joint ventures. The improvement in top-line
and operating leverage yielded an after-tax return on equity of 13.0% for the year ended December 31, 2015.
At the same time, the Company continued to strengthen its balance sheet, liquidity and financial position by raising an
additional $47.3 million in net proceeds from its equity offering of common stock in December 2015 and increased its
borrowing capacity under its senior unsecured revolving credit facility during the year by $75 million to an aggregate
commitment of $200 million.
We ended 2015 with $166.6 million in wholly-owned backlog, a 92% year-over-year increase. With this solid ending
backlog, the new wholly-owned communities that we plan to open in 2016, and our improved balance sheet and liquidity, we
believe our growth prospects for 2016 are strong.
37
Results of Operations
Net New Home Orders and Backlog
Net new home orders
Monthly absorption rate
Cancellation rate
Average selling communities
Selling communities at end of period
Backlog (dollar value)
Backlog (homes)
Year Ended December 31,
Increase/(Decrease)
Increase/(Decrease)
2015
Amount
%
2014
Amount
%
2013
(Dollars in thousands)
174
1.9
10%
7.2
10
95
—
(3)%
3.8
6
120 %
— %
(23)%
112 %
150 %
79
1.9
13%
3.4
4
7
(0.1)
10 %
(5)%
(7)%
(35)%
0.4
1
13 %
33 %
72
2.0
20%
3.0
3
$ 166,567
$ 79,856
92 % $
86,711
$ 74,844
631 % $
11,867
Average sales price of backlog
$
2,486
$
67
26
371
63 %
41
26
173 %
18 % $
2,115
$
1,324
167 % $
15
791
Net new home orders for the year ended December 31, 2015 increased 120% compared to the same period in 2014
primarily due to an increase in the number of average selling communities. Our monthly sales absorption rate per community
for the year ended December 31, 2015 was flat with the prior year at 1.9 per month. Our cancellation rate for the year ended
December 31, 2015 was 10% versus 13% in the prior year.
Backlog reflects the number of homes, net of cancellations, for which we have entered into a sales contract with a
customer, but for which we have not yet delivered the home. The number of homes in backlog as of December 31, 2015
compared to December 31, 2014 increased 63% as a result of increased net new orders due largely to a significant increase in
average active community count. As a result of the increase in net new orders and an 18% higher average sales price in
backlog, the dollar value of backlog as of December 31, 2015 increased $79.9 million, or 92% compared to the prior year.
Net new home orders for the year ended December 31, 2014 increased 10% compared to 2013. Our monthly sales
absorption rate per community for the year ended December 31, 2014 was down slightly to 1.9 per month compared to 2.0 per
month in 2013. Our cancellation rate for the year ended December 31, 2014 was 13% as compared to 20% for the same period
in 2013.
The number of homes in backlog as of December 31, 2014 compared to December 31, 2013 increased 173% as a result
of higher year-over-year net new home orders and a decrease of new home deliveries. The dollar value of backlog
increased $74.8 million, or 631%, as of December 31, 2014 compared to December 31, 2013 primarily due to the opening of
two new communities in Irvine, California with average sales prices of $2.0 million and $2.8 million.
Home Sales Revenue and New Homes Delivered
Year Ended December 31,
Increase/(Decrease)
Increase/(Decrease)
2015
Amount
%
2014
Amount
%
2013
(Dollars in thousands)
New homes delivered
Home sales revenue
Average sales price of homes delivered
148
95
179%
53
(29)
(35)%
82
$
$
280,209
1,893
$
$
224,115
400% $
835
79% $
56,094
1,058
$
$
20,431
57 % $
35,663
623
143 % $
435
New home deliveries increased 179% to 148 for the year ended December 31, 2015 compared to 2014, primarily due to
the increase in net new home orders and the number of actively selling communities.
For the year ended December 31, 2015, home sales revenue increased 400% compared to the prior year, primarily due to
an increase in the number of homes delivered and a 79% increase in the average sales price of homes delivered. The year-over-
year increase in average sales price was due primarily to a shift to higher-priced homes in coastal Southern California where
prices exceeded $2.7 million per delivery.
38
New home deliveries decreased by 35% during the year ended December 31, 2014 compared to 2013 primarily due to the
closeout of one community in Sacramento, California, coupled with the mid-year opening of three new communities.
During the year ended December 31, 2014, home sales revenue increased 57% compared to 2013 due to an increase in
the average sales price of homes delivered, offset partially by a decrease in the number of new homes delivered. The increase
in average sales price of homes delivered was primarily due to the opening of two new communities in Irvine, California as
noted above.
Homebuilding
Homebuilding gross margin percentage for the year ended December 31, 2015 declined 70 basis points to 14.3% as
compared to 15.0% for the same period in 2014. The year-over-year decrease was largely due to lower margins generated from
Sacramento close-out communities in 2015 that required higher incentives.
Homebuilding gross margin percentage for the year ended December 31, 2014 decreased to 15.0% as compared to 18.7%
in 2013. The year-over-year decline in gross margin was due to a mix shift to a significantly higher proportion of deliveries
and revenues from a masterplan community in Irvine, CA that has profit participation. In exchange for prime locations in high
quality masterplans with lower allowable profit margins, we purchase lots under favorable lot option structures, which enhance
inventory turns and returns on equity.
Excluding interest in cost of home sales, adjusted homebuilding gross margin percentage for the years ended
December 31, 2015, 2014 and 2013 were 15.2%, 16.0% and 20.2%, respectively. See the table below reconciling this non-
GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.
Home sales revenue
Cost of home sales
Homebuilding gross margin
Add: interest in cost of home sales
Adjusted homebuilding gross margin(1)
2015
%
2014
%
2013
%
Year Ended December 31,
(Dollars in thousands)
$
$
280,209
240,030
40,179
2,511
42,690
100.0% $
85.7%
14.3%
0.9%
15.2% $
56,094
47,660
8,434
532
8,966
100.0% $
85.0%
15.0%
1.0%
16.0% $
35,663
28,980
6,683
550
7,233
100.0%
81.3%
18.7%
1.5%
20.2%
(1)
Adjusted homebuilding gross margin is a non-GAAP financial measure. We believe that by adding interest in cost of home sales back to homebuilding
gross margin, investors are able to assess the performance of our homebuilding business excluding our interest cost. We believe this information is
meaningful as it isolates the impact that leverage has on homebuilding gross margin and permits investors to make better comparisons with our
competitors who adjust gross margins in a similar fashion.
Fee Building
2015
%
2014
%
2013
%
Year Ended December 31,
(Dollars in thousands)
Fee building revenue
Cost of fee building
Fee building gross margin
$
$
149,890
139,677
10,213
100.0% $
93.2%
6.8% $
93,563
89,057
4,506
100.0% $
95.2%
4.8% $
47,565
42,317
5,248
100.0%
89.0%
11.0%
Fee building revenue includes (i) billings to independent third-party land owners for general contracting services, and (ii)
management fees from our unconsolidated joint ventures for construction management services. Cost of fee building includes
(i) labor, subcontractor, and other indirect construction and development costs that are reimbursable by the land owner, and (ii)
general and administrative, or G&A, expenses that are attributable to fee building activities.
Billings to land owners are a function of construction activity and reimbursable costs are incurred as homes are started.
The total billings and reimbursable costs are driven by the pace at which the land owner has us execute its development plan.
Management fees from our unconsolidated joint ventures are collected over the project's life and increase as homes and lots are
delivered.
For the year ended December 31, 2015, fee building revenue increased 60% year-over-year to $149.9 million from $93.6
million due to an increase in construction activity in the fee building communities and higher joint venture management fees.
39
Included in fee building revenue were (i) $137.5 million and $84.0 million of billings to land owners for the years ended
December 31, 2015 and 2014, respectively, and (ii) $12.4 million and $9.6 million of management fees from our
unconsolidated joint ventures for the years ended December 31, 2015 and 2014, respectively.
Fee building revenue increased to $93.6 million for the year ended December 31, 2014 compared to $47.6 million for
2013, primarily due to the increase in construction activity in the fee building communities. Included in fee building revenue
were (i) $84.0 million and $39.3 million of billings to land owners for the years ended December 31, 2014 and 2013,
respectively, and (ii) $9.6 million and $8.3 million of management fees from our unconsolidated joint ventures for the years
ended December 31, 2014 and 2013, respectively.
Our fee building revenue has historically been concentrated with a small number of customers. For the years ended
December 31, 2015, 2014 and 2013, one customer comprised 92%, 87% and 75% of fee building revenue, respectively.
For the year ended December 31, 2015, cost of fee building increased to $139.7 million compared to $89.1 million for the
same period during 2014. The amount of G&A expenses included in cost of fee building were $8.8 million and $9.3 million for
the years ended December 31, 2015 and 2014, respectively. Fee building gross margin percentage increased to 6.8% from
4.8% for the years ended December 31, 2015 and 2014, respectively, primarily due to the increase in management fees from
our unconsolidated joint ventures.
Cost of fee building increased to $89.1 million for the year ended December 31, 2014 compared to $42.3 million for the
same period during 2013. The amount of G&A expenses included in cost of fee building were $9.3 million and $5.4 million for
the years ended December 31, 2014 and 2013, respectively. The increase in billings to land owners and the related increase in
G&A expenses were the primary reasons fee building gross margin percentage decreased to 4.8% from 11.0% for the years
ended December 31, 2014 and 2013, respectively.
Selling, General and Administrative Expenses
Year Ended December 31,
As a Percentage of
Home Sales Revenue
2015
2014
2013
2015
2014
2013
(Dollars in thousands)
Selling and marketing expenses
General and administrative expenses (“G&A”)
Total selling, marketing and G&A (“SG&A”)
$
$
8,943
20,278
29,221
$
$
3,166
12,420
15,586
$
$
1,772
7,107
8,879
3.2%
7.2%
10.4%
5.6%
22.2%
27.8%
5.0%
19.9%
24.9%
Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2015 were $29.2 million,
compared to $15.6 million in the prior year period. The increase in SG&A expenses resulted from higher selling and marketing
expenses due to a 400% increase in home sales revenue and increased G&A related to higher personnel and professional fees to
support our growth. As a percentage of home sales revenue, SG&A for the year ended December 31, 2015 was 10.4% versus
27.8% in the prior year period. The year-over-year improvement in the SG&A percentage for the period was driven by stronger
operating leverage from higher home sales revenue.
SG&A expenses for the year ended December 31, 2014 were $15.6 million, compared to $8.9 million in the prior year
period. The increase in SG&A expenses resulted from higher selling and marketing expenses due to a 57% increase in home
sales revenue and increased G&A related to higher personnel and professional fees to support our growth and costs associated
with being a new public company. As a percentage of home sales revenue, SG&A for the year ended December 31, 2014 was
27.8% versus 24.9% in the prior year period.
Equity in Net Income of Unconsolidated Joint Ventures
As of December 31, 2015 and 2014, we had ownership interests in 14 and 12, respectively, unconsolidated joint ventures.
We own economic interests in our unconsolidated joint ventures, which include our capital interests that generally range from
5% to 35% plus, in each case, a share of the distributions from the joint ventures in excess of our capital interest. These
economic interests vary among our different unconsolidated joint ventures.
For the year ended December 31, 2015, the unconsolidated joint ventures produced $65.2 million in net income
compared to $41.2 million for the same period in 2014. Our equity in net income from unconsolidated joint ventures was $13.8
million for the year ended December 31, 2015, compared to equity in net income of $8.4 million for 2014. During the second
quarter of 2015, we formed a new unconsolidated joint venture and received capital credit and a cash distribution in excess of
the book value of our land basis. As a result, we recognized $1.6 million in equity in net income of unconsolidated joint
ventures related to this transaction. This transaction, combined with the increase in total revenues and net income of our
40
unconsolidated joint ventures, were the primary drivers of the increase in our equity in net income from unconsolidated joint
ventures for the year ended December 31, 2015.
The unconsolidated joint ventures produced $41.2 million and $35.4 million in net income during the years ended
December 31, 2014 and 2013, respectively. The net income of our unconsolidated joint ventures increased primarily due to
land sales revenue recognized by one joint venture during the fourth quarter of 2014. Our equity in net income from
unconsolidated joint ventures was $8.4 million for the year ended December 31, 2014, compared to $4.7 million for the same
period in 2013.
The following sets forth supplemental operational and financial information about our unconsolidated joint ventures.
Such information is not included in our financial data for GAAP purposes, but is recognized in our results as a component of
equity in net income of unconsolidated joint ventures. This data is included for informational purposes only.
Year Ended December 31,
Increase/(Decrease)
Increase/(Decrease)
2015
Amount
%
2014
Amount
%
2013
(Dollars in thousands)
Unconsolidated Joint Ventures—Homebuilding
Operational Data
Net new home orders
Monthly absorption rate
Cancellation rate
Average selling communities
New homes delivered
Home sales revenue
299
2.6
11
(0.2)
4 %
(7)%
8%
(1)% (11)%
9.6
265
1.1
(10)
13 %
(4)%
288
2.8
9%
8.5
275
132
(0.8)
2%
4.9
127
85 %
(22)%
29 %
136 %
86 %
156
3.6
7%
3.6
148
$ 335,515
$ 111,017
49 % $ 224,498
Average sales price of homes delivered
$
1,266
Selling communities at end of period
8
Backlog (dollar value)
Backlog (homes)
$ 117,936
109
Average sales price of backlog
$
1,082
$
$
$
450
—
2,948
34
(451)
55 % $
— %
816
8
3 % $ 114,988
45 %
75
(29)% $
1,533
$
$
$
$
41,460
23 % $
183,038
(421)
(34)% $
1,237
2
33 %
6
72,418
170 % $
42,570
13
846
21 %
123 % $
62
687
Net new home orders from unconsolidated joint ventures for the year ended December 31, 2015 increased 4% compared
to the same period in 2014, primarily due to an increase in the number of average selling communities offset partially by a
slight decrease in the monthly absorption rate. The monthly sales absorption rate from unconsolidated joint venture
communities for the year ended December 31, 2015 was 2.6 compared to 2.8 for the same period in 2014. The decline in the
sales absorption ratio from 2014 to 2015 was primarily the result of having fewer homes available to sell per active community
in 2015 at many of our joint ventures, which generally results in slower sales rates.
The number of homes in backlog from unconsolidated joint ventures as of December 31, 2015 increased 45% to 109
homes compared to December 31, 2014, primarily due to a 4% increase in net new home orders and a slight decrease in the
number of deliveries for the year ended December 31, 2015. The dollar value of backlog as of December 31, 2015 compared to
December 31, 2014 increased 3% due to the increase in the number of homes in backlog, offset partially by a reduction in the
average sales price of backlog. The average sales price of backlog decreased primarily due to a change in product mix.
Home sales revenue from unconsolidated joint ventures increased 49% during the year ended December 31, 2015
compared to the same period in 2014, primarily due to a 55% increase in the average sales price of homes delivered. The slight
decrease in new home deliveries from unconsolidated joint ventures for the year ended December 31, 2015 as compared to the
same period in 2014 was primarily due to a decrease in the monthly sales absorption pace as discussed above.
Net new home orders from unconsolidated joint ventures for the year ended December 31, 2014 increased 85% compared
to the same period in 2013, primarily due to an increase in the number of average selling communities. The monthly sales
absorption rate from unconsolidated joint venture communities for the year ended December 31, 2014 was 2.8 compared to
3.6 for the same period in 2013.
The number of homes in backlog from unconsolidated joint ventures as of December 31, 2014 increased 21% to 75
homes compared to December 31, 2013, primarily due to a 85% increase in net new home orders, offset partially by an increase
in new home deliveries for the year ended December 31, 2014. The dollar value of backlog as of December 31, 2014 compared
41
to December 31, 2013 increased 170% due to the increase in the number of homes in backlog and the average sales price of
backlog. The average sales price of backlog increased by $0.8 million primarily due to a change in product mix.
Home sales revenue from unconsolidated joint ventures increased 23% during the year ended December 31, 2014
compared to the same period in 2013, primarily due to a 86% increase in homes delivered, offset partially by a 34% decrease in
its average selling price resulting from a change in community mix. The increase in new home deliveries from unconsolidated
joint ventures for the year ended December 31, 2014 as compared to the same period in 2013 was primarily due to an increase
in community count.
For the year ended December 31, 2015, unconsolidated joint venture homebuilding gross margin percentage was up 40
basis points to 22.8%. The improvement in our unconsolidated joint venture gross margins was largely due to a higher number
of deliveries from our highly successful Newport Beach luxury condominium community and to a lesser extent, increased
pricing at our San Jose Orchard Park community.
Excluding interest in cost of home sales, adjusted unconsolidated joint ventures homebuilding gross margin percentage
for the years ended December 31, 2015, 2014 and 2013 were 24.0%, 23.6% and 29.0%, respectively. See the table below
reconciling this non-GAAP financial measure to unconsolidated joint venture homebuilding gross margin, the nearest GAAP
equivalent.
2015
%
2014
%
2013
%
Year Ended December 31,
(Dollars in thousands)
Unconsolidated Joint Ventures—Homebuilding Gross Margin
Unconsolidated joint ventures home sales revenue
$
335,515
100.0% $
224,498
100.0% $
183,038
Cost of unconsolidated joint ventures home sales
258,978
77.2%
174,302
77.6%
133,310
100.0%
72.8%
Unconsolidated joint ventures homebuilding gross
margin
Add: interest in cost of unconsolidated joint
venture home sales
Adjusted unconsolidated joint ventures homebuilding
gross margin (1)
$
76,537
22.8%
50,196
22.4%
49,728
27.2%
4,016
1.2%
2,885
1.2%
3,257
1.8%
80,553
24.0% $
53,081
23.6% $
52,985
29.0%
(1)
Adjusted unconsolidated joint ventures homebuilding gross margin is a non-GAAP financial measure. We believe that by adding interest in cost of
unconsolidated joint venture home sales back to unconsolidated joint ventures homebuilding gross margin, investors are able to assess the performance
of our unconsolidated joint ventures excluding interest cost. We believe this information is meaningful as it isolates the impact that leverage has on
unconsolidated joint venture homebuilding gross margin and permits investors to make better comparisons with our competitors who adjust gross
margins in a similar fashion.
Year Ended December 31,
Increase/(Decrease)
Increase/(Decrease)
2015
Amount
%
2014
Amount
%
2013
(Dollars in thousands)
Unconsolidated Joint Ventures—Land
Operational Data
Land sales revenue
Backlog (dollar value)
$
$
74,366
33,534
$
$
27,478
59 % $
(55,569)
(62)% $
46,888
89,103
$
$
46,888
89,103
—% $
—% $
—
—
(1)
Amount includes $33.9 million of backlog dollar value related to purchase contracts between an unconsolidated joint venture and the Company.
Land sales for the year ended December 31, 2015 represented residential lot sales to merchant homebuilders from our
unconsolidated joint ventures in Davis (Cannery Park) and Foster City, California.
During the year ended December 31, 2014, our Foster City and Cannery Park joint ventures began selling lots and the
Foster City joint venture also began delivering lots. No such activity occurred during the year ended December 31, 2013.
42
Excluding interest in cost of land sales, adjusted unconsolidated joint ventures land gross margin percentage for the years
ended December 31, 2015 and 2014 were 21.0% and 25.8%, respectively. See the table below reconciling this non-GAAP
financial measure to unconsolidated joint venture land gross margin, the nearest GAAP equivalent.
Year Ended December 31,
2015
%
2014
%
2013
%
(Dollars in thousands)
Unconsolidated Joint Ventures—Land Gross Margin
Unconsolidated joint ventures land sales revenue
$
Cost of unconsolidated joint ventures land sales
Unconsolidated joint ventures land gross margin
Add: interest in cost of unconsolidated joint
ventures land sales
Adjusted unconsolidated joint ventures land gross
margin (1)
74,366
58,753
15,613
100.0% $
79.0%
21.0%
46,888
34,966
11,922
100.0% $
74.6%
25.4%
38
—%
173
0.4%
$
15,651
21.0% $
12,095
25.8% $
—
—
—
—
—
—%
—%
—%
—%
—%
(1)
Adjusted unconsolidated joint ventures land gross margin is a non-GAAP financial measure. We believe that by adding interest in cost of
unconsolidated joint ventures land sales back to unconsolidated joint ventures land gross margin, investors are able to assess the performance of our
unconsolidated joint ventures excluding interest cost. We believe this information is meaningful as it isolates the impact that leverage has on
unconsolidated joint ventures land gross margin and permits investors to make better comparisons with our competitors who adjust gross margins in a
similar fashion.
The tables below summarizes lots owned and controlled by our unconsolidated joint ventures as of the dates presented:
Increase/(Decrease)
Increase/(Decrease)
2015
Amount
%
2014
Amount
%
2013
December 31,
Unconsolidated Joint Ventures—
Lots Owned and Controlled
Homebuilding
Lots owned
Lots controlled (1)
Homebuilding Total
Land Development
Lots owned
Lots controlled (1)
Land Development Total
Total
681
68
749
2,340
235
2,575
3,324
(204)
68
(136)
(432)
—
(432)
(568)
(23)%
— %
(15)%
(16)%
— %
(14)%
(15)%
885
—
885
2,772
235
3,007
3,892
61
(328)
(267)
1,902
(716)
1,186
919
7 %
(100)%
(23)%
219 %
(75)%
65 %
31 %
824
328
1,152
870
951
1,821
2,973
(1)
Consists of lots that are under purchase contracts.
Provision for Taxes
For the year ended December 31, 2015, we recorded a provision for income taxes of $12.5 million. The effective tax rate
for the year ended December 31, 2015 differs from the 35% statutory tax rate due to the tax benefit of production activities and
energy efficient credits, partially offset by state income taxes.
During 2013 and for the first 30 calendar days of 2014, we were a Delaware LLC, which was treated as a partnership for
income tax purposes and was subject to certain minimal taxes and fees; however, income taxes on taxable income or losses
realized by us were the obligation of the members. Federal and state taxes provided during 2013 and the first 30 calendar days
of 2014 relate to a subsidiary that is treated as a C Corporation.
On January 30, 2014, we completed our IPO and reorganized from a Delaware LLC into a Delaware corporation. For
the year ended December 31, 2014, we recorded a tax provision of $0.2 million. The effective tax rate for the year ended
December 31, 2014 differs from the 35% statutory tax rate primarily due to the differences between the financial statement
43
basis and tax basis of certain assets upon conversion to a taxable entity at the time of our IPO, resulting in a net deferred tax
asset. Additionally, the effective tax rate was reduced by the exclusion of pre-conversion earnings from taxable income for the
three months ended March 31, 2014, and the tax benefit of production activities, partially offset by state income taxes.
Lots Owned and Controlled
Lots Owned
Southern California
Northern California
Total
Lots Controlled (1)
Southern California
Northern California
Fee Building Projects (2)
Total
Total Lots Owned and Controlled
Increase/(Decrease)
Increase/(Decrease)
2015
Amount
%
2014
Amount
%
2013
December 31,
123
289
412
754
152
1,422
2,328
2,740
3
19
22
415
(48)
317
684
706
3 %
7 %
6 %
122 %
(24)%
29 %
42 %
35 %
120
270
390
339
200
1,105
1,644
2,034
(49)
53
4
85
47
(206)
(74)
(70)
(29)%
24 %
1 %
33 %
31 %
(16)%
(4)%
(3)%
169
217
386
254
153
1,311
1,718
2,104
(1)
(2)
Includes lots that we control under purchase contracts or non-binding letters of intent that are subject to customary conditions and have not yet closed.
There can be no assurance that such acquisitions will occur.
Subject to agreements with property owners.
Liquidity and Capital Resources
Overview
Our principal uses of capital for the year ended December 31, 2015 were land purchases, land development, home
construction, repayments of our senior unsecured revolving credit facility, operating expenses and the payment of routine
liabilities. Our principal sources of capital for the year ended December 31, 2015 were advances from our senior unsecured
revolving credit facility, distributions from our unconsolidated joint ventures, cash generated from home sales activities and the
sale of common stock in our follow-on offering.
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 outflow
associated with home and land construction was previously incurred. From a liquidity standpoint, we and our unconsolidated
joint ventures are actively acquiring and developing lots to increase our lot supply and community count. As we continue to
expand our business, we expect cash outlays for land purchases, land development and home construction to exceed our cash
generated by operations.
We exercise strict controls and believe we have a prudent strategy for companywide cash management, including those
related to cash outlays for land and inventory acquisition, development and investments in unconsolidated joint ventures. We
ended 2015 with $45.9 million of cash and cash equivalents, a $1.8 million increase from December 31, 2014, primarily as a
result of $47.3 million in net proceeds from our follow-on offering, net income of $21.7 million, net distributions of equity
from our unconsolidated joint ventures of $17.0 million, partially offset by the growth in our community count and increased
investment in real estate inventories of $69.3 million and net repayments of our notes payable of $27.2 million. We intend to
generate cash from the sale of our inventory, but intend to redeploy the net cash generated from the sale of inventory to acquire
and develop strategic, well-positioned lots that represent opportunities to generate future income and cash flows.
As of December 31, 2015 and 2014, we had $16.7 million and $11.9 million, respectively, in accounts payable that related
to costs incurred under our fee building agreements. Funding to pay these amounts is the obligation of the independent third-
party land owner, which is generally funded on a monthly basis. Similarly, contracts and account receivable as of the same
dates included $17.8 million and $13.2 million, respectively, related to the payment of the above payables. As of December 31,
44
2015, we have not experienced any losses from uncollectable contracts and accounts receivable related to our fee building
projects.
