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THE NEW HOME COMPANY
2018 Annual Report
NWHM 2018 ANNUAL REPORT LETTER TO SHAREHOLDERS
In 2018, The New Home Company took another step forward in its evolution towards becoming a more
diversifi ed homebuilder by expanding both its product portfolio and geographic reach. The company
continued to move down the price point spectrum to address a deeper pool of buyers through more
affordably priced product and established a presence in new markets with the opening of new wholly owned
communities in San Diego, the Inland Empire and Phoenix. These efforts helped generate a 46% increase in
new home deliveries versus last year and a 28% higher backlog value to end the year as compared to 2017.
While we made progress on a number of fronts in 2018, the second half of the year proved to be more
challenging than anticipated as potential buyers in our markets exercised a high degree of caution, which
resulted in slower absorption rates. Several factors contributed to this slowdown, including heightened
affordability concerns driven by years of home price appreciation and rising interest rates, a decline in the
number of foreign buyers in the Southern California market and reduced buyer confi dence due in part to a
volatile stock market. These issues combined to create a diffi cult sales environment for our company and the
industry as a whole.
While we continue to have confi dence in the fundamental drivers of our business and the quality of our
home offerings, we recognize that this sales softness may continue for the foreseeable future and have
proactively adjusted to this new demand environment in a number of ways. First, we are keenly focused on
generating cash fl ow and reducing our leverage. This effort has resulted in additional scrutiny on our land
acquisition efforts, making sure that every deal makes sense from a profi t and return on capital perspective.
Second, we have meaningfully cut overhead expenses internally by reducing headcount to keep our
organization as streamlined as possible. Third, we are actively re-bidding many of our projects to ensure we
are getting competitive prices from our trade partners and suppliers.
In summary, we are proud of our accomplishments in 2018 and continue to have confi dence in the strategic
focus of our company and the appeal of our home offerings. While the sales softness we experienced at
the end of the year may prove to be temporary, we are positioning our company in 2019 to be prepared for
the possibility that they are not. We are taking the necessary steps to generate cash fl ow and deleverage
our balance sheet, right size our cost structure and re-evaluate all land options. Our leadership team has a
wealth of experience operating in diffi cult demand environments, and I believe this experience will serve us
well going forward.
Finally, I would like to thank our team members for their collective contributions in 2018, our Board of
Directors for their continued guidance and our shareholders and credit providers for their ongoing support.
I am proud of what we have built at The New Home Company and continue to be optimistic about its future.
Sincerely,
Larry 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, 2018 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, every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark 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, a
smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer,"
"smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 29, 2018,
based on the closing price of $9.97 as reported by the New York Stock Exchange was $160,926,637.
There were 19,906,991 shares of the registrant's common stock issued and outstanding as of February 13, 2019.
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 2019, 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, 2018
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
Item 16
Exhibits and Financial Statement Schedules
Form 10-K Summary (Not Applicable)
Signatures
Part IV
3
Page
Number
5
13
31
32
32
32
33
34
35
59
60
60
60
61
61
61
62
62
62
63
—
112
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and other materials we have filed or will file with the Securities and Exchange
Commission (the "SEC") (as well as information included in oral statements or other written statements made or to be made by
us) contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act, as amended. 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. These forward-looking statements are frequently accompanied by words such as "believe,"
"may," "will," "estimate," "continue," "anticipate," "intend," "expect," "goal," "could," "can," "might," "should," "plan" and
similar expressions. We have based these forward-looking statements largely on our current expectations and projections about
future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term
and long-term business operations and objectives, and financial needs. Such statements may include, but are not limited to
information related to: anticipated operating results; home deliveries; the ability to acquire land and pursue real estate
opportunities; our ability to reduce our leverage; our plans to sell more affordably priced homes; the ability to gain approvals
and open new communities; the ability to sell homes and properties; the ability to deliver homes from backlog; the ability to
secure materials and subcontractors; joint ventures in which we are involved; anticipated results from our investments in
unconsolidated entities; the ability to produce the liquidity and obtain capital necessary to expand and take advantage of
opportunities; financial resources and condition; changes in revenues; changes in profitability; changes in margins; changes in
accounting treatment; cost of sales; selling, general and administrative expenses; interest expense; inventory write-downs;
dividends; community openings; seasonality; home warranty claims and reserves; unrecognized tax benefits; anticipated
effective tax rates; seasonality; dividends; sales paces and prices; trends and effects of home buyer cancellations; growth and
expansion; and the impact of legal proceedings, claims and reserves.
From time to time, forward-looking statements also are included in other reports on Forms 10-Q and 8-K, in press
releases, in presentations, on our website and in other materials released to the public. Any or all of the forward-looking
statements included in this report and in any other reports or public statements made by us are not guarantees of future
performance and may turn out to be inaccurate. This can occur as a result of incorrect assumptions or as a consequence of
known or unknown risks and uncertainties. Many factors mentioned in this report or in other reports or public statements made
by us, such as market conditions, government regulation and the competitive environment, will be important in determining our
future performance. 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. Consequently, actual results
may differ materially from those that might be anticipated from our forward-looking statements.
Forward-looking statements speak only as of the date they are made, 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.
For a discussion of factors that we believe could cause our actual results to differ materially from expected and
historical results, see "Item 1A - Risk Factors" in this annual report on Form 10-K. This discussion is provided as permitted by
the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their
entirety by the cautionary statements contained or referenced in this section.
4
Item 1.
Business
PART I
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. The
New Home Company LLC was formed on June 25, 2009 as a Delaware limited liability company. On January 30, 2014, in
connection with our initial public offering, 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. You should read the following in
conjunction with the section titled "Risk Factors", which is included in Part I, Item 1A in this annual report on Form 10-K.
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 Southern California, the
San Francisco Bay area, metro Sacramento and the greater Phoenix area.
We were founded in 2009, towards the end of an unprecedented downturn in the U.S. homebuilding industry. 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, and a reputation for quality building, which provide a competitive
advantage in being able to acquire land, participate in and create masterplans, obtain entitlements and build quality homes.
We are organized into two reportable segments: homebuilding and fee building. Our homebuilding operations are
comprised of divisions in Northern California, Southern California and Arizona. Our primary business focus is building and
selling homes for our own account; however, we also have a meaningful fee building business. For financial information about
our segments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note
15 to the Consolidated Financial Statements.
Homebuilding Operations
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 Southern California, the San
Francisco Bay area, metro Sacramento and the greater Phoenix area. We seek sites where we are rewarded for thoughtful land
planning and architecture, and additional defining characteristics of our markets generally include barriers to entry, job growth,
high employment to building permit ratios and increasing populations, which can create growing demand for new housing. We
perform extensive consumer research that helps us create land plans and design homes that meet the needs and desires of our
targeted buyers. 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 build range in price from approximately $360,000 to over $3 million, with home sizes ranging from
approximately 700 to 5,000 square feet. Homebuilding revenue contributed to 76%, 75% and 73% of total revenue for the years
ended December 31, 2018, 2017 and 2016, respectively. For the years ended December 31, 2018, 2017 and 2016, the average
sales price of homes delivered from our communities was approximately $1.0 million, $1.6 million and $2.0 million,
respectively. We believe that customer-focused community creation and product development, our reputation for high quality
construction, as well as exemplary customer service, are key components of the lifestyle connection we seek to establish with
each homebuyer and enhances our overall financial performance.
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 with dedicated designers who are knowledgeable about the attributes of the homes
offered in the community, are often a competitive differentiator. We believe that the active participation of buyers in selecting
options and upgrades results in buyers becoming more personally invested in their homes. In addition to our on-site design
studios, we also believe our emphasis on customer care provides us a competitive advantage. Our commitment to customer
satisfaction is a key element of company culture, which fosters an environment where team members can innovate.
5
We seek to maximize returns and reduce exposure to land risk through the use of land options, joint ventures and other
flexible land acquisition and development arrangements. The Company owned approximately 1,667 lots and had options to
purchase an additional 1,145 lots as of December 31, 2018. We believe our lot option and joint venture strategy allows us to
leverage and establish a homebuilding platform focused on high-growth, land-constrained markets. In addition, we believe that
our professional reputation and long-standing relationships with key land sellers, including masterplan 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.
Fee Building Operations
Our fee business is comprised primarily of building for third party landowners for a fee with such third party landowners
paying or reimbursing the Company for all costs associated with construction. Our fee building segment also includes our
management fee revenues that we receive for serving as the managing member or other similar role in our joint ventures. We
believe our fee building business complements our homebuilding business nicely, as most of the fee building occurs in what we
believe are among the most attractive masterplan communities in Southern California and in a concentrated geographic area.
One of our wholly owned subsidiaries is usually the general contractor for our and our unconsolidated joint ventures’ projects
and retains subcontractors for home construction and land development.
The following table shows the percentage of each segment's revenue in relation to our consolidated total revenues for the
years ended December 31, 2018, 2017 and 2016. For additional information related to geographic location of our
homebuilding revenues, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Year Ended December 31,
(dollars in thousands)
Homebuilding
Fee building
Total revenues
2018
504,029
163,537
667,566
$
$
% of Total
Revenues
2017
% of Total
Revenues
2016
% of Total
Revenues
76% $
560,842
75% $
507,949
24%
190,324
25%
186,507
100% $
751,166
100% $
694,456
73%
27%
100%
Summary of Owned and Controlled Lots
As of December 31, 2018, we owned or controlled an aggregate of 2,812 lots, plus another 806 lots pursuant to our fee
building contracts. The following table presents certain information with respect to our wholly owned and fee building lots as
of December 31, 2018. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -
Lots Owned and Controlled" for further detail.
Lots Owned
Lots Controlled(1)
Lots Owned and Controlled - Wholly Owned
Fee Building(2)
Total Lots Owned and Controlled
December 31,
Change
Change
2018
Amount
%
2017
Amount
%
2016
1,667
1,145
2,812
806
3,618
721
(661)
60
(114)
(54)
76 %
(37)%
2 %
(12)%
(1)%
946
1,806
2,752
920
3,672
356
820
1,176
(15)
1,161
60 %
83 %
75 %
(2)%
46 %
590
986
1,576
935
2,511
(1)
(2)
Includes lots that we control under purchase and sales agreements or option agreements subject to customary conditions and have not yet closed.
There can be no assurance that such acquisitions will occur.
Lots owned by third party property owners for which we perform general contracting or construction management services.
6
Backlog
At December 31, 2018 and 2017, homes under contract, but not yet delivered ("backlog") totaled 191 and 153,
respectively, with an estimated sales value of $207.1 million and $162.3 million, respectively. We expect to deliver all of the
homes in backlog at December 31, 2018 during 2019 under existing home order contracts or through the replacement of an
existing contract with a new home order contract. The estimated backlog sales value at December 31, 2018 may be impacted
by, among other things, subsequent home order cancellations, incentives provided, and/or options and upgrades selected.
Acquisition Process
Our land acquisition strategy focuses on purchasing entitled finished, or partially improved land sufficient for
construction of homes over a two- to three-year period from the initiation of homebuilding activity. We also selectively acquire
parcels that require land development activities. 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;
limitation on the size of an acquisition relative to the Company's pro forma capitalization; and
centralized acquisition procedure through a land committee and full Board approval process for larger acquisitions.
Before purchasing a land parcel, we engage and work closely with outside architects and consultants to design our homes
and communities.
We also differentiate our acquisition strategy based on whether the land is in a masterplan community, or part of a larger
development. For land which is not part of a larger development or masterplan, we generally enter into a purchase agreement
with the land owner and deliver a deposit, which becomes nonrefundable 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 generally enter into a purchase agreement
with the master developer and pay a deposit that becomes nonrefundable upon expiration of the due diligence period. The
closing in master developments is generally tied to the issuance of final land development entitlements and completion of
certain infrastructure and other improvements by the master developer. 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 (b) pay to the master developer marketing fees and/or (c)
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 obtained using
one or more of the following: (i) proceeds from the sale of debt securities, (ii) unsecured lines of credit; (iii) secured
acquisition-development loans; (iv) equity obtained from joint venture partners and/or (v) land bank arrangements with
providers 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.
Construction, Marketing and Sales Process
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 sales demand in prior phases. Our construction process is driven by sales
contracts that generally precede the start of the construction of homes, however, depending on the price point, product, and
buyer demand we also engage in some speculative building. 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 and
budget.
7
Land Development and Construction
We customarily acquire improved or unimproved land zoned for residential use. To control larger land parcels or gain
access to highly desirable parcels, we sometimes form land development joint ventures with third parties in order to provide us
with a pipeline of land to acquire from the joint venture when the lots are developed. If we purchase raw land or partially
developed land, we will perform development work that may include negotiating with governmental agencies and local
communities to obtain any necessary zoning, environmental and other regulatory approvals and permits, and constructing, as
necessary, roads, water, sewer and drainage systems and recreational facilities like parks, community centers, pools, and hiking
and biking trails.
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. We act as a general
contractor (and certain of our wholly owned subsidiaries hold the general contractor's licenses in California and Arizona) with
our supervisory employees coordinating most of the land development and construction work on a project. Independent
architectural design, engineering and other consulting firms are generally engaged on a project-by-project basis to assist in
project planning and community and home design, and subcontractors and trade partners are engaged to perform all of the
physical development and construction work. Although we generally do not have long-term contractual commitments with our
subcontractors, trade partners, suppliers or laborers, we maintain strong and long-standing relationships with many of our
subcontractors and trade partners. We believe that our relationships with subcontractors and trade partners have been enhanced
through involving them prior to the start of a new community, maintaining our schedules and making timely payments. By
dealing fairly, we believe we are able to keep our key subcontractors and 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 and through the use of outside brokers. It is also fairly
common that a third party broker representing a homebuyer receives co-broker commissions in connection with a sale. One of
our wholly owned subsidiaries holds the corporate broker's licenses in California and Arizona. Our in-house sales force works
from sales offices located in model homes or sales centers close to, or within 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.
Generally, we build model homes at each project and have them professionally decorated and landscaped 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. 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 this process. The specific options
selected for each community are 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 typically sell homes using sales contracts that include cash deposits by the purchasers. Most homebuyers utilize long-
term mortgage financing to purchase a home, and mortgage lenders will usually make loans only to qualified borrowers.
Before entering into sales contracts, we pre-qualify many of 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. For our communities, the cancellation rate of buyers who contracted to buy a
home but did not close escrow as a percentage of overall orders was 10%, 9% and 12% for the years ended December 31, 2018,
2017 and 2016, respectively. Cancellation rates are subject to a variety of factors, including those beyond our control, such as
adverse economic or housing market conditions and increases in mortgage interest rates.
8
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 subcontractors and trade partners we employ
are monitored using our personnel and third-party consultants. We make regular inspections and evaluations of our
subcontractors and trade partners to seek to ensure that our standards are met.