We intend to utilize both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash
flows from continuing operations, to provide us with the financial flexibility to operate our business. In that regard, we expect
to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. As
of December 31, 2015, we had $208.9 million of aggregate loan commitments, of which $83.1 million was outstanding. 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 senior unsecured revolving credit facility contains certain financial covenants that limits the
amount of leverage we can maintain. However, our certificate of incorporation does not contain a limitation on the amount of
debt we may incur and our board of directors may change our target debt levels at any time without the approval of our
stockholders.
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 a combination of common and preferred equity, secured
and unsecured corporate level debt, property-level debt and mortgage financing and other public, private or bank debt.
Land Acquisition Notes
During 2012, we entered into a term loan with a land seller, secured by real estate, which bears interest at 7.0% per
annum. The total available commitment under the note is $6.0 million, all of which had been funded as of December 31, 2015.
During February 2016, we made a principal reduction payment of $2.0 million and extended the maturity date of the note. The
note matures on the earlier of (i) 10 days following entitlement approval, or (ii) December 15, 2016. Interest is payable
monthly and the remaining principal is due at maturity.
Secured Construction Notes
In May 2014, we entered into two secured construction loans with a bank related to model and production homes for a
specific project. The loans are secured by real estate and bear interest at the bank's prime rate plus 2.0%, or 5.50% as of
December 31, 2015. The total commitment under the construction loans is $2.9 million, with funding and repayment
requirements based on the project development and sales cycle. As of December 31, 2015, we had $0.7 million available to
borrow under the construction loans subject to certain funding criteria. The loans mature on November 27, 2016. Interest is
payable monthly, with all unpaid principal and interest due at maturity.
Senior Unsecured Revolving Credit Facility
We have a senior unsecured revolving credit facility (the "Credit Facility") with a bank group. During 2015, the Credit
Facility was upsized by $50 million and $25 million in May and December, respectively, by exercising the accordion provision.
As of December 31, 2015, the total commitment under such Credit Facility was $200 million, of which $74.9 million was
outstanding and $125.1 million was available. The maturity date under the Credit Facility is April 30, 2018 and has the
potential for a one-year extension, subject to specified conditions and the payment of an extension fee. We may repay advances
at any time without premium or penalty. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin
ranging from 2.25% to 3.00% depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter. As of
December 31, 2015, the interest rate under the facility was 3.18%.
Under our Credit Facility, we are required to comply with certain financial covenants, including but not limited to those
set forth in the table below, and as described and defined further in the Credit Facility:
Financial Covenant
Unencumbered Liquid Assets
EBITDA to Interest Incurred
Tangible Net Worth
Leverage Ratio
Adjusted Leverage Ratio (1)
Actual at
December 31,
2015
Covenant
Requirement at
December 31,
2015
(Dollars in thousands)
$
$
45,874
8.0 : 1.0
219,796
$
$
17%
29%
7,000
> 1.5 : 1.0
157,186
< 65%
< 50%
(1)
Adjusted Leverage Ratio is computed as total joint venture debt divided by total joint venture equity.
45
As of December 31, 2015 and 2014, we were in compliance with all financial covenants.
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. The ratio of debt-to-capital and the ratio of net debt-to-capital are calculated as follows:
Notes payable, including unsecured revolving credit facility
Equity, exclusive of noncontrolling interest
Total capital
Ratio of debt-to-capital (1)
Notes payable, including unsecured revolving credit facility
Less: cash, cash equivalents and restricted cash
Net debt
Equity, exclusive of noncontrolling interest
Total capital
Ratio of net debt-to-capital (2)
December 31,
2015
2014
(Dollars in thousands)
$
$
$
$
83,082
220,775
303,857
27.3%
83,082
46,254
36,828
220,775
257,603
$
$
$
$
113,751
148,084
261,835
43.4%
113,751
44,340
69,411
148,084
217,495
14.3%
31.9%
(1)
(2)
The ratio of debt-to-capital is computed as the quotient obtained by dividing notes payable by the sum of total notes payable plus equity, exclusive of
noncontrolling interest.
The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is notes payable less cash to the extent necessary to
reduce the debt balance to zero) by total capital, exclusive of noncontrolling interest. 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 notes payable, 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.
See the table above reconciling this non-GAAP financial measure to the ratio of debt-to-capital.
Cash Flows — Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
For the year ended December 31, 2015 as compared to the year ended December 31, 2014, the comparison of cash flows
is as follows:
• Net cash used in operating activities was $32.3 million in 2015 versus $112.2 million in 2014. The change was
primarily a result of an increase in net income and a reduction in cash outflows for real estate inventories to $69.3
million in 2015 compared to $119.6 million in 2014. The significant investment in real estate inventories in 2014 was
the result of the investment in a number of new wholly-owned projects subsequent to the IPO. In 2015, we continued
to invest in wholly-owned communities, but were able to utilize favorable lot option takedown structures that defrayed
a portion of the upfront capital to acquire land. In addition, we delivered more homes in 2015 as compared to the prior
year, which partially offset land acquisition and construction costs capitalized to inventory as compared to the prior
year.
• Net cash provided by investing activities was $16.6 million in 2015 compared to net cash used in investing activities
of $24.9 million in 2014. For the year ended December 31, 2015, our net distributions from unconsolidated joint
ventures increased to $17.0 million compared to net contributions of $24.0 million during the year ended
December 31, 2014 and was the primary reason net cash provided by investing activities increased. The increase in
distributions related to the increase in total revenues of the unconsolidated joint ventures, as well as being at the later
stages of certain joint ventures, where there was more cash available to distribute.
• Net cash provided by financing activities was $17.5 million in 2015 versus $171.6 million in 2014. The change was
primarily driven by net paydowns of notes payable in 2015 of $27.2 million versus net borrowings of $95.9 million
during 2014. In addition, 2015 included the follow-on issuance of common stock of $47.3 million while 2014
included net proceeds from the IPO of $75.8 million.
46
Off-Balance Sheet Arrangements and Contractual Obligations
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 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 equity. Option contracts generally require a non-refundable 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. As of December 31, 2015, we had $8.2 million of non-refundable cash deposits pertaining to
land option contracts and purchase contracts with an estimated aggregate remaining purchase price of $377.1 million (net of
deposits).
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.
We have provided credit enhancements in connection with joint venture borrowings in the form of loan-to-value ("LTV")
maintenance agreements in order to secure performance under the loans and maintain certain LTV ratios. We have also entered
into agreements with our partners in each of the unconsolidated joint ventures whereby we and our partners are apportioned
liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements
provide us, to the extent our 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. The loans underlying the agreements
comprise acquisition and development loans, construction revolvers and model 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 December 31, 2015 and 2014,
$74.1 million and $61.4 million, respectively, was outstanding under the loans and credit enhanced by us through LTV
maintenance agreements. Under the terms of the joint venture agreements, our proportionate share of LTV maintenance
agreement liabilities was 30.3% and 12.6%, respectively, as of December 31, 2015 and 2014. In addition, we have provided
completion guaranties regarding specific performance for certain projects whereby we are required to complete the given
project with funds provided by the beneficiary of the guaranty. If there are not adequate funds available under the specific
project loans, then we would be subject to financial liability under such completion guaranties. Typically, under such terms of
our joint venture agreements, we have the right to apportion the respective share of any liabilities funded under such
completion guaranties to our partners.
47
Off-Balance Sheet Arrangements
As of December 31, 2015, we held membership interests in 14 unconsolidated joint ventures, 10 of which related to
homebuilding activities and four of which related to land development as noted below. We were a party to five loan-to-value
maintenance agreements related to unconsolidated joint ventures as of December 31, 2015. The following table reflects certain
financial and other information related to our unconsolidated joint ventures as of December 31, 2015:
Joint Venture (Project
Name)
Year
Formed
Location
Assets
(1)
Debt
Equity
Debt-to-Total
Capitalization
Total Joint Venture
December 31, 2015
Loan-to-
Value
Maintenance
Agreement
Future
Capital
Commitment
(2)
LR8 Investors, LLC
(Lambert Ranch)
Larkspur Land 8
Investors, LLC (Rose Lane)
TNHC-HW San Jose LLC
(Orchard Park)
TNHC-TCN Santa Clarita
LP (Villa Metro)(3)
TNHC Newport LLC
(Meridian)(3)
Encore McKinley Village
LLC (McKinley Village)(4)
TNHC San Juan LLC
(Oliva)(5)
TNHC Russell Ranch LLC
(Russell Ranch)(3)(4)(6)
TNHC-HW Foster City
LLC (Foster Square)(6)
Calabasas Village LP
(Avanti)(3)
TNHC-HW Cannery LLC
(Cannery Park)(6)
Arantine Hills Holdings LP
(Bedford Ranch)(3)(6)
TNHC Tidelands LLC
(Tidelands)
TNHC Mountain Shadows
LLC (Mountain Shadows)
2010
Irvine, CA
2011
Larkspur, CA
2012
San Jose, CA
2012
2013
2013
2013
Santa
Clarita, CA
Newport
Beach, CA
Sacramento,
CA
San Juan
Capistrano,
CA
2013
Folsom, CA
2013
2013
Foster City,
CA
Calabasas,
CA
2013
Davis, CA
2014
Corona, CA
2015
2015
San Mateo,
CA
Paradise
Valley, AZ
$
2,443 $
— $
201
(Dollars in 000's)
3,046
—
1,149
72,807
19,305
48,974
11,211
6,747
16,270
51,986
—
774
2,514
8,544
47,670
42,462
14,104
26,539
44,189
20,000
23,525
14,680
—
110
52,170
19,855
28,831
43,064
90,637
—
—
31,040
90,170
37,883
14,105
20,947
3,069
—
3,000
Total Unconsolidated Joint Ventures
$
485,917 $
94,890 $
333,214
—%
—%
28%
73%
—%
2%
35%
46%
—%
41%
—%
—%
40%
—%
22%
N/A $
N/A
Yes
Yes
N/A
No
Yes
No
N/A
Yes
N/A
N/A
Yes
N/A
—
—
—
—
—
1,132
—
16,850
—
72
—
316
—
5,650
$
24,020
(1)
(2)
(3)
(4)
(5)
(6)
Scheduled maturities of the unconsolidated joint venture debt as of December 31, 2015 are as follows: $16.4 million matures in 2016, $77.7 million
matures in 2017, $0 matures in 2018 and $0.8 million matures in 2019.
Estimated future capital commitment represents our proportionate share of estimated future contributions to the respective unconsolidated joint
ventures as of December 31, 2015. Actual contributions may differ materially.
Certain members of the Company's board of directors are affiliated with entities that have an investment in these joint ventures.
The debt associated with this joint venture consists of a land seller note.
This joint venture was dissolved in January 2016 and is now wholly-owned by the Company.
Land development joint ventures.
As of December 31, 2015, the unconsolidated joint ventures were in compliance with their respective loan covenants,
where applicable, and we were not required to make any loan-to-value maintenance related payments during the year ended
December 31, 2015.
48
Contractual Obligations Table
The following table summarized our future estimated cash payments under existing contractual obligations as of
December 31, 2015 including estimated cash payments due by period. Our purchase obligations primarily represent
commitments for land purchases under purchase and land option contracts with non-refundable deposits and commitments for
subcontractor labor and material to be utilized in the normal course of business.
Contractual Obligations
Long-term debt principal payments (1)
Long-term interest payments
Operating leases
Purchase obligations (2)
Total
Payments Due By Period
Total
Less than 1
Year
1-3 Years
4-5 Years
(Dollars in thousands)
More than 5
Years
$
$
83,082
$
8,158
$
74,924
$
— $
11,565
4,364
414,276
5,001
1,419
414,276
6,564
1,567
—
—
1,378
—
513,287
$
428,854
$
83,055
$
1,378
$
—
—
—
—
—
(1)
(2)
Long-term debt represents our senior unsecured revolving credit facility, two secured construction loans, and a note payable with a land seller. For a
more detailed description of our long-term debt, please see Note 8 of the notes to our consolidated financial statements.
Includes $377.1 million (net of deposits) of the remaining purchase price of non-refundable cash deposits for land option and land purchase contracts
and $37.1 million of subcontractor labor and material commitments as of December 31, 2015 for which we are responsible if the subcontractor
completes the work as specified in their respective commitments, excluding purchase obligations made on behalf of the owner(s) of fee build projects
for which we do not have risk of loss.
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 are often 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 spring and summer, although this activity is also
highly dependent on the number of active selling communities, timing of new community openings and other market factors.
Since it typically takes four to seven months to construct a new home, we deliver more homes in the second half of the year as
spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs 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. We expect this seasonal pattern to continue over the long-term,
although it may be affected by volatility in the homebuilding industry.
Critical Accounting Policies
The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the
reported amounts of our assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates and judgments, including those that impact our most critical accounting
policies. We base our estimates and judgments on historical experience and various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Listed below are those estimates and policies that we believe are critical and require the use of complex judgment in their
application and should be read in conjunction with the Notes to our Consolidated Financial Statements.
49
Real Estate Inventories
We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect
construction costs to real estate inventories. 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. Inventory is stated at cost, unless the carrying amount is
determined not to be recoverable, in which case inventory is written down to fair value.
We review our real estate assets at each project (including unconsolidated joint venture real estate projects) on a periodic
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 and 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 remaining undiscounted future cash flows of the project are more or less than
the asset’s carrying value. If the undiscounted cash flows are more than the asset’s carrying value, no impairment adjustment is
required. However, if the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and is
written down to fair value.
When estimating undiscounted 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, the
level of time sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such
as model maintenance costs and advertising 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 sales. These objectives may vary significantly from
project to project and over time. If assets are considered impaired, impairment is determined by the amount the asset’s carrying
value exceeds its fair value. Fair value is determined based on estimated future cash flows discounted for inherent risks
associated with real estate assets. These discounted cash flows are impacted by expected risk based on estimated land
development; construction and delivery timelines; market risk of price erosion; uncertainty of development or construction cost
increases; and other risks specific to the asset or market conditions where the asset is located when assessment is made. These
factors are specific to each project and may vary among projects.
Home Sales Revenue and Cost of Home Sales
Homebuilding revenue and cost of sales are recognized after construction is completed, a sufficient down payment has
been received, title has transferred to the homebuyer, collection of the purchase price is reasonably assured and we have no
continuing involvement. Cost of sales is recorded based upon total estimated costs to be allocated to each home within a
community. Any changes to the estimated costs are allocated to the remaining undelivered lots and homes within their
respective community. The estimation and allocation of these costs requires a substantial degree of judgment by management.
The estimation process involved in determining relative sales or fair values is inherently uncertain because it involves
estimating future sales values of homes before delivery. Additionally, in determining the allocation of costs to a particular land
parcel or individual home, we rely on project budgets that are based on a variety of assumptions, including assumptions about
construction schedules and future costs to be incurred. It is common that actual results differ from budgeted amounts for
various reasons, including construction delays, increases in costs that have not been committed or unforeseen issues
encountered during construction that fall outside the scope of existing contracts, or costs that come in less than originally
anticipated. While the actual results for a particular construction project are accurately reported over time, a variance between
the budget and actual costs could result in the understatement or overstatement of costs and have a related impact on gross
margins between reporting periods. To reduce the potential for such variances, we have procedures that have been applied on a
consistent basis, including assessing and revising project budgets on a periodic basis, obtaining commitments from
50
subcontractors and vendors for future costs to be incurred, and utilizing the most recent information available to estimate costs.
We believe that these policies and procedures provide for reasonably dependable estimates for purposes of calculating amounts
to be relieved from inventories and expensed to cost of sales in connection with the delivery of homes.
Fee Building
The Company enters into fee building agreements to provide services whereby it will build homes on behalf of
independent third-party property owners. The independent 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 independent
third-party property owners for all direct and indirect costs, plus a negotiated management fee. For these types of contracts, the
Company recognizes revenue based on the actual total costs it has expended plus the applicable management fee. The
management fee is typically a fixed fee based on a percentage of the cost or home sales revenue of the project depending on the
terms of the agreement with the independent third-party property owner. In accordance with ASC 605, Revenue Recognition
(“ASC 605”), revenues from fee building services are recognized over a cost-to-cost approach in applying the percentage-of-
completion method. Under this approach, revenue is earned in proportion to total costs incurred, divided by total costs expected
to be incurred. The total estimated cost plus the management fee represents the total contract value. The Company recognizes
revenue based on the actual labor and other direct costs incurred, plus the portion of the management fee it has earned to date.
In the course of providing its services, the Company routinely subcontracts for services and incurs other direct costs on behalf
of its customers. These costs are passed through to customers and, in accordance with industry practice and GAAP, are included
in the Company’s revenue and cost of revenue. Under certain agreements, the Company is eligible to receive additional
incentive compensation as certain financial thresholds defined in the agreement are achieved. The Company recognizes revenue
for any incentive compensation when such financial thresholds are probable of being met and such compensation is deemed to
be collectible, generally at the date the amount is communicated to us by the independent third-party property owner.
The Company also enters into fee building and management contracts with third parties and its unconsolidated joint
ventures where it provides construction supervision services, as well as sales and marketing services, and does not bear
financial risks for any services provided. In accordance with ASC 605, revenue from these services are recognized over a
proportional performance method or completed performance method. Under this approach, revenue is earned as services are
provided in proportion to total services expected to be provided to the customer or on a straight line basis if the pattern of
performance cannot be determined while costs are recognized as incurred. Revenue recognition for any portion of the fees
earned from these services that are contingent upon a financial threshold or specific event is deferred until the threshold is
achieved or the event occurs.
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.
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. In accordance with ASC 810, we perform ongoing reassessments of whether an
enterprise is the primary beneficiary of a VIE.
Investments in Unconsolidated Joint Ventures
We first analyze our homebuilding and land development joint ventures to determine if they are variable interest entities
under the provisions of ASC 810 (as discussed above) when determining whether the entity should be consolidated. If we
conclude that our homebuilding and land development joint ventures are not variable interest entities, then, in accordance with
the provisions of ASC 810, limited partnerships or similar entities must be further evaluated under the presumption that the
general partner, or the managing member in the case of a limited liability company, is deemed to have a controlling interest and
therefore must consolidate the entity unless the limited partners or non-managing members have: (1) the ability, either by a
single limited partner or through a simple majority vote, to dissolve or liquidate the entity, or kick-out the managing member/
general partner without cause, or (2) substantive participatory rights that are exercised in the ordinary course of business. Under
51
the provisions of ASC 810, we may be required to consolidate certain investments in which we hold a general partner or
managing member interest.
Investments in our unconsolidated joint ventures are accounted for under the equity method of accounting. 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. Our ownership interests in our unconsolidated joint ventures
vary, but are generally less than or equal to 35%.
We review real estate inventory held by our unconsolidated joint ventures for impairment, consistent with our real estate
inventories. We also review our investments in unconsolidated joint ventures for evidence of other-than-temporary declines in
value. To the extent we deem any portion of our investment in unconsolidated joint ventures as not recoverable, we impair our
investment accordingly.
In addition, the Company has provided credit enhancements in connection with joint venture borrowings such as loan-to-
value maintenance agreements, construction completion agreements, and environmental indemnities. In many cases, we share
these obligations with our joint venture partners, and in some cases, we are solely responsible for such obligations. Through
December 31, 2015, the Company has not made any payments related to these credit enhancements. For further discussion
regarding these credit enhancements, please see Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Liquidity and Capital Resources—Off-Balance Sheet Arrangements and Contractual Obligations” and
Note 11 to the Consolidated Financial Statements.
Warranty Accrual
We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural
construction defects for one-year periods. 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
rates. Due to the Company’s limited history related to homebuilding sales, the Company also considers the historical
experience of its peers in determining the amount of its warranty accrual. In addition, the Company receives warranty payments
from its customers for certain of its fee building projects where it 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. Although we consider the warranty accruals reflected in our consolidated balance sheet to be adequate,
actual future costs could differ significantly from our currently estimated amounts.
Income Taxes
Income taxes are accounted for in accordance with ASC 740, Income Taxes (“ASC 740”). This statement requires an
asset and a liability approach for measuring deferred taxes based on temporary differences between the financial statement and
tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which taxes are
expected to be paid or recovered.
Deferred tax assets are evaluated on a quarterly basis to determine if adjustments to the valuation allowance are required.
In accordance with ASC 740, we assess whether a valuation allowance should be established based on the consideration of all
available evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. 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. 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. Changes in existing tax laws and tax rates also affect
actual tax results and the valuation of deferred tax assets over time.
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 (defined as a likelihood of more than 50%), 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
52
management based on the individual facts and circumstances. Changes in the recognition or measurement of uncertain tax
positions could result in material increases or decreases in our income tax expense in the period in which we make the change.
Stock-Based Compensation
We account for share-based awards in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”) and
ASC 505-50, Equity – Equity Based Payments to Non-Employees (“ASC 505-50”).
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.
ASC 505-50 requires that if an employee becomes a non-employee and continues to vest in a share-based award pursuant
to the award's original terms, the award be treated as an award to a non-employee prospectively, provided the individual is
required to continue providing services to the employer (such as consulting services). These awards are to be accounted for
prospectively, such that the fair value of the award will be re-measured at each reporting date until the earlier of (a) the
performance commitment date or (b) the date the services required under the agreement have been completed. ASC 505-50
requires that compensation cost ultimately recognized in the Company's financial statements be the sum of (a) the
compensation cost recognized during the period of time the individual was an employee (based on the grant-date fair value)
plus (b) the fair value of the award determined on the measurement date determined in accordance with ASC 505-50 for the
pro-rata portion of the vesting period in which the individual was a non-employee.
The determination of the fair value of share-based awards at the grant date, or subsequent remeasurment dates under
ASC 505-50, requires judgment in developing assumptions and involves a number of variables. These variables include, but
are not limited to: expected stock-price volatility over the term of the awards and expected stock option exercise behavior.
Additionally, judgment is required in estimating the number of share-based awards that are expected to be forfeited and, in the
case of performance share awards, the level of performance that will be achieved and the number of shares that will be earned.
If actual results differ significantly from these estimates, stock-based compensation expense and our consolidated results of
operations could be significantly impacted.
Recently Issued Accounting Standards
See Note 1 to the accompanying notes to consolidated financial statements included in this annual report on Form 10-K.
JOBS Act
We qualify as an "emerging growth company" pursuant to the provisions of the JOBS Act. For as long as we are an "emerging
growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to other
public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the
auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory "say-on-pay"
votes on executive compensation, shareholder advisory votes on golden parachute compensation and the extended transition period
for complying with the new or revised accounting standards.
In addition, Section 107 of the JOBS Act also 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 for complying with new or revised accounting standards. An
"emerging growth company" can therefore delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. However, we have chosen to "opt out" of such extended transition period and, as a result, we will
comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-
emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period
for complying with new or revised accounting standards is irrevocable.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our outstanding variable rate debt. We did not
utilize swaps, forward or option contracts on interest rates or commodities, or other types of derivative financial instruments as
of or during the year ended December 31, 2015. We have not entered into and currently do not hold derivatives for trading or
53
speculative purposes. Many of the statements contained in this section are forward looking and should be read in conjunction
with our disclosures under the heading “Cautionary Note Concerning Forward-Looking Statements.”
The table below details the principal amount and the average interest rates for the outstanding debt for each category
based upon the expected maturity or disposition dates. The fair value of our variable rate debt consists of our senior unsecured
revolving credit facility (the "Credit Facility") and two secured construction loans. Based on the short-term duration of LIBOR
rates, the fair value of debt under the Credit Facility approximates the carrying value. The fair value of our two secured
construction loans are prime-based borrowings which float with changes in the prime rate and, as such approximate the
carrying value.
Expected Maturity Date
2016
2017 - 2020
Thereafter
Total
(Dollars in thousands)
Estimate Fair
Value
Liabilities:
Variable rate debt
$
2,158
$
74,924
$
Weighted Average Interest Rate
5.5%
3.1%
— $
—%
77,082
$
77,082
3.2%
—%
Based on the current interest rate management policies we have in place with respect to our outstanding debt, we do
not believe that the future market rate risks related to the above securities will have a material adverse impact on our financial
position, results of operations or liquidity.
Item 8.
Financial Statements and Supplementary Data
The information required by this item is set forth beginning on page 56.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and 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 communicated to the 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 that such information is accumulated 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 (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act). 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 December 31, 2015.
54
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, conducted an assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2015 based on the framework established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission (2013 Framework). Based on this framework,
our management concluded that our internal control over financial reporting was effective as of December 31, 2015.
This annual report on Form 10-K does not include an attestation report of our independent registered public
accounting firm, because as an "emerging growth company" under the JOBS Act our independent registered public accounting
firm is not required to issue such an attestation report.
Changes in Internal Controls
There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the
Exchange Act) that occurred during our most recent fiscal quarter that have materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
Item 9B.
Other Information
None.
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
Information required by Item 10 of Part III is included in our Proxy Statement relating to our 2016 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 11.
Executive Compensation
Information required by Item 11 of Part III is included in our Proxy Statement relating to our 2016 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by Item 12 of Part III is included in our Proxy Statement relating to our 2016 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Information required by Item 13 of Part III is included in our Proxy Statement relating to our 2016 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services
Information required by Item 14 of Part III is included in our Proxy Statement relating to our 2016 Annual Meeting of
Shareholders and is incorporated herein by reference.
55
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(a) The following documents are filed as part of this annual report on Form 10-K:
(1) Financial Statements:
The New Home Company Inc.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Equity for the Years Ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
TNHC Meridian Investors LLC (our unconsolidated investee)
Report of Independent Auditors
Balance Sheets as of December 31, 2015 and 2014
Statements of Operations for the Years Ended December 31, 2015 and 2014, and Period From August
20, 2013 (Inception) to December 31, 2013
Statements of Members' Capital for the Years Ended December 31, 2015 and 2014, and Period From
August 20, 2013 (Inception) to December 31, 2013
Statements of Cash Flows for the Years Ended December 31, 2015 and 2014, and Period From August
20, 2013 (Inception) to December 31, 2013
Notes to Financial Statements
TNHC Newport LLC (our unconsolidated lower tier investee)
Report of Independent Auditors
Balance Sheets as of December 31, 2015 and 2014
Statements of Operations for the Years Ended December 31, 2015 and 2014, and Period From March 1,
2013 (Inception) to December 31, 2013
Statements of Members' Capital for the Years Ended December 31, 2015 and 2014, and Period From
March 1, 2013 (Inception) to December 31, 2013
Statements of Cash Flows for the Years Ended December 31, 2015 and 2014, and Period From March
1, 2013 (Inception) to December 31, 2013
Notes to Financial Statements
PAGE
58
59
60
61
62
63
PAGE
83
85
86
87
88
89
PAGE
96
98
99
100
101
102
56
LR8 Investors, LLC (our unconsolidated investee)
Report of Independent Auditors
Consolidated Balance Sheet as of December 31, 2014
Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Members' Capital for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to Consolidated Financial Statements
Larkspur Land 8 Investors LLC (our unconsolidated investee)
Report of Independent Auditors
Consolidated Balance Sheet as of December 31, 2014
Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Members' Capital for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to Consolidated Financial Statements
TNHC-HW Foster City LLC (our unconsolidated investee)
Report of Independent Auditors
Balance Sheet as of December 31, 2014
Statements of Operations for the Year Ended December 31, 2014 and Period From July 2, 2013
(Inception) to December 31, 2013
Statements of Members' Capital for the Year Ended December 31, 2014 and Period From July 2, 2013
(Inception) to December 31, 2013
Statements of Cash Flows for the Year Ended December 31, 2014 and Period From July 2, 2013
(Inception) to December 31, 2013
Notes to Financial Statements
(2) Financial Statement Schedules
PAGE
110
112
113
114
115
116
PAGE
121
123
124
125
126
127
PAGE
133
135
136
137
138
139
All other schedules have been omitted since the required information is presented in the financial statements and
the related notes or is not applicable.
(3) Exhibits
The exhibits filed or furnished as part of this annual report on Form 10-K are listed in the Index to Exhibits
immediately preceding those exhibits, which Index is incorporated in this Item by reference.
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
The New Home Company Inc.
We have audited the accompanying consolidated balance sheets of The New Home Company Inc. (the "Company") as of
December 31, 2015 and 2014, and the related consolidated statements of operations, equity, and cash flows for each of the three
years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of The New Home Company Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Irvine, California
February 26, 2016
58
THE NEW HOME COMPANY INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2015
2014
(Dollars in thousands, except per share
amounts)
$
45,874
$
380
23,960
979
209,918
60,572
9,587
351,270
$
26,371
$
19,827
293
74,924
8,158
129,573
$
$
44,058
283
13,164
2,662
163,564
60,564
7,663
291,958
16,581
11,200
—
100,474
13,277
141,532
Assets
Cash and cash equivalents
Restricted cash
Contracts and accounts receivable
Due from affiliates
Real estate inventories
Investment in unconsolidated joint ventures
Other assets
Total assets
Liabilities and equity
Accounts payable
Accrued expenses and other liabilities
Due to affiliates
Unsecured revolving credit facility
Other notes payable
Total liabilities
Commitments and contingencies (Note 10)
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, 20,543,130 and 16,448,750,
shares issued and outstanding as of December 31, 2015 and December 31, 2014,
respectively
Additional paid-in capital
Retained earnings
Total The New Home Company Inc. stockholders' equity
Noncontrolling interest in subsidiary
Total equity
Total liabilities and equity
See accompanying notes to the consolidated financial statements.
205
194,437
26,133
220,775
922
221,697
$
351,270
$
164
143,475
4,445
148,084
2,342
150,426
291,958
59
THE NEW HOME COMPANY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2015
2014
2013
(Dollars in thousands, except per share amounts)
$
280,209
$
56,094
$
35,663
149,890
430,099
240,030
139,677
8,943
20,278
408,928
13,767
—
(1,027)
33,911
(12,533)
21,378
310
93,563
149,657
47,660
89,057
3,166
12,420
152,303
8,443
19
(813)
5,003
(246)
4,757
30
21,688
$
4,787
$
47,565
83,228
28,980
42,317
1,772
7,107
80,176
4,735
114
(905)
6,996
(290)
6,706
—
6,706
1.29
1.28
$
$
0.30
0.30
$
$
0.85
0.85
16,767,513
16,941,088
15,927,917
15,969,199
7,905,757
7,905,757
Revenues:
Home sales
Fee building, including management fees from unconsolidated joint
ventures of $12,426, $9,582 and $8,251, respectively
Expenses:
Cost of homes sales
Cost of fee building
Selling and marketing
General and administrative
Equity in net income of unconsolidated joint ventures
Guaranty fee income
Other expense, net
Income before taxes
Provision for taxes
Net income
Net loss attributable to noncontrolling interest
Net income attributable to The New Home Company Inc.
Earnings per share attributable to The New Home Company Inc.
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes to the consolidated financial statements.
$
$
$
60
THE NEW HOME COMPANY INC.
CONSOLIDATED STATEMENTS OF EQUITY
Stockholders’ Equity
Number of
Shares of
Common
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Total
Stockholders’
Equity
Members’
Equity
Noncontrolling
Interest in
Subsidiary
Total
Equity
(Dollars in thousands)
Balance at December 31, 2012
— $
— $
— $
— $
— $
35,575
$
— $
35,575
Net income (loss)
Contributions from members
Noncontrolling interest contribution
Equity-based compensation expense
Balance at December 31, 2013
Net income (loss)
Noncontrolling interest contribution
Noncontrolling interest distribution
Equity-based compensation expense
Conversion of members’ equity into
common stock
Issuance of common stock, net of
issuance costs
—
—
—
—
—
—
—
—
—
8,636,250
8,984,375
—
—
—
—
—
—
—
—
—
86
90
—
—
—
—
—
—
—
—
2,005
64,929
87,710
Repurchase of common stock
(1,171,875)
(12)
(11,977)
Deductible transaction costs and
additional contribution of deferred
tax assets from IPO
—
Balance at December 31, 2014
16,448,750
—
164
808
143,475
Net income (loss)
Noncontrolling interest contribution
Noncontrolling interest distribution
Stock-based compensation expense
Minimum tax withholding paid on
behalf of employees for stock
awards
Excess tax benefits from stock-
based compensation
—
—
—
—
—
—
Shares issued through stock plans
69,380
Issuance of common stock, net of
issuance costs
4,025,000
—
—
—
—
—
—
1
40
—
—
—
3,884
(248)
97
16
47,213
—
—
—
—
—
4,445
—
—
—
—
—
—
—
4,445
21,688
—
—
—
—
—
—
—
—
—
—
—
—
4,445
—
—
2,005
6,706
21,600
—
475
64,356
342
—
—
317
65,015
(65,015)
87,800
(11,989)
808
148,084
21,688
—
—
3,884
(248)
97
17
47,253
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,171
—
1,171
(30)
1,253
(52)
—
—
—
—
—
2,342
(310)
1,301
(2,411)
—
—
—
—
—
6,706
21,600
1,171
475
65,527
4,757
1,253
(52)
2,322
—
87,800
(11,989)
808
150,426
21,378
1,301
(2,411)
3,884
(248)
97
17
47,253
Balance at December 31, 2015
20,543,130
$
205
$ 194,437
$ 26,133
$
220,775
$
— $
922
$ 221,697
See accompanying notes to the consolidated financial statements.
61
THE NEW HOME COMPANY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2015
Year Ended December 31,
2014
(Dollars in thousands)
2013
$
21,378
$
4,757
$
6,706
Operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating activities:
Deferred taxes
Amortization of equity based compensation
Excess tax benefits from stock-based compensation
Distributions of earnings from unconsolidated joint ventures
Equity in net income of unconsolidated joint ventures
Deferred profit from unconsolidated joint ventures
Depreciation and amortization
Abandoned project costs
Net changes in operating assets and liabilities:
Restricted cash
Contracts and accounts receivable
Due from affiliates
Real estate inventories
Other assets
Accounts payable
Accrued expenses and other liabilities
Due to affiliates
Net cash used in operating activities
Investing activities:
Purchases of property and equipment
Contributions to unconsolidated joint ventures
Distributions of capital from unconsolidated joint ventures
Net cash provided by (used in) investing activities
Financing activities:
Net proceeds from issuance of common stock
Repurchase of common stock
Cash contributions from members
Cash distributions to noncontrolling interest in subsidiary
Proceeds from issuance of unsecured notes to members
Borrowings from credit facility and other notes payable
Repayments of credit facility and other notes payable
Minimum tax withholding paid on behalf of employees for stock awards
Excess tax benefits from stock-based compensation
Proceeds from exercise of stock options
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents – beginning of year
Cash and cash equivalents – end of year
Supplemental disclosures of cash flow information
Interest paid, net of amounts capitalized
Income taxes paid
Supplemental disclosures of non-cash transactions
Purchase of real estate with note payable to land seller
Purchase of real estate with notes payable to affiliate
Note payable with member for equity investment
Distribution from unconsolidated joint ventures in lieu of cash
Contribution of real estate to unconsolidated joint ventures
Contribution of real estate from noncontrolling interest in subsidiary
Deductible transaction costs and additional contribution of deferred tax
assets from IPO
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
$
$
$
$
62
(1,675)
3,884
(97)
18,477
(13,767)
(1,603)
473
635
(97)
(10,796)
1,683
(69,289)
(304)
9,790
8,712
293
(32,303)
(418)
(15,028)
32,026
16,580
47,253
—
—
(2,411)
—
103,002
(130,171)
(248)
97
17
17,539
1,816
44,058
45,874
$
— $
$
11,261
— $
747
$
— $
— $
$
$
18,828
1,301
(5,819)
2,322
—
6,040
(8,443)
—
381
754
(153)
(5,986)
(2,104)
(119,605)
3,388
7,893
4,349
—
(112,226)
(883)
(34,610)
10,609
(24,884)
87,800
(11,989)
—
(52)
—
111,636
(15,768)
—
—
—
171,627
34,517
9,541
44,058
$
— $
$
1,470
17,000
$
— $
— $
— $
$
$
1,890
1,252
— $
808
$
—
475
—
6,930
(4,735)
—
200
875
14
(1,128)
(507)
(21,754)
(3,198)
733
3,592
—
(11,797)
(359)
(22,028)
13,901
(8,486)
—
—
21,600
—
1,055
25,007
(23,846)
—
—
—
23,816
3,533
6,008
9,541
—
245
—
—
2,055
1,083
17,052
1,172
—
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 and Arizona.
Initial Public and Follow-On Offerings
The Company completed its initial public offering (“IPO”) on January 30, 2014. In preparation for the IPO, the
Company reorganized from a Delaware limited liability company (“LLC”) into a Delaware corporation, issuing 8,636,250
shares of common stock to the former members of the LLC in the Company's formation transactions, and changed its name to
The New Home Company Inc. As a result of the IPO, the Company issued and sold 8,984,375 shares of common stock
(including 1,171,875 shares sold pursuant to the underwriter's exercise of their option to purchase additional shares from the
Company) at the public offering price of $11.00 per share. In accordance with the terms of the IPO, with net proceeds received
from the underwriters exercise of their option to purchase additional shares, the Company repurchased 1,171,875 shares of its
common stock issued to a member of the LLC in connection with the Company's formation transactions. The Company
received proceeds of $75.8 million, net of the underwriting discount, offering expenses and the repurchase of shares. Upon the
close of the IPO, the Company had 16,448,750 common shares outstanding.
On December 9, 2015, the Company completed a follow-on equity offering, issuing and selling 4,025,000 shares of
common stock (including 525,000 shares sold pursuant to the underwriter's exercise of their option to purchase additional
shares from the Company) at a public offering price of $12.50 per share. The Company received proceeds of $47.3 million, net
of the underwriting discount and offering expenses. After the closing of the follow-on offering, the Company had 20,541,546
common shares outstanding.
Basis of Presentation
The 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 financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”).
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 consolidated financial statements and
notes. Accordingly, actual results could differ materially from these estimates.
Segment Reporting
ASC 280, Segment Reporting (“ASC 280”) established standards for the manner in which public enterprises report
information about operating segments. In accordance with ASC 280, we have determined that our homebuilding division and
our fee building division are our operating segments. Corporate is a non-operating segment.
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.
63
Restricted Cash
Restricted cash of $0.4 million and $0.3 million as of December 31, 2015 and 2014, respectively, is held in accounts for
payment of subcontractor costs incurred in connection with various fee building projects.
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 non-refundable land deposits, are expensed to other expense, net, when 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 allocation of construction costs of each home and 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 costs are generally 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 fair value. We review our real estate
assets at each project on a periodic 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 and 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 remaining undiscounted future cash flows of the project are more or less than
the asset’s carrying value. If the undiscounted cash flows are more than the asset’s carrying value, no impairment adjustment is
required. However, if the undiscounted cash flows are less than the asset’s carrying value, the asset is deemed impaired and is
written down to fair value.
When estimating undiscounted 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, the
level of time sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such
as model maintenance costs and advertising 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 sales. These objectives may vary significantly from
project to project and over time. If assets are considered impaired, impairment is determined by the amount the asset’s carrying
value exceeds its fair value. Fair value is determined based on estimated future cash flows discounted for inherent risks
associated with real estate assets. These discounted cash flows are impacted by expected risk based on estimated land
development; construction and delivery timelines; market risk of price erosion; uncertainty of development or construction cost
increases; and other risks specific to the asset or market conditions where the asset is located when assessment is made. These
factors are specific to each project and may vary among projects. For the years ended December 31, 2015, 2014 and 2013, no
impairment adjustments relating to homebuilding real estate inventories were recorded.
64
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 component of cost 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 income from
or increase in loss from unconsolidated joint ventures when the related homes or lots are sold to third parties. 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.
Revenue Recognition
Home Sales and Profit Recognition
In accordance with ASC 360, revenues from home sales and other real estate sales are recorded and a profit is recognized
when the respective homes are closed. Home sales and other real estate sales are closed when all conditions of escrow are met,
including delivery of the home or other real estate asset, title passes, appropriate consideration is received and collection of
associated receivables, if any, is reasonably assured. Sales incentives are a reduction of revenues when the respective home is
closed. When it is determined that the earnings process is not complete, the sale and related profit are deferred for recognition
in future periods. 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.”
Fee Building
The Company enters into fee building agreements to provide services whereby it will build homes on behalf of
independent third-party property owners. The independent 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 independent
third-party property owners for all direct and indirect costs, plus a negotiated management fee. For these types of contracts, the
Company recognizes revenue based on the actual total costs it has expended plus the applicable management fee. The
management fee is typically a fixed fee based on a percentage of the cost or home sales revenue of the project depending on the
terms of the agreement with the independent third-party property owner. In accordance with ASC 605, Revenue Recognition
(“ASC 605”), revenues from fee building services are recognized over a cost-to-cost approach in applying the percentage-of-
completion method. Under this approach, revenue is earned in proportion to total costs incurred, divided by total costs expected
to be incurred. The total estimated cost plus the management fee represents the total contract value. The Company recognizes
revenue based on the actual labor and other direct costs incurred, plus the portion of the management fee it has earned to date.
In the course of providing its services, the Company routinely subcontracts for services and incurs other direct costs on behalf
of its customers. These costs are passed through to customers and, in accordance with industry practice and GAAP, are included
in the Company’s revenue and cost of revenue. Under certain agreements, the Company is eligible to receive additional
incentive compensation as certain financial thresholds defined in the agreement are achieved. The Company recognizes revenue
for any incentive compensation when such financial thresholds are probable of being met and such compensation is deemed to
be collectible, generally at the date the amount is communicated to us by the independent third-party property owner.
The Company also enters into fee building and management contracts with third parties and its unconsolidated joint
ventures where it provides construction supervision services, as well as sales and marketing services, and does not bear
financial risks for any services provided. In accordance with ASC 605, revenue from these services are recognized over a
proportional performance method or completed performance method. Under this approach, revenue is earned as services are
provided in proportion to total services expected to be provided to the customer or on a straight line basis if the pattern of
performance cannot be determined while costs are recognized as incurred. Revenue recognition for any portion of the fees
earned from these services that are contingent upon a financial threshold or specific event is deferred until the threshold is
achieved or the event occurs.
The Company’s fee building revenues have historically been concentrated with a small number of customers. For the
years ended December 31, 2015, 2014 and 2013, one customer comprised 92%, 87% and 75% of fee building revenue,
respectively. As of December 31, 2015 and 2014, one customer comprised 74% and 98% of contracts and accounts
receivables, respectively.
65
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.
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.
Under ASC 810, a non-refundable 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 non-refundable deposit, a VIE may have been
created.
As of December 31, 2015 and 2014, 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.
Noncontrolling 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 variable interest entity; however, the
Company determined it was required to consolidate the joint venture as it is the managing member with the powers to direct the
major decisions of the entity. As of December 31, 2015 and 2014, the third-party investor had made contributions of $0.9
million and $2.3 million, respectively, net of losses and distributions.
Investments in Unconsolidated Joint Ventures
We first analyze our homebuilding and land development joint ventures to determine if they are variable interest entities
under the provisions of ASC 810 (as discussed above) when determining whether the entity should be consolidated. If we
conclude that our homebuilding and land development joint ventures are not variable interest entities, then, in accordance with
the provisions of ASC 810, limited partnerships or similar entities must be further evaluated under the presumption that the
general partner, or the managing member in the case of a limited liability company, is deemed to have a controlling interest and
therefore must consolidate the entity unless the limited partners or non-managing members have: (1) the ability, either by a
single limited partner or through a simple majority vote, to dissolve or liquidate the entity, or kick-out the managing member/
general partner without cause, or (2) substantive participatory rights that are exercised in the ordinary course of business. Under
the provisions of ASC 810, we may be required to consolidate certain investments in which we hold a general partner or
managing member interest.
As of December 31, 2015 and 2014, the Company concluded that some of its joint ventures were variable interest
entities. The Company concluded that it was not the primary beneficiary of the variable interest entities and accounted for
these entities under the equity method of accounting.
Investments in our unconsolidated joint ventures are accounted for under the equity method of accounting. 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. Our ownership interests in our unconsolidated joint ventures vary,
but are generally less than or equal to 35%. The unconsolidated joint ventures accounting policies are generally consistent with
those of the Company.
We review real estate inventory held by our unconsolidated joint ventures for impairment, consistent with our real estate
inventories. We also review our investments in unconsolidated joint ventures for evidence of other-than-temporary declines in
value. To the extent we deem any portion of our investment in unconsolidated joint ventures as not recoverable, we impair our
66
investment accordingly. For the years ended December 31, 2015, 2014 and 2013, no impairments related to investment in
unconsolidated joint ventures were recorded.
The Company selectively provides loan-to-value (“LTV”) maintenance agreements and completion guaranties for debt
held by its unconsolidated joint ventures. Such arrangements facilitated the financing of our joint ventures' development
projects and arose in the ordinary course of business. Refer to Note 11 for more information discussing the LTV agreements
and completion guaranties.
Selling and Marketing Expense
Selling and marketing costs incurred to sell real estate projects are capitalized if they are reasonably expected to be
recovered from the sale of the project or from incidental operations, and are incurred for tangible assets that are used directly
through the selling period to aid in the sale of the project or services that have been performed to obtain regulatory approval of
sales. All other selling and marketing costs, such as commissions and advertising, are expensed in the period incurred.
Warranty Accrual
We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural
construction defects for one-year periods. 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
rates. Due to the Company’s limited history related to homebuilding sales, the Company also considers the historical
experience of its peers in determining the amount of its warranty accrual. In addition, the Company receives warranty payments
from its customers for certain of its fee building projects where it 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
consolidated balance sheets.
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 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.
As of December 31, 2015 and 2014, no allowance was recorded related to contracts and accounts receivable.
Property and Equipment
Property and equipment are recorded at cost and included in other assets in the accompanying consolidated balance
sheets and depreciated 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 using the straight-line method over the shorter of either their
estimated useful lives or the term of the lease. For the years ended December 31, 2015, 2014 and 2013, the Company incurred
depreciation and amortization expense of $0.5 million, $0.4 million and $0.2 million, respectively.
Income Taxes
Income taxes are accounted for in accordance with ASC 740, Income Taxes (“ASC 740”). As a result of the conversion
from an LLC to a taxable entity in connection with the Company's IPO, the Company recognized a cumulative net deferred tax
asset of $1.5 million related to the difference between the financial statement basis and tax basis of the assets and liabilities as
of January 30, 2014. Subsequent to the conversion, the consolidated provision for, or benefit from, income taxes are 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.
Deferred tax assets are evaluated on a quarterly basis to determine if adjustments to the valuation allowance are required.
In accordance with ASC 740, we assess whether a valuation allowance should be established based on the consideration of all
available evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. The
ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in
67
which the differences become deductible. 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.
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 (defined as a likelihood of more than 50%), 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. Actual results could differ from estimates.
Stock-Based Compensation
We account for share-based awards in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”) and
ASC 505-50, Equity – Equity Based Payments to Non-Employees (“ASC 505-50”).
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.
On June 26, 2015, the Company entered into an agreement that transitioned Joseph Davis' role within the Company from
Chief Investment Officer to a non-employee consultant to the Company. Per the agreement, Mr. Davis' outstanding restricted
stock units and stock option equity awards will continue to vest in accordance with their original terms. Under ASC 505-50, if
an employee becomes a non-employee and continues to vest in an award pursuant to the award's original terms, that award will
be treated as an award to a non-employee prospectively, provided the individual is required to continue providing services to
the employer (such as consulting services). Based on the terms and conditions of Mr. Davis' consulting agreement noted above,
we account for Mr. Davis' share-based awards in accordance with ASC 505-50.
ASC 505-50 requires that Mr. Davis' award be accounted for prospectively, such that the fair value of the award will be
re-measured at each reporting date until the earlier of (a) the performance commitment date or (b) the date the services required
under the transition agreement with Mr. Davis have been completed. ASC 505-50 requires that compensation cost ultimately
recognized in the Company's financial statements be the sum of (a) the compensation cost recognized during the period of time
the individual was an employee (based on the grant-date fair value) plus (b) the fair value of the award determined on the
measurement date determined in accordance with ASC 505-50 for the pro-rata portion of the vesting period in which the
individual was a non-employee.
Recently Issued Accounting Standards
The Company qualifies as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”), enacted on April 5, 2012. 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, for complying with new or revised accounting standards. As previously disclosed, the Company has chosen,
irrevocably, to “opt out” of such extended transition period, and as a result, will comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes existing accounting literature relating to
how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the company expects to be
entitled in exchange for those goods and services. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date”, which delayed the effective date of ASU 2014-09 by
one year. As a result, for public companies, ASU 2014-09 will be effective for interim and annual reporting periods beginning
after December 15, 2017, and is to be applied either with a full retrospective or modified retrospective approach, with early
application permitted, but not before the original effective date. We are currently evaluating the impact the adoption will have
on our consolidated financial statements and related disclosures.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”), which requires
68
that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a
performance condition. A reporting entity should apply existing guidance in ASC 718, Compensation - Stock Compensation,
as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU
2014-12 are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. Our
adoption of ASU 2014-12 is not expected to have a material effect on our consolidated financial statements and related
disclosures.
In February 2015, the FASB issued Accounting Standards Update ASU No. 2015-02, Amendments to the
Consolidation Analysis (“ASU 2015-02”), which changes the analysis that a reporting entity must perform to determine
whether it should consolidate certain types of legal entities. The amendments in ASU 2015-02 are effective for interim and
annual periods beginning after December 15, 2015. Early adoption is permitted. Our adoption of ASU 2015-02 is not expected
to have a material effect on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued Accounting Standards Update ASU No. 2015-03, Simplifying the Presentation of Debt
Issuance Costs (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in
the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The
amendments in ASU 2015-03 are effective for interim and annual periods beginning after December 15, 2015. Early adoption is
permitted. Our adoption of ASU 2015-03 is not expected to have a material effect on our consolidated financial statements and
related disclosures.
In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance
Costs Associated with Line-of-Credit Arrangements – Amendments to SEC Paragraphs Pursuant to Staff Announcement at June
18, 2015 EITF Meeting (“ASU 2015-15”), which clarifies the treatment of debt issuance costs from line-of-credit arrangements
after the adoption of ASU 2015-03. In particular, ASU 2015-15 clarifies that the SEC staff would not object to an entity
deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably
over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit
arrangement. Our adoption of ASU 2015-15 is not expected to have a material effect on our consolidated financial statements
and related disclosures.