We utilize a third party quality control provider and maintain 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, including the coordination of warranty requests. Our
quality and service initiatives include taking homebuyers on a comprehensive tour of their home during construction and prior
to delivery. In addition, we generally use a third party, Eliant, to survey our homebuyers in order to improve our performance
and evaluate our standards of quality and customer satisfaction.
Insurance and Warranty Program
We provide a limited one-year warranty to our homeowners covering workmanship and materials. In addition, we
generally provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered by
the applicable statute of repose, that covers certain defined construction defects. The limited warranty covering construction
defects is transferable to subsequent buyers and provides for the resolution of unresolved construction-related disputes through
binding arbitration. Additionally, we have dedicated customer service staff that work with our homebuyers and coordinate with
subcontractors and trade partners, as necessary, during the warranty period. We maintain reserves to cover the resolution of our
potential liabilities associated with known and anticipated warranty and construction defect related claims and litigation. While
our subcontractors who perform our homebuilding work generally provide us with an indemnity for claims relating to their
workmanship and materials, we also purchase general liability insurance that covers development and construction activity at
each of our communities. Our subcontractors are usually covered by these programs through an owner-controlled insurance
program, or "OCIP." Consultants such as engineers and architects are generally not covered by the OCIP but are required to
maintain their own insurance. In general, we maintain insurance, subject to deductibles and self-insured retentions, to protect
us against various risks associated with our activities, including, among others, general liability, "all-risk" property,
construction defects, workers’ compensation, automobile, and employee fidelity. Our warranty reserves include expected costs
associated with the deductibles and self-insured amounts. For a further discussion of the risks associated with our warranty and
insurance program, please see the risk factor under the heading "Risks Related to Our Business - We are subject to construction
defect, warranty, and personal injury claims arising in the ordinary course of business that can be significant and could
adversely affect our cash flows and results of operations."
Seasonality and Cycles
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. Our revenues and cash flows (exclusive of the amount and timing of land purchases) from
homebuilding operations are generally higher in the second half of the calendar year, particularly in the fourth quarter. We
expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding
industry. The homebuilding industry is cyclical. We continue to make substantial investments in land, which is likely to utilize a
significant portion of our cash resources, so long as we believe such investments will yield results that meet our investment
criteria.
Labor and Raw Materials
Typically, the raw materials and most of the components used in our business are available in the United States. Most are
standard items carried by major suppliers. However, our industry experiences shortages in both raw materials and labor from
time to time. Increases in the cost of building materials and subcontracted labor may reduce gross margins from home sales to
the extent that market conditions prevent the recovery of increased costs through higher home sales prices. These shortages
and delays may result in delays in the delivery of homes under construction, reduced gross margins from home sales, or both.
We continue to monitor the supply markets to achieve favorable prices. In addition, the imposition of tariffs on building
materials frequently impacts the cost of construction and increases in costs may not be recovered by raising home prices due to
affordability and market demand constraints.
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Joint Ventures
Our joint venture strategy has assisted in leveraging our entity-level capital and establishing a homebuilding and land
development platform focused on high-growth, land-constrained markets. We own interests in our unconsolidated joint
ventures that generally range from 5% to 35%. We also earn management fees from such joint ventures.
We serve as the administrative member, manager or managing member of each of our six 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 most 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 related to our unconsolidated joint ventures is set forth in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Off-Balance Sheet Arrangements and Contractual Obligations."
Fee Building Services
Although our primary business focus is building and selling homes for our own account, we also selectively provide
general contracting, construction management and coordination services, and sales and marketing services as part of
agreements with third-parties and the Company's unconsolidated joint ventures. We refer to these projects as "fee building
projects." For the year ended December 31, 2018, 97% of our fee building revenue represents billings to third-party land
owners for general contracting and construction management services and 3% represents management fees from
unconsolidated joint ventures and third-party land owners for construction and sales management services. Our services with
respect to fee building projects may include design, development, construction, and sales and marketing services. 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. For the years ended December 31, 2018, 2017 and 2016, fee
building revenue contributed to 24%, 25% and 27%, respectively, of total revenue. 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 totaled 23%, 25%, and 26% of our total consolidated revenues for the years ended
December 31, 2018, 2017 and 2016, respectively. 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 Consolidated Financial Statements for
further discussion of this revenue concentration.
Government Regulation and Environmental Matters
We are subject to numerous local, state and federal 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. Communities 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 communities in their jurisdiction. Communities 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
communities or prevent their development.
We are also subject to a variety of local, state and federal 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. Legislation related to climate change
and energy efficiency can impose stricter building standards, which may increase our cost to build. From time to time, the EPA
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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, where we conduct most of our
operations, 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.
We use and our business relies upon general contractors' licenses and corporate real estate broker's licenses in order to
build and sell homes.
For a further discussion of the impact of govern regulations on our business, including the impact of environmental
regulations, please see the risk factors included under the heading "Risks Related to Laws and Regulations."
Health and Safety Matters
We strive to provide a safe and healthy work environment for all employees. We believe that corporate social
responsibility is a significant factor for our overall success. This includes adopting ethical practices to direct how we do
business while keeping the interests of our stakeholders and the environment in mind, including valuing and challenging the
talented men and women who comprise our workforce. To that end, we have a comprehensive Code of Ethics and Business
Conduct applicable to all employees and an actively-managed ethics hotline. We are also committed to maintaining high
standards in health and safety at all of our sites. We have a health and safety audit system that includes comprehensive
independent third-party inspections.
In 2018, the Company performed a review on gender pay equality by reviewing compensation between similar roles and
positions and comparing male versus female compensation. We believe that our pay practices are consistent across male and
female employees, as we evaluate each person that we hire to ensure that the individual, regardless of gender, is paid
consistently with regards to role, department, and function. Further, we believe it is important to treat all employees with
dignity and respect. Employee diversity and inclusion are embraced and opportunities for training, growth, and advancement
are strongly encouraged.
Sustainability
California is at the forefront when it comes to sustainability, including green energy, water conservation and efficient
construction standards. As a builder with most of its operations in California, we have made a dedicated effort to implement a
variety of sustainable best practices in many of our communities, including the masterplan communities which we and our joint
venture partners have created. For example, our Cannery joint venture created a visionary farm-to-table new-home community,
with a working urban farm operated by the Center for Land-Based Learning which serves as a training ground for beginning
farmers while supplying the community with fresh seasonal produce. Non-potable water from an onsite agricultural well was
designed to irrigate landscaped areas along roadways and within open-space greenbelts, parks and the urban farm. In addition,
a 1.5 kV photovoltaic solar system and electric vehicle charging pre-wire has been designed to come standard with every home,
and residents can upgrade to net zero living. Similarly, our McKinley Village joint venture created the McKinley Village
masterplan where each residence is pre-wired for solar and electric vehicle chargers with building standards that reflect what
are among the best environmental practices. We believe our commitment to design and build energy-efficient homes is aligned
with buyer sensitivities about how eco-friendly designs, features and materials help impact the environment and the livability
of homes in addition to reducing cost of home ownership.
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Bonds and Other Obligations
In connection with the development of our communities, we are frequently required to provide performance, maintenance
and other bonds and letters of credit in support of our related obligations with respect to such developments. The amount of
such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such
bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such bonds or letters of credit. As
of December 31, 2018, we had approximately $50.5 million and $2.3 million of outstanding performance bonds and letters of
credit, respectively, primarily related to our obligations to local governments to construct roads and other improvements in
various developments.
Competition
The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential
construction companies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor,
and employees. 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. We compete for customers primarily on the basis of home design and
location, price, customer satisfaction, construction quality, reputation, and the availability of mortgage financing. We also
compete for sales with individual resales of existing homes and with available rental housing. In the past several years, we have
embarked on a strategy to expand our product offerings to include more affordably-priced homes to reach a deeper pool of
qualified buyers and in connection with growing our overall community count. We anticipate that we will continue to build
more affordably-priced homes. We believe there is more competition among homebuilding companies in more affordable
product offerings than in the luxury and move-up segments, however, we also believe this is a prudent strategy as there is a
larger population of qualified buyers in more affordable price points. For risks associated with the competition we face, please
see the risk factor under the heading "Risks Related to Our Business - We may not be able to compete effectively against
competitors in the homebuilding industry".
Employees
As of December 31, 2018, we had 322 employees, 122 of whom were executive, management and administrative
personnel located in our offices, 64 of whom were sales and marketing personnel and 136 were involved in field construction.
Although none of our employees are covered by collective bargaining agreements, certain of the third party subcontractors and
trade partners engaged by us are represented by labor unions or are subject to collective bargaining arrangements. We believe
that relations with our employees, subcontractors and trade partners are good.
Our Offices and Available Information
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. Our common stock is listed on the New York Stock
Exchange (NYSE: NWHM). We will make available through the "Investors" section of 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 SEC. Copies of these reports, and any amendment to them, are available free of charge upon request. We
provide information about our business and financial performance, including our corporate profile, on our Investor Relations
website. Additionally, we webcast our earnings calls and certain events we participate in with members of the investment
community on our Investor Relations website. Further corporate governance information, including our Code of Ethics and
Business Conduct, corporate governance guidelines, and board committee charters, is also available on our Investor Relations
website. 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.
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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 geographic concentration could materially and adversely affect us if the homebuilding industry or the
availability of land parcels in our current markets declines.
Our current business involves the design, construction and sale of innovative single-family detached and attached homes
in planned communities in major metropolitan areas in Southern California, the San Francisco Bay area, metro Sacramento and
the greater Phoenix area. 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
2007 to 2011, land values, the demand for new homes and home prices declined substantially in California. If another downturn
were to occur and land values decreased or demand for new homes and home prices declined substantially in California, our
sales, results of operations, financial condition and business would be negatively impacted.
In addition, 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. The availability of
land parcels in our California markets 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.
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 homebuyers, interest rate levels, demographic trends, homebuyer preferences for specific designs or locations, real estate
taxes, inflation and supply of and demand for new and 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 historically contributed to decreased demand for housing, declining sales prices and
increasing pricing pressure. In the event that one or more of such economic and business conditions 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. Federal government actions and new legislation
related to economic stimulus, taxation, spending levels and borrowing limits, along with the related political debates, conflicts
and compromises associated with such actions, may negatively impact the financial markets and consumer confidence. Such
events could hurt the U.S. economy and the housing market and, in turn, could adversely affect the operating results of our
business. Adverse economic conditions outside the U.S., such as Asia 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 and second "move-up" buyers, who often
purchase homes contingent upon the sale of their existing homes. During recessionary periods, these buyers may face
difficulties selling their homes, which may in turn 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.
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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.
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 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 the downturn in 2007 to 2011, a large
number of qualified trade partners went out of business or otherwise exited the market into new fields. A reduction in available
trade partners exacerbates labor shortages as demand for new housing increases. Shortages and price increases could cause
delays in and increase our costs of home construction, which we may not be able to recover by raising home prices due to
market demand and because the price for each home is typically sets prior to its delivery pursuant to the agreement of sale with
the home buyer. In addition, the Trump Administration has, at various times during 2018, imposed tariffs on a variety of
imports from foreign countries and may impose additional tariffs in the future. Significant tariffs or other restrictions are placed
on raw materials that we use in our homebuilding operation, such as lumber or steel, could cause the cost of home construction
to increase which we may not be able to recover by raising home prices or which could slow our absorption due to being
constrained by market demand. As a result, shortages or increased costs of labor and raw materials could have a material
adverse effect on our business, prospects, financial condition and results of operations
Our business and results of operations depend on the availability and skill of subcontractors at reasonable rates.
Substantially all of our construction work is done by third-party subcontractors with us acting as the general contractor.
Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. We do not
have long-term contractual commitments with any subcontractors, 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 subcontractors
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. Access to qualified labor at reasonable rates
may also be affected by other circumstances beyond our control, including: (i) shortages of qualified tradespeople, such as
carpenters, roofers, drywallers, electricians and plumbers; (ii) high inflation; (iii) changes in laws relating to employment and
union organizing activity; (iv) changes in trends in labor force migration; (v) increases in contractor, subcontractor and
professional services costs; and (vi) changes in immigration laws and policies as well as changes in immigration trends. In
particular, changes in federal and state immigration laws and policies, or in the enforcement of current laws and policies, may
have the effect of increasing our labor costs. The lack of adequate supply of skilled labor or a significant increase in labor costs
could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
In addition, the enactment of federal, state or local statutes, ordinances, rules or regulations requiring the payment
of prevailing wages on private residential developments would materially increase our costs of development and construction.
For example, California, where we conduct most of our business, generally requires that workers employed on public works
projects in California be paid the applicable prevailing wage, as determined by the Department of Industrial Relations. Private
residential projects built on private property are exempt unless the project is built pursuant to an agreement with a state agency,
redevelopment agency, or local public housing authority. In 2017, the California legislature made this exemption inapplicable to
a project built pursuant to an agreement with a successor agency of a redevelopment agency. We expect that the imposition of a
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prevailing wage requirement to additional types of projects would materially increase our costs of development and
construction for those projects. Further extensions of prevailing wage requirements to private projects could materially and
adversely affect our business, prospects, liquidity, financial condition and results of operations.
Furthermore, despite our quality control efforts, we may discover that our subcontractors were engaging in improper
construction practices or installing defective materials in our homes. When we discover these issues, we, generally through our
subcontractors, 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 subcontractors. 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.
We could be responsible for employment-related liabilities with respect to our contractors’ employees.
Although contractors are independent of the homebuilders that contract with them under normal management practices
and the terms of trade contracts and subcontracts within the homebuilding industry, on October 14, 2017, California’s governor
signed into law Assembly Bill 1701, which would require general contractors to assume and be liable for unpaid wage, fringe
or other benefit payments or contributions that subcontractors owe their employees. Assembly Bill 1701 imposes such liability
under California Labor Code Section 218.7 for private works contracts entered on or after January 1, 2018. We are, and may
become in the future, subject to similar measures and legislation, such as California Labor Code Section 2810.3, that requires
us to share liability with our contractors for the payment of wages and the failure to secure valid workers’ compensation
insurance coverage. While the Company ordinarily negotiates with its subcontractors to obtain broad indemnification rights,
there is no guarantee that it will be able to recover from its subcontractors for actions brought against the Company by its
subcontractors’ employees or unions representing such employees and such liability could have a material and adverse effect on
our financial position or results of operations. Even if we are successful in obtaining indemnification from our subcontractors,
we may sustain additional administrative costs as a result of such legislation which could materially and adversely affect our
results of operations. In addition, despite the fact that our subcontractors are independent from us, if regulatory agencies
reclassify the employees of contractors as employees of homebuilders, homebuilders using contractors could be responsible for
wage and hour labor laws, workers’ compensation and other employment-related liabilities of their contractors. Governmental
rulings that make us responsible for labor practices by our subcontractors could create substantial exposures for us in situations
that are not within our control.