2.
Computation of Earnings Per Share
Basic and diluted earnings per share for the years ended December 31, 2015, 2014 and 2013 give effect to the
conversion of the Company’s members’ equity into common stock on January 30, 2014 as though the conversion had occurred
as of the beginning of the reporting period or the original date of issuance, if later. The number of shares converted was based
on the actual IPO price of $11.00 per share.
The following table sets forth the components used in the computation of basic and diluted earnings per share for the
years ended December 31, 2015, 2014 and 2013:
Year Ended December 31,
2015
2014
2013
(Dollars in thousands, except per share amounts)
Numerator:
Net income attributable to The New Home Company Inc.
$
21,688
$
4,787
$
6,706
Denominator:
Basic weighted-average shares outstanding
Effect of dilutive shares:
Stock options and unvested restricted stock units
Diluted weighted-average shares outstanding
16,767,513
15,927,917
7,905,757
173,575
41,282
—
16,941,088
15,969,199
7,905,757
Basic earnings per share attributable to The New Home Company Inc.
Diluted earnings per share attributable to The New Home Company Inc.
$
$
1.29
1.28
$
$
0.30
0.30
$
$
Antidilutive stock options and unvested restricted stock units not included in
diluted earnings per share
7,414
796,864
0.85
0.85
—
69
3.
Contracts and Accounts Receivable
Contracts and accounts receivable consist of the following:
Contracts receivable:
Costs incurred on fee building projects
Estimated earnings
Less: amounts collected during the period
Contracts receivable
Contracts receivable:
Billed
Unbilled
Accounts receivable:
Escrow receivables
Other receivables
Contracts and accounts receivable
December 31,
2015
2014
(Dollars in thousands)
139,677
$
10,213
149,890
(132,109)
17,781
$
— $
17,781
17,781
6,179
—
89,056
4,506
93,562
(80,404)
13,158
2
13,156
13,158
—
6
23,960
$
13,164
$
$
$
$
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 billable pursuant to contract terms or administratively not
invoiced. All unbilled receivables as of December 31, 2015 and 2014 are expected to be billed and collected within 90 days.
Accounts payable at December 31, 2015 and 2014 includes $16.7 million and $11.9 million, respectively, related to costs
incurred under the Company’s fee building contracts.
4.
Real Estate Inventories
Real estate inventories are summarized as follows:
Deposits and pre-acquisition costs
Land held and land under development
Homes completed or under construction
Model homes
December 31,
2015
2014
(Dollars in thousands)
$
$
17,133
$
57,659
109,805
25,321
9,349
48,990
87,072
18,153
209,918
$
163,564
All of our deposits and pre-acquisition costs are non-refundable, except for $0.5 million and $0 as of December 31, 2015
and 2014, respectively.
Model homes, homes completed, and homes under construction include all costs associated with home construction,
including land, development, indirects, permits, materials and labor. Land held and land under development includes costs
incurred during site development such as land, development, indirects, and permits.
70
Interest Capitalization
Interest is capitalized to inventory during development and other qualifying activities. Interest capitalized as a cost of
inventory is included in cost of sales as related homes are closed. For the years ended December 31, 2015, 2014 and 2013
interest incurred, capitalized and expensed was as follows:
Interest incurred
Interest capitalized
Interest expensed
Capitalized interest in beginning inventory
Interest capitalized as a cost of inventory
Contribution to unconsolidated joint venture
Interest previously capitalized as a cost of inventory, included in cost of sales
Interest previously capitalized as a cost of inventory, included in other expense
$
$
$
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
4,722
$
1,857
$
(4,722)
(1,857)
— $
— $
2,328
$
1,003
$
4,722
(264)
(2,511)
(85)
1,857
—
(532)
—
1,060
(1,060)
—
493
1,060
—
(550)
—
Capitalized interest in ending inventory
$
4,190
$
2,328
$
1,003
Contribution to unconsolidated joint venture relates to interest capitalized as a cost of inventory, which was
contributed by the Company to TNHC Tidelands LLC, an unconsolidated joint venture formed by the Company on June 29,
2015.
5.
Unconsolidated Joint Ventures
As of December 31, 2015 and 2014, the Company had ownership interests in 14 and 12, respectively, unconsolidated
joint ventures with ownership percentages that generally range from 5% to 35%. The condensed combined balance sheets for
our unconsolidated joint ventures accounted for under the equity method are as follows:
December 31,
2015
2014
(Dollars in thousands)
$
$
$
$
$
$
53,936
12,279
415,730
3,972
485,917
57,813
94,890
152,703
60,572
272,642
333,214
$
485,917
$
45,037
14,981
459,770
1,822
521,610
52,601
87,994
140,595
60,564
320,451
381,015
521,610
22.2%
18.8%
Cash and cash equivalents
Restricted cash
Real estate inventories
Other assets
Total assets
Accounts payable and accrued liabilities
Notes payable
Total liabilities
The Company's equity
Other partners' equity
Total equity
Total liabilities and equity
Debt-to-capitalization ratio
71
The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity
method are as follows:
Revenues
Cost of sales
Gross margin
Operating expenses
Net income of unconsolidated joint ventures
Equity in net income of unconsolidated joint ventures reflected in the
accompanying consolidated statements of operations
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
409,881
$
271,385
$
317,731
92,150
26,956
65,194
13,767
$
$
209,267
62,118
20,944
41,174
8,443
$
$
$
$
$
183,710
133,982
49,728
14,294
35,434
4,735
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 from its unconsolidated joint ventures based on each project’s revenues.
For the years ended December 31, 2015, 2014 and 2013, the Company earned $12.4 million, $9.6 million, and $8.3 million,
respectively, in management fees, which have been recorded as fee building revenues in the accompanying consolidated
statements of operations.
6.
Other Assets
Other assets consist of the following:
Deferred tax asset
Property and equipment, net of accumulated depreciation
Prepaid loan fees
Prepaid expenses
Other assets
7.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
Warranty accrual
Accrued compensation and benefits
Accrued interest
Completion reserve
Accrued professional fees
Income taxes payable
Deferred profit from unconsolidated joint ventures
Other accrued expenses
72
December 31,
2015
2014
(Dollars in thousands)
7,516
$
5,841
929
—
1,127
15
984
307
500
31
9,587
$
7,663
$
$
December 31,
2015
2014
(Dollars in thousands)
$
4,181
$
5,106
453
1,168
212
6,780
1,603
324
$
19,827
$
1,578
4,680
268
219
414
3,930
—
111
11,200
Completion reserves relate to liabilities for completed subcontractor work on closed homes for which invoices have not
been remitted as of the balance sheet date.
Changes in our warranty accrual are detailed in the table set forth below:
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
Beginning warranty accrual for homebuilding projects
$
1,277
$
Warranty provision for homebuilding projects
Warranty payments for homebuilding projects
Ending warranty accrual for homebuilding projects
Beginning warranty accrual for fee building projects
Warranty provision for fee building projects
Warranty efforts for fee building projects
Ending warranty accrual for fee building projects
2,802
(233)
3,846
301
57
(23)
335
$
810
562
(95)
1,277
264
62
(25)
301
464
360
(14)
810
295
—
(31)
264
Total ending warranty accrual
$
4,181
$
1,578
$
1,074
8.
Unsecured Revolving Credit Facility and Other Notes Payable
Notes payable consisted of the following:
Senior unsecured revolving credit facility
Note payable with land seller
Construction loans
December 31,
2015
2014
(Dollars in thousands)
$
$
74,924
$
100,474
6,000
2,158
9,500
3,777
83,082
$
113,751
The Company has a senior unsecured revolving credit facility (the "Credit Facility") with a bank group. During 2015,
the Credit Facility was upsized by $50 million and $25 million in May and December, respectively, by exercising the accordion
provision. As of December 31, 2015, the total commitment under such Credit Facility was $200 million, of which $74.9
million was outstanding and $125.1 million was available. The maturity date under the Credit Facility is April 30, 2018 and
has the potential for a one-year extension, subject to specified conditions and the payment of an extension fee. The Company
may repay advances at any time without premium or penalty. Interest is payable monthly and is charged at a rate of 1-month
LIBOR plus a margin ranging from 2.25% to 3.00% depending on the Company’s leverage ratio as calculated at the end of
each fiscal quarter. The Company may incur costs associated with unused commitment fees pursuant to the terms of the Credit
Facility. No such costs were accrued and payable as of December 31, 2015 and 2014. As of December 31, 2015, the interest
rate under the facility was 3.18%. In connection with the agreement, the Company is required to maintain certain financial
covenants as defined in the Credit Facility, including (i) a minimum tangible net worth; (ii) leverage ratios; (iii) a minimum
liquidity covenant; and (iv) a minimum fixed charge coverage ratio based on EBITDA to interest incurred. As of December 31,
2015, the Company was in compliance with all financial covenants.
In 2012, the Company entered into a $9.5 million term loan with a land seller, secured by real estate, which bears interest
at 7.0% per annum. During 2015, we made principal payments of $3.5 million. During February 2016, we made a principal
reduction payment of $2.0 million and extended the maturity date of the note. The note matures on the earlier of (i) 10 days
following entitlement approval, or (ii) December 15, 2016. Interest is payable monthly and the remaining principal is due at
maturity.
In May 2014, the Company entered into two construction loans with a bank related to model and production homes for a
project. The loans are secured by real estate and bear interest at the bank's prime rate plus 2.0%, or 5.50% at December 31,
2015. The total commitment under the construction loans is $2.9 million. As of December 31, 2015, the Company had $0.7
million available to borrow under the construction loans subject to certain funding criteria. The loans mature on November 27,
2016. Interest is payable monthly with all unpaid principal and interest due at maturity.
73
Notes payable have stated maturities as follows for the years ending December 31 (dollars in thousands):
2016
2017
2018
$
$
8,158
—
74,924
83,082
9.
Fair Value Disclosures
ASC 820, "Fair Value Measurements and Disclosures," 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 accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents,
restricted cash, contracts and accounts receivable, due from affiliates, accounts payable, accrued expenses and other liabilities,
due to affiliates and notes payable.
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 and due to affiliates is not determinable due to the related party nature of such amounts. As of
December 31, 2015 and 2014, the fair value of the Company's notes payable approximated the carrying value. The Company
has determined that its notes payable are classified as Level 3 within the fair value hierarchy. Estimated fair values of the
outstanding notes payable at December 31, 2015 and 2014 were based on cash flow models discounted at market interest rates
that considered underlying risks of the debt.
Non-Recurring Fair Value Adjustments
Nonfinancial assets and liabilities include items such as inventory and long-lived assets that are measured at cost when
acquired and adjusted for impairment to fair value, if deemed necessary. During the years ended December 31, 2015, 2014 and
2013, the Company did not record any fair value adjustments to those nonfinancial assets and liabilities remeasured at fair
value on a nonrecurring basis.
10.
Commitments and Contingencies
Legal Matters
The Company is a defendant in various lawsuits related to its normal course of business. We are also subject to local,
state and federal laws and regulations related to land development activities, house construction standards, sales practices,
employment practices and environmental protection. As a result, we are subject to periodic examinations or inquiry by
agencies administering these laws and regulations.
We record a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential
loss is reasonably estimable. We accrue for these matters based on facts and circumstances specific to each matter and revise
these estimates when necessary.
In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, we generally cannot
predict their ultimate resolution, related timing or eventual loss. If our evaluations indicate loss contingencies that could be
material are not probable, but are reasonably possible, we will disclose their nature with an estimate of possible range of losses
or a statement that such loss is not reasonably estimable. As of December 31, 2015 and 2014, the Company did not have any
accruals for asserted or unasserted matters.
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
74
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.
Performance Bonds
We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of
our projects. At December 31, 2015 and 2014, the Company had outstanding surety bonds totaling $33.6 million and $18.8
million, respectively. The estimated remaining costs to complete of such improvements was $17.0 million and $12.2 million,
respectively. The beneficiaries of the bonds are various municipalities and other organizations. In the unlikely 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.
On May 6, 2015, the Company entered into a letter of credit facility agreement that allows the Company and certain
affiliated unconsolidated joint ventures to issue up to $5.0 million in letters of credit. The agreement includes an option to
increase this amount to $7.5 million, subject to certain conditions. As of December 31, 2015, the Company and its affiliated
joint ventures had $3.6 million in outstanding letters of credit issued under this facility.
Leases
We lease our corporate headquarters in Aliso Viejo, California. The lease on this facility consists of approximately
18,700 square feet and expires in November 2020. In addition, we lease divisional offices in Northern California, Southern
California and Arizona, including approximately 6,800 square feet through April 2017 in Roseville, approximately 6,100 square
feet through May 2018 in Walnut Creek, approximately 1,400 square feet through July 2018 in Agoura Hills and approximately
2,000 square feet through January 2018 in Scottsdale. As of December 31, 2015, the future minimum lease payments under
non-cancelable operating leases, primarily associated with our office facilities, are as follows (dollars in thousands):
2016
2017
2018
2019
2020
Thereafter
$
$
1,419
899
668
682
696
—
4,364
For the years ended December 31, 2015, 2014 and 2013, rental expense was $0.9 million, $0.7 million and $0.5 million,
respectively, and is included in general and administrative expenses.
11.
Related Party Transactions
During the years ended December 31, 2015, 2014 and 2013, the Company incurred construction-related costs on behalf
of its unconsolidated joint ventures totaling $11.3 million, $8.0 million and $5.4 million, respectively. As of December 31,
2015 and 2014, $0.3 million and $1.1 million, respectively, are included in due from affiliates in the accompanying
consolidated balance sheets.
The Company has entered into Management Agreements with its unconsolidated joint ventures to provide management
services related to the underlying projects. Pursuant to the Management Agreements, the Company receives a management fee
based on each project’s revenues. During the years ended December 31, 2015, 2014 and 2013, the Company earned $12.4
million, $9.6 million, and $8.3 million, respectively, in management fees, which have been recorded as fee building revenue in
the accompanying consolidated statements of operations. As of December 31, 2015 and 2014, $0.7 million and $1.6 million,
respectively, of management fees are included in due from affiliates in the accompanying consolidated balance sheets.
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 performance under the loans and maintain 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. The loans underlying the agreements comprise acquisition and development loans, construction revolvers and model
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
75
development underway, the timing of phase build outs, and the period necessary to complete the escrow process for
homebuyers. As of December 31, 2015 and 2014, $74.1 million and $61.4 million, respectively, was outstanding under the
loans and 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 30.3% and 12.6%, respectively,
as of December 31, 2015 and 2014. In addition, the Company has provided completion guaranties regarding specific
performance for certain projects whereby the Company is required to complete the given project with funds provided by the
beneficiary of the guaranty. 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 liabilities funded under such completion guaranties to its
partners. In connection with providing credit enhancements, the Company recognized $0, $18,927 and $113,562 in guaranty
fee income during the years ended December 31, 2015, 2014 and 2013, respectively, in the accompanying consolidated
statements of operations.
Berchtold Capital Partners, an entity owned by Mr. Michael Berchtold, one of the Company's non-employee directors,
served as an advisor to the Company, providing general advice and guidance in connection with the Company's IPO, as well as
assisting with the selection of the members of the Company's board of directors, the selection of and interacting with the
Company's compensation consultant and advising the executives and board of managers regarding governance and
compensation matters. The Company paid Berchtold Capital Partners $562,500 for these services, including $500,000 upon
completion of our IPO. Amounts paid to Mr. Berchtold are included in offering expenses and were offset against the proceeds
of our IPO.
One member of the Company's board of directors owns more than 10% of the Company's outstanding common stock
and is also affiliated with an entity that has investments in two of the Company's unconsolidated joint ventures. As of
December 31, 2015, the Company's investment in the two unconsolidated joint ventures totaled $10.3 million.
TL Fab LP, an affiliate of Mr. Paul Heeschen, one of the Company's non-employee directors, was engaged by the
Company and some of its unconsolidated joint ventures as a trade contractor to provide metal fabrication services. For the
years ended December 31, 2015 and 2014, the Company and its unconsolidated joint ventures incurred $0.9 million and $1.2
million, respectively, for these services. Of these costs, $0.2 million and $0.1 million was due to TL Fab LP at December 31,
2015 and 2014, respectively, and included in accounts payable in the accompanying consolidated balance sheets.
On June 26, 2015 ("Transition Date"), the Company entered into an agreement that transitioned Joseph Davis' role
within the Company from Chief Investment Officer to a non-employee consultant to the Company. As of the Transition Date,
Mr. Davis ceased being an employee of the Company and became an independent contractor performing consulting services.
Per the agreement, Mr. Davis is expected to work approximately, but not more than, 40 consulting hours per month. For his
services, he will be compensated $10,000 per month for a term of one year from the Transition Date with the option to extend
the agreement one year on each anniversary of the Transition Date, if mutually consented to by the parties. Either party may
terminate the agreement at any time for any or no reason. Additionally, Mr. Davis' outstanding restricted stock units and stock
option equity awards will continue to vest in accordance with their original terms. For the year ended December 31, 2015, the
Company paid Mr. Davis $70,000, excluding reimbursable expenses. Of these costs, no balance was due to Mr. Davis at
December 31, 2015.
On June 29, 2015, the Company formed a new unconsolidated joint venture and received capital credit in excess of our
contributed land basis. As a result, the Company recognized $1.6 million in equity in net income of unconsolidated joint
ventures and deferred $0.4 million in profit from unconsolidated joint ventures related to this transaction.
During 2015, the Company purchased lots from one of its land development unconsolidated joint ventures, TNHC-HW
Cannery LLC. As a related party transaction, the Company deferred its portion of the underlying gain from the joint venture
sale. The deferred gain is recorded as a reduction to the Company’s land basis on the purchased lots and is recognized as the
lots are delivered to third-party home buyers. As of December 31, 2015, the Company has reduced its land basis by $1.3
million related to its portion of the underlying gain from the joint venture sale. As of December 31, 2015, $1.1 million
remained unrecognized, being included as a reduction to land basis within the consolidated balance sheets.
The Company’s land purchase agreement with TNHC-HW Cannery LLC also requires profit participation payments due
to the joint venture upon the closing of each home. Payment amounts are calculated based upon a percentage of Company
project net profits and are due every 90 days after the first home closing. As of December 31, 2015, $0.3 million of profit
participation was due to TNHC-HW Cannery LLC, which is included in due to affiliates in the accompanying consolidated
balance sheets.
On November 14, 2014, The Company entered into an option agreement with one of its unconsolidated land
development joint ventures, TNHC-HW Cannery LLC to purchase lots in two phases. As noted above, the Company purchased
a portion of these lots during 2015 and the option on the remaining lots was assigned to a third party, The Cannery-Davis LP.
On December 23, 2015, The Cannery-Davis LP purchased the optioned lots. Subsequently, the Company entered into an
76
option and development agreement with The Cannery-Davis LP whereby The Cannery-Davis LP will develop the property into
finished lots that the Company has an option to purchase in accordance with the terms and conditions of the agreement. In
accordance with ASC 360-20, Property, Plant and Equipment – Real Estate Sales (“ASC 360-20”), the Company has elected to
defer its portion of the underlying gain from the joint venture's sale to The Cannery-Davis LP. At December 31, 2015, $1.2
million of the gain from this transaction is included in the accompanying consolidated balance sheets as deferred profit from
unconsolidated joint ventures, which is included in accrued expenses and other liabilities. As the Company purchases lots from
The Cannery-Davis LP, a pro-rata share of deferred profit is recorded as a reduction to the Company's land basis of the
purchased lots. The gain is ultimately recognized when the Company delivers lots to third-party home buyers. As of
December 31, 2015, the Company had not purchased any of the optioned lots from The Cannery-Davis LP.
12.
Stock-Based Compensation
On August 18, 2010, the Company granted equity based units to certain members of management valued on the date of
grant at $1.9 million with a four year vesting period. Recipients of the equity based units had the right to receive certain
distributions, if any, from the Company following return of capital to its equity members. The share based units vested upon
completion of the IPO, and the remaining unrecognized compensation expense of $316,667 was recognized during the first
quarter of 2014, and is included in general and administrative expense in the accompanying consolidated statements of
operations.
The 2014 Long-Term Incentive Plan (“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. Our board of directors may terminate or
amend the 2014 Incentive Plan at any time, subject to any requirement of stockholder approval required by applicable law, rule
or regulation and provided that the rights of a holder of an outstanding award may not be impaired without the consent of the
holder.
The number of shares of our common stock that may 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 option, stock appreciation right, stock award or
performance 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.
The Company has issued stock option and restricted stock unit awards under the 2014 Incentive Plan. The exercise
price of stock-based 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 option and restricted stock awards typically vest over a one to three year period and expire ten years from the
date of grant.
A summary of the Company’s common stock option activity as of and for the year ended December 31, 2015 and 2014
is presented below:
Outstanding Stock Option Activity
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable, end of year
Year Ended December 31,
2015
2014
Weighted-
Average
Exercise
Price per
Share
Number of
Shares
Weighted-
Average
Exercise
Price per
Share
Number of
Shares
846,874
$
11.00
—
—
— $
(1,584) $
(4,992) $
840,298
23,133
$
$
—
11.00
11.00
11.00
11.00
872,683
$
11.00
—
(25,809) $
846,874
$
—
—
11.00
11.00
—
77
A summary of the Company’s restricted stock units activity as of and for the year ended December 31, 2015 and 2014 is
presented below:
Restricted Stock Units Activity
Outstanding, beginning of year
Granted
Vested
Forfeited
Outstanding, end of year
Year Ended December 31,
2015
2014
Weighted-
Average
Grant-
Date Fair
Value per
Share
Number of
Shares
Weighted-
Average
Grant-
Date Fair
Value per
Share
Number of
Shares
112,233
294,355
$
$
(85,386) $
(12,816) $
308,386
$
11.36
14.46
11.48
13.44
14.20
—
—
118,937
$
11.34
—
(6,704) $
112,233
$
—
11.00
11.36
The expense related to the Company's stock-based compensation programs, included in general and administrative
expense in the accompanying consolidated statements of operations, was as follows:
Expense related to:
Equity based incentive units
Stock options
Restricted stock units
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
$
— $
317
$
1,184
2,700
1,128
877
3,884
$
2,322
$
475
—
—
475
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:
Year Ended December 31,
2015
2014
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividends
4.3
49.0%
1.2%
—
Weighted-average grant date fair value per share
$
4.43
$
4.3
49.0%
1.2%
—
4.43
78
The following table presents details of the assumptions used to calculate the re-measurement date fair value of common
stock options granted to Mr. Davis by the Company in accordance with ASC 505-50 as discussed in Note 1:
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividends
Re-measurement date fair value per share
December 31,
2015
2.1
28.2%
1.1%
—
3.21
$
We used the "simplified method" to establish the expected term of the common stock options granted by the Company.
Our restricted stock awards are valued based on the closing price of our common stock on the date of grant. At December 31,
2015, the amount of unearned stock-based compensation currently estimated to be expensed through 2018 related to unvested
common stock options and restricted stock units is $3.0 million, net of estimated forfeitures. The weighted-average period over
which the unearned stock-based compensation is expected to be recognized is 1.3 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.
13.
Income Taxes
As discussed in Note 1, during 2013 and for the first 30 calendar days of 2014, the Company was a Delaware LLC
which was treated as partnership for income tax purposes and was subject to certain minimal taxes and fees; however, income
taxes on taxable income or losses realized by the Company were the obligation of the members.
The provision for income taxes includes the following:
Current provision for income taxes:
Federal
State
Total
Deferred (benefit) provision for income taxes:
Federal
State
Total
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
10,822
$
4,722
$
3,386
14,208
(1,522)
(153)
(1,675)
1,343
6,065
(4,600)
(1,219)
(5,819)
Provision for income taxes
$
12,533
$
246
$
195
56
251
—
39
39
290
79
The effective tax rate differs from the federal statutory rate of 35% due to the following items:
Income before income taxes
Less: Non-taxable entities income
Income before taxes of taxable entities
Provision for income taxes at federal statutory rate
(Increases) decreases in tax resulting from:
State income taxes, net of federal benefit
Manufacturing deduction
Deferred tax assets upon conversion to a corporation
Tax rate change
State tax credits
Other
Provision for income taxes
Effective tax rate
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
$
$
33,911
—
33,911
(11,869)
$
$
$
5,003
—
5,003
(1,751)
$
$
$
(1,979)
1,274
—
—
—
41
(293)
225
1,495
100
—
(22)
$
(12,533)
$
37.0%
(246)
$
4.9%
6,996
6,365
631
(215)
(36)
—
—
—
(39)
—
(290)
46.0%
The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for
measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities
existing at each balance sheet date using enacted tax rates for the years in which taxes are expected to be paid or recovered.
The components of our deferred income tax asset are as follows:
State tax
Reserves and accruals
Intangible assets
Share based compensation
Inventory
Investments in joint ventures
Depreciation
Net deferred tax asset
December 31,
2015
2014
(Dollars in thousands)
$
1,300
$
2,128
548
1,999
868
822
(149)
$
7,516
$
405
1,096
313
817
2,468
883
(141)
5,841
Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely or not
unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is
more likely or not unrealizable. 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 operating loss and tax credit carryforwards and the planning alternatives, to the extent these items are applicable.
The Company classifies any interest and penalties related to income taxes assessed by jurisdiction as part of income tax
expense. The Company has concluded that there were no significant uncertain tax positions requiring recognition in its
financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open
tax periods.
14.
Segment Information
The Company’s operations are organized into two reportable segments: homebuilding and fee building. In accordance
with ASC 280, 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 acquisition results, and underlying demand and supply.
80
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:
Revenues:
Homebuilding
Fee building, including management fees
Total
Income before taxes:
Homebuilding
Fee building, including management fees
Total
Assets:
Homebuilding
Fee building
Total
Year Ended December 31,
2015
2014
2013
(Dollars in thousands)
$
$
$
$
280,209
149,890
430,099
23,698
10,213
33,911
$
$
$
$
$
$
56,094
93,563
149,657
497
4,506
5,003
$
$
$
$
35,663
47,565
83,228
1,748
5,248
6,996
December 31,
2015
2014
(Dollars in thousands)
331,697
19,573
351,270
$
$
275,611
16,347
291,958
15.
Pro Forma Net Income and Earnings per Share (Unaudited)
The pro forma amounts reflect the income tax provision as if the Company was a taxable corporation as of the beginning
of the period, and assume the Company filed a consolidated tax return for the periods presented.
For the year ended December 31, 2014, the pro forma tax provision assumes the Company's taxable income for the year
would have included pretax income earned between January 1, 2014 and January 30, 2014, prior to the conversion to a taxable
corporation. In addition, a net deferred income tax asset of $1.5 million was recognized as a result of the conversion to a
taxable entity during the first quarter of 2014. However, the pro forma results exclude the effect of the conversion adjustment
because of its nonrecurring nature.
For the year ended December 31, 2013, the pro forma tax provision is recorded at the combined federal and state
statutory rate of 40%, after utilization of cumulative net operating loss carry forwards.
Basic and diluted earnings per share and pro forma basic and diluted earnings per share give effect to the conversion of
the Company's members' equity into common stock on January 30, 2014 as though the conversion had occurred as of the
beginning of the reporting period or the original date of issuance, if later. See Note 2.
Income before taxes
Pro forma income tax provision to reflect the conversion to a C Corporation
Pro forma net income
Net loss attributable to noncontrolling interests
Pro forma net income attributable to The New Home Company Inc.
Pro forma basic earnings per share attributable to The New Home Company Inc.
Pro forma diluted earnings per share attributable to The New Home Company Inc.
81
Year Ended December 31,
2014
2013
(Dollars in thousands, except per share
amounts)
$
$
$
$
5,003
$
(1,648)
3,355
30
3,385
0.21
0.21
$
$
$
6,996
(1,017)
5,979
—
5,979
0.76
0.76
16.
Results of Quarterly Operations (Unaudited)
The following table presents our unaudited quarterly financial data. In our opinion, this information has been prepared
on a basis consistent with that of our audited consolidated financial statements and all necessary material adjustments,
consisting of normal recurring accruals and adjustments, have been included to present fairly the unaudited quarterly financial
data. Our quarterly results of operations for these periods are not necessarily indicative of future results of operations:
2015
Home sales revenue
Cost of home sales
Homebuilding gross margin
Fee building revenue
Cost of fee building
Fee building gross margin
Net income attributable to The New Home Company
Inc.
Basic earnings per share attributable to The New Home
Company Inc. (1)
Diluted earnings per share attributable to The New
Home Company Inc. (1)
2014
Home sales revenue
Cost of home sales
Homebuilding gross margin
Fee building revenue
Cost of fee building
Fee building gross margin
Net income (loss) attributable to The New Home
Company Inc.
Basic earnings (loss) per share attributable to The New
Home Company Inc. (1)
Diluted earnings (loss) per share attributable to The
New Home Company Inc. (1)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
(Dollars in thousands, except per share amounts)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
56,235
48,279
7,956
46,630
43,777
2,853
4,569
0.28
0.28
5,050
3,981
1,069
20,513
19,452
1,061
1,571
0.11
0.11
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
19,202
17,196
2,006
26,429
25,209
1,220
449
0.03
0.03
9,607
7,918
1,689
12,897
13,024
(127) $
57,878
49,889
7,989
29,099
27,028
2,071
4,444
0.27
0.27
8,197
6,922
1,275
20,408
19,389
1,019
$
$
$
$
$
$
$
$
$
$
$
146,894
124,666
22,228
47,732
43,663
4,069
12,226
0.70
0.69
33,240
28,839
4,401
39,745
37,192
2,553
(1,045) $
(1,059) $
5,320
(0.06) $
(0.06) $
(0.06) $
(0.06) $
0.32
0.32
$
$
$
$
$
$
$
$
$
$
$
$
$
$
280,209
240,030
40,179
149,890
139,677
10,213
21,688
1.29
1.28
56,094
47,660
8,434
93,563
89,057
4,506
4,787
0.30
0.30
(1)
Some amounts do not add to our full year results presented on our consolidated statement of operations due to rounding differences in quarterly and
annual weighted average share calculations.
82
Report of Independent Auditors
The Members
TNHC Meridian Investors LLC
We have audited the accompanying financial statements of TNHC Meridian Investors LLC, which comprise
the balance sheets as of December 31, 2015 and 2014, and the related statements of operations, members’
capital, and cash flows for the two year period ended December 31, 2015, and the period from August 20,
2013 (inception) to December 31, 2013, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
conformity with U.S. generally accepted accounting principles; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
83
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of TNHC Meridian Investors LLC at December 31, 2015 and 2014, and the results of its operations
and its cash flows for the year period ended December 31, 2015, and the period from August 20, 2013
(inception) to December 31, 2013, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
February 26, 2016
84
TNHC Meridian Investors LLC
(A Delaware Limited Liability Company)
Balance Sheets
Assets
Cash
Investment in unconsolidated joint venture
Total assets
Liabilities and members’ capital
Accounts payable
Due to affiliates (Note 2)
Commitments and contingencies (Note 3)
Members’ capital
Total liabilities and members’ capital
See accompanying notes.
December 31
2015
2014
54,177 $
4,500,755
4,554,932 $
1,162,032
19,482,073
20,644,105
26,000 $
—
26,000
—
75,198
75,198
4,528,932
4,554,932 $
20,568,907
20,644,105
$
$
$
$
85
TNHC Meridian Investors LLC
(A Delaware Limited Liability Company)
Statements of Operations
Year Ended December 31
2015
2014
Period from
August 20,
2013
(Inception) to
December 31
2013
Revenues:
Management fee revenues from affiliates (Note 2)
$
4,071,046 $
2,150,378 $
416,000
Expenses:
Overhead fees to the Members (Note 2)
General and administrative expenses
4,071,046
58,777
4,129,823
2,150,378
7,245
2,157,623
416,000
90,800
506,800
Net operating loss
(58,777)
(7,245)
(90,800)
Equity in net income (loss) of unconsolidated joint
venture
Net income (loss)
16,319,542
16,260,765 $
$
3,885,517
3,878,272 $
(203,564)
(294,364)
See accompanying notes.
86
TNHC Meridian Investors LLC
(A Delaware Limited Liability Company)
Statements of Members' Capital
Years Ended December 31, 2015 and 2014
and Period from August 20, 2013 (Inception) to December 31, 2013
The New
Home
Company
Southern
California
LLC
IHP
Meridian
LLC
Balance at August 20, 2013 (Inception) $
Contributions
Distributions
Net loss
Balance at December 31, 2013
Contributions
Net income
Balance at December 31, 2014
Distributions
Net income
Balance at December 31, 2015
$
— $
14,369,677
(8,214,727)
(147,182)
6,007,768
129,500
1,473,227
7,610,495
(13,326,079)
7,980,050
2,264,466 $
— $
10,480,049
—
(147,182)
10,332,867
220,500
2,405,045
12,958,412
(18,974,661)
8,280,715
2,264,466 $
See accompanying notes.
Total
—
24,849,726
(8,214,727)
(294,364)
16,340,635
350,000
3,878,272
20,568,907
(32,300,740)
16,260,765
4,528,932
87
TNHC Meridian Investors LLC
(A Delaware Limited Liability Company)
Statements of Cash Flows
Period from
August 20,
2013
(Inception) to
December 31
2013
Year Ended December 31
2015
2014
$ 16,260,765 $
3,878,272 $
(294,364)
14,500,860
(16,319,542)
999,880
(3,885,517)
26,000
(75,198)
14,392,885
—
75,198
1,067,833
—
203,564
—
—
(90,800)
—
16,800,000
16,800,000
(350,000)
—
(350,000)
(8,029,558)
4,618,808
(3,410,750)
—
(32,300,740)
(32,300,740)
350,000
—
350,000
11,810,476
(8,214,727)
3,595,749
(1,107,855)
1,162,032
54,177 $
1,067,833
94,199
1,162,032 $
94,199
—
94,199
— $
— $
13,039,250
$
$
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Distributions of earnings from unconsolidated joint venture
Equity in net (income) loss of unconsolidated joint venture
Net changes in operating assets and liabilities:
Accounts payable
Due to affiliates
Net cash provided by (used in) operating activities
Investing activities
Contributions to unconsolidated joint venture
Distributions of equity from unconsolidated joint venture
Net cash provided by (used in) investing activities
Financing activities
Members’ capital contributions
Members’ capital distributions
Net cash (used in) provided by financing activities
Net (decrease) increase in cash
Cash at beginning of period
Cash at end of period
Supplemental disclosures of cash flow information
Real estate contributed in lieu of cash for members' capital
See accompanying notes.
88
TNHC Meridian Investors LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2015
1. Organization and Summary of Significant Accounting Policies
TNHC Meridian Investors LLC, a Delaware limited liability company (the “Company”), was formed with
an effective date of February 20, 2013. The Company was initially capitalized through cash and asset
contributions by The New Home Company Southern California LLC (“TNHC”). Effective August 20, 2013,
TNHC Meridian Investors LLC amended and restated its limited liability agreement and concurrently
admitted IHP Meridian LLC (“IHP”) as a member (TNHC and IHP, collectively, are referred to herein as the
“Members”). The Company holds an interest in one unconsolidated joint venture, TNHC Newport LLC (the
“Unconsolidated Joint Venture”).
Subject to the operating agreement, distributions of net cash flow to the Members shall be in the following
order of priority:
1) To the Members in proportion and up to the difference between their respective aggregate Special
Preferred Return, as defined, and the aggregate amounts distributed previously; then
2) To the Members in proportion to their respective Unreturned Special Capital Contributions, as defined;
then
3) To the Members in proportion and up to the difference between their respective aggregate Preferred
Return, as defined, and the aggregate amounts distributed previously; then
4) If there is a Controllable Cost Overrun, as defined, and a Profit Shortfall, as defined, an amount equal
to 50% of the lesser of such Controllable Cost Overrun or such Profit Shortfall shall be distributed
to the Members in the following proportion: 75% to IHP and 25% to TNHC; then
5) To the Members in proportion and up to each Member’s Unreturned Capital Contribution, as defined;
then
6) To the Members in proportion to their respective Percentage Interests, as defined (TNHC 50% and
IHP 50%).
89
Subject to the operating agreement, income and losses are allocated to the Members generally in the same
manner as distributions of net cash flow.
Pursuant to the operating agreement, the Special Preferred Return on Unreturned Special Capital
Contributions, as defined, for both Members is 20% per annum, compounded monthly. The preferred return
on Unreturned Capital Contributions for both Members is 12% per annum, compounded monthly. During
2015, the Unreturned Capital Contributions and all associated preferred return have been returned to the
partners, as such, no additional preferred return distributions are expected as of December 31, 2015.
The following is a summary of the preferred returns for the Members as of December 31, 2015:
TNHC
IHP
Total
Cumulative Special Preferred Return
Cumulative Special Preferred distributions
Cumulative Preferred Return
Cumulative Preferred distributions
Remaining undistributed preferred return
Basis of Presentation
$
— $
—
1,753,940
(1,753,940)
$
— $
— $
—
2,986,420
(2,986,420)
— $
—
—
4,740,360
(4,740,360)
—
The accompanying financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). This basis of accounting contemplates the recovery of the
Company’s assets and the satisfaction of its liabilities in the normal course of business. Management believes
the Company has sufficient cash and access to capital to fund its operations.
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of commitments and contingencies. Actual results could differ materially from those
estimates.
Cash
The Company considers all highly-liquid investments that are readily convertible to cash, with original
maturity dates of three months or less, to be cash and cash equivalents. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of cash deposited with
financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. The
Company has not experienced any losses related to uninsured cash balances.
90
Variable Interest Entities
The Company accounts for variable interest entities in accordance with ASC 810, Consolidation. 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. 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.
As of December 31, 2015 and 2014, the Company was not required to consolidate any VIEs. In accordance
with ASC 810, the Company performs ongoing reassessments of whether it is the primary beneficiary of a
VIE.
The Company first analyzes the Unconsolidated Joint Venture to determine if it is a variable interest entity
under the provisions of ASC 810 (as discussed above) when determining whether the entity should be
consolidated.
Investment in Unconsolidated Joint Venture
If the Company concludes that the Unconsolidated Joint Venture is not a variable interest entity, then, in
accordance with the provisions of ASC 810, limited partnerships or similar entities must be further evaluated
under the presumption that the general partner, or the managing member in the case of a limited liability
company, is deemed to have a controlling interest and therefore must consolidate the entity unless the limited
partners or non-managing members have: (1) the ability, either by a single limited partner or through a simple
majority vote, to dissolve or liquidate the entity, or kick-out the managing member/general partner without
cause, or (2) substantive participatory rights that are exercised in the ordinary course of business. Under the
provisions of ASC 810, the Company may be required to consolidate certain investments in which it holds
a general partner or managing member interest.
As of December 31, 2015 and 2014, the Company concluded that the Unconsolidated Joint Venture was not
a variable interest entity and it did not control the entity, therefore the Company accounted for this entity
under the equity method of accounting. Under the Unconsolidated Joint Venture operating agreement, capital
contributions are determined based on the operating budgets and needs of the Unconsolidated Joint Venture,
which vary throughout the life of the Unconsolidated Joint Venture based on the circumstances unique to the
Unconsolidated Joint Venture.
91
As of December 31, 2015, the Company had an ownership and percentage interest in one unconsolidated
joint venture, with an ownership percentage of 32% and a percentage interest percentage of 50%. Investment
in the Unconsolidated Joint Venture is accounted for under the equity method of accounting. Under the
equity method, the Company recognizes its proportionate share of earnings and losses generated by the
Unconsolidated Joint Venture upon the delivery of lots or homes to third parties.
The Company reviews the real estate inventory held by the Unconsolidated Joint Venture for impairments
whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. The
Company also reviews its investment in the Unconsolidated Joint Venture for evidence of other-than-
temporary declines in value.
To the extent the Company deems any portion of its investment in the Unconsolidated Joint Venture as not
recoverable, the Company impairs its investment accordingly. As of December 31, 2015 and 2014, the
Company determined that no portion of its investment in the Unconsolidated Joint Venture was impaired.
The balance sheets for the Unconsolidated Joint Venture are as follows:
Cash
Restricted cash
Real estate inventories
Total assets
Accounts payable
Accrued expenses and other liabilities
Due to affiliate
Note payable
Note payable to member
Total liabilities
The Company’s equity
Other member’s equity
Total equity
Total liabilities and equity
December 31
2015
2014
$
$
$
$
12,021,389 $
500,000
3,694,238
16,215,627 $
4,573,627 $
3,076,484
49,280
—
—
7,699,391
4,258,118
4,258,118
8,516,236
16,215,627 $
10,925,677
500,000
79,688,329
91,114,006
8,083,611
1,214,572
168,924
17,730,943
4,268,291
31,466,341
19,239,436
40,408,229
59,647,665
91,114,006
During the period from March 1, 2013 to August 20, 2013, TNHC recognized $242,638 in losses related to
the Unconsolidated Joint Venture prior to the admittance of IHP as a member in the Company. This amount
is reflected as a difference between the Company’s equity in the Unconsolidated Joint Venture and the
Company’s investment in the Unconsolidated Joint Venture as shown in the accompanying balance sheets.
92
The condensed statements of operations for the Unconsolidated Joint Venture are as follows:
Years ended December 31
2015
2014
March 1, 2013
(Inception) to
December 31
2013
Revenues
Cost of sales and expenses
Income (loss) of unconsolidated joint venture $ 34,868,571 $ 11,422,524 $
Income (loss) from unconsolidated joint
venture reflected in the accompanying
statements of operations
$ 175,610,776 $ 60,158,550 $
$ 16,319,542 $
3,885,517 $
140,742,205
48,736,026
—
1,274,859
(1,274,859)
(203,564)
Income Taxes
As a limited liability company, the Company is subject to certain minimal taxes and fees; however, income
taxes on income reported by the Company are the obligation of the Members.
The Company applies the provisions of ASC 740, Accounting for Uncertainty in Income Taxes (“ASC 740”).
Based on its evaluation, under ASC 740, the Company has concluded that there are no significant uncertain
tax positions requiring recognition in its financial statements, nor has the Company been assessed interest
or penalties by any major tax jurisdictions. The Company’s evaluation was performed for the tax year ended
December 31, 2015 and 2014.
New Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires
that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments
in ASU 2015-03 are effective for interim and annual periods beginning after December 15, 2015. Early
adoption is permitted. The Company is in the process of evaluating the effects of ASU 2015-03 on its
consolidated financial statements. The Company's adoption of ASU 2015-03 is not expected to have a
material effect on the consolidated financial statements and related disclosures.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from
Contracts with Customers (“ASU 2014-09”), which supersedes existing accounting literature relating to
how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue
when it transfers promised goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods and services. In August 2015, the
FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the
93
Effective Date, which delayed the effective date of ASU 2014-09 by one year. As a result, for public
companies, ASU 2014-09 will be effective for interim and annual reporting periods beginning after
December 15, 2017, and is to be applied either with a full retrospective or modified retrospective
approach, with early application permitted. The Company is currently evaluating the impact the adoption
will have on our consolidated financial statements and related disclosures.
2. Due to Affiliates and Related Party Transactions
Pursuant to the operating agreement of the Unconsolidated Joint Venture, the Company receives a
management fee from the Unconsolidated Joint Venture in an amount equal to 3.0% of Unconsolidated Joint
Venture revenues. During the years ended December 31, 2015 and 2014, the Company earned $4,071,046
and $2,150,378, respectively, in management fees which have been recorded by the Company as management
fee revenues from affiliates in the accompanying statements of operations.
Pursuant to the operating agreement, TNHC shall receive an overhead fee from the Company in an amount
equal to 3.0%, less $500,000, of the Unconsolidated Joint Venture revenues. This amount will be paid as
follows:
1) 1.5% of the projected gross sales revenue of the Unconsolidated Joint Venture, less $500,000, paid
in equal monthly installments on or about the first day of the month over the projected life of the
project.
2) 1.5% of the gross sales revenue from each home sold, payable upon the first day of the month following
close of escrow.
Pursuant to the operating agreement, IHP shall receive an overhead fee from the Company in an amount
equal to $500,000, which has been paid in full. During the years ended December 31, 2015 and 2014 and
the period from August 20, 2013 (inception) to December 31, 2013, TNHC earned $1,335,700, $1,143,600
and $381,200, respectively, and IHP earned $109,300, $104,400 and $34,800, respectively, in monthly
overhead fees, which have been recorded by the Company as overhead fees to the Members in the
accompanying statements of operations. As of December 31, 2015 and 2014, no amounts were due to TNHC
or IHP for such fees.
During the years ended December 31, 2015 and 2014, TNHC earned and received $2,449,744 and $827,180
respectively, and IHP earned $176,302 and $75,198, respectively, in overhead fees earned from homes sold,
which have been recorded by the Company as overhead fees to the Members in the accompanying statements
of operations. As of December 31, 2015 and 2014, no amounts were due to TNHC and IHP for such fees.
94
3. Commitments and Contingencies
The Company’s commitments and contingencies include the usual obligations and litigation incurred by real
estate developers in the normal course of business. In the opinion of management, there are no material loss
contingencies.
As an owner of a 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.
4. Subsequent Events
The Company has evaluated subsequent events through February 26, 2016, the date the financial statements
were available for issuance.
On January 29, 2016, the Company's Unconsolidated Joint Venture closed on the final remaining
inventory and as a result will close out operations.
95
Report of Independent Auditors
The Members
TNHC Newport LLC
We have audited the accompanying financial statements of TNHC Newport LLC, which comprise the balance
sheets as of December 31, 2015 and 2014, and the related statements of operations, members’ capital, and
cash flows for the two year period ended December 31, 2015, and the period from March 1, 2013 (inception)
to December 31, 2013, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
conformity with U.S. generally accepted accounting principles; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
96
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of TNHC Newport LLC at December 31, 2015 and 2014, and the results of its operations and its
cash flows for the two year period ended December 31, 2015, and the period from March 1, 2013 (inception)
to December 31, 2013, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
February 26, 2016
97
TNHC Newport LLC
(A Delaware Limited Liability Company)
Balance Sheets
Assets
Cash
Restricted cash
Real estate inventories
Total assets
Liabilities and members’ capital
Accounts payable
Accrued expenses and other liabilities
Due to affiliate (Note 4)
Notes payable
Note payable to member
Commitments and contingencies (Note 6)
Members’ capital
Total liabilities and members’ capital
See accompanying notes.
$
$
$
December 31
2015
2014
12,021,389 $
500,000
3,694,238
16,215,627 $
10,925,677
500,000
79,688,329
91,114,006
4,573,627 $
3,076,484
49,280
—
—
7,699,391
8,083,611
1,214,572
168,924
17,730,943
4,268,291
31,466,341
8,516,236
16,215,627 $
59,647,665
91,114,006
$
98
TNHC Newport LLC
(A Delaware Limited Liability Company)
Statements of Operations
Revenues:
Home sales
Design studio option sales
Cost of sales:
Cost of home sales
Cost of design studio option sales
Gross profit
Year Ended December 31
2015
2014
March 1, 2013
(Inception) to
December 31,
2013
$ 161,728,995 $
13,881,781
175,610,776
56,601,330 $
3,557,220
60,158,550
122,256,635
10,191,160
132,447,795
42,001,484
2,668,840
44,670,324
43,162,981
15,488,226
—
—
—
—
—
Selling and marketing expenses
Selling and marketing expenses incurred from
affiliates
Overhead fees to affiliates
Net income (loss)
1,623,474
467,156
5,391
1,242,532
5,428,404
34,868,571 $
731,575
2,866,971
11,422,524 $
$
21,618
1,247,850
(1,274,859)
See accompanying notes.
99
TNHC Newport LLC
(A Delaware Limited Liability Company)
Statements of Members' Capital
Years Ended December 31, 2015 and 2014
and Period From March 1, 2013 (Inception) to December 31, 2013
TNHC
Meridian
Investors
LLC
NB
Residences,
LLC
$
$
$
— $
— $
21,068,808
(4,618,808)
(446,201)
16,003,799 $
350,000
(999,880)
3,885,517
19,239,436
(31,300,860)
16,319,542
4,258,118 $
30,550,000
—
(828,658)
29,721,342 $
5,150,000
(2,000,120)
7,537,007
40,408,229
(54,699,140)
18,549,029
4,258,118 $
Total
—
51,618,808
(4,618,808)
(1,274,859)
45,725,141
5,500,000
(3,000,000)
11,422,524
59,647,665
(86,000,000)
34,868,571
8,516,236
Balance at March 1, 2013 (Inception)
Contributions
Distributions
Net loss
Balance at December 31, 2013
Contributions
Distributions
Net income
Balance at December 31, 2014
Distributions
Net income
Balance at December 31, 2015
See accompanying notes.
100
TNHC Newport LLC
(A Delaware Limited Liability Company)
Statements of Cash Flows
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Net changes in operating assets and liabilities:
Restricted cash
Real estate inventories
Accounts payable
Accrued expenses and other liabilities
Due to affiliate
Net cash provided by (used in) operating activities
Financing activities
Proceeds from issuance of note payable to member
Repayment of note payable to member
Proceeds from issuance of note payable
Repayment of note payable
Members’ capital contributions
Members’ capital distributions
Net cash (used in) provided by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
Year Ended December 31
2015
2014
March 1, 2013
(Inception) to
December 31,
2013
$ 34,868,571 $ 11,422,524 $
(1,274,859)
—
75,994,091
(3,509,984)
1,861,912
(119,644)
109,094,946
—
(29,125,882)
4,511,432
1,202,321
152,309
(11,837,296)
(500,000)
(43,318,639)
3,572,179
12,251
16,615
(41,492,453)
—
(4,268,291)
35,961,943
(53,692,886)
—
(86,000,000)
(107,999,234)
4,268,291
—
13,054,838
—
5,500,000
(3,000,000)
19,823,129
—
—
4,676,105
—
44,375,000
(4,618,808)
44,432,297
1,095,712
10,925,677
7,985,833
2,939,844
$ 12,021,389 $ 10,925,677 $
2,939,844
—
2,939,844
Supplemental disclosures of cash flow information
Land contributed in lieu of cash for members’ capital
$
— $
— $
7,243,808
See accompanying notes.