If the market value of our land or housing inventory decreases, our results of operations could be adversely affected
due to the illiquid nature of real estate investments and by impairments.
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 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 valuation of property is inherently subjective and based on the individual characteristics
of each property. When market conditions drive land values down, land we have purchased or option agreements we have
previously entered into may become less desirable because we may not be able to build and sell homes profitably, at which time
we may elect to sell the land or, in the case of options contracts, to forego pre-acquisition costs and forfeit deposits and
terminate the agreements. 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. 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 or the housing market and
general economy are in financial distress. In addition, inventory carrying costs can be significant and can result in losses in a
poorly performing project or market. We regularly review the value of our land holdings and continue to review our holdings on
a periodic basis. Material impairments in the value of our inventory may be required, and we may in the future sell land or
homes at significantly lower margins or at a loss, if we are able to sell them at all, which could adversely affect our results of
operations and financial condition.
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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. Over the past several years, we have embarked on a strategy to expand our product offerings to include more
affordably-priced homes to reach a deeper pool of qualified buyers and grow our overall community count. We anticipate that
we will continue to build more affordably-priced homes. We believe there is more competition among homebuilding companies
in more affordable product offerings than in the luxury and move-up segments. 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 or reduce our prices. In past
housing cycles, an oversupply of homes available for sale and 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,
including a lower cost of capital. 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 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.
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. Our
ability to process a significant number of transactions (which include, among other things, evaluating the site purchase,
designing the layout of the development, sourcing materials and subcontractors and managing contractual commitments)
efficiently and accurately is important to our success. Errors by employees, failure to comply with regulatory requirements and
conduct of business rules, failings or inadequacies in internal control processes, equipment failures, natural disasters or the
failure of external systems, including those of our suppliers or counterparties, could result in delays and operational issues that
could adversely affect our business, financial condition and operating results and our relationships with our customers. Delays
in the development of communities also 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, homebuilding margins
and cash flows.
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. In California, upon a home order cancellation, the homebuyer’s escrow deposit is generally returned to the
homebuyer (other than with respect to certain design-related deposits, which we generally retain). In Arizona, we generally
retain buyer deposits following a home order cancellation. 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 or personal
circumstances. In addition, as part of our strategy, we intend to increase the number of homes we build at more affordable price
points. Our cancellation rate may increase as we sell to a more diverse credit quality of buyers. Home order cancellations
negatively impact our financial and operating results due to a negative impact on the number of homes closed, net new home
orders, home sales revenue, results of operations and cash flows, as well as the number of homes in backlog.
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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 negatively impact
our business and 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.
We are subject to construction defect, warranty, and personal injury claims arising in the ordinary course of business
that can be significant and could adversely affect our cash flows and results of operations.
As a homebuilder, we are subject to construction defect, product liability and home warranty 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. Some claims may not be covered by insurance or may exceed applicable
coverage limits. 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, product liability
claims, soil subsidence or building related claims. Some claims may arise out of uninsurable events or circumstances not
covered by insurance or that are not subject to effective indemnification agreements with our trade partners. In addition, we
typically act as the general contractor for the homes we build for third party landowners on fee. In connection with these fee
building agreements, we indemnify the landowner for liabilities arising from our work. While we are covered by general
liability insurance, procured either by us or the landowner, and we generally seek to require our subcontractors to indemnify us
for some portion of the liabilities arising from their work, there can be no assurance that these indemnities will be collectible
and some claims may arise out of uninsurable events or circumstances not covered by insurance. Furthermore, most insurance
policies have some level of a self insured retention that we are required to satisfy per occurrence in order to access the
underlying insurance which levels can be significant. Any such claims or self insured retentions can be costly and could result
in significant liability.
With respect to certain general liability exposures, including construction defects and related claims and product liability
claims, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve
estimation process require us to exercise significant judgment due to the complex nature of these exposures, with each exposure
often exhibiting unique circumstances. Furthermore, once claims are asserted against us for construction defects, it is difficult
to determine the extent to which the assertion of these claims will expand. Plaintiffs may seek to consolidate multiple parties in
one lawsuit or seek class action status in some of these legal proceedings with potential class sizes that vary from case to case.
Consolidated and class action lawsuits can be costly to defend and, if we were to lose any consolidated or certified class action
suit, it could result in substantial liability.
We also expend significant resources to repair items in homes we have sold to fulfill the warranties we issued to our
homebuyers. Additionally, construction defect claims can be costly to defend and resolve in the legal system. Warranty and
construction defect matters can also result in negative publicity in the media and on the internet, which can damage our
reputation and adversely affect our ability to sell homes.
In addition, we conduct most 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 as a percentage of the total enterprise.
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
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markets are in areas which have historically experienced significant earthquake activity, seasonal wildfires, droughts and water
shortages. In addition to directly damaging our land or projects, earthquakes, floods, landslides, 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.
Power, water and other natural resource shortages, including drought conditions and wildfires, or price increases
could have an adverse impact on operations.
The markets in which we operate have experienced power and resource shortages, including mandatory periods without
electrical power, changes to water availability (including drought conditions) and significant increases in utility and resource
costs. These conditions may cause us to incur additional costs and we may not be able to complete construction on a timely
basis if they were to continue for an extended period of time. Shortages of natural resources, particularly water and power, may
make it more difficult to obtain regulatory approval of new developments. 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. Furthermore, water
restrictions, drought conditions, power shortages and rate increases may adversely affect the regional economies and the
environment in which we operate, as well as increase greatly the risk of wildfires, which may both reduce demand for housing
and damage our inventory currently under construction. Our operations may be adversely impacted if further restrictions,
drought conditions, wildfires, rate increases and/or power shortages occur.
Because of the seasonal nature of our business, our quarterly operating results fluctuate.
As discussed under "Management’s Discussion and Analysis of Financial Condition-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 five to nine months to construct a new home, depending on the nature of the
product and whether it is single-family detached or multi-family attached, we typically deliver more homes in the second half
of the year as 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.
Seasonality also requires us to finance construction activities in advance of the receipt of sales proceeds. In many cases,
we may not be able to recapture increased costs by raising prices because prices are established upon signing the purchase
contract. Accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of
land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames. If, due to
market conditions, construction delays or other causes, we do not complete sales of our homes at anticipated pricing levels or
within anticipated time frames, our financial performance and financial conditions could be materially and adversely affected.
We may be unable to obtain suitable bonding for the development of our housing projects.
We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects.
As a result of market conditions, 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.
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, which in turn requires us to increase our home selling price in an effort to maintain satisfactory housing gross
margins. 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
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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. Depressed land values may cause us to abandon and
forfeit deposits on land option contracts and other similar contracts if we cannot satisfactorily renegotiate the purchase price of
the subject land. We may record charges against our earnings for inventory impairments if the value of our owned inventory,
including land we decide to sell, is reduced, or for land option contract abandonments if we choose not to exercise land option
contracts or other similar contracts, and these charges may be substantial. 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.
Negative publicity or poor relations with the residents of our communities could negatively impact sales, which could
cause our revenues or results of operations to decline.
Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or
prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. Our success
in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media
environment. Adverse publicity or negative commentary on social media outlets, such as blogs, websites or newsletters, could
hurt operating results, as consumers might avoid or protest brands that receive bad press or negative reviews. Negative
publicity may result in a decrease in our operating results.
In addition, residents of communities we develop may look to 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.
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 use information
technology and other computer resources to carry out important operational and marketing activities and to maintain our
business records. Furthermore, as part of our normal business activities, we may collect and store certain confidential
information, including information about employees, homebuyers, customers, vendors and suppliers and may share information
with vendors who assist us with certain aspects of our business. These information technology systems are dependent upon
global communications providers, web browsers, third-party software and data storage providers and other aspects of the
Internet infrastructure that have experienced security breaches, cyber-attacks, significant systems failures and service outages in
the past. A material breach in the security of our information technology systems or other data security controls could include
the theft or release of customer, employee, vendor or company data. A data security breach, a significant and extended
disruption in the functioning of our information technology systems or a breach of any of our data security controls could
disrupt our business operations, damage our reputation and cause us to lose customers, adversely impact our sales and revenue
and require us to incur significant expense to address and remediate or otherwise resolve these kinds of issues. The release of
confidential information as a result of a security breach could also lead to litigation or other proceedings against us by affected
individuals or business partners, or by regulators, and the outcome of such proceedings, which could include penalties or fines,
could have a significant negative impact on our business. We may also be required to incur significant costs to protect against
damages caused by information technology failures or security breaches in the future. We provide employee awareness training
of cybersecurity threats and routinely utilize information technology consultants to assist us in our evaluations of the
effectiveness of the security of our information technology systems, and we regularly enhance our security measures to protect
our systems and data. However, because methods used to obtain unauthorized access, disable or degrade systems change
frequently and often are not recognized until launched against a target, we may be unable to anticipate these attacks or to
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implement adequate preventative measures. Consequently, we cannot eliminate the risk that a security breach, cyber-attack,
data theft or other significant systems or security failures will occur in the future, and such occurrences could have a material
and adverse effect on our consolidated results of operations or financial position. In addition, the cost and operational
consequences of implementing further data or system protection measure could be significant and our efforts to deter, identify,
mitigate and/or eliminate any security breaches or incidents may not be successful.
Inefficient or ineffective allocation of capital, including from efforts to invest in future growth or expansion of our
operations or acquisitions of businesses, could adversely affect our operations and/or stockholder value if expected benefits
are not 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:
• 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 expansion or acquisition;
• 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 as well as capital resources. 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.
Furthermore, we may engage in other capital projects such as repurchasing shares or engage in bond repurchases from
time to time to reduce our indebtedness. While our goal is to allocate capital to maximize our overall long-term returns, if we
do not properly allocate our capital, we may fail to produce optimal financial results and we may experience a reduction in
stockholder value, including increased volatility in our stock price.
Our ability to execute on our business strategies is uncertain, and we may be unable to achieve our goals.
We may undertake various strategic initiatives as part of our business, such as our recent strategy to offer more
affordable-priced homes or our entry into new markets. We can provide no assurance (i) that our strategies, and any related
initiatives or actions, will be successful or that they will generate growth, earnings or returns at any particular level or within
any particular time frame; (ii) that in the future we will achieve positive operational or financial results or results in any
particular metric or measure equal to or better than those attained in the past; or (iii) that we will perform in any period as well
as other homebuilders. We also cannot provide any assurance that we will be able to maintain our strategies, and any related
initiatives or actions, in the future and, due to unexpectedly favorable or unfavorable market conditions or other factors, we
may determine that we need to adjust, refine or abandon all or portions of our strategies, and any related initiatives or actions,
though we cannot guarantee that any such adjustments will be successful. The failure of any one or more of our present
strategies, or any related initiatives or actions, or the failure of any adjustments that we may pursue or implement, would likely
have an adverse effect on our ability to increase the value and profitability of our business; on our ability to operate our
business in the ordinary course; on our overall liquidity; and on our consolidated financial statements, and the effect, in each
case, could be material.
A reduction in our sales absorption levels may force us to incur and absorb additional community-level costs.
We incur certain overhead costs associated with our communities, such as indirect construction costs, property taxes,
marketing expenses and costs associated with the upkeep and maintenance of our model and sales complexes. If our sales
absorptions pace decreases and the time required to close out our communities is extended, we would likely incur additional
overhead costs, which would negatively impact our financial results. Additionally, we incur various land development
improvement costs for a community prior to the commencement of home construction. Such costs include infrastructure,
utilities, property taxes, HOA assessments, interest and other related expenses. Reduction in home absorption rates increases
the associated holding costs and extends our time to recover such costs. Declines in the homebuilding market may also require
us to evaluate the recoverability of costs relating to land acquired more recently.
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Future terrorist attacks against the United States, public health issues or increased domestic or international
instability could have an adverse effect on our operations.
Deployments of U.S. military personnel to foreign regions, terrorist attacks, other acts of violence or threats to national
security and any corresponding response by the United States or any foreign country or increased domestic or international
instability could cause consumer unease or an economic slowdown, which could significantly reduce the number of new
contracts signed, and/or increase the number of cancellations of existing contracts, which could adversely affect our business.
Public health issues such as a major epidemic or pandemic could adversely affect our business. The U.S. and other
countries have experienced, and may experience in the future, outbreaks of contagious diseases that affect public perception of
health risk. In the event of a widespread, prolonged, actual or perceived outbreak of a contagious disease, our operations could
be negatively impacted by a reduction in customer traffic or other factors which could reduce demand for new homes.
Risks Related to Laws and Regulations
Mortgage financing, interest rate increases or changes in federal lending programs or other regulations could lower
demand for or impact homebuyers’ ability to purchase our homes, which could materially and adversely affect us.
A substantial percentage of 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,
increased monthly mortgage costs, tightened credit requirements and underwriting standards, and an increase in indemnity
claims for mortgages may lead to reduced demand for our homes and mortgage loans. 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. In
addition, as a result of the turbulence in the credit markets and mortgage finance industry during the last significant downturn,
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 that reduce the availability
of loans to borrowers or increase the costs to borrowers to obtain such loans. 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. The foregoing may 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, stricter underwriting standards, and a reduction of loan products, among other
similar factors, can contribute to a decrease in our home sales. Any of these factors could have a material adverse effect on our
business, prospects, liquidity, financial condition and results of operations.
The federal government has also 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,
especially as we move down in price point, 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.
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Changes in tax laws can increase the after-tax cost of owning a home, and further tax law changes or government
fees could adversely affect demand for the homes we build, increase our costs, or negatively affect our operating results.
Under previous tax law, certain significant expenses of owning a home, including mortgage loan interest costs and real
estate taxes, generally were deductible expenses for the purpose of calculating an individual’s federal, and in some cases state,
tax liability. However, the Tax Cuts and Jobs Act (the "Tax Act") signed into law on December 22, 2017 now limits these
deductions for some individuals. The Tax Act caps individual state and local tax deductions at $10,000 for the aggregate of
state and local real property and income taxes or state and local sales taxes. Additionally, the Tax Act reduces the cap on
mortgage interest deduction to $750,000 of debt for debt incurred after December 15, 2017 while retaining the $1 million debt
cap for debt incurred prior to December 15, 2017. The limits on deductibility of mortgage interest and property taxes may
increase the after-tax cost of owning a home for some individuals.
Any 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. Furthermore, increases in real
estate taxes and other local government fees, such as fees imposed on developers to fund schools, open space, and road
improvements, and/or provide low- and moderate-income housing, could increase our costs and have an adverse effect on our
operations. In addition, increases in local real estate taxes as well as the limitation on deductibility of such costs could
adversely affect our potential home buyers, who may consider those costs in determining whether to make a new home
purchase and decide, as a result, not to purchase one of our homes or not purchase a resale, which would negatively impact
homebuyers that need to sell their home before they purchase one of ours.