101
TNHC Newport LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2015
1. Organization and Summary of Significant Accounting Policies
TNHC Newport LLC, a Delaware limited liability company (the “Company”), was formed with an effective
date of March 1, 2013. The Company was capitalized through cash and asset contributions by TNHC Meridian
Investors LLC (“TNHC”) and NB Residences, LLC (“NB Residences”) (collectively, “the Members”). On
April 1, 2013, the Company purchased 4.25 acres of land located in Newport Beach, California, for the
development and sale of 79 homes in a community known as Meridian (“the Project”). Subject to the
operating agreement, distributions of net cash flow to the Members shall be in the following order of priority:
1) To the Members in proportion to their respective accrued and unpaid First Priority Preference Amount,
as defined; then
2) To the Members in proportion to their respective Undistributed First Priority Capital Amount, as
defined; then
3) To the Members in proportion to their respective accrued and unpaid Second Priority Preference
Amount, as defined; then
4) To the Members in proportion to their respective Undistributed Second Priority Capital Amount, as
defined; then
5) To the Members in proportion to their respective Percentage Interests, as defined (TNHC 50% and
NB Residences 50%).
Upon the formation of the Company, TNHC received a distribution of $4,618,808 from the Company in
order to bring contribution percentages of each Member in line with the operating agreement, which was
35% for TNHC and 65% for NB Residences. During 2014, the Members amended the operating agreement
to allow NB Residences to make a contribution of $4,500,000 without the requirement for TNHC to make
a corresponding contribution. This contribution was designated as an increase to NB Residences
Undistributed Second Priority Capital.
Subject to the operating agreement, income and loss are allocated to the Members generally in the same
manner as distributions of net cash flow.
102
Pursuant to the operating agreement, the preferred return on First Priority Capital, as defined, for both
Members is 20% per annum, compounded monthly. The preferred return on Second Priority Capital, as
defined, for both Members is 12% per annum, compounded monthly. During 2015, the First Priority Capital,
Second Priority Capital and all preferred return associated have been returned to the partners, as such, no
additional preferred return distributions are expected as of December 31, 2015.
The following is a summary of the preferred returns for the Members as of December 31, 2015:
Cumulative First Priority preferred return
Cumulative First Priority preferred distributions
Cumulative Second Priority preferred return
Cumulative Second Priority preferred distributions
Remaining undistributed preferred return
TNHC
NB
Residences
$
$
— $
—
5,532,742
(5,532,742)
— $
—
11,085,315
(11,085,315)
— $
— $
Total
—
—
16,618,057
(16,618,057)
—
Basis of Presentation
The accompanying financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). This basis of accounting contemplates the recovery of the
Company’s assets and the satisfaction of its liabilities in the normal course of business. Management believes
the Company has sufficient cash and access to capital to fund its operations.
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of commitments and contingencies. Actual results could differ materially from those
estimates.
Cash
The Company considers all highly liquid investments that are readily convertible to cash, with original
maturity dates of three months or less, to be cash and cash equivalents. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of cash deposited with
financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. The
Company has not experienced any losses related to uninsured cash balances.
Restricted Cash
Restricted cash of $500,000 as of December 31, 2015 and 2014, is held in a single account and serves as
collateral for a letter of credit for certain performance bonds.
103
Real Estate Inventories and Cost of Sales
Real estate inventories are carried at cost. Development costs, including land, land development, direct costs
of construction, indirect costs, interest, and property taxes incurred during the development period, are
capitalized. Capitalization of development costs ends when the assets are substantially complete and ready
for sale.
Costs of home sales are allocated based on specific identification or relative sales value, depending on the
nature of the costs. Project-specific costs are amortized to cost of sales as homes are closed based upon a
method that approximates relative sales value. A provision for warranty costs is included in cost of homes
sold at the time the sale of a home is recorded. Selling and marketing costs are expensed in the period
incurred.
Real estate inventories are stated at cost, unless the carrying amount is determined not to be recoverable, in
which case the inventories are written down to fair value in accordance with ASC 360, Property, Plant and
Equipment. ASC 360 requires that real estate assets be tested for impairment whenever events or changes
in circumstances indicate that their carrying amounts may not be recoverable.
Impairment of assets is measured by comparing the carrying amount of an asset to the undiscounted future
net cash flows expected to be generated by the asset. These evaluations for impairment are significantly
impacted by estimates of the amounts and timing of revenues, costs and expenses, and other factors. If real
estate assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined based
on estimated future cash flows discounted for inherent risks associated with the real estate assets, or other
valuation techniques.
As of December 31, 2015 and 2014, the Company determined that the carrying amounts of its real estate
inventories were not impaired based upon the undiscounted future cash flows of the underlying Project.
Revenue Recognition
In accordance with ASC 360, revenues from home sales and other real estate sales are recorded and a profit
is recognized when the respective units are closed. Home sales and other real estate sales are closed when
all conditions of escrow are met, including delivery of the home, title passage, appropriate consideration is
received and collection of associated receivables, if any, is reasonably assured, and other applicable criteria
are met. Sales incentives are a reduction of revenues when the respective unit is closed. When it is determined
that the earnings process is not complete, the sale and related profit are deferred for recognition in future
periods.
104
Income Taxes
As a limited liability company, the Company is subject to certain minimal taxes and fees; however, income
taxes on income reported by the Company are the obligation of the Members.
The Company applies the provisions of ASC 740, Accounting for Uncertainty in Income Taxes (“ASC 740”).
Based on its evaluation, under ASC 740, the Company has concluded that there are no significant uncertain
tax positions requiring recognition in its financial statements, nor has the Company been assessed interest
or penalties by any major tax jurisdictions. The Company’s evaluation was performed for the tax years ended
December 31, 2015 and 2014.
New Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires
that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendments
in ASU 2015-03 are effective for interim and annual periods beginning after December 15, 2015. Early
adoption is permitted. The Company is in the process of evaluating the effects of ASU 2015-03 on its
consolidated financial statements. The Company's adoption of ASU 2015-03 is not expected to have a
material effect on the consolidated financial statements and related disclosures.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts
with Customers (“ASU 2014-09”), which supersedes existing accounting literature relating to how and when
a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers
promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU No.
2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed
the effective date of ASU 2014-09 by one year. As a result, for public companies, ASU 2014-09 will be
effective for interim and annual reporting periods beginning after December 15, 2017, and is to be applied
either with a full retrospective or modified retrospective approach, with early application permitted. The
Company is currently evaluating the impact the adoption will have on our consolidated financial statements
and related disclosures.
105
2. Real Estate Inventories
Real estate inventories consisted of the following:
Land and land development
Construction in progress
Model home
December 31
2015
2014
$
$
— $
3,694,238
—
3,694,238 $
8,869,985
68,454,324
2,364,020
79,688,329
Construction in progress consists primarily of construction costs for homes and common area facilities, which
are in various stages of development.
The Company incurred, capitalized and amortized interest costs as follows:
Year Ended December 31
2015
2014
March 1, 2013
(Inception) to
December 31,
2013
Interest included in beginning real estate inventories $
Interest incurred and capitalized
Interest amortized to cost of sales
Interest included in ending real estate inventories
$
576,695 $
12,251 $
1,037,939
(1,565,393)
1,313,753
(749,309)
49,241 $
576,695 $
—
12,251
—
12,251
3. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
Completion reserve
Other liabilities
Warranty reserve
December 31
2015
2014
$
$
813,038 $
—
2,263,446
3,076,484 $
607,615
5,955
601,002
1,214,572
The Company offers warranties on its homes that generally cover various defects in workmanship, materials,
or to cover structural 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. The Company assesses
the adequacy of its warranty accrual on a quarterly basis and adjusts the amounts recorded if necessary. The
Company’s warranty accrual is included in accrued expenses and other liabilities in the accompanying balance
sheets.
106
The completion reserve includes project costs for homes that have closed but for which invoices from vendors
have not yet been received. The Company periodically assesses the adequacy of its completion reserve and
adjusts the amounts as necessary.
Changes in the Company’s warranty liability are as follows:
Beginning warranty liability
Warranty provision
Warranty payments
Ending warranty liability
4. Due to Affiliates and Related Party Transactions
Amounts due to affiliates consisted of the following:
Accrued interest
Accrued payroll
Year Ended December 31
2015
2014
March 1, 2013
(Inception) to
December 31
2015
$
$
601,002 $
1,756,030
(93,586)
2,263,446 $
— $
602,432
(1,430)
601,002 $
—
—
—
—
December 31
2015
2014
$
$
— $
49,280
49,280 $
2,050
166,874
168,924
During the years ended December 31, 2015 and 2014 and the period from March 1, 2013 (inception) to
December 31, 2013, TNHC incurred construction-related costs on the Company’s behalf totaling $2,120,294 ,
$1,274,951, and $281,535, respectively. The Company capitalized $877,762, $543,376, and $280,917 of
these amounts to real estate inventories for the years ended December 31, 2015 and 2014 and the period from
March 1, 2013 (inception) to December 31, 2013 and charged the remaining $1,242,532, $731,575, and
$21,618, respectively, to selling and marketing expenses incurred from affiliates in the accompanying
statements of operations. As of December 31, 2015 and December 31, 2014, $49,280, and $166,874,
respectively, was due to TNHC and is reflected in the accompanying balance sheets as due to affiliates.
Pursuant to the operating agreement, TNHC and NB Residences shall receive an overhead fee from the
Company in an amount equal to 3.0% and 1.0%, respectively, of the Project revenues. This amount will be
paid as follows:
1) 1.5% of the projected gross sales revenue of the Project to TNHC and 0.5% of the projected gross
sales revenue of the Project to NB Residences, paid in equal monthly installments on or about the
first day of each month over the projected life of the project, which began April 1, 2013.
107
2) 1.5% of the gross sales revenue from each home sold to TNHC and 0.5% of the gross sales revenue
from each home sold to NB Residences, payable upon the first day of the month following close of
escrow.
During the years ended December 31, 2015, 2014 and the period from March 1, 2013 (inception) to December
31, 2013, TNHC earned $1,445,000, $1,248,000, and $936,000, respectively, and NB Residences earned
$482,000, $415,800, and $311,850, respectively, in monthly overhead fees, which have been recorded by
the Company as overhead fees to affiliates in the accompanying statements of operations. During the years
ended December 31, 2015 and 2014, and the period from March 1, 2013 (inception) to December 31, 2013,
TNHC earned $2,626,046, $902,378, and $0, respectively, and NB Residences earned $875,358, $300,793,
and $0, respectively, in overhead fees earned from homes sold, which have also been recorded by the Company
as overhead fees to affiliates in the accompanying statements of operations. As of December 31, 2015 and
2014, no amounts were outstanding for such fees.
TNHC provides certain loan guaranties related to the Company’s construction note payable (Note 5). In the
event that these guaranties are called upon, they would be considered a cost of the Company and would be
allocated appropriately to the Members in accordance with the operating agreement.
5. Notes Payable
The Company had notes payable outstanding as follows:
Construction note payable
Unsecured note payable to Member
December 31
2015
2014
$
$
— $
—
— $
17,730,943
4,268,291
21,999,234
The Company had a construction note payable, which was paid in full as of October 29, 2015, terminating
the Company's ability to borrow under this contract.
The Company had an unsecured note payable to a Member, which was paid in full as of November 13, 2015
terminating the Company's ability to borrow under this contract.
As of December 31, 2014, the Company had accrued interest of $2,050 related to the construction note,
which has been reflected in accrued expenses and other liabilities in the accompanying balance sheets.
6. Commitments and Contingencies
The Company’s commitments and contingencies include the usual obligations and litigation incurred by real
estate developers in the normal course of business. In the opinion of management, there are no material loss
contingencies.
108
The Company obtains performance bonds in the normal course of business to ensure completion of the
infrastructure of the Project. As of December 31, 2015 and 2014, the Company had $4,935,627 and
$4,933,386, respectively, in performance bonds outstanding with the city of Newport Beach, governmental
entities, and others.
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.
7. Subsequent Events
The Company has evaluated subsequent events through February 26, 2016, the date the financial
statements were available for issuance.
On January 29, 2016, the Company closed on the final remaining inventory and as a result will close out
operations.
109
Report of Independent Auditors
The Members
LR8 Investors, LLC
We have audited the accompanying consolidated financial statements of LR8 Investors, LLC, which comprise
the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of operations,
members’ capital, and cash flows for each of the two years in the period ended December 31, 2014, and the
related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
conformity with U.S. generally accepted accounting principles; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
110
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of LR8 Investors, LLC at December 31, 2014, and the consolidated results
of its operations and its cash flows for each of the two years in the period ended December 31, 2014, in
conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
February 27, 2015
111
LR8 Investors, LLC
(A Delaware Limited Liability Company)
Consolidated Balance Sheet
Assets
Cash
Other assets
Total assets
Liabilities and members’ capital
Accounts payable
Accrued expenses and other liabilities
Due to affiliates
Commitments and contingencies (Note 6)
Members’ capital
Total liabilities and members’ capital
See accompanying notes.
December 31
2014
$
$
$
$
4,311,732
205,113
4,516,845
21,148
2,435,995
18,795
2,475,938
2,040,907
4,516,845
112
LR8 Investors, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Operations
Revenues:
Home sales
Design studio option sales
Cost of sales:
Cost of home sales
Cost of design studio option sales
Gross profit
Legal expenses
Selling and marketing expenses
Selling and marketing expenses
incurred from affiliates
Guaranty fees to affiliates
Overhead fees to affiliates
Net income
See accompanying notes.
Year Ended December 31
2014
2013
$
12,246,011 $
1,935,856
14,181,867
151,912,433
19,704,104
171,616,537
7,982,505
1,526,821
9,509,326
111,015,455
13,241,592
124,257,047
4,672,541
47,359,490
534,415
94,957
—
2,437,766
189,768
18,927
229,321
3,605,153 $
1,041,592
113,562
3,791,914
39,974,656
$
113
LR8 Investors, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Members’ Capital
Years Ended December 31, 2014 and 2013
The New Home
Company
Southern
California LLC
MFCI8 LR,
LLC
Total
Balance at December 31, 2012
$
2,460,104 $
46,741,977 $
49,202,081
Distributions
Net income
Balance at December 31, 2013
Distributions
Net income
(6,930,433)
(77,424,601)
(84,355,034)
5,678,264
1,207,935
34,296,392
3,613,768
39,974,656
4,821,703
(1,677,190)
(4,708,759)
(6,385,949)
1,081,546
2,523,607
3,605,153
2,040,907
Balance at December 31, 2014
$
612,291 $
1,428,616 $
See accompanying notes.
114
LR8 Investors, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Cash Flows
Year Ended December 31
2014
2013
$
3,605,153 $
39,974,656
6,375,364
72,814,795
408,815
114,369
(1,412,515)
(3,083,200)
(256,916)
1,352,563
33,932
(156,037)
8,753,833
111,017,146
—
39,702,252
752,032
4,496,968
(3,150,326)
(67,689,266)
(6,385,949)
(84,355,034)
(8,784,243)
(107,845,080)
(30,410)
3,172,066
4,342,142
1,170,076
$
4,311,732 $
4,342,142
$
— $
—
Operating activities
Net income
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Net changes in operating assets and liabilities:
Real estate inventories
Other assets
Accounts payable
Due to affiliates
Accrued expenses and other liabilities
Net cash provided by operating activities
Financing activities
Proceeds from issuance of notes payable
Cash collateral on notes payable, net
Repayments of secured notes
Members’ capital distributions
Net cash used in financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosures of cash flow
information
Interest paid, net of amounts capitalized
See accompanying notes.
115
LR8 Investors, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
1. Organization and Summary of Significant Accounting Policies
LR8 Investors, LLC (“Investors”), a Delaware limited liability company, was formed with an effective date
of September 22, 2010, for the purpose of acquiring and owning 100% of LR8 Owner, LLC (“Owner”, and
together with Investors, the “Company”), a Delaware limited liability company.
Owner was formed with an effective date of September 22, 2010 to acquire approximately 51 acres of land
for the development and sale of 169 homes in a community known as Lambert Ranch, located in Irvine,
California (the “Project”). As of December 31, 2014, all homes had been sold and closed.
As of December 31, 2014, the members of Investors (individually, the “Member”, and collectively, the
“Members”) and their respective percentage interests are as follows:
The New Home Company Southern California LLC (“TNHC”)
MFCI8 LR, LLC (“MFCI8”)
5%
95%
Investors is scheduled to terminate on December 31, 2060, unless sooner terminated by the provisions
provided for in the limited liability company agreement (the “Agreement”).
Distributions, income and losses are to be allocated in accordance with the provisions of the Agreement.
The liability of each Member is limited to the amount of capital contributions required to be made by such
Member in accordance with the provisions of the Agreement.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”). This basis of accounting contemplates the recovery
of the Company’s assets and the satisfaction of its liabilities in the normal course of business.
Principles of Consolidation
The consolidated financial statements include the accounts of LR8 Investors, LLC and its wholly owned and
controlled subsidiary. The accounting policies of the subsidiary are substantially the same as those of
Investors. All significant intercompany accounts and transactions have been eliminated in consolidation.
116
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 reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of commitments and contingencies. Actual results could differ materially
from those estimates.
Cash
The Company considers all highly liquid investments that are readily convertible to cash, with original
maturity dates of three months or less, to be cash and cash equivalents. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of cash deposited with
financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. The
Company has not experienced any losses related to uninsured cash balances.
Real Estate Inventories and Cost of Sales
Real estate inventories are carried at cost. Development costs, including land, land development, direct costs
of construction, indirect costs, interest, and property taxes incurred during the development period, are
capitalized. Capitalization of development costs ends when the assets are substantially complete and ready
for sale.
Costs of home sales are allocated based on specific identifications, or relative sales value, depending on the
nature of the costs. Project-specific costs are amortized to cost of sales as homes are closed based upon a
method that approximates relative sales value. A provision for warranty costs is included in cost of home
sales at the time the sale of a home is recorded. Selling and marketing costs are expensed in the period
incurred.
Real estate inventories are stated at cost, unless the carrying amount is determined not to be recoverable, in
which case the inventories are written down to fair value in accordance with ASC 360, Property, Plant, and
Equipment. ASC 360 requires that real estate assets be tested for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Impairment of assets is measured by comparing the carrying amount of an asset to the undiscounted future
net cash flows expected to be generated by the asset. These evaluations for impairment are significantly
impacted by estimates of the amounts and timing of revenues, costs and expenses, and other factors. If real
estate assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined based on
estimated future cash flows discounted for inherent risks associated with the real estate assets, or other
valuation techniques.
The Company did not have real estate inventories as of December 31, 2014.
Revenue Recognition
In accordance with ASC 360, revenues from home sales and other real estate sales are recorded and a profit
is recognized when the respective units are closed. Home sales and other real estate sales are closed when
all conditions of escrow are met, including delivery of the home, title passage, appropriate consideration is
received and collection of associated receivables, if any, is reasonably assured. Sales incentives are a reduction
117
of revenues when the respective unit is closed. When it is determined that the earnings process is not complete,
the sale and the related profit are deferred for recognition in future periods.
Income Taxes
As a limited liability company, the Company is subject to certain minimal taxes and fees; however, income
taxes on income reported by the Company are the obligation of the Members.
The Company applies the provisions of ASC 740, Accounting for Uncertainty in Income Taxes. Based on its
evaluation, under ASC 740, the Company has concluded that there are no significant uncertain tax positions
requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by
any major tax jurisdictions. The Company’s evaluation was performed for the tax years ended December 31,
2014 and 2013.
2. Real Estate Inventories
The Company incurred, capitalized, and amortized interest costs as follows:
Interest included in beginning real estate inventories
$
Interest incurred and capitalized
Interest amortized to cost of sales
Interest included in ending real estate inventories
$
Year Ended December 31
2014
66,386 $
18,113
(84,499)
— $
2013
1,962,533
1,216,333
(3,112,480)
66,386
3. Other Assets
Other assets consisted of the following:
Cash collateral - performance bonds
Refundable deposits
4. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
Warranty reserve
Completion reserve
118
December 31
2014
180,113
25,000
205,113
December 31
2014
2,175,003
260,992
2,435,995
$
$
$
$
The Company offers warranties on its homes that generally cover various defects in workmanship, materials,
or to cover structural 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. The Company assesses
the adequacy of its warranty accrual on a quarterly basis and adjusts the amounts recorded if necessary. The
Company’s warranty accrual is included in accrued expenses and other liabilities in the accompanying
consolidated balance sheet. Changes in the Company’s warranty liability are as follows:
Beginning warranty liability
Warranty provision
Warranty payments
Ending warranty liability
Year Ended December 31
2014
2013
$
$
2,190,108 $
141,825
(156,930)
2,175,003 $
560,206
1,716,200
(86,298)
2,190,108
The completion reserve includes project costs for homes that have closed but for which invoices from vendors
have not yet been received. The Company periodically assesses the adequacy of its completion reserve and
adjusts the amounts as necessary.
5. Due to Affiliates and Related-Party Transactions
Due to affiliates consisted of the following:
Accrued payroll
December 31
2014
$
$
18,795
18,795
During the years ended December 31, 2014 and 2013, TNHC incurred construction-related costs on the
Company’s behalf of $788,760 and $2,284,409, respectively. The Company capitalized $598,992 and
$1,242,817 of these amounts to real estate inventories and charged the remaining $189,768 and $1,041,592
to selling and marketing expenses incurred from affiliates in the accompanying consolidated statements of
operations. As of December 31, 2014, $18,795 is included in due to affiliates in the accompanying
consolidated balance sheet.
Pursuant to the Development Management Agreement as referenced in the operating agreement, TNHC shall
receive an overhead fee from the Company in an amount equal to 3.0% of the Project’s revenues. This amount
will be paid as follows:
1 0.75% of the projected gross sales revenue of the Project, paid in equal monthly installments beginning
with the commencement of grading work, based upon a 23-month period;
2 0.75% of the projected gross sales revenue of the Project, paid in equal monthly installments beginning
with the commencement of construction of the model homes, based upon a 28-month period;
3 0.75% of the gross sales revenue from each home sold, payable upon the close of escrow;
4 0.75% of the gross sales revenue from each home sold, payable upon each Member having reached
a 15% IRR on its capital contributions.
119
During the years ended December 31, 2014 and 2013, TNHC earned $229,321 and $3,791,914, respectively,
in overhead fees, which have been recorded by the Company as overhead fees to affiliates in the accompanying
consolidated statements of operations. As of December 31, 2014, $0 was due to TNHC for such fees.
During the years ended December 31, 2014 and 2013, the Company incurred $120,000 in project coordination
fees due to an affiliate of MFCI8. The Company has capitalized these amounts to real estate inventories. As
of December 31, 2014, no amounts were due to this affiliate.
During the years ended December 31, 2014 and 2013, the Company incurred $18,927 and $113,562,
respectively, for certain loan provided to the Company by TNHC, which were recorded by the Company as
guaranty fees to affiliates in the accompanying consolidated statements of operations. As of December 31,
2014, $0 was due to TNHC.
6. Commitments and Contingencies
The Company’s commitments and contingencies include the usual obligations and litigation incurred by real
estate developers in the normal course of business. In the opinion of management, there are no material loss
contingencies.
The Company obtains performance bonds in the normal course of business to ensure completion of the
infrastructure of the Project. As of December 31, 2014, the Company had $1,670,694 in performance bonds
outstanding with various cities, governmental entities, and others, for which the Company had disbursed
$180,113 in cash collateral to third parties.
7. Subsequent Events
The Company has evaluated subsequent events through February 27, 2015, the date the consolidated
financial statements were available for issuance.
120
Report of Independent Auditors
The Members
Larkspur Land 8 Investors, LLC
We have audited the accompanying consolidated financial statements of Larkspur Land 8 Investors, LLC,
which comprise the consolidated balance sheet as of December 31, 2014, and the related consolidated
statements of operations, members’ capital, and cash flows for each of the two years in the period ended
December 31, 2014, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
conformity with U.S. generally accepted accounting principles; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
121
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Larkspur Land 8 Investors, LLC at December 31, 2014, and the consolidated
results of its operations and its cash flows for each of the two years in the period ended December 31, 2014,
in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
February 27, 2015
122
Larkspur Land 8 Investors, LLC
(A Delaware Limited Liability Company)
Consolidated Balance Sheet
Assets
Cash
Restricted cash
Real estate inventories
Other assets
Total assets
Liabilities and members’ capital
Accounts payable
Due to affiliates
Accrued expenses and other liabilities
Notes payable
Commitments and contingencies (Note 7)
Members’ capital
Total liabilities and members’ capital
See accompanying notes.
December 31
2014
$
4,072,468
4,251,585
28,741,391
1,493,417
$
38,558,861
$
3,249,658
254,282
745,752
11,340,718
15,590,410
22,968,451
$
38,558,861
123
Larkspur Land 8 Investors, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Operations
Revenues:
Home sales
Design studio option sales
Cost of sales:
Cost of home sales
Cost of design studio option sales
Gross profit
Selling and marketing expenses
Selling and marketing expenses incurred
from affiliates
Overhead fees to affiliates
Net income (loss)
See accompanying notes.
Year Ended December 31
2014
2013
66,048,338 $
4,632,357
70,680,695
52,663,079
3,252,694
55,915,773
14,764,922
—
—
—
—
—
—
—
894,571
185,803
931,950
601,344
12,337,057 $
106,480
931,774
(1,224,057)
$
$
124
Larkspur Land 8 Investors, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Members’ Capital
Years Ended December 31, 2014 and 2013
The New Home
Company
Northern
California LLC
MFCI8
Larkspur
Land, LLC
Total
Balance at December 31, 2012
$
3,045,545 $
27,409,906 $
30,455,451
Contributions
Net loss
Balance at December 31, 2013
Contributions
Distributions
Net income
520,000
(122,406)
4,680,000
5,200,000
(1,101,651)
(1,224,057)
3,443,139
30,988,255
34,431,394
50,000
450,000
500,000
(2,430,000)
(21,870,000)
(24,300,000)
1,233,706
11,103,351
12,337,057
Balance at December 31, 2014
$
2,296,845 $
20,671,606 $
22,968,451
See accompanying notes.
125
Larkspur Land 8 Investors, LLC
(A Delaware Limited Liability Company)
Consolidated Statements of Cash Flows
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Net changes in operating assets and liabilities:
Real estate inventories
Other assets
Accounts payable
Due to affiliates
Accrued expenses and other liabilities
Year Ended December 31
2014
2013
$
12,337,057 $
(1,224,057)
25,548,253
(18,638,678)
(777,392)
(388,500)
1,265,883
1,151,908
253,146
740,805
1,136
(104,296)
Net cash provided by (used in) operating activities
39,367,752
(19,202,487)
Financing activities:
Cash collateral on notes payable
Proceeds from issuance of notes payable
Repayments of secured notes
Members’ capital contributions
Members’ capital distributions
Net cash (used in) provided by financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosure of cash flow information
Interest paid, net of amounts capitalized
See accompanying notes.
126
(2,591,510)
(1,660,075)
31,831,975
20,813,005
(41,590,698)
(5,298,000)
500,000
5,200,000
(24,300,000)
—
(36,150,233)
19,054,930
3,217,519
(147,557)
854,949
1,002,506
4,072,468 $
854,949
— $
—
$
$
Larkspur Land 8 Investors, LLC
(A Delaware Limited Liability Company)
Notes to Consolidated Financial Statements
December 31, 2014
1. Organization and Summary of Significant Accounting Policies
Larkspur Land 8 Investors, LLC (“Investors”), a Delaware limited liability company, was formed on June 23,
2011, for the purpose of acquiring and owning 100% of Larkspur Land 8 Owner, LLC (“Owner”, and together
with Investors, the “Company”), a Delaware limited liability company.
Owner was formed on June 23, 2011 to acquire approximately 17 acres of land for the development and sale
of 85 homes in a community known as Rose Lane, located in Larkspur, California (the “Project”).
As of December 31, 2014, the members of Investors (individually, the “Member”, and collectively, the
“Members”) and their respective percentage interests are as follows:
The New Home Company Northern California LLC (“TNHC”)
MFCI8 Larkspur Land, LLC (“MFCI8”)
10%
90%
Investors will terminate on December 31, 2061, unless sooner terminated pursuant to the provisions of the
limited liability company agreement (the “Agreement”).
Distributions, income and losses are to be allocated in accordance with the provisions of the Agreement.
The liability of each Member is limited to the amount of capital contributions required to be made by such
Member in accordance with the provisions of the Agreement.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”). This basis of accounting contemplates the recovery
of the Company’s assets and the satisfaction of its liabilities in the normal course of business.
Principles of Consolidation
The consolidated financial statements include the accounts of Larskpur Land 8 Investors, LLC and its wholly
owned and controlled subsidiary. The accounting policies of the subsidiary are substantially the same as
those of Investors. All significant intercompany accounts and transactions have been eliminated in
consolidation.
127
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 reported amounts of assets, liabilities, revenues
and expenses, and the disclosure of commitments and contingencies. Actual results could differ materially
from those estimates.
Cash
The Company considers all highly-liquid investments that are readily convertible to cash, with original
maturity dates of three months or less, to be cash and cash equivalents. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of cash deposited with
financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. The
Company has not experienced any losses related to uninsured cash balances.
Restricted Cash
As of December 31, 2014, restricted cash of $4,251,585 is held in a separate account and serves as additional
collateral for certain notes payable.
Real Estate Inventories and Cost of Sales
Real estate inventories are carried at cost. Development costs, including land, land development, direct costs
of construction, indirect costs, interest and property taxes incurred during the development period, are
capitalized. Capitalization of development costs ends when the assets are substantially complete and ready
for sale.
Costs of home sales are allocated based on specific identification, or relative sales value, depending on the
nature of the costs. Project specific costs are amortized to cost of sales as homes are closed based upon a
method that approximates relative sales value. A provision for warranty costs is included in cost of homes
sold at the time the sale of a home is recorded. Selling and marketing costs are expensed in the period incurred.
Real estate inventories are stated at cost, unless the carrying amount is determined not to be recoverable, in
which case the inventories are written down to fair value in accordance with ASC 360, Property, Plant and
Equipment. ASC 360 requires that real estate assets be tested for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Impairment of assets is measured by comparing the carrying amount of an asset to the undiscounted future
net cash flows expected to be generated by the asset. These evaluations for impairment are significantly
impacted by estimates of the amounts and timing of revenues, costs and expenses, and other factors. If real
estate assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined based on
estimated future cash flows discounted for inherent risks associated with the real estate assets, or other
valuation techniques.
As of December 31, 2014, the Company determined that the carrying amounts of its real estate inventories
were not impaired based upon undiscounted future cash flows of the underlying Project.
128
Revenue Recognition
In accordance with ASC 360, revenues from home sales and other real estate sales are recorded and a profit
is recognized when the respective units are closed. Home sales and other real estate sales are closed when
all conditions of escrow are met, including delivery of the home, title passage, appropriate consideration is
received and collection of associated receivables, if any, is reasonably assured. Sales incentives are a reduction
of revenues when the respective unit is closed. When it is determined that the earnings process is not complete,
the sale and the related profit are deferred for recognition in future periods.
Income Taxes
As a limited liability company, the Company is subject to certain minimal taxes and fees; however, income
taxes on income reported by the Company are the obligation of the Members.
The Company applies the provisions of ASC 740, Accounting for Uncertainty in Income Taxes. Based on its
evaluation, under ASC 740, the Company has concluded that there are no significant uncertain tax positions
requiring recognition in its financial statements, nor has the Company been assessed interest or penalties
by any major tax jurisdictions. The Company’s evaluation was performed for the tax years ended December
31, 2014 and 2013.
2. Real Estate Inventories
Real estate inventories consisted of the following:
Construction in progress
Finished homes
Model homes
December 31
2014
$
$
25,578,588
826,736
2,336,067
28,741,391
Construction in progress consists primarily of construction costs for homes and common area facilities, which
are in various stages of development.
The Company incurred, capitalized and amortized interest costs as follows:
Interest included in beginning real estate
inventories
Interest incurred and capitalized
Interest amortized to cost of sales
Interest included in ending real estate
inventories
Year Ended December 31
2014
2013
$
$
822,438 $
1,315,541
(1,338,677)
15,662
806,776
—
799,302 $
822,438
129
3. Other Assets
Other assets consisted of the following:
Cash collateral - performance bonds
Receivables
December 31
2014
$
$
1,285,009
208,408
1,493,417
Receivables are amounts related to overpayments made to and due from trade partners during the year ended
December 31, 2014.
4. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
Warranty reserve
Completion reserve
Interest payable
December 31
2014
$
$
676,946
37,336
31,470
745,752
The Company offers warranties on its homes that generally cover various defects in workmanship or materials
or to cover structural 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. The Company assesses
the adequacy of its warranty reserve on a quarterly basis and adjusts the amounts recorded if necessary. The
Company’s warranty reserve is included in accrued expenses and other liabilities on the accompanying
consolidated balance sheet.
Changes in the Company’s warranty reserve are as follows:
Beginning warranty reserve
Warranty provision
Warranty payments
Ending warranty reserve
Year Ended December 31
2014
2013
$
$
— $
707,268
(30,322)
676,946 $
—
—
—
—
The completion reserve includes project costs for homes that have closed but for which invoices from vendors
have not yet been received. The Company periodically assesses the adequacy of its completion reserve and
adjusts the amounts as necessary.
130
5. Due to Affiliates and Related-Party Transactions
Due to affiliates consisted of the following:
Accrued payroll
Accrued overhead fees to affiliates
Commissions payable
December 31
2014
$
$
121,125
102,344
30,813
254,282
During the years ended December 31, 2014 and 2013, TNHC incurred construction-related costs on the
Company’s behalf of $1,820,028 and $711,671, respectively. The Company has capitalized $888,078 and
$605,191 of these amounts to real estate inventories and charged the remaining $931,950 and $106,480 to
selling and marketing expenses incurred from affiliates in the accompanying consolidated statements of
operations. As of December 31, 2014, $151,948 is included in due to affiliates in the accompanying
consolidated balance sheet.
Pursuant to the Development Management Agreement as referenced in the operating agreement, TNHC shall
receive an overhead fee from the Company in an amount equal to 3.0% of the Project revenues. This amount
will be paid as follows:
1) 1.0% of the projected gross sales revenue of the Project, paid in equal monthly installments beginning
with the commencement of grading work, based upon a 25-month period;
2) 1.0% of the projected gross sales revenue of the Project, paid in equal monthly installments beginning
with the commencement of the construction of the model homes, based upon a 27-month period;
3) 1.0% of the gross sales revenue from each home sold, payable upon each Member having reached a
15% IRR on its capital contributions.
During the years ended December 31, 2014 and 2013, the Company incurred $601,344 and $931,774,
respectively, in overhead fees payable to TNHC, which have been recorded by the Company as overhead
fees to affiliates in the accompanying consolidated statements of operations. As of December 31, 2014,
$102,344 was due to TNHC for such fees and has been reflected in due to affiliates in the accompanying
consolidated balance sheet.
The Company is provided certain loan guaranties by the Members on its construction note payable in order
to secure performance under the loan and maintain certain loan-to-value ratios. Each of the Members is
apportioned liability under the guaranties according to their respective percentage interest. As of December
31, 2014, $11,340,718 was outstanding under the loan.
During the years ended December 31, 2014 and 2013, the Company incurred $120,000 in project coordination
fees due to an affiliate of MFCI8. The Company has capitalized these amounts to real estate inventories. At
December 31, 2014, no amounts were due to this affiliate.
131
6. Notes Payable
The Company had notes payable secured by real estate outstanding as follows:
Construction note payable with a total commitment of
$36,000,000; matures March 2015 and bears interest at a rate of
1-month LIBOR plus 5.5% (5.69% at
December 31, 2014). At December 31, 2014, $24,659,282 was
available to be drawn under the note.
December 31
2014
$
$
11,340,718
11,340,718
7. Commitments and Contingencies
The Company’s commitments and contingencies include the usual obligations incurred by real estate
developers in the normal course of business. In the opinion of management, there are no material loss
contingencies.
The Company obtains performance bonds in the normal course of business to ensure completion of the
infrastructure of the Project. As of December 31, 2014, the Company had $19,823,991 in performance bonds
outstanding with various cities, governmental entities, and others, for which the Company had disbursed
$1,285,009 in cash collateral to third parties.
8. Subsequent Events
The Company has evaluated subsequent events through February 27, 2015, the date the financial
statements were available for issuance.
132
Report of Independent Auditors
The Members
TNHC-HW Foster City LLC
We have audited the accompanying financial statements of TNHC-HW Foster City LLC, which comprise
the balance sheet as of December 31, 2014, and the related statements of operations, members’ capital, and
cash flows for the year ended December 31, 2014, and the period from July 2, 2013 (inception) to December
31, 2013, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
conformity with U.S. generally accepted accounting principles; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
133
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of TNHC-HW Foster City LLC at December 31, 2014, and the results of its operations and its cash
flows for the year ended December 31, 2014, and the period from July 2, 2013 (inception) to December 31,
2013, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
February 13, 2015
134
TNHC-HW Foster City LLC
(A Delaware Limited Liability Company)
Balance Sheet
Assets
Cash
Restricted cash
Real estate inventories
Total assets
Liabilities and members’ capital
Accounts payable
Due to affiliates
Deferred revenue
Accrued expenses and other liabilities
Commitments and contingencies (Note 5)
Members’ capital
Total liabilities and members’ capital
See accompanying notes.
December 31
2014
$
$
$
$
12,134,090
2,809,331
8,066,506
23,009,927
918,816
1,480,450
16,598,154
1,200,099
20,197,519
2,812,408
23,009,927
135
TNHC-HW Foster City LLC
(A Delaware Limited Liability Company)
Statements of Operations
Period From
July 2, 2013
(Inception) to
December 31,
2013
Year Ended
December 31,
2014
$
$
46,887,846 $
34,965,482
11,922,364
—
—
—
499,715
1,968,000
9,454,649 $
—
264,241
(264,241)
Land sales
Cost of land sales
Gross profit
Selling and marketing expenses
Overhead fees to affiliates
Net income (loss)
See accompanying notes.
136
TNHC-HW Foster City LLC
(A Delaware Limited Liability Company)
Statements of Members’ Capital
Year Ended December 31, 2014 and Period From
July 2, 2013 (Inception) to December 31, 2013
TNHC Land
Company LLC
HWFC
Project, LLC
Total
Balance at July 2, 2013 (Inception)
$
— $
— $
—
Contributions
Distributions
Net loss
Balance at December 31, 2013
Contributions
Distributions
Net income
2,872,300
2,114,500
4,986,800
(757,800)
(132,120)
1,982,380
4,403,200
—
(132,121)
1,982,379
9,989,800
(757,800)
(264,241)
3,964,759
14,393,000
(9,466,507)
(15,533,493)
(25,000,000)
4,387,853
5,066,796
9,454,649
Balance at December 31, 2014
$
1,306,926 $
1,505,482 $
2,812,408
See accompanying notes.
137
TNHC-HW Foster City LLC
(A Delaware Limited Liability Company)
Statements of Cash Flows
Period From
July 2, 2013
(Inception) to
December 31,
2013
Year Ended
December 31,
2014
$
9,454,649 $
(264,241)
(2,809,331)
(4,216,595)
788,141
1,476,028
16,598,154
1,200,099
22,491,145
—
(1,717,111)
130,675
4,422
—
—
(1,846,255)
14,393,000
(25,000,000)
(10,607,000)
2,854,000
(757,800)
2,096,200
11,884,145
249,945
12,134,090 $
249,945
—
249,945
— $
21,000,000 $
2,132,800
—
— $
—
$
$
$
$
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Net changes in operating assets and liabilities:
Restricted Cash
Real estate inventories
Accounts payable
Due to affiliates
Deferred revenue
Accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Financing activities
Members’ capital contributions
Members’ capital distributions
Net cash (used in) provided by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
Supplemental disclosure of noncash transactions
Real estate inventories contributed for members’ capital
Purchase of real estate with note payable to land seller
Supplemental disclosure of cash flow information
Interest paid, net of amounts capitalized
See accompanying notes.
138
TNHC-HW Foster City LLC
(A Delaware Limited Liability Company)
Notes to Financial Statements
December 31, 2014
1. Organization and Summary of Significant Accounting Policies
TNHC-HW Foster City LLC, a Delaware limited liability company (the “Company”), was formed with an
effective date of July 2, 2013. The Company was capitalized through cash and asset contributions by TNHC
Land Company LLC (“TNHC”) and HWFC Project, LLC (“Hillwood”) (collectively referred to herein as
the “Members”). On October 3, 2014, the Company purchased approximately 15 acres of land located in
Foster City, California for the development and sale of lots planned for 200 residential dwellings, 221 assisted
and independent living apartments, a retail space, and a public use space, in a site known as Foster Square
(the “Project”).
Subject to the operating agreement, distributions of net cash flow to the Members shall be in the following
order of priority (taking into account, as applicable, each Member’s then existing preferred return amount
and contribution account balances, and subject to any other applicable provisions of the operating agreement):
1. To the Members in proportion to their respective accrued and unpaid First Priority Preference Amount,
as defined; then
2. To the Members in proportion to their respective Undistributed First Priority Capital Amount, as
defined; then
3. To the Members in proportion to their respective accrued and unpaid Second Priority Preference
Amount, as defined; then
4. To the Members in proportion to their respective Undistributed Second Priority Capital Amount, as
defined; then
5. To the Members in proportion to their respective Percentage Interests (TNHC 46.47% and Hillwood
53.53%).
Upon formation of the Company, TNHC received a distribution from the Company of $757,800 in order to
bring the contribution percentages of each Member in line with the operating agreement, which at the time
was 50% for TNHC and 50% for Hillwood. Upon acquisition of fee title to the Project site on October 3,
2014, the contribution percentages of the Members were adjusted, pursuant to the operating agreement, to
35% for TNHC and 65% for Hillwood.
Subject to the operating agreement, income and loss is allocated to the Members generally in the same manner
as distributions of net cash flow.
Pursuant to the operating agreement, the preferred return on First Priority Capital, as defined, for both
Members is 20% per annum, compounded monthly. The preferred return on Second Priority Capital, as
defined, for both Members is 12% per annum, compounded monthly. As the payment for the preferred return
is not guaranteed, it is not currently accrued on the financial statements. As of December 31, 2014, no
contributions had been made that qualify as a First Priority Capital Amount, as defined.
139
The following is a summary of the preferred returns for the Members as of December 31, 2014:
TNHC
Hillwood
Total
Cumulative First Priority preferred return
Cumulative First Priority preferred distributions
Cumulative Second Priority preferred return
Cumulative Second Priority preferred distributions
Remaining undistributed preferred return
$
$
— $
—
487,970
(487,970)
— $
— $
—
594,490
(594,490)
— $
—
—
1,082,460
(1,082,460)
—
Basis of Presentation
The accompanying financial statements have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) as contained within the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”). This basis of accounting contemplates the recovery of the
Company’s assets and the satisfaction of its liabilities in the normal course of business.
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of commitments and contingencies. Actual results could differ materially from those
estimates.
Cash
The Company considers all highly-liquid investments that are readily convertible to cash, with original
maturity dates of three months or less, to be cash and cash equivalents. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of cash deposited with
financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation. The
Company has not experienced any losses related to uninsured cash balances.
Restricted Cash
Restricted cash of $2,809,331 at December 31, 2014, includes $700,052 that serves as collateral for a letter
of credit for certain performance bonds and $2,109,279 that serves as collateral for the construction costs
related to a portion of the Project sold to a third party in December 2014. See discussion of post-closing
development activities, as described in more detail in Note 1 under the caption entitled “Revenue
Recognition.”
Real Estate Inventories and Costs of Sales
Real estate inventories are carried at cost. Development costs including land, land development, direct costs
of construction, indirect costs, interest, and property taxes incurred during the development period, are
capitalized. Capitalization of development costs ends when the assets are substantially complete and ready
for sale. Costs of land sales are allocated based on relative sales value. Selling and marketing costs are
expensed in the period incurred.
140
Real estate inventories are stated at cost, unless the carrying amount is determined not to be recoverable, in
which case the inventories are written down to fair value in accordance with ASC 360, Property, Plant, and
Equipment. ASC 360 requires that real estate assets be tested for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Impairment of assets is measured by comparing the carrying amount of an asset to the undiscounted future
net cash flows expected to be generated by the asset. These evaluations for impairment are significantly
impacted by estimates of the amounts and timing of revenues, costs and expenses, and other factors. If real
estate assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds the fair value of the assets. Fair value is determined based on
estimated future cash flows discounted for inherent risks associated with the real estate assets, or other
valuation techniques.
As of December 31, 2014, the Company determined that the carrying amounts of its real estate inventories
were not impaired based upon undiscounted future cash flows of the underlying Project.
Revenue Recognition
In accordance with ASC 360, revenues from land sales are recorded and a profit is recognized when the
respective lots are closed. Land sales are closed when all conditions of escrow are met, including delivery
of the real estate asset, title passage, appropriate consideration is received and collection of associated
receivables, if any, is reasonably assured. Sales incentives are a reduction of revenues when the respective
lot is closed. When it is determined that the earnings process is not complete, the sale and the related profit
are deferred for recognition in future periods.
During the year ended December 31, 2014, the Company sold land from the Project to two parties for a total
of $71,250,000. Under the terms of the contracts, the Company is obligated to perform certain development
activities after the close of escrow, including grading of property, utilities, backbone improvements, and
improvement plans and permits. Due to this continuing involvement, the Company has recognized the land
sale under the percentage-of-completion method, whereby revenue is recognized in proportion to total costs
incurred divided by total costs expected to be incurred. As of December 31, 2014, $16,598,154 of revenue
and $6,194,665 of profit remains deferred and will be recognized as development progresses.
Income Taxes
As a limited liability company, the Company is subject to certain minimal taxes and fees; however, income
taxes on income reported by the Company are the obligation of the Members.
The Company applies the provisions of ASC 740, Accounting for Uncertainty in Income Taxes. Based on its
evaluation, under ASC 740, the Company has concluded that there are no significant uncertain tax positions
requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by
any major tax jurisdictions. The Company’s evaluation was performed for the tax years ended December 31,
2014 and 2013.
141
2. Real Estate Inventories
Real estate inventories consist of the following:
Land and land under development
December 31
2014
$
8,066,506
The Company incurred, capitalized and amortized interest costs as follows:
Interest included in beginning real estate inventories
Interest incurred and capitalized
Interest amortized to cost of sales
Interest included in ending real estate inventories
3. Due to Affiliates and Related-Party Transactions
Amounts due to affiliates consist of the following:
Accrued payroll
Accrued overhead fees to affiliates
Year Ended
December 31
2014
Period Ended
December 31
2013
$
$
— $
212,877
(172,976)
39,901 $
—
—
—
—
December 31
2014
$
$
55,450
1,425,000
1,480,450
During the year ended December 31, 2014 and the period from July 2, 2013 (inception) to December 31,
2013, TNHC incurred construction-related costs on the Company’s behalf of $353,090 and $93,460,
respectively. The total amounts were capitalized as real estate inventories for both periods.
Pursuant to the operating agreement, TNHC and Hillwood shall receive an overhead fee from the Company
in an amount equal to 3.0% and 1.0%, respectively, of the Project’s gross sales revenue. This amount will
be paid as follows:
1) 1.5% of the projected gross sales revenue of the Project to TNHC and 0.5% of the projected gross
sales revenue of the Project to Hillwood, payable in equal monthly installments on or about the first
day of the each month over the projected life of the project, beginning July 1, 2013;
2) 1.5% of the gross sales price of all or any portion of the Project site to TNHC and 0.5% of the gross
sales price of all or any portion of the Project site to Hillwood, payable upon the first day of the month
following closing of the sale.
142
During the year ended December 31, 2014 and the period from July 2, 2013 (inception) to December 31,
2013, TNHC earned $406,000 and $198,494 in monthly overhead fees and Hillwood earned $137,000 and
$65,747 in monthly overhead fees, respectively, which have been recorded by the Company as overhead fees
to affiliates in the accompanying statements of operations. During the year ended December 31, 2014 and
the period from July 2, 2013 (inception) to December 31, 2013, TNHC earned $1,068,750 and $0 and
Hillwood earned $356,250 and $0, respectively, in overhead fees from lots sold, which have also been recorded
by the Company as overhead fees from affiliates in the accompanying statements of operations. As of
December 31, 2014, $1,068,750 and $356,250 were due to TNHC and Hillwood, respectively, for overhead fees earned
from lots sold and are reflected in the accompanying balance sheet as due to affiliates. As of December 31, 2014,
all monthly fees were paid in full.
4. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities of $1,200,099 at December 31, 2014, consist of initial cash deposits
from a buyer to purchase lots from the Company.
5. Commitments and Contingencies
The Company’s commitments and contingencies include the usual obligations and litigation incurred by real
estate developers in the normal course of business. In the opinion of management, there are no material loss
contingencies.
The Company obtains performance bonds in the normal course of business to ensure completion of the
infrastructure of the Project. As of December 31, 2014, the Company had $5,680,620 in performance bonds
outstanding with various cities, governmental entities, and others, for which the Company had distributed
$700,052 in cash collateral to third parties.
6. Subsequent Events
The Company has evaluated subsequent events through February 13, 2015, the date the financial statements
were available for issuance.
143
Exhibit
Number
Exhibit Description
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
4.1
4.2
Bylaws of The New Home Company Inc. (incorporated by reference to Exhibit 3.2 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2013)
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))
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)
10.1
Revolving Credit Agreement by and among The New Home Company Northern California LLC and U.S.