New and existing laws and regulations, including environmental laws and regulations, or other governmental actions
may increase our expenses, limit the number of homes that we can build or delay the completion of our projects.
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 are also subject to a significant number and variety of local, state and federal laws and regulations concerning
protection of health, safety, labor standards and 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 and geographic
attributes or historical artifacts, the present and former uses of the property, the presence or absence of endangered plants,
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. For example, under certain 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. 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.
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 of 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.
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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.
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.
Legislation relating to energy and climate change could increase our costs to construct homes.
There is a variety of new legislation being enacted, or considered for enactment at the federal, state and local level
relating to energy, emissions and climate change. This legislation relates to items such as carbon dioxide emissions control and
building codes that impose energy efficiency standards. New building code requirements, including California's solar mandate
that will go into effect in 2020, that impose stricter energy efficiency standards could significantly increase our cost to construct
homes and we may be unable to fully recover such costs due to market conditions, which could cause a reduction in our
homebuilding gross margin and materially and adversely effect our results of operations. As climate change concerns continue
to grow, legislation and regulations of this nature are expected to continue and become more costly to comply with. Similarly,
energy-related initiatives affect a wide variety of companies throughout the United States and the world and because our
operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, they could have
an indirect adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are
burdened with expensive cap and trade and similar energy-related regulations.
Risks Related to Financing and Indebtedness
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 complete development. We cannot assure you that we will maintain cash reserves and generate
sufficient cash flow from operations in an amount to enable us to service our debt or to fund other liquidity needs. Additionally,
while we have issued $325 million in aggregate principal amount of 7.25% Senior Notes due 2022 (the "Notes") and debt
commitments of $200 million under our revolving credit facility, our ability and capacity to borrow under the credit facility is
limited by our asset based borrowing base and our ability to meet the covenants of the facility. In addition, our senior notes
contain certain restrictions on our business, including the incurrence of additional debt under certain circumstances. If our
Notes, credit facility and 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. 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 the land and construct homes. 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. Furthermore, if additional funds are raised through the issuance of stock,
dilution to stockholders could result. If additional funds are raised through the incurrence of debt, we will incur increased debt
servicing costs and would likley become subject to additional restrictive financial and other covenants. We can give no
assurance as to the terms or availability of additional capital. If we are not successful in obtaining or refinancing capital when
needed, it could adversely impact our ability to operate our business effectively, which could reduce our sales and earnings, and
adversely impact our financial position.
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Our level of indebtedness is significant and may adversely affect our financial position and prevent us from fulfilling
our debt obligations; we may incur additional debt in the future.
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 discussed elsewhere in this filing, including "Management's Discussion and Analysis of Financial Condition and
Result of Operations - Liquidity and Capital Resources," the Company has outstanding $325 million in aggregate principal
amount of 7.25% Senior Notes due 2022 (the "Notes"). As of December 31, 2018, the Notes had a carrying value of $320.1
million, net of the unamortized discount of $1.7 million, unamortized premium of $1.3 million and $4.5 million of unamortized
debt issuance costs. In addition, we have $200 million in debt commitments under our revolving credit facility, of which $67.5
million was outstanding and $2.3 million was utilized to provide letters of credit at December 31, 2018 and $130.2 million is
available for borrowing, subject to satisfaction of the financial covenants and borrowing base requirements in our revolving
credit facility. As of December 31, 2018, we did not meet the minimum interest coverage ratio test under our revolving credit
facility. Not meeting such test is not a default under the credit facility so long as we maintain unrestricted cash equal to not less
than the trailing 12 month consolidated interest incurred (as defined in the credit facility agreement) which was $28.5 million as
of December 31, 2018. The Company was in compliance with this requirement with an unrestricted cash balance of $42.3
million at December 31, 2018. This requirement to maintain additional cash balances may reduce our ability to use our cash
flow for other purposes, including land investments.
The terms of the indenture governing the Notes and our revolving credit facility permit us to incur additional debt, in
each case, subject to certain restrictions. Our level of indebtedness and incurring additional debt subject us to many risks that, if
realized, would adversely affect us, including the risk that:
• our ability to obtain additional financing as needed for working capital, land acquisition costs, building costs, other
capital expenditures, or general corporate purposes, or to refinance existing indebtedness before its scheduled maturity,
may be limited;
• our debt may increase our vulnerability to adverse economic and industry conditions;
• 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;
• our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt,
which would likely result in acceleration of the maturity of such debt; and
• 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.
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 or property 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.
We currently have significant amounts invested in unconsolidated joint ventures with third parties - some of which
are affiliated with certain of our board members - in which we have less than a controlling interest. These investments are
highly illiquid and have significant risks due to, in part, a lack of sole decision-making authority and reliance on the
financial condition and liquidity of our joint venture partners.
We own interests in various joint ventures and as of December 31, 2018, our investments in and advances to our
unconsolidated joint ventures was $34.3 million. We have entered into joint ventures in order to acquire land positions, to
manage our risk profile and to leverage our capital base. We may enter into additional joint ventures in the future. Such joint
venture investments involve risks not otherwise present in wholly owned projects, including the following:
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• Control and Partner Dispute Risk. 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. 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. 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. 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.
• Covenant Compliance Risk. Our revolving credit facility prohibits us from making investments in and advances to joint
ventures when we are unable to meet certain financial covenants. In addition, the Indenture governing the Notes limits
our ability to make investments in joint ventures or guarantee of joint venture indebtedness when our aggregate
investments in joint ventures exceeds 15% of our consolidated tangible assets (before the operation of general baskets
and other exceptions). If we become unable to fund our joint venture obligations this could result in, among other things,
our default under our joint venture operating agreements, loan agreements, and credit enhancements. And, our failure to
satisfy our joint venture obligations could also affect our joint venture's ability to carry out its operations or strategy
which could impair the value of our investment in the joint venture. Furthermore, a failure to comply with covenants in
our joint venture loans could trigger cross-defaults with respect to the Company's other indebtedness.
• Development Risk. Typically, we serve as the administrative member, managing member, or general partner of our joint
ventures and one of our subsidiaries acts as the general contractor while our joint venture partner serves as the capital
provider. Due to our respective role in these joint ventures, we may become liable for obligations beyond our
proportionate equity share. In addition, the projects we build through joint ventures are often larger and have a longer
time horizon than the typical project developed by our wholly owned homebuilding operations. Time delays associated
with obtaining entitlements, unforeseen development issues, unanticipated labor and material cost increases, higher
carrying costs, and general market deterioration and other changes are more likely to impact larger, long-term projects,
all of which may negatively impact the profitability and capital needs of these ventures and our proportionate share of
income and capital. For example, as discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Equity in Net Income (Loss) of Unconsolidated Joint Ventures", in 2018 one of our Northern
California land development joint ventures recorded a significant impairment loss of $28.8 million, of which the
Company's allocated shares totaled $18.9 million.
• Financing Risk. There are generally a limited number of sources willing to provide acquisition, development and
construction financing to land development and homebuilding joint ventures. During difficult market conditions, it may
be difficult or impossible to obtain financing for our joint ventures on commercially reasonable terms, or to refinance
existing joint venture borrowings as such borrowings mature. In addition, a partner may fail to fund its share of required
capital contributions or may become bankrupt, which may cause us and any other remaining partners to need to fulfill
the obligations of the venture in order to preserve our interests and retain any benefits from the joint venture. As a result,
we could be contractually required, or elect, to contribute our corporate funds to the joint venture to finance acquisition
and development and/or construction costs following termination or step-down of joint venture financing that the joint
venture is unable to restructure, extend, or refinance with another third party lender. In addition, our ability to contribute
our funds to or for the joint venture may be limited if we do not meet the credit facility conditions discussed above. In
addition, we sometimes finance projects in our unconsolidated joint ventures with debt that is secured by the underlying
real property. Secured indebtedness increases the risk of the joint venture’s loss of ownership of the property (which
would, in turn, impair the value of our ownership interests in the joint venture). 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"
• Contribution Risk. Under credit enhancements that we typically provide with respect to joint venture borrowings, we and
our partners could be required to make additional unanticipated investments in and advances to these joint ventures,
either in the form of capital contributions or loan repayments, to reduce such outstanding borrowings. We may have to
make additional contributions that exceed our proportional share of capital if our partners fail to contribute any or all of
their share. While in most instances we would be able to exercise remedies available under the applicable joint venture
agreements if a partner fails to contribute its proportional share of capital, our partner's financial condition may preclude
any meaningful cash recovery on the obligation. 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.
25
• Completion Risk. We often sign a completion agreement in connection with obtaining financing for our joint ventures.
Under such agreements, we may be compelled to complete a project, usually with costs within the budget related to the
project being funded by the lender with any budget shortfalls being borne by us, even if we no longer have an economic
interest in the joint venture or the joint venture no longer has an interest in the property.
Illiquid Investment Risk. We lack a controlling interest in our joint ventures and therefore are generally unable to compel
our joint ventures to sell assets, return invested capital, require additional capital contributions or take any other action
without the vote of at least one or more of our venture partners. This means that, absent partner agreement, we may not
be able to liquidate our joint venture investments to generate cash.
•
• Consolidation Risk. The accounting rules for joint ventures are complex and the decision as to whether it is proper to
consolidate a joint venture onto our balance sheet is fact intensive. If the facts concerning an unconsolidated joint
venture were to change and a triggering event under applicable accounting rules were to occur, we might be required to
consolidate previously unconsolidated joint ventures onto our balance sheet which could adversely impact our financial
statements and our leverage and other financial conditions or covenants.
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.
Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive
covenants relating to our operations.
Our current financing arrangements, including the Indenture governing the Notes, contain covenants (financial and
otherwise) affecting our ability to incur additional debt, make certain investments, allow liquidity to fall below certain levels,
make distributions to our stockholders, and otherwise affect our operating policies. These restrictions limit our ability to, among
other things:
• incur or guarantee additional indebtedness or issue certain equity interests;
• pay dividends or distributions, repurchase equity or prepay subordinated debt;
• make certain investments;
• sell assets;
• incur liens;
• create restrictions on the ability of restricted subsidiaries to transfer assets;
• enter into transactions with affiliates;
• create unrestricted subsidiaries; and
• consolidate, merge or sell all or substantially all of our assets.
In addition, our revolving credit facility provides that our maximum leverage ratio must be less than 65%, which, as
defined in our revolving credit agreement, is calculated on a net debt basis after a minimum liquidity threshold of $10 million.
Our leverage ratio as of December 31, 2018, as calculated under our revolving credit facility, was approximately 59.7%. Our
credit facility also contains financial covenants related to our tangible net worth, liquidity, and interest coverage or a minimum
unrestricted cash balance. Tables measuring our compliance with the financial conditions and covenants under the Notes and
revolving credit facility are set forth in "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" included elsewhere in this Report on Form 10-K and incorporated herein by
reference. Failure to have sufficient borrowing base availability in the future or to be in compliance with our financial
covenants under our revolving credit facility could have a material adverse effect on our operations and financial condition.
A breach of the covenants under the Indenture or any of the other agreements governing our indebtedness could
result in an event of default under the Indenture or other such agreements.
A default under the Indenture governing the Notes or our revolving credit facility or other agreements governing our
indebtedness may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to
which a cross-acceleration or cross-default provision applies. In addition, an event of default under the revolving credit
agreement would permit the lenders thereunder to terminate all commitments to extend further credit under our revolving
credit facility. Furthermore, if we were unable to repay the amounts due and payable under any future secured credit facilities,
those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or the
holders of our Notes accelerate the repayment of our borrowings, we cannot assure you that we and our subsidiaries would
26
have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be:
• limited in how we conduct our business;
• unable to raise additional debt or equity financing to operate during general economic or business downturns; or
• unable to compete effectively or to take advantage of new business opportunities. These restrictions may affect our
ability to grow in accordance with our plans.
Potential future downgrades of our credit ratings could adversely affect our access to capital and could otherwise
have a material adverse effect on us.
Rating agencies may elect in the future to downgrade our corporate credit rating or any rating of the Notes due to
deterioration in our homebuilding operations, credit metrics or other earnings-based metrics, as well as our leverage or a
significant decrease in our tangible net worth. These ratings and our current credit condition affect, among other things, our
ability to access new capital, especially debt, and negative changes in these ratings may result in more stringent covenants and
higher interest rates under the terms of any new debt. Our credit ratings could be downgraded or rating agencies could issue
adverse commentaries in the future, which could have a material adverse effect on our stock price, business, results of
operations, financial condition and liquidity. In particular, a weakening of our financial condition, including a significant
increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary
funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.
Interest expense on debt we incur may limit our cash available to fund our growth strategies.
As of December 31, 2018, our Notes had a carrying value of approximately $320.1 million, net of the unamortized
discount of $1.7 million, unamortized premium of $1.3 million and $4.5 million of unamortized debt issuance costs. In
addition, we have $200 million in debt commitments under our revolving credit facility, of which $67.5 million is outstanding,
$2.3 million is utilized to provide letters of credit at December 31, 2018 and $130.2 million is available for borrowing, subject
to satisfaction of the financial covenants and borrowing base requirements in our senior unsecured revolving credit facility. As
part of our financing strategy, we may incur a significant amount of additional debt. Our revolving credit facility has, and any
additional debt we subsequently incur may have, a floating rate of interest. Our Notes have a fixed rate of interest. We may
incur fixed rate debt in the future that 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 that may not permit realization of a favorable return on
such assets and could result in a loss or lower profitability. The occurrence of either such event or both could materially and
adversely affect our business, prospects, liquidity, financial condition and results of operations.
We may be unable to repurchase the Notes upon a change of control as required by the Indenture.
Upon the occurrence of certain specific kinds of change of control events, we must offer to repurchase the Notes at
101% of their principal amount, plus accrued and unpaid interest thereon. In such circumstances, we cannot assure you that
we would have sufficient funds available to repay all of our indebtedness that would become payable upon a change of control
and to repurchase all of the Notes. Our failure to purchase the Notes would be a default under the Indenture and would trigger
a cross default of the revolving credit facility.
Risks Related to Our Organization and Structure
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,
our executive officers, each of whom would be difficult to replace. Although we have entered into employment agreements
with our executive officers, there is no guarantee that these executives will remain employed with us. 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 and with our bank group. 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.
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Termination of the employment agreements with the members of our management team could be costly and prevent a
change in control of our company.
Our employment agreements with Messrs. Webb, Stephens and Miller each provide that if their employment with us
terminates under certain circumstances, we may be required to pay them significant amounts of severance compensation,
thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a
change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the
best interests of our stockholders, which could materially and adversely affect the market price of our common stock.
Our charter and bylaws could prevent a third party from acquiring us or limit the price that investors might be willing
to pay for shares of our common stock.
Provisions of the Delaware General Corporation Law, our certificate of incorporation and our bylaws could have the
effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control
of us. These provisions could delay or prevent a change in control of and could limit the price that investors might be willing to
pay in the future for shares of our common stock.
Our Board of Directors is divided into three classes, with the term of one class expiring each year, which could delay a
change in our control. Our certificate of incorporation also authorizes our Board of Directors to issue new series of common
stock and preferred stock without stockholder approval. Depending on the rights and terms of any new series created, and the
reaction of the market to the series, rights of existing stockholders could be negatively affected. For example, subject to
applicable law, our Board of Directors could create a series of common stock or preferred stock with preferential rights to
dividends or assets upon liquidation, or with superior voting rights to our existing common stock. The ability of our Board of
Directors to issue these new series of common stock and preferred stock could also prevent or delay a third party from
acquiring us, even if doing so would be beneficial to our stockholders.
We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which
prohibits Delaware corporations from engaging in business combinations specified in the statute with an interested stockholder,
as defined in the statute, for a period of three years after the date of the transaction in which the person first becomes an
interested stockholder, unless the business combination is approved in advance by a majority of the independent directors or by
the holders of at least two-thirds of the outstanding disinterested shares. The application of Section 203 of the Delaware
General Corporation Law could also have the effect of delaying or preventing a change of control of us.
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 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 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" which is scheduled to occur as of December 31, 2019. 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. These reporting and other obligations place significant demands on our management,
administrative, operational and accounting resources and may cause us to incur significant expenses.
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.
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.
28
We are an "emerging growth company" and a "smaller reporting company" and, as a result of the reduced
disclosure and governance requirements applicable to emerging growth and smaller reporting 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. We have elected to adopt certain of these
reduced disclosure requirements. Our status as an emerging growth company is scheduled to expire on December 31, 2019.
We are also a "smaller reporting company" because we had public float of less than $250 million on the applicable
measurement date. As a smaller reporting company, we are subject to reduced disclosure obligations in our periodic reports and
proxy statements.
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.
Risks Related to Ownership of Our Common Stock
The price of our Common Stock is subject to volatility and our trading volume is relatively low.
The market price of our common stock may be highly volatile and subject to wide fluctuations. Compared to other public
homebuilders, we believe we have relatively low trading volume. Because of this limited trading volume, purchases and sales
of large numbers of our shares may cause rapid price swings in our stock. In addition, our financial performance, government
regulatory action, tax laws, additions or departures of key personnel, interest rates and market conditions in general could have
a significant impact on the future market price of our common stock.
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. 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 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, applicable legal requirements 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.
29
Certain stockholders have rights to cause our Company to undertake securities offerings. 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. In addition, we entered into a registration rights agreement with the individual founders and certain of our
institutional shareholders, IHP Capital Partners VI, LLC, TCN/TNHC LLC and Watt/TNHC LLC (the "Institutional Investors")
at the time our Company consummated its initial public offering. If these holders, or any shareholders, sell substantial amounts
of their shares, the price of our common stock could decline significantly. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional equity securities. 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 such sales could occur, may adversely affect the market price of our
common stock.
Our Notes and Future offerings of debt securities, which 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.
We have issued $325 million in aggregate principal amount of Notes. 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, including the Senior Notes, 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.
Certain large stockholders own a significant percentage of our shares and exert significant influence over us. Their
interests may not coincide with ours and may have conflicts of interests with us in the future.
IHP Capital Partners VI, LLC ("IHP"), H. Lawrence Webb, Wayne Stelmar, Tom Redwitz and Joseph Davis
(collectively, the "Founders") beneficially own (as such term is defined in Section 13(d)(3) of the Exchange Act), directly or
indirectly through their affiliates, approximately 28% of our common stock. IHP and the Founders are also currently party to an
investor rights agreement, pursuant to which each such holder agreed to vote, in respect of IHP, in favor of one individual for
nomination and election to the Board chosen by IHP for so long as IHP owns 4% or more of our then-outstanding stock. IHP
has also agreed to vote its shares of common stock in favor of Messrs. Webb, Stelmar or Berchtold (or, if at that time nominated
as a director, Messrs. Davis or Redwitz) in any election in which any such individual is a nominee. In addition to the influence
such holders have due to their voting arrangement, to the extent they and their affiliates vote their shares together on any matter,
their combined stock ownership may effectively give them the power to influence matters reserved for our shareholders,
including the election of members of our board of directors and significant corporate or change of control transactions.
Circumstances may occur in which the interest of these shareholders could be in conflict with your interests or our
interests. In addition, such persons may have an interest in pursuing transactions that, in their judgment, enhance the value of
their equity investment in us, even though such transactions may involve risks to you. For example, our Institutional Investors
are also in the real estate and land development business. Such Institutional Investors and their affiliates may have an interest
in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could
enhance their other equity investments, even though such transactions might involve risks to us. We have entered into various
business relationships with some of our Institutional Investors, or entities affiliated with or controlled by them, including real
estate development or homebuilding joint ventures. While our audit committee, and in some cases all of our independent or
disinterested board members, have reviewed and approved all such transactions, we do not have exclusive control over such
joint ventures, which may prevent us from taking actions that are in our best interest but opposed by our partners. If the projects
within such joint ventures do not perform well, it is possible that disputes between us and our partners may result in litigation or
arbitration which would be further complicated due to the conflict of interest. Any such dispute would increase our expenses
and prevent our officers and directors from focusing their time and efforts on our business and could have a material and
adverse effect on our business. See the Risk Factor entitled "We currently have significant amounts invested in unconsolidated
30
joint ventures with independent third parties--some which are affiliated with certain of our board members--in which we have
less than a controlling interest. These investments are highly illiquid and have significant risks due to, in part, a lack of sole
decision-making authority and reliance on the financial condition and liquidity of our joint venture partners" for a description
of additional risks arising from our investments in joint ventures. Institutional Investors and their affiliates are involved in
business that provides equity capital for residential housing, land and development, including for businesses that directly or
indirectly compete with our business. In their capacities as principals or executives of those businesses, they may also pursue
opportunities that may be complementary to our business, and, as a result, those opportunities may not be available to us.
There is no assurance that the existence of a stock repurchase program will result in additional repurchases of our
common stock or enhance long term stockholder value, and repurchases, if any, could affect our stock price and increase its
volatility and will diminish our cash reserves.
On May 10, 2018, the Company's Board of Directors approved a stock repurchase program (the “Repurchase Program”),
authorizing the repurchase of shares of common stock with an aggregate value of up to $15 million. The repurchases of the
Company’s shares may be made in the open market, in privately negotiated transactions, or otherwise. The timing and amount
of repurchases, if any, will be determined by the Company’s management at its discretion and be based on a variety of factors
such as the market price of the Company’s common stock, corporate and contractual requirements, prevailing market and
economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any
time. The Company intends to retire any shares repurchased.
Repurchases pursuant to the Repurchase Program or any other stock repurchase program we adopt in the future could
affect our stock price and increase its volatility and will reduce the market liquidity for our stock. The existence of a stock
repurchase program could also cause our stock price to be higher than it would be in the absence of such a program.
Additionally, these repurchases will diminish our cash reserves and increase our leverage, which could impact our ability to
pursue possible future strategic opportunities and acquisitions, result in lower overall returns on our cash balances and impact
our debt covenants and our ability to incur more indebtedness. There can be no assurance that any stock repurchases will, in
fact, occur, or, if they occur, that they will enhance stockholder value. Although stock repurchase programs are intended to
enhance long term stockholder value, short-term stock price fluctuations could reduce the effectiveness of these repurchases.
Non-U.S. holders may be subject to United States federal income tax on gain realized on the sale or
disposition of shares of our common stock.
We believe that we are a “United States real property holding corporation,” or USRPHC, for United States federal
income tax purposes. If we are a USRPHC, Non-U.S. Holders (as defined below) may be subject to United States federal
income tax (including withholding tax) upon a sale or disposition of our common stock, if (i) our common stock is not regularly
traded on an established securities market, or (ii) our common stock is regularly traded on an established securities market, and
the Non-U.S. Holder owned, actually or constructively, common stock with a fair market value of more than 5% of the total fair
market value of such common stock throughout the shorter of the five-year period ending on the date of the sale or other
disposition or the Non-U.S. Holder’s holding period for such common stock.
For purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of our common stock that is neither a “U.S.
person” nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S.
federal income tax purposes, is or is treated as any of the following:
• an individual who is a citizen or resident of the United States;
• a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;
• an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
• a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States
persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a
United States person for U.S. federal income tax purposes.
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 May 2020 in Roseville, CA approximately 7,700
square feet through October 2021 in Walnut Creek, CA (of which approximately 5,800 square feet is sublet), approximately
1,400 square feet through July 2021 in Agoura Hills, CA and approximately 3,100 square feet through February 2021 in
Scottsdale, AZ. For information on land owned and controlled by us and our joint ventures for use in our homebuilding
activities, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations - Lots Owned and Controlled", "- Equity in Net Income (Loss) of Unconsolidated Joint Ventures" and "-
Off-Balance Sheet Arrangements and Contractual Obligations - Joint Ventures".
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.
32
PART II
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our common stock is listed on the New York Stock Exchange under the ticker symbol "NWHM" and began trading on
January 31, 2014.
As of February 13, 2019, we had 11 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 to finance the development and expansion of our business and,
therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay
dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations,
capital requirements, compliance with Delaware law, restrictions contained in any financing instruments, including but not
limited to, our unsecured credit facility and senior notes indenture, and such other factors as our board of directors deem
relevant.
Issuer Share Repurchases
During the year ended December 31, 2018, the Company repurchased 1,003,116 shares of its common stock at an
aggregate purchase price of $8.5 million. The table below summarizes the number of shares that were repurchased during the
three month period ended December 31, 2018.
Total number
of shares
purchased
Average price
paid per share
54,605
261,388
63,512
379,505
$
$
$
$
6.94
7.66
6.44
7.35
Approximate
dollar value of
shares that may
be purchased
under the plans or
programs
(in thousands)(1)
8,869
$
$
$
6,867
6,457
Total number of
shares purchased
as part of publicly
announced plans
or programs(1)
54,605
261,388
63,512
379,505
October 1, 2018 to October 31, 2018
November 1, 2018 to November 30, 2018
December 1, 2018 to December 31, 2018
Total
(1) On May 10, 2018, our board of directors approved a stock repurchase program (the "Repurchase Program") authorizing the repurchase of the Company's
common stock with an aggregate value of up to $15 million. The Repurchase Program was announced on May 14, 2018. Repurchases of the Company's
common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in
block trades or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule
10b5-1 of the Securities Exchange Act of 1934. The board of directors did not fix any expiration date for the Repurchase Program.
Recent Sales of Unregistered Securities
We did not sell any unregistered securities during the year ended December 31, 2018.
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.
Income Statement Data
Home sales revenue
Fee building revenue, including management fees
Total revenues
Pretax income (loss):
Homebuilding
Fee building
Pretax income
Net income (loss) attributable to the Company
Basic earnings (loss) per share
Diluted earnings (loss) per share
Weighted Average Common Shares Outstanding: (1)
Basic
Diluted
Balance Sheet Data
2018
Year Ended December 31,
2016
(Dollars in thousands, except per share amounts)
2017
2015
$
$
$
$
$
$
$
504,029
163,537
667,566
$
$
560,842
190,324
751,166
(24,706) $
4,401
(20,305) $
(14,216) $
(0.69) $
(0.69) $
27,034
5,497
32,531
17,152
0.82
0.82
$
$
$
$
$
$
$
507,949
186,507
694,456
25,546
8,404
33,950
21,022
1.02
1.01
$
$
$
$
$
$
$
280,209
149,890
430,099
23,698
10,213
33,911
21,688
1.29
1.28
$
$
$
$
$
$
$
2014
56,094
93,563
149,657
497
4,506
5,003
4,787
0.30
0.30
20,703,967
20,703,967
20,849,736
20,995,498
20,685,386
20,791,445
16,767,513
16,941,088
15,927,917
15,969,199
$
Cash and cash equivalents
Real estate inventories (2)
$
Investment in and advances to unconsolidated joint ventures $
$
Total assets
$
Total debt
Stockholders’ equity
$
$
Stockholders' equity per common share outstanding
$
Cash dividends declared per share
42,273
566,290
34,330
696,097
387,648
239,954
11.96
$
$
$
$
$
$
$
— $
123,546
416,143
55,824
644,512
318,656
263,990
12.64
$
$
$
$
$
$
$
— $
30,496
286,928
50,857
419,136
118,000
244,523
11.81
$
$
$
$
$
$
$
— $
45,874
200,636
60,572
351,270
83,082
220,775
10.75
$
$
$
$
$
$
$
— $
44,058
157,629
60,564
291,958
113,751
148,084
9.00
—
Operating Data (excluding unconsolidated JVs)
Net new home orders
New homes delivered
Average sales price of homes delivered
Selling communities at end of year
Backlog at end of year, number of homes
Backlog at end of year, dollar value
Average sales price of homes in backlog
536
498
1,012
20
191
207,071
1,084
$
$
$
412
341
1,645
17
153
162,250
1,060
$
$
$
253
250
2,032
15
79
187,296
2,371
$
$
$
174
148
1,893
10
67
166,567
2,486
$
$
$
$
$
$
Operating Data – Fee Building Projects (excluding unconsolidated JVs)
545
600
244
Homes started
Homes delivered
Homes under construction at end of period
533
820
299
784
644
586
513
537
446
79
53
1,058
4
41
86,711
2,115
550
206
470
(1)
(2)
The Company completed a follow-on offering on December 9, 2015 issuing and selling 4,025,000 shares of common stock at a price of $12.50 per
share.
Effective July 1, 2016, certain capitalizable selling and marketing costs were reclassified to other assets from real estate inventories. Prior year
periods have been reclassified to conform to current year presentation. $9.3 million and $5.9 million was reclassified from real estate inventories to
other assets for the years ended December 31, 2015 and 2014, respectively.
34
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.
Non-GAAP Measures
This annual report on Form 10-K includes certain non-GAAP measures, including homebuilding gross margin before
impairments (or home sales gross margin before impairments), homebuilding gross margin percentage before impairments,
Adjusted EBITDA, Adjusted EBITDA margin percentage, the ratio of Adjusted EBITDA to total interest incurred, adjusted net
income, adjusted earnings per share, adjusted earnings per diluted share, net debt, the ratio of net debt-to-capital, adjusted
homebuilding gross margin, adjusted homebuilding gross margin percentage, and the effective tax rate before discrete items.
For a reconciliation of homebuilding gross margin before impairments, homebuilding gross margin percentage before
impairments, Adjusted EBITDA, Adjusted EBITDA margin percentage, and the ratio of Adjusted EBITDA to total interest
incurred to the comparable GAAP measures please see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Consolidated Financial Data." For a reconciliation of adjusted net income, adjusted earnings per
share and adjusted earnings per diluted share to the comparable GAAP measures, please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview." For a reconciliation of adjusted homebuilding gross
margin and adjusted homebuilding gross margin percentage to the comparable GAAP measures, please see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations -
Homebuilding Gross Margin." For a reconciliation of net debt and net debt-to-capital to the comparable GAAP measures,
please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Debt-to-Capital Ratios." For reconciliation of effective rate before discrete items see "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Provision (Benefit) for Income Taxes."
35
Consolidated Financial Data
Revenues:
Home sales
Fee building, including management fees from unconsolidated joint
ventures of $3,385, $4,945 and $8,202, respectively
Cost of Sales:
Home sales
Home sales impairments
Land sales impairment
Fee building
Gross Margin:
Home sales
Land sales
Fee building
Home sales gross margin
Home sales gross margin before impairments(1)
Fee building gross margin
Selling and marketing expenses
General and administrative expenses
Equity in net income (loss) of unconsolidated joint ventures
Other income (expense), net
Pretax income (loss)
(Provision) benefit for income taxes
Net income (loss)
Net loss attributable to non-controlling interest
Net income (loss) attributable to The New Home Company Inc.
Interest incurred
Adjusted EBITDA(2)
Adjusted EBITDA margin percentage (2)
Ratio of Adjusted EBITDA to total interest incurred (2)
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
$
504,029
$
560,842
$
507,949
163,537
667,566
436,530
10,000
—
159,136
605,666
57,499
—
4,401
61,900
11.4%
13.4%
2.7%
(36,065)
(25,966)
(19,653)
(521)
(20,305)
6,075
(14,230)
14
(14,216)
28,377
39,898
6.0%
1.4x
$
$
$
190,324
751,166
473,213
2,200
—
184,827
660,240
85,429
—
5,497
90,926
15.2%
15.6%
2.9%
(32,702)
(26,330)
866
(229)
32,531
(15,390)
17,141
11
17,152
21,978
50,145
6.7%
2.3x
$
$
$
186,507
694,456
433,559
2,350
1,150
178,103
615,162
72,040
(1,150)
8,404
79,294
14.2%
14.6%
4.5%
(26,744)
(25,882)
7,691
(409)
33,950
(13,024)
20,926
96
21,022
7,484
43,144
6.2%
5.8x
$
$
$
36
(1)
Home sales gross margin before impairments (also referred to as homebuilding gross margin before impairments) is a non-GAAP measure. The table
below reconciles this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.
Home sales revenue
Cost of home sales
Homebuilding gross margin
Add: Home sales impairments
Homebuilding gross margin before impairments
2018
%
2017
%
2016
%
Year Ended December 31,
(Dollars in thousands)
$
504,029
446,530
57,499
10,000
67,499
100.0% $
88.6%
11.4%
2.0%
13.4%
560,842
475,413
85,429
2,200
87,629
100.0% $
84.8%
15.2%
0.4%
15.6%
507,949
435,909
72,040
2,350
74,390
100.0%
85.8%
14.2%
0.4%
14.6%
(2)
Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred are non-GAAP measures. Adjusted
EBITDA margin percentage is calculated as a percentage of total revenue. Management believes that Adjusted EBITDA, which is a non-GAAP
measure, assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the
differences in companies' respective capitalization, interest costs, tax position and inventory impairments. Due to the significance of the GAAP
components excluded, Adjusted EBITDA should not be considered in isolation or as an alternative to net income (loss), cash flows from operations or
any other performance measure prescribed by GAAP. The table below reconciles net income (loss), calculated and presented in accordance with
GAAP, to Adjusted EBITDA.
Net income (loss)
Add:
Interest amortized to cost of sales and equity in net income (loss) of
unconsolidated joint ventures
Provision (benefit) for income taxes
Depreciation and amortization
Amortization of stock-based compensation
Cash distributions of income from unconsolidated joint ventures
Noncash inventory impairments and abandonments
Less:
Gain from notes payable principal reduction
Equity in net (income) loss of unconsolidated joint ventures
Adjusted EBITDA
Total Revenue
Adjusted EBITDA margin percentage
Interest incurred
Ratio of Adjusted EBITDA to total interest incurred
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
(14,230)
$
17,141
$
20,926
19,908
(6,075)
6,631
3,090
715
10,206
—
19,653
39,898
667,566
6.0%
28,377
1.4x
$
$
11,057
15,390
449
2,803
1,588
2,583
—
(866)
$
$
50,145
751,166
$
$
6.7%
21,978
2.3x
5,331
13,024
511
3,471
3,742
4,080
(250)
(7,691)
43,144
694,456
6.2%
7,484
5.8x
37
Overview
Fiscal 2018 was a transition year for our Company as we expanded and diversified our product portfolio to more
affordably priced communities, which resulted in a 38% decrease in our average price of homes delivered to $1.0 million from
$1.6 million in 2017. The fourth quarter of 2018 was particularly challenging from a sales, closings and profitability
perspective. The healthy buyer demand experienced in the first half of 2018 weakened during the second half of the year as
homebuyer hesitation emerged. We believe home affordability concerns stemming from higher interest rates and higher absolute
home prices slowed our sales absorption rates in the back half of 2018, particularly in the fourth quarter, and resulted in an
overall decline in our monthly sales per community for 2018 as compared to 2017. The slower sales pace contributed to an
increase in incentives and estimated carrying costs at certain communities, which along with a mix shift in deliveries partially
attributable to construction delays, resulted in a 380 basis point decline in our gross margin from home sales (220 basis points
excluding inventory impairments*). In addition, higher incentives and pricing adjustments at two of our higher-priced Southern
California communities resulted in $10.0 million of noncash pretax inventory impairment charges for 2018. The Company also
incurred $20.0 million in noncash, pretax impairment charges related to a master plan land development joint venture in
Northern California in the 2018 fourth quarter.
While 2018 home deliveries were up 46% due to increased community count and a strategic shift to more affordable
product, our average selling price declined 38%. The lower year over year average selling price, coupled with slower sales
absorption rates experienced in the second half of 2018, offset the delivery increase and resulted in a 10% decline in homes sales
revenue from 2017 to $504.0 million. Home sales revenue was also adversely impacted by construction delays at a few of our
communities where the delivery of several homes scheduled to occur in the fourth quarter of 2018 were delayed. Most notably,
home closings from our multifamily condominium community in Playa Vista, CA were delayed into 2019, which negatively
impacted our 2018 home sales revenue by approximately $20 million. These homes remained in backlog as of December 31,
2018 and are scheduled to deliver in the 2019 first quarter. Backlog dollar value at the end of 2018 was $207.1 million related to
191 homes, up 28% and 25%, respectively, from December 31, 2017.
As a result of these activities, the Company generated a net loss of $14.2 million, or $(0.69) per diluted share for 2018.
Included in the net loss was $10.0 million of noncash inventory impairment charges and $20.0 million of joint venture
impairments, or $1.05 per diluted share on an after-tax basis. Adjusted net income for 2018 was $7.6 million*, or $0.37* per
diluted share, after excluding the $30.0 million in pretax impairment charges. Net income attributable to the Company for 2017
was $17.2 million, or $0.82 per diluted share, and adjusted net income was $21.7 million*, or $1.03* per diluted share, after
excluding $3.2 million in income tax charges related to the revaluation of deferred tax assets and $2.2 million in pretax inventory
impairment charges. The year-over-year decrease in net income was primarily due to a $27.8 million increase in inventory and
joint venture impairments, a 380 basis point decline in home sales gross margin (220 basis point decline in home sales gross
margin before impairments*), an 11% decrease in total revenues, and a 180 basis point increase in selling, general and
administrative expenses as a percentage of home sales revenue. These items were partially offset by an income tax benefit for
2018.
The Company's wholly owned lots owned and controlled at December 31, 2018 was 2,812. Of the total wholly owned
lots, approximately 41% were controlled through option contracts. The Company ended the year with $42.3 million in cash and
cash equivalents, $387.6 million in debt, of which $67.5 million was outstanding under its $200 million unsecured revolving
credit facility. The Company's debt-to-capital ratio was 61.8% and its net debt-to-capital ratio was 59.0%*. The Company also
authorized a $15 million stock repurchase plan during 2018. As of December 31, 2018, the Company had repurchased and
retired 1,003,116 shares of common stock totaling $8.5 million, leaving a remaining authorization of $6.5 million for future
purchases.
As we move into fiscal 2019, we are aware of the operational challenges a slowing housing market poses and are taking
the appropriate steps to right-size our business and fortify our balance sheet. We anticipate that these initiatives will lead to a
leaner cost structure and an improved debt leverage over time.
* Home sales gross margin before impairments, adjusted net income, adjusted earnings per diluted share and net debt-to-capital ratio are non-GAAP measures.
For a reconciliation of home sales gross margin before impairments to home sales gross margin, the nearest GAAP equivalent, please see "Results of Operations
- Homebuilding Gross Margin." For a reconciliation of adjusted net income and adjusted earnings per diluted share please see below. For a reconciliation of the
net debt-to-capital ratio to the appropriate GAAP measure, please see "Liquidity and Capital Resources - Debt-to-Capital Ratios." We believe home sales gross
margin before impairments is meaningful, as it isolates the impact home sales impairments have on homebuilding gross margin and provides investors better
comparisons with our competitors, who may adjust gross margins in a similar fashion. We believe adjusted net income and adjusted earnings per diluted share
are meaningful as the impact of impairments and deferred tax asset adjustments are removed to provide investors with an understanding of the impact these
noncash items had on earnings. We believe that the ratio of net debt-to-capital is a relevant financial measure for management and investors to understand the
leverage employed in our operations and as an indicator of the Company’s ability to obtain financing.
38
Net income (loss) attributable to The New Home Company Inc.
Home sales, land sales and joint venture impairments (tax effected)
Noncash deferred tax asset charge
Adjusted net income attributable to The New Home Company Inc.
Earnings (loss) per share attributable to The New Home Company Inc.:
Basic
Diluted
Adjusted earnings per share attributable to The New Home Company Inc.:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Home sales, land sales and joint venture impairments
Effective tax rate for The New Home Company Inc. before discrete items(1)
Tax benefit from home sales, land sales and joint venture impairments
Home sales, land sales and joint venture impairments (tax effected)
Year Ended December 31,
2018
2017
2016
(14,216)
$
17,152
$
21,810
—
1,366
3,190
21,022
2,194
—
7,594
$
21,708
$
23,216
(0.69)
(0.69)
0.37
0.37
20,703,967
20,804,859
30,000
27.3%
(8,190)
21,810
$
$
$
$
$
$
$
0.82
0.82
1.04
1.03
20,849,736
20,995,498
2,200
37.9%
(834)
1,366
$
$
$
$
$
$
$
1.02
1.01
1.12
1.12
20,685,386
20,791,445
3,500
37.3%
(1,306)
2,194
$
$
$
$
$
$
$
$
$
After-tax loss per share attributable to The New Home Company Inc. related to home sales, land
sales and joint venture impairments:
Basic
Diluted
Loss per share attributable to The New Home Company Inc. related to deferred tax asset charge:
Basic
Diluted
$1.05
$1.05
$0.07
$0.07
NA $
NA $
(0.15)
(0.15)
$0.11
$0.11
NA
NA
(1) For a reconciliation of effective tax rate before discrete items, please see "Results of Operations - Provision (Benefit) for Income Taxes."
39
Results of Operations
Net New Home Orders
Net new home orders
Southern California
Northern California
Arizona
Total net new home orders
Selling communities at end of year
Southern California
Northern California
Arizona
Total selling communities
Monthly sales absorption rate per community (1)
Southern California
Northern California
Arizona
Total monthly sales absorption rate per
community (1)
Average selling communities
Southern California
Northern California
Arizona
Total average selling communities
Year Ended December 31,
Change
Change
2018
Amount
%
2017
Amount
%
2016
301
202
33
536
13
5
2
20
2.2
2.7
1.7
2.3
12
6
2
20
104
(13)
33
124
3
(2)
2
3
(0.1)
(0.4)
NA
53 %
(6)%
NA
30 %
30 %
(29)%
NA
18 %
(4)%
(13)%
NA
(0.4)
(15)%
197
215
—
412
10
7
—
17
2.3
3.1
—
2.7
5
—
NA
7
71 %
— %
NA
54 %
7
6
NA
13
56
103
—
159
2
—
—
2
0.5
1.4
NA
1.0
—
1
NA
1
40%
92%
NA
63%
25%
—%
NA
13%
28%
82%
NA
59%
—%
20%
NA
8%
141
112
—
253
8
7
—
15
1.8
1.7
—
1.7
7
5
NA
12
Cancellation rate
10%
1%
NA
9%
(3)%
NA
12%
(1) Monthly sales absorption represents the number of net new home orders divided by the number of average selling communities for the period.
Net new home orders for the year ended December 31, 2018 were up 30% compared to 2017 as a result of a 54% increase
in average selling communities, partially offset by a decline in the monthly sales absorption rate. Demand was healthy across
our markets throughout the first half of 2018, however, buyer hesitancy emerged in the second half of the year, particularly in the
2018 fourth quarter, which was spurred by higher interest rates and higher absolute home prices and resulted in an overall
decline in sales per community for 2018.
Orders were up 53% in 2018 for Southern California primarily driven by a 71% increase in average selling communities,
which included six communities that opened in late 2017 and 2018 with base pricing of $750,000 or less. The increase in more
affordably priced communities helped maintain Southern California's monthly sales absorption rate at 2.2 sales per community,
nearly flat with the pace in 2017, as buyer demand was less impacted at lower price points. The decline in net new orders for
Northern California was largely attributable to a 13% decrease in 2018 monthly sales absorption rate to 2.7 sales per community
from 3.1 in the year ago period. Northern California benefited in 2017 from strong sales activity from high-demand
communities that sold out during 2017, two of which were located in the Bay Area and one in Davis, CA. New for 2018, were
contributions of 1.7 sales per month from our first wholly owned projects in Arizona which were largely driven by our single-
family detached, move-up Belmont community in Gilbert.
Net new home orders for the year ended December 31, 2017 increased 63% compared to 2016. The increase was
primarily driven by a 59% increase in the monthly sales absorption rate per community and to a lesser extent, an 8% increase in
40
average selling communities. The improvement in our 2017 absorption rate was driven by solid order activity in both Southern
and Northern California resulting from the addition of more affordably-priced product, which generally sells at a faster pace than
move-up or luxury product. Southern California experienced a monthly absorption of 2.3 sales per community in 2017,
compared to 1.8 in 2016, while high buyer demand in Northern California resulted in an 82% increase in monthly sales
absorption to 3.1 sales per community in 2017 as compared to 2016.
The Company's cancellation rate for 2018 was 10% as compared to 9% and 12% for 2017 and 2016, respectively. We
believe our cancellation rate is one of the lower rates in the industry due to many factors, including loan prequalifying buyers
before ratifying sales contracts, the high level of personalized options that our homebuyers select in some higher-priced
communities, which often creates emotional attachment, and a higher proportion of affluent buyers with strong credit profiles.
As we transition to more affordably-priced product, our cancellation rate may increase moderately. Additionally, cancellations
may rise in a slowing housing market where higher interest rates may impact buyer financing and soft demand may preclude
move-up buyers from being able to sell their existing homes. We experienced a spike in our 2018 fourth quarter cancellation
rate largely resulting from the low level of gross orders generated during the 2018 fourth quarter, however, our cancellations as a
percentage of beginning backlog remained relatively low at 7% during the 2018 fourth quarter.
Backlog
Southern California
Northern California
Arizona
Total
Year Ended December 31,
2018
Dollar
Value
Homes
Average
Price
Homes
2017
Dollar
Value
Average
Price
Homes
% Change
Dollar
Value
Average
Price
90
68
33
$111,024
$
1,234
59,847
36,200
880
1,097
(Dollars in thousands)
71
82
—
$ 93,955
$
1,323
68,295
—
833
—
191
$207,071
$
1,084
153
$162,250
$
1,060
27 %
(17)%
NA
25 %
18 %
(12)%
NA
28 %
(7)%
6 %
NA
2 %
Year Ended December 31,
2017
Dollar
Value
Homes
Average
Price
Homes
2016
Dollar
Value
Average
Price
Homes
% Change
Dollar
Value
Average
Price
Southern California
Northern California
Total
71
82
$ 93,955
$ 1,323
68,295
833
153
$162,250
$ 1,060
(Dollars in thousands)
48
31
79
$162,599
$
3,387
24,697
797
$187,296
$
2,371
48%
165%
94%
(42)%
177 %
(13)%
(61)%
5 %
(55)%
Backlog reflects the number of homes, net of cancellations, for which we have entered into sales contracts with
customers, but for which we have not yet delivered the homes. The number of homes in backlog at the end of 2018 was up 25%
compared to a year ago due to a 30% increase in net new home orders from a higher average community count, and the impact
of closing delays at a few communities. The 28% increase in backlog dollar value to $207.1 million at December 31, 2018, was
driven mostly by the increase in the number of homes in backlog, and to a lesser extent, a 2% increase in average selling price.
Northern California average sales price was up year-over-year due to sales price increases at one particular community in the
Bay Area. This increase was partially offset by a decrease in Southern California average selling price related to the close-out of
higher-priced communities and an increase in orders from more affordable communities during 2018.
Backlog dollar value at December 31, 2017 declined 13% compared to 2016 due to a 55% decrease in average selling
price to $1.1 million in 2017 as compared to $2.4 million in 2016, which was partially offset by a 94% increase in backlog units.
The decline in the average selling price of homes in backlog in 2017 as compared to 2016 was primarily related to the delivery
of the final homes from two higher-priced luxury communities in Newport Coast, CA in 2017. Additionally, 2017 ending
backlog included increased contributions from more affordably-priced communities consistent with the Company's strategic shift
to diversify its product offerings and access a deeper buyer pool as compared to ending backlog at December 31, 2016. The
increase in the number of homes in backlog as of December 31, 2017 compared to 2016 was largely the result of higher monthly
sales absorption rates.
41
Lots Owned and Controlled
Lots Owned
Southern California
Northern California
Arizona
Total
Lots Controlled(1)
Southern California
Northern California
Arizona
Total
Lots Owned and Controlled - Wholly Owned
Fee Building(2)
Total Lots Owned and Controlled
December 31,
Change
Change
2018
Amount
%
2017
Amount
%
2016
626
742
299
1,667
205
451
489
1,145
2,812
806
3,618
63
424
234
721
(73)
(580)
(8)
(661)
60
(114)
(54)
11 %
133 %
360 %
76 %
(26)%
(56)%
(2)%
(37)%
2 %
(12)%
(1)%
563
318
65
946
278
1,031
497
1,806
2,752
920
3,672
273
18
65
356
(443)
766
497
820
1,176
(15)
1,161
94 %
6 %
NA
60 %
(61)%
289 %
NA
83 %
75 %
(2)%
46 %
290
300
—
590
721
265
—
986
1,576
935
2,511
(1)
(2)
Includes lots that we control under purchase and sale agreements or option agreements that are subject to customary conditions and have not yet closed.
There can be no assurance that such acquisitions will occur.
Lots owned by third party property owners for which we perform general contracting or construction management services.
The Company increased the number of wholly owned lots owned and controlled by 2% and 75% year-over-year for the
years ending December 31, 2018 and 2017, respectively. Of the lots owned and controlled at December 31, 2018, 41% were
controlled through option contracts. The increase in wholly owned lots owned and controlled was due to contracts entered into
during 2018 for new developments across all markets. In Southern California, contracts were executed for three communities
for control of 272 lots within the Inland Empire. Purchase agreements for two new communities in the greater Phoenix area were
executed for a total of 226 lots increasing our geographic footprint in the Arizona market. In Northern California, we entered
into an agreement for 60 lots in a community in Rocklin, CA. The increase in wholly owned lots owned and controlled was
partially offset by a 46% increase in home deliveries for 2018.
The increase in wholly owned lots owned and controlled in 2017 compared to 2016 was due to our planned expansion in
Arizona where we entered into contracts on four land parcels totaling 562 aggregate lots, and an increase in lots controlled in
Northern California primarily due to two new developments with multiple planning areas, one for 418 lots in Vacaville, CA and
a second for 394 lots in a masterplan development in Folsom, CA. The increase in wholly owned lots owned and controlled was
partially offset by a 36% increase in new home deliveries in 2017.
The decrease in fee building lots at December 31, 2018 as compared to 2017 was primarily attributable to the delivery of
600 homes to customers during 2018. This impact was offset by fee lot additions of 486 lots for new contracts entered into
during 2018, including construction management contracts the Company entered into with a new customer during the 2018
second quarter totaling 165 lots across five communities.
42
Home Sales Revenue and New Homes Delivered
Year Ended December 31,
2018
Dollar
Value
Homes
Average
Price
Homes
2017
Dollar
Value
% Change
Average
Price
Homes
Dollar
Value
Average
Price
Southern California
Northern California
Total
282
216
498
$317,373
$
1,125
186,656
864
$504,029
$
1,012
(Dollars in thousands)
174
167
341
$433,651
$
2,492
127,191
762
$560,842
$
1,645
62%
29%
46%
(27)%
47 %
(10)%
(55)%
13 %
(38)%
Year Ended December 31,
2017
Dollar
Value
Homes
Average
Price
Homes
2016
Dollar
Value
Average
Price
Homes
% Change
Dollar
Value
Average
Price
Southern California
Northern California
Total
174
167
341
$433,651
$
2,492
127,191
762
$560,842
$
1,645
(Dollars in thousands)
147
103
250
$422,041
$
2,871
85,908
834
$507,949
$
2,032
18%
62%
36%
3 %
48 %
10 %
(13)%
(9)%
(19)%
New home deliveries increased 46% for the year ended December 31, 2018 compared to the prior year. The increase in
deliveries was the result of a higher number of homes in backlog at December 31, 2017, and an increase in new home orders
during the year. Notwithstanding the increase in 2018 deliveries, home sales revenue decreased 10% compared to 2017
primarily due to a 38% lower average sales price per delivery that resulted from the Company's strategic shift to more affordable
price points. The year-over-year decrease in average sales price was most pronounced in Southern California where over half of
2018 deliveries were from more-affordable communities with base pricing of $750,000 or less compared to only about 10% of
total deliveries from this price point in 2017. Additionally, the 2017 average selling price was heavily influenced by deliveries
from two Crystal Cove luxury communities in Newport Coast, CA where average selling prices exceeded $6.0 million for the
year. 2018 home sales revenue was also adversely impacted by closing delays of several homes in backlog that were scheduled
to be delivered in the 2018 fourth quarter and an overall slowing in sales rates in the second half of 2018, particularly in the
fourth quarter. Most notably, homes in backlog from our multifamily condominium community in Playa Vista, CA were
scheduled to close in the 2018 fourth quarter but were rescheduled for delivery in the 2019 first quarter, which negatively
impacted 2018 home sales revenue by approximately $20.0 million.
New home deliveries increased 36% for the year ended December 31, 2017 compared to 2016. The increase in deliveries
was the result of a higher number of homes in backlog at December 31, 2016 and an increase in new home orders generated
during 2017. Home sales revenue for 2017 increased 10% compared to 2016 primarily due to an increase in new home
deliveries, which was offset by a 19% lower average sales price per delivery. The year-over-year decrease in average sales price
in 2017 versus 2016 was driven by increased deliveries from our Northern California operations, which had lower-priced
communities than Southern California, coupled with a product mix shift for both Southern California and Northern California
from deliveries from more affordably-priced communities increased.
Homebuilding Gross Margin
Homebuilding gross margin percentage for 2018 was 11.4% versus 15.2% in the prior year. Homebuilding gross margin
for 2018 included a $10.0 million in noncash inventory impairment charges related to two higher-priced communities in
Southern California that were experiencing slower monthly sales absorption and required sales price adjustments. Inventory
impairment charges for 2017 totaled $2.2 million and related to one homebuilding community in Southern California where
slower monthly sales required additional incentives. Homebuilding gross margin percentage before impairments was 13.4% and
15.6% for 2018 and 2017, respectively. Homebuilding gross margin before impairments is a non-GAAP measure. See the table
below reconciling this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent. The 220 basis
point decline in homebuilding gross margin before impairments was primarily due to higher interest costs included in cost of
homes sales, and to a lesser extent a product mix shift. Interest in cost of home sales increased for 2018 as the amount of
previously capitalized interest from our Senior Notes issued in 2017 began to flow through cost of homes sales in greater
proportion than capitalized interest from our unsecured credit facility, which carries a lower interest rate. The year-over-year
43
mix shift included, among other things, significant deliveries in 2017 from two luxury communities in Newport Coast, CA,
which generated higher gross margins than many of our 2018 communities.
Homebuilding gross margin percentage for 2017 improved 100 basis points to 15.2% as compared to 14.2% in 2016.
2017 included $2.2 million in noncash inventory impairments related to one homebuilding community in Southern California
while 2016 included $2.4 million in noncash inventory impairment charges related to two homebuilding communities, one in
each of Southern and Northern California. The impairments in both years were due to project-specific issues, including slower
monthly sales absorption rates that required additional sales incentives. In addition, the 2017 and 2016 homebuilding gross
margins included a benefit related to warranty adjustments of $0.8 million and $1.1 million, respectively. The homebuilding
gross margin before impairments for 2017 was 15.6% versus 14.6% in 2016. The 100 basis point improvement in homebuilding
gross margin before impairments for 2017 as compared to 2016 was due primarily to a change in product mix, including the
favorable impact of higher-margin, luxury communities located in Newport Coast, CA.
Excluding home sales impairments and interest in cost of home sales, adjusted homebuilding gross margin percentage for
the years ended December 31, 2018, 2017 and 2016 was 17.1%, 17.6% and 15.7%, 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: Home sales impairments
Homebuilding gross margin before impairments (1)
Add: Interest in cost of home sales
Adjusted homebuilding gross margin(1)
2018
%
2017
%
2016
%
Year Ended December 31,
(Dollars in thousands)
$ 504,029
100.0%
$ 560,842
100.0%
$ 507,949
100.0%
446,530
57,499
10,000
67,499
18,678
$
86,177
88.6%
11.4%
2.0%
13.4%
3.7%
17.1%
475,413
85,429
2,200
87,629
11,021
$
98,650
84.8%
15.2%
0.4%
15.6%
2.0%
17.6%
435,909
72,040
2,350
74,390
5,331
$
79,721
85.8%
14.2%
0.4%
14.6%
1.1%
15.7%
(1)
Homebuilding gross margin before impairments and adjusted homebuilding gross margin are non-GAAP financial measures. We believe this
information is meaningful as it isolates the impact that home sales impairments and leverage have on homebuilding gross margin and permits investors
to make better comparisons with our competitors who also break out and adjust gross margins in a similar fashion.
Land Sales
During the fourth quarter of 2016, the Company recorded a noncash land sale impairment charge of $1.2 million related to
land under development in Northern California that the Company initially intended to sell. The land sale was ultimately not
consummated and the Company made the determination to develop and build homes on this land.
Fee Building
Fee building revenue
Cost of fee building
Fee building gross margin
2018
%
2017
%
2016
%
Year Ended December 31,
(Dollars in thousands)
$ 163,537
100.0%
$ 190,324
100.0%
$ 186,507
100.0%
159,136
$
4,401
97.3%
2.7%
184,827
$
5,497
97.1%
2.9%
178,103
$
8,404
95.5%
4.5%
Our fee building revenue includes (i) billings to third-party land owners for general contracting services, and (ii)
management fees from our unconsolidated joint ventures and third party land owners for construction and sales 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 and joint venture management overhead. Besides allocable G&A expenses, there are no other material costs associated
with management fees from our unconsolidated joint ventures.
44
Billings to land owners for general contracting services are a function of construction activity and reimbursable costs are
incurred generally once home construction begins. The total billings and reimbursable costs are driven by the pace at which the
land owner executes its development plan. Management fees from our unconsolidated joint ventures are collected over the
underlying project's life and as homes and lots are delivered. Construction management fees from third-party customers are
collected over the life of the contract and sales management fees from third-party customers are collected as homes close escrow.
For the year ended December 31, 2018, fee building revenues decreased 14% from the prior year period primarily due to a
decrease in costs incurred from fee building activities resulting from a lower number of homes under construction during the
year. Included in fee building revenues for the years ended December 31, 2018 and December 31, 2017 were (i) $157.8 million
and $185.4 million, respectively, of billings to land owners for general contracting services and (ii) $5.7 million and $4.9 million
of management fees from our unconsolidated joint ventures and third-party land owners for 2018 and 2017, respectively. The
increase in management fees related to $2.3 million in new fee revenue from construction and sales management service
contracts commencing in 2018, partially offset by a $1.6 million reduction in management fees from joint ventures as a result of
joint venture community closeouts and buyouts during 2017.
For the year ended December 31, 2018, cost of fee building decreased due to the decrease in fee building activity,
compared to 2017. The amount of G&A expenses included in cost of fee building was $7.2 million and $8.3 million for the
years ended December 31, 2018 and 2017, respectively. Fee building gross margin percentage decreased to 2.7% for the year
ended December 31, 2018 from 2.9% in the prior year. The decrease in fee building gross margin was due to a change in the fee
building business agreements on certain projects from a percentage of cost fee to a per-unit fixed fee arrangement and a decrease
in fee billings and joint venture management fees, partially offset by an increase in management fees from new construction and
sales service contracts and lower allocated G&A expenses.
For the year ended December 31, 2017, fee building revenues increased 2% from 2016 primarily due to an increase in fee
building costs incurred related to a higher fee building delivery volume. Included in fee building revenues for the years
ended December 31, 2017 and December 31, 2016 were (i) $185.4 million and $178.3 million of billings to land owners for
general contracting services for 2017 and 2016, respectively, and (ii) $4.9 million and $8.2 million of management fees from our
unconsolidated joint ventures for 2017 and 2016, respectively. The decrease in management fees from JVs was primarily the
result of fewer deliveries and lower land sales revenue from JV communities.
For the year ended December 31, 2017, cost of fee building increased due to the increase in fee building activity,
compared to the same period during 2016. The amount of G&A expenses included in cost of fee building was $8.3
million and $8.8 million for the years ended December 31, 2017 and 2016, respectively. Fee building gross margin percentage
decreased to 2.9% for the year ended December 31, 2017 from 4.5% in the prior year period. The decrease in fee building gross
margin was due to a change in the fee building business arrangements on certain projects combined with a decrease in
management fees received from joint ventures.
Our fee building revenue has historically been concentrated with a small number of customers. For the years ended
December 31, 2018, 2017 and 2016, one customer comprised 95%, 97% and 96% of fee building revenue, respectively.
Selling, General and Administrative Expenses
Year Ended December 31,
As a Percentage of
Home Sales Revenue
2018
2017
2016
2018
2017
2016
(Dollars in thousands)
Selling and marketing expenses
General and administrative expenses ("G&A")
Total selling, marketing and G&A ("SG&A")
$
$
36,065
25,966
62,031
$
$
32,702
26,330
59,032
$
$
26,744
25,882
52,626
7.1%
5.2%
5.8%
4.7%
5.3%
5.1%
12.3%
10.5%
10.4%
During 2018, our SG&A rate as a percentage of home sales revenue increased 180 basis points to 12.3% from 10.5% for
2017. The increase was primarily due to lower home sales revenue, higher selling and marketing costs related to advertising for
newly opened communities, increased master marketing fees, higher co-broker commissions, and higher sales personnel and
advertising costs associated with increased community count growth. These increases were partially offset by lower
amortization of capitalized selling and marketing costs due to the 2017 close out of higher-end, luxury communities. In addition,
the increase also included a net $0.1 million increase in selling and marketing expenses in 2018 related to accounting changes
from the adoption of ASC 606, the updated revenue recognition standard. The G&A rate for 2018 was up 50 basis points due to
45
lower home sales revenue, notwithstanding a year-over-year reduction in G&A expenses primarily due to lower incentive-based
compensation costs.
The Company's SG&A expense ratio for the year ended December 31, 2017 increased 10 basis points over 2016
to 10.5%. The slight increase was primarily attributable to higher selling and marketing costs, driven by greater amortization of
capitalized selling and marketing costs from our two luxury communities located in Newport Coast, CA and an increase in
marketing spend and model operating costs related to new community openings.
Equity in Net Income (Loss) of Unconsolidated Joint Ventures
As of December 31, 2018 and 2017, we had ownership interests in 10 unconsolidated joint ventures. We own interests in
our unconsolidated joint ventures that generally range from 5% to 35% and these interests vary by entity.
The Company's share of joint venture loss for the year ended December 31, 2018 was $19.7 million as compared to $0.9
million of income for the year ended December 31, 2017. The joint venture loss in 2018 was primarily the result of allocated
noncash impairment losses of $18.9 million and a $1.1 million impairment to the Company's investment in unconsolidated joint
ventures, and to a lesser extent, lower homebuilding gross margins. The $20.0 million aggregate joint venture impairment
charges related to one of the Company's unconsolidated land development joint ventures in Northern California. The joint
venture impairment resulted from lower anticipated land sales revenue, higher development and carrying costs, and a strategic
decision not to incorporate a potential homebuilding component into the existing land development venture at this time in order
to preserve capital and avoid over-concentration in one geographic location. The Company's share of 2017 joint venture income
was positively impacted by buyouts and community closeouts.
The Company's share of joint venture income was $0.9 million for the year ended December 31, 2017 as compared
to $7.7 million for the year ended December 31, 2016. A 37% reduction in joint venture revenues from decreased home and lot
deliveries and lower gross margins from joint venture home sales contributed to the year-over-year decrease in the Company's
share of joint venture income. Additionally, in 2017, the Company purchased the equity interest of its joint venture partner in
the joint venture known as Larkspur. Prior to the close out, the Company received a $0.1 million income allocation from the
joint venture. Upon close out, the Company recognized a gain of $0.3 million due to the purchase of its joint venture partner's
interest for less than its carrying value. In 2016, the Company purchased the equity interest of its joint venture partner in the
joint venture known as Lambert Ranch. Prior to the close out, the Company received a $0.5 million income allocation from the
joint venture. Upon closeout, the Company recognized a gain of $1.1 million due to the purchase of its joint venture partner's
interest for less than its carrying value. The joint venture close outs mentioned are discussed in further detail within Note 12,
"Related Party Transactions," in our accompanying Consolidated Financial Statements.
46
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 reflected in our results as a component of
equity in net income (loss) of unconsolidated joint ventures. This data is included for informational purposes only.
Year Ended December 31,
Change
Change
2018
Amount
%
2017
Amount
%
2016
(Dollars in thousands)
Unconsolidated Joint Ventures—Homebuilding
Operational Data
Net new home orders
New homes delivered
Average sales price of homes delivered
$
142
146
951
Home sales revenue
Land sales revenue
Total Revenue
Net income (loss)
(28)
(3)
(7)
(16)%
(2)%
(1)% $
170
149
958
$
11
(48)
57
7 %
(24)%
6 % $
159
197
901
(3,805)
37,981
34,176
(3)% $ 142,697
$ (34,847)
(20)% $ 177,544
800 %
4,750
(50,925)
(91)%
55,675
23 % $ 147,447
$ (85,772)
(37)% $ 233,219
$
$
$
$ 138,892
42,731
$ 181,623
$ (27,904)
$ (27,375)
NM $
(529)
$ (26,720)
(102)% $
26,191
Selling communities at end of period
Backlog (dollar value)
Backlog (homes)
Average sales price of homes in backlog
Homebuilding lots owned and controlled
Land development lots owned and
controlled
Total lots owned and controlled
$
$
7
66,892
76
880
211
1,879
2,090
Provision (Benefit) for Income Taxes
—
256
(4)
47
$
$
— %
7
(2)
(22)%
9
— % $
66,636
$ 11,222
20 % $
55,414
(5)%
6 % $
80
833
341
18
(61)
$
29 %
(7)% $
(244)
(42)%
62
894
585
(130)
(38)%
(444)
(574)
(19)%
(22)%
2,323
2,664
(92)
(336)
(4)%
(11)%
2,415
3,000
For the year ended December 31, 2018, the Company recorded an income tax benefit of $6.1 million compared to a
provision of $15.4 million for 2017. The Company's effective tax rate for 2018 was 29.9%, 27.3% before discrete items,
compared to 47.3%, 37.9% before discrete items, for 2017. The effective tax rate for 2017 was impacted by a $3.2 million
deferred tax asset charge, included in discrete items, related to federal tax rate cuts from 2017's Tax Cuts and Jobs Act ("Tax
Act"). The federal corporate tax rate cut to a flat 21% from a maximum 35% was the primary driver of the year-over-year
decrease in the Company's effective tax rate before discrete items, partially offset by the loss of certain tax benefits from
production activities that were eliminated as a result of the Tax Act. Effective tax rate before discrete items is a non-GAAP
measure, please see the table below for a reconciliation to effective tax rate, the nearest GAAP equivalent.
The effective tax rate for 2018 differs from the federal statutory tax rate due to state income taxes, deduction limitations,
and discrete items. Discrete items totaled $0.5 million of tax benefit for the year and were primarily related to benefits from
energy tax credits that were extended in February 2018 for 2017 closings and, to a lesser extent, an adjustment to the Company's
deferred tax asset revaluation required as a result of the federal tax rate cut. The effective tax rate for 2017 differs from
the 35% federal statutory tax rate, primarily due to the $3.2 million noncash, provisional charge related to the revaluation of the
Company's deferred tax asset to reflect the reduction in the federal corporate tax rate from 35% to 21%, and state income taxes,
offset partially by the benefit from production activities.
For the year ended December 31, 2016, the Company recorded a provision for income taxes of $13.0 million and its
effective tax rate was 38.4%. Included in this provision is an allocation of income of $0.5 million from LR8 Investors LLC
("LR8") and a $1.1 million gain from the closeout of the LR8 joint venture, which resulted in a provision for income taxes of
$0.6 million for the year ended December 31, 2016 and did not impact our effective tax rate. The effective tax rate for 2016
differs from the 35% federal statutory tax rate, primarily due to state income taxes, offset partially by the benefit from
production activities and energy efficient credits.
47
The Tax Act amended the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for
individuals and businesses. In accordance with ASC 740, Income Taxes ("ASC 740"), the consolidated provision for income
taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the
difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. As a result of the reduction in the corporate income tax rate from 35% to 21%
under the Tax Act, the Company revalued its net deferred tax asset at December 31, 2017 and recorded a noncash, provisional
charge of $3.2 million, which was included in the tax provision for fiscal 2017. The Company completed its accounting for the
tax effects of the Tax Act in the 2018, within the one-year measurement period prescribed by the SEC, and recorded a $0.1
million adjustment to the provisional amount. As part of the Tax Act, the Company was no longer able to take certain tax
deductions for production activities in 2018 that reduced our effective tax rate in prior years. Additionally, the Company may be
subject to increased deduction limitations on certain executive compensation in future years.
Effective tax rate for The New Home Company Inc.:
Pretax income (loss)
(Provision) benefit for income taxes
Effective tax rate(1)
Effective tax rate for The New Home Company Inc. before discrete
items:
(Provision) benefit for income taxes
Adjustment for discrete items (2)
(Provision) benefit for income taxes before discrete items
Effective tax rate for The New Home Company Inc. before discrete
items(1)
2018
Year ended December 31,
2017
(Dollars in thousands)
2016
$
$
$
$
(20,305)
6,075
29.9%
6,075
(523)
5,552
$
$
$
$
32,531
(15,390)
47.3%
(15,390)
3,068
(12,322)
$
$
$
$
33,950
(13,024)
38.4%
(13,024)
364
(12,660)
27.3%
37.9%
37.3%
(1)
(2)
Effective tax rate is computed by dividing the (provision) benefit for income taxes by pretax income (loss).
The noncash deferred tax asset charges related to the reduction in federal corporate income tax rates are included among discrete items.
Liquidity and Capital Resources
Overview
Our principal sources of capital for the year ended December 31, 2018 were cash generated from home sales activities,
borrowing from our credit facility, distributions from our unconsolidated joint ventures, and management fees from our fee
building agreements. Our principal uses of capital for 2018 were land purchases, land development, home construction,
repayments on our revolving credit facility, contributions and advances to our unconsolidated joint ventures, repurchases of the
Company's common stock and payment of operating expenses and routine liabilities.
Cash flows for each of our communities depend on their stage in the development cycle, and can differ substantially
from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions,
entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities.
Because these costs are a component of our real estate inventories and not recognized in our consolidated statement of
operations until a home is delivered, we incur significant cash outlays prior to our recognition of earnings. In the later stages of
community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash
outflows associated with home and land construction were previously incurred. From a liquidity standpoint, we are 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 at times to exceed cash generated by
operations.
We ended 2018 with $42.3 million of cash and cash equivalents, an $81.3 million decrease from December 31, 2017,
primarily due to the issuance of our Senior Notes in 2017, land acquisition expenditures and development activity and home
construction costs in excess of proceeds from home sales during the year. We expect to generate cash from the sale of our
inventory and plan to reduce our net leverage over the next year. We will redeploy a portion of the net cash generated from the
48
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, 2018 and 2017, we had $8.5 million and $11.3 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 third-party land
owner, which is generally funded on a monthly basis. Similarly, contracts and accounts receivable and due from affiliates as of
the same dates included $8.8 million and $11.6 million, respectively, related to the payment of the above payables.
We intend to utilize both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash
flows from 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, 2018, we had outstanding borrowings of $325.0 million in aggregate principal related to our senior notes and
$67.5 million related to our credit facility. We will consider a number of factors when evaluating our level of indebtedness and
when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired
with debt financing, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to
generate cash flow to cover the expected debt service. In addition, our debt contains certain financial covenants that limit the
amount of leverage we can maintain.
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 unsecured corporate level debt, property-level debt, and
other public, private or bank debt, or common and preferred equity.
Senior Notes Due 2022
On March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior
Unsecured Notes due 2022 (the "Existing Notes"), in a private placement. The Notes were issued at an offering price of
98.961% of their face amount, which represents a yield to maturity of 7.50%. On May 4, 2017, the Company completed a
tack-on private placement offering through the sale of an additional $75 million in aggregate principal amount of the 7.25%
Senior Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of 102.75% of their face
amount plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438%. Net proceeds from the
Existing Notes were used to repay all borrowings outstanding under the Company’s revolving credit facility with the remainder
used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land acquisition
and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is payable
semiannually in arrears on April 1 and October 1. The Notes will mature on April 1, 2022. The Notes were exchanged in an
exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act of 1933
and are freely tradeable in accordance with applicable law.
The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on
restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and
stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of
indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a
leverage condition or an interest coverage condition. The leverage and interest coverage conditions are summarized in the table
below, as described and defined further in the indenture for the Notes. Exceptions to the additional indebtedness limitation
include, among other things, borrowings of up to $260 million under existing or future bank credit facilities, non-recourse
indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the
limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we
do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket
limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2017 forward and
100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make
restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our
consolidated tangible net assets and a general basket of $15 million. The Notes are guaranteed by all of the Company's 100%
owned subsidiaries, for more information about these guarantees, please see Note 18 of the notes to our consolidated financial
statements.
49
Financial Conditions
Fixed Charge Coverage Ratio: EBITDA to Consolidated Interest Incurred; or
Leverage Ratio: Indebtedness to Tangible Net Worth
As of December 31, 2018, we were able to satisfy the leverage condition.
Senior Unsecured Revolving Credit Facility
December 31, 2018
Actual
Requirement
1.4
1.62
> 2.0 : 1.0
< 2.25 : 1.0
The Company's senior unsecured revolving credit facility ("Credit Facility") is with a bank group and matures