Bank National Association, dated as of Sept. 26, 2013 (incorporated by reference to Exhibit 10.22 of the
Company’s Registration Statement on Form S-1 (Amendment No. 6, filed December 17, 2013))
10.2
10.3†
10.4†
10.5†
10.6†
Registration Rights Agreement among The New Home Company Inc., TNHC Partners LLC, IHP Capital
Partners VI, LLC, WATT/TNHC LLC, and TCN/TNHC LP (incorporated by reference to Exhibit 10.2 of
the Company's Annual Report on Form 10-K for the year ended December 31, 2013)
The New Home Company Inc. 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3
of the Company's Annual Report on Form 10-K for the year ended December 31, 2013)
The New Home Company Inc. Executive Incentive Compensation Plan (incorporated by reference to
Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013)
Employment Agreement between The New Home Company Inc. and H. Lawrence Webb (incorporated by
reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31,
2013)
Employment Agreement between The New Home Company Inc. and Wayne Stelmar (incorporated by
reference to Exhibit 10.6 of the Company's Annual Report on Form 10-K for the year ended December 31,
2013)
10.6(a)†
Amendment to Employment Agreement, dated May 29, 2015, by and between The New Home Company
Inc. and Wayne Stelmar (incorporated by reference to Exhibit 10.5 of the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2015)
10.7†
10.8†
Employment Agreement between The New Home Company Inc. and Thomas Redwitz (incorporated by
reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the year ended December 31,
2013)
Employment Agreement, dated May 29, 2015, between The New Home Company Inc. and John Stephens
(incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2015)
144
10.9†
10.10†
10.11†
Form of Indemnification Agreement between The New Home Company Inc. and each of its directors and
officers (incorporated by reference to Exhibit 10.9 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2013)
The New Home Company Inc. 2014 Long-Term Incentive Plan form of Option Award and Stock Option
Agreement (incorporated by reference to Exhibit 10.10 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2013)
The New Home Company Inc. 2014 Long-Term Incentive Plan form of Restricted Stock Unit Award
Agreement (incorporated by reference to Exhibit 10.11 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2013)
10.11(a)*†
The New Home Company Inc. 2014 Long-Term Incentive Plan form of Restricted Stock Unit Award
Agreement for Nonemployee Directors
10.12*†
The New Home Company Inc. Non-Employee Director Compensation Program
10.13
10.13(a)
10.13(b)
10.13(c)
10.13(d)
10.13(e)
10.14+
10.15
Credit Agreement, dated June 26, 2014, among The New Home Company Inc. and U.S. Bank National
Association (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed
July 2, 2014)
Modification Agreement, dated December 3, 2014, by and between The New Home Company Inc. and U.S.
Bank National Association (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2015)
Second Modification Agreement, dated May 7, 2015, by and between The New Home Company Inc. and
U.S. Bank National Association (incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2015)
Third Modification Agreement, dated July 22, 2015, by and between The New Home Company Inc. and
U.S. Bank National Association (incorporated by reference to Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2015)
Augmenting Lender Supplement, dated December 17, 2015, among The New Home Company Inc.,
California Bank & Trust and U.S. Bank National Association, d/b/a Housing Capital Company, as
Administrative Agent (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form
8-K filed December 21, 2015)
Augmenting Lender Supplement, dated December 17, 2015, among The New Home Company Inc., City
National Bank and U.S. Bank National Association, d/b/a Housing Capital Company, as Administrative
Agent (incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed
December 21, 2015)
Agreement of Limited Partnership of Arantine Hills Holdings LP (incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014)
Restated Consulting Agreement, dated June 18, 2015, by and among The New Home Company Inc.,
Mendocino Group Inc. and Joseph Davis (incorporated by reference to Exhibit 10.6 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2015)
21.1*
List of subsidiaries of The New Home Company Inc.
23.1*
Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP
145
23.2*
Consent of Independent Auditors, Ernst & Young LLP
31.1*
Chief Executive Officer Section 302 Certification of Periodic Report dated February 26, 2016
31.2*
Chief Financial Officer Section 302 Certification of Periodic Report dated February 26, 2016
32.1**
Chief Executive Officer Section 906 Certification of Periodic Report dated February 26, 2016
32.2**
Chief Financial Officer Section 906 Certification of Periodic Report dated February 26, 2016
†
+
*
**
Management Contract or Compensatory Plan or Arrangement
Confidential treatment was requested with respect to omitted portions of this Exhibit, which portions
have been filed separately with the U.S. Securities and Exchange Commission.
Filed herewith
The information in Exhibits 32.1 and 32.2 shall not be deemed "filed" for purposes of Section 18 of the
Securities and Exchange Act of 1934, as amended (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 of 1933, as amended, or the Exchange Act (including this Report), unless the Registrant
specifically incorporates the foregoing information into those documents by reference.
146
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
The New Home Company Inc.
By:
/s/ H. Lawrence Webb
H. Lawrence Webb
Chief Executive Officer and Chairman
Date: February 26, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ H. Lawrence Webb
H. Lawrence Webb
/s/ John M. Stephens
John M. Stephens
/s/ Sam Bakhshandehpour
Sam Bakhshandehpour
/s/ Michael Berchtold
Michael Berchtold
/s/ David Berman
David Berman
/s/ Paul Heeschen
Paul Heeschen
/s/ Gregory P. Lindstrom
Gregory P. Lindstrom
/s/ Cathey S. Lowe
Cathey S. Lowe
/s/ Douglas C. Neff
Douglas C. Neff
/s/ Wayne Stelmar
Wayne Stelmar
/s/ Nadine Watt
Nadine Watt
/s/ William A. Witte
William A. Witte
Chief Executive Officer and Chairman of the
February 26, 2016
Board (Principal Executive Officer)
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
February 26, 2016
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
147
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
Exhibit 10.11(a)
THE NEW HOME COMPANY INC.
2014 LONG-TERM INCENTIVE PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT FOR NONEMPLOYEE
DIRECTORS
The New Home Company Inc., a Delaware corporation (the “Company”), hereby
grants to [________] (the “Holder”) as of [_______] (the “Grant Date”), pursuant to the terms
and conditions of The New Home Company Inc. 2014 Long-Term Incentive Plan (the “Plan”), a
restricted stock unit award (the “Award”) with respect to [_____] shares of the Company’s
Common Stock, par value $0.01 per share (“Common Stock”), upon and subject to the
restrictions, terms and conditions set forth in the Plan and this agreement (the “Agreement”).
1.
Award Subject to Acceptance of Agreement. The Award shall be null and
void unless the Holder accepts this Agreement by executing it in the space provided below and
returning such original execution copy to the Company.
2.
Rights as a Stockholder. The Holder shall not be entitled to any privileges
of ownership with respect to the shares of Common Stock subject to the Award unless and until,
and only to the extent, such shares become vested pursuant to Section 3 hereof and the Holder
becomes a stockholder of record with respect to such shares. With respect to cash dividends
declared by the Company on shares of Common Stock between the Grant Date and the date on
which the Award is either paid out or forfeited, the number of shares subject to the Award shall
increase, as of each date on which the Company pays the corresponding cash dividend to record
owners of shares of Common Stock (the “Dividend Date”), by (i) the product of the total number
of shares subject to the Award immediately prior to the date on which such cash dividends are
declared, multiplied by the dollar amount of the cash dividend paid per share of Common Stock
by the Company on such Dividend Date, divided by (ii) the Fair Market Value of a share of
Common Stock on such Dividend Date. Any such additional shares shall be subject to the same
vesting conditions and payment terms set forth herein as the shares to which they relate.
3.
Restriction Period and Vesting.
3.1.
Service-Based Vesting Condition. Except as otherwise provided in the
Plan, the Agreement or any other agreement between the Company and the Holder, the Award
shall vest on the earlier of the first anniversary of the Grant Date and the date of the annual
meeting of the Company’s stockholders immediately following the Grant Date; provided the
Holder remains continuously in service as a member of the Board of Directors of the Company
(the “Board”) through the applicable vesting date. The period of time prior to the vesting shall be
referred to herein as the “Restriction Period.”
3.2. Change in Control. In the event of a Change in Control, the Award shall
become fully vested immediately prior to such Change in Control, and the Board (as
constituted prior to such Change in Control) may, in its discretion:
(a)
require that shares of capital stock of the corporation resulting from such
Change in Control, or a parent corporation thereof, be substituted for some or all of the shares of
Common Stock subject to the Award, with an appropriate and equitable adjustment to the Award
as determined by the Board in accordance with Section 6.2; or
(b)
require the Award to be surrendered to the Company and to be
immediately cancelled by the Company, and to provide for the Holder to receive (i) a cash
payment from the Company in an amount equal to the number of shares of Common Stock then
subject to the Award multiplied by the Fair Market Value of a share of Common Stock on the
date of the occurrence of the Change in Control, (ii) shares of capital stock of the corporation
resulting from such Change in Control, or a parent corporation thereof, having a fair market
value not less than the amount determined under clause (i) above or (iii) a combination of the
payment of cash pursuant to clause (i) above and the issuance of shares pursuant to clause (ii)
above.
3.3.
Termination of Service. Except as otherwise determined by the Board in
its sole discretion, if the Holder’s service on the Board terminates prior to the end of the
Restriction Period, then the portion of the Award that was not vested immediately prior to such
termination of service shall be immediately forfeited by the Holder and cancelled by the
Company.
4.
Delivery of Certificates. Subject to Section 6, as soon as practicable (but
no later than thirty (30) days) after the vesting of the Award, in whole or in part, the Company
shall deliver or cause to be delivered one or more certificates issued in the Holder’s name (or
such other name as is acceptable to the Company and designated in writing by the Holder)
representing the number of vested shares. The Company shall pay all original issue or transfer
taxes and all fees and expenses incident to such delivery, except as otherwise provided in Section
6.1. Prior to the issuance to the Holder of the shares of Common Stock subject to the Award, the
Holder shall have no direct or secured claim in any specific assets of the Company or in such
shares of Common Stock, and will have the status of a general unsecured creditor of the
Company.
5.
Transfer Restrictions and Investment Representation.
5.1. Nontransferability of Award. The Award may not be transferred by the
Holder other than by will or the laws of descent and distribution or, to the extent permitted by the
Committee, pursuant to the designation of one or more beneficiaries on the form prescribed by
the Company, a trust or entity established by the Holder for estate planning purposes, a charitable
organization designated by the Holder or pursuant to a qualified domestic relations order, in each
case, without consideration. Except to the extent permitted by the foregoing sentence, the Award
may not be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed
of (whether by operation of law or otherwise) or be subject to execution, attachment or similar
process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or
otherwise dispose of the Award, the Award and all rights hereunder shall immediately become
null and void.
5.2.
Investment Representation. The Holder hereby represents and covenants
that (a) any share of Common Stock acquired upon the vesting of the Award will be acquired for
investment and not with a view to the distribution thereof within the meaning of the Securities
Act of 1933, as amended (the “Securities Act”), unless such acquisition has been registered under
the Securities Act and any applicable state securities laws; (b) any subsequent sale of any such
shares shall be made either pursuant to an effective registration statement under the Securities
Act and any applicable state securities laws, or pursuant to an exemption from registration under
the Securities Act and such state securities laws; and (c) if requested by the Company, the Holder
shall submit a written statement, in form satisfactory to the Company, to the effect that such
representation (x) is true and correct as of the date of vesting of any shares of Common Stock
hereunder or (y) is true and correct as of the date of any sale of any such share, as applicable. As
a further condition precedent to the delivery to the Holder of any shares of Common Stock
subject to the Award, the Holder shall comply with all regulations and requirements of any
regulatory authority having control of or supervision over the issuance or delivery of the shares
and, in connection therewith, shall execute any documents which the Board shall in its sole
discretion deem necessary or advisable.
6.
Additional Terms and Conditions of Award.
6.1. Withholding Taxes. (a) To the extent required under applicable law, the
Company shall have the right to require, prior to the issuance or delivery of any shares of
Common Stock upon the vesting of the Award, payment by the Holder of such Award of any
federal, state, local or other taxes which may be required to be withheld or paid in connection
with such Award (the “Required Tax Payments”).
(b)
To the extent the Company is required to withhold Required Tax
Payments, the Holder may satisfy his or her obligation to advance the Required Tax Payments by
any of the following means: (1) a cash payment to the Company, (2) delivery (either actual
delivery or by attestation procedures established by the Company) to the Company of previously
owned whole shares of Common Stock having an aggregate Fair Market Value, determined as of
the date the obligation to withhold or pay taxes arises in connection with the Award (the “Tax
Date”), equal to the Required Tax Payments, (3) authorizing the Company to withhold whole
shares of Common Stock which would otherwise be delivered or an amount of cash which would
otherwise be payable to the Holder having an aggregate Fair Market Value, determined as of the
Tax Date, equal to the Required Tax Payments or (4) any combination of (1), (2) and (3). Shares
of Common Stock to be delivered or withheld may not have an aggregate Fair Market Value in
excess of the amount determined by applying the minimum statutory withholding rate. Any
fraction of a share of Common Stock which would be required to satisfy such an obligation shall
be disregarded and the remaining amount due shall be paid in cash by the Holder.
6.2. Adjustment. In the event of any equity restructuring (within the meaning
of Financial Accounting Standards Board Accounting Standards Codification Topic 718,
Compensation-Stock Compensation) that causes the per share value of shares of Common Stock
to change, such as a stock dividend, stock split, spinoff, rights offering or recapitalization
through an extraordinary dividend, the terms of this Award, including the number and class of
securities subject hereto, shall be appropriately adjusted by the Committee. In the event of any
other change in corporate capitalization, including a merger, consolidation, reorganization, or
partial or complete liquidation of the Company, such equitable adjustments described in the
foregoing sentence may be made as determined to be appropriate and equitable by the
Committee (or, if the Company is not the surviving corporation in any such transaction, the
board of directors of the surviving corporation) to prevent dilution or enlargement of rights of the
Holder. The decision of the Committee regarding any such adjustment shall be final, binding
and conclusive.
6.3. Compliance with Applicable Law. The Award is subject to the condition
that if the listing, registration or qualification of the shares of Common Stock subject to the
Award upon any securities exchange or under any law, or the consent or approval of any
governmental body, or the taking of any other action is necessary or desirable as a condition of,
or in connection with, the delivery of shares hereunder, the shares of Common Stock subject to
the Award shall not be delivered, in whole or in part, unless such listing, registration,
qualification, consent, approval or other action shall have been effected or obtained, free of any
conditions not acceptable to the Company. The Company agrees to use reasonable efforts to
effect or obtain any such listing, registration, qualification, consent, approval or other action.
6.4. Award Subject to Clawback. The Award and any shares of Common
Stock, cash, other securities or other property delivered pursuant to the Award are subject to
forfeiture, recovery by the Company or other action pursuant to any clawback or recoupment
policy which the Company may adopt from time to time, including without limitation any such
policy which the Company may be required to adopt under the Dodd-Frank Wall Street Reform
and Consumer Protection Act and implementing rules and regulations thereunder, or as
otherwise required by law.
6.5. Section 409A. This Agreement is intended to comply with the
requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”),
and shall be interpreted and construed consistently with such intent. The payments to the
Holder pursuant to this Agreement are also intended to be exempt from Section 409A of the
Code to the maximum extent possible as short-term deferrals pursuant to Treasury regulation
§1.409A-1(b)(4). In the event the terms of this Agreement would subject the Holder to taxes or
penalties under Section 409A of the Code (“409A Penalties”), the Company and the Holder
shall cooperate diligently to amend the terms of this Agreement to avoid such 409A Penalties,
to the extent possible; provided that in no event shall the Company be responsible for any
409A Penalties that arise in connection with any amounts payable under this Agreement. To
the extent any amounts under this Agreement are payable by reference to the Holder’s
termination of service, such term shall be deemed to refer to the Holder’s “separation from
service,” within the meaning of Section 409A of the Code. Notwithstanding any other
provision in this Agreement, if the Holder is a “specified employee,” as defined in Section
409A of the Code, as of the date of Holder’s separation from service, then to the extent any
amount payable to the Holder (i) constitutes the payment of nonqualified deferred
compensation, within the meaning of Section 409A of the Code, (ii) is payable upon the
Holder’s separation from service and (iii) under the terms of this Agreement would be payable
prior to the six-month anniversary of the Holder’s separation from service, such payment shall
be delayed until the earlier to occur of (a) the first business day following the six-month
anniversary of the separation from service and (b) the date of the Holder’s death.
6.6. Award Confers No Rights to Continued Service. In no event shall the
granting of the Award or its acceptance by the Holder, or any provision of the Agreement or the
Plan, give or be deemed to give the Holder any right to continued service on the Board or affect
in any manner the right of the Company to remove the Holder from the Board at any time.
6.7. Decisions of Board or Committee. The Board or the Committee shall
have the right to resolve all questions which may arise in connection with the Award. Any
interpretation, determination or other action made or taken by the Board or the Committee
regarding the Plan or this Agreement shall be final, binding and conclusive.
6.8.
Successors. This Agreement shall be binding upon and inure to the benefit
of any successor or successors of the Company and any person or persons who shall, upon the
death of the Holder, acquire any rights hereunder in accordance with this Agreement or the Plan.
6.9. Notices. All notices, requests or other communications provided for in
this Agreement shall be made, if to the Company, to The New Home Company Inc., Attn:
Fabienne Smolinski, 85 Enterprise, Suite 450, Aliso Viejo, California 92656, and if to the Holder,
to the last known mailing address of the Holder contained in the records of the Company. All
notices, requests or other communications provided for in this Agreement shall be made in
writing either (a) by personal delivery, (b) by facsimile or electronic mail with confirmation of
receipt, (c) by mailing in the United States mails or (d) by express courier service. The notice,
request or other communication shall be deemed to be received upon personal delivery, upon
confirmation of receipt of facsimile or electronic mail transmission or upon receipt by the party
entitled thereto if by United States mail or express courier service; provided, however, that if a
notice, request or other communication sent to the Company is not received during regular
business hours, it shall be deemed to be received on the next succeeding business day of the
Company.
6.10. Governing Law. This Agreement, the Award and all determinations made
and actions taken pursuant hereto and thereto, to the extent not governed by the laws of the
United States, shall be governed by the laws of the State of Delaware and construed in
accordance therewith without giving effect to principles of conflicts of laws.
6.11. Agreement Subject to the Plan. This Agreement is subject to the
provisions of the Plan, including Section 5.8 relating to a Change in Control, and shall be
interpreted in accordance therewith. The Holder hereby acknowledges receipt of a copy of the
Plan.
6.12. Entire Agreement. The Plan is incorporated herein by reference.
Capitalized terms not defined herein shall have the meanings specified in the Plan. This
Agreement and the Plan constitute the entire agreement of the parties with respect to the subject
matter hereof and supersede in their entirety all prior undertakings and agreements of the
Company and the Holder with respect to the subject matter hereof, and may not be modified
adversely to the Holder’s interest except by means of a writing signed by the Company and the
Holder.
6.13. Partial Invalidity. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof and this Agreement shall
be construed in all respects as if such invalid or unenforceable provision was omitted.
6.14. Amendment and Waiver. The provisions of this Agreement may be
amended or waived only by the written agreement of the Company and the Holder, and no course
of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the
validity, binding effect or enforceability of this Agreement.
6.15. Counterparts. This Agreement may be executed in two counterparts each
of which shall be deemed an original and both of which together shall constitute one and the
same instrument.
THE NEW HOME COMPANY INC.
By:
H. Lawrence Webb, CEO
Accepted this ___ day of _____________, 20___
_________________________________________
Exhibit 10.12
THE NEW HOME COMPANY INC.
NON-EMPLOYEE DIRECTOR COMPENSATION
At a meeting of the Board of Directors of The New Home Company Inc. (the “Board”) held February 23, 2016, the
Board approved the following Non-Employee Director Compensation Program for payment of the Company’s non-
employee directors (“Directors”). The cash and equity compensation described below shall be paid or be made, as
applicable, automatically and without further action of the Board.
Effective as of the Company’s 2016 fiscal year until amended, modified or terminated by the Board in the future at
its sole discretion:
Cash Compensation
All annual retainers will be paid in cash quarterly in arrears promptly following the end of the applicable calendar
quarter, but in no event more than thirty (30) days after the end of such quarter. The Directors are entitled to receive
annual retainers in the following amounts, pro-rated for any partial year of service:
Director:
Audit Committee:
Compensation Committee:
Nominating and Corporate Governance Committee:
Executive Committee Member:
Equity Compensation
$
$
$
$
$
45,000
20,000 (Chair); $8,500 (Other Members)
15,000 (Chair); $6,000 (Other Members)
15,000 (Chair); $6,000 (Other Members)
15,000
Beginning with calendar year 2017, each Director who is serving on the Board as of the date of each annual meeting
of the Company’s stockholders and who is re-elected for another year of service as a Director at such annual meeting
shall be granted restricted stock units with a value of $60,000 on the date of the applicable annual shareholder
meeting (the “Annual Grant”).
Each Annual Grant will vest in full on the earlier of (i) the date of the annual meeting of the Company’s stockholders
next following the applicable grant date (it being understood that the Annual Grant shall vest on the date of such
annual meeting whether or not the Director is re-elected at such meeting, so long as the Director serves through such
meeting) and (ii) the first anniversary of the applicable grant date, subject in each case to continued service.
The Annual Grants will be granted under and shall be subject to the terms and provisions of the Company’s 2014
Long-Term Incentive Plan or any other applicable Company equity incentive plan then-maintained by the Company.
Other
The Company reimburses Directors for reasonable out-of-pocked expenses incurred in connection with the
performance of their duties as directors, including without limitation travel expenses in connection with their
attendance in-person at Board and committee meetings. Each member of the Board that is an employee of the
Company will not receive any compensation for their services as a director.
THE NEW HOME COMPANY INC.
SUBSIDIARIES
Exhibit 21.1
Subsidiary
TNHC Realty and Construction Inc.
State of Incorporation or Formation
Delaware
The New Home Company Southern California LLC
TNHC-Santa Clarita GP, LLC
TNHC-Calabasas GP LLC
The New Home Company Northern California LLC
TNHC Land Company LLC
TNHC-Arantine GP LLC
TNHC Arizona LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
THE NEW HOME COMPANY INC.
UNCONSOLIDATED INVESTEES AND LOWER TIER INVESTEE
(which represent significant interests under Regulation S-X Rule 3-09)
Unconsolidated Investee
LR8 Investors, LLC(1)
Larkspur Land 8 Investors, LLC(1)
TNHC-HW Foster City LLC(1)
TNHC Meridian Investors LLC
State of Incorporation or Formation
Delaware
Delaware
Delaware
Delaware
Unconsolidated Lower Tier Investee
TNHC Newport LLC
State of Incorporation or Formation
Delaware
(1) These unconsolidated investees did not represent significant interests under Regulation S-X Rule 3-09 for the year ended December 31, 2015.
For a complete list of all our unconsolidated joint ventures, see page 13 of this Form 10-K.
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-3 No. 333-204238) and related prospectus of The New Home Company Inc. and
(2) Registration Statement (Form S-8 No. 333-193753) pertaining to the 2014 Long-Term Incentive Plan of The New Home
Company Inc.;
of our report dated February 26, 2016, with respect to the consolidated financial statements of The New Home Company Inc.,
included in this Annual Report (Form 10-K) for the year ended December 31, 2015, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Irvine, California
February 26, 2016
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-3 No. 333-204238) and related prospectus of The New Home Company Inc. and
(2) Registration Statement (Form S-8 No. 333-193753) pertaining to the 2014 Long-Term Incentive Plan of The New Home
Company Inc.;
of (i) our report dated February 26, 2016, with respect to the financial statements of TNHC Newport LLC, included in this
Annual Report (Form 10-K) of The New Home Company Inc. for the year ended December 31, 2015, filed with the Securities
and Exchange Commission; (ii) our report dated February 26, 2016, with respect to the financial statements of TNHC Meridian
Investors LLC, included in this Annual Report (Form 10-K) of The New Home Company Inc. for the year ended December 31,
2015, filed with the Securities and Exchange Commission; (iii) our report dated February 27, 2015, with respect to the
consolidated financial statements of LR8 Investors, LLC, included in this Annual Report (Form 10-K) of The New Home
Company Inc. for the year ended December 31, 2015, filed with the Securities and Exchange Commission; (iv) our report dated
February 27, 2015, with respect to the consolidated financial statements of Larkspur Land 8 Investors LLC, included in this
Annual Report (Form 10-K) of The New Home Company Inc. for the year ended December 31, 2015, filed with the Securities
and Exchange Commission; and (vii) our report dated February 13, 2015, with respect to the financial statements of TNHC-
HW Foster City LLC, included in this Annual Report (Form 10-K) of The New Home Company Inc. for the year ended
December 31, 2015, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Irvine, California
February 26, 2016
I, H. Lawrence Webb, certify that:
Section 302 CERTIFICATION
Exhibit 31.1
(1)
I have reviewed this annual report on Form 10-K of The New Home Company Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report, based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 26, 2016
/s/ H. Lawrence Webb
H. Lawrence Webb
Chief Executive Officer (Principal Executive
Officer)
I, John M. Stephens, certify that:
Section 302 CERTIFICATION
Exhibit 31.2
(1) I have reviewed this annual report on Form 10-K of The New Home Company Inc.;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report, based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
(5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 26, 2016
/s/ John M. Stephens
John M. Stephens
Chief Financial Officer and Secretary
(Principal Financial Officer and Principal
Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Report of The New Home Company Inc. (the “Company”) on Form 10-K for the period
ended December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, H. Lawrence Webb, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: February 26, 2016
/s/ H. Lawrence Webb
H. Lawrence Webb
Chief Executive Officer (Principal Executive
Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Report of The New Home Company Inc. (the “Company”) on Form 10-K for the period
ended December 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”),
I, John M. Stephens, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: February 26, 2016
/s/ John M. Stephens
John M. Stephens
Chief Financial Officer and Secretary
(Principal Financial Officer and Principal
Accounting Officer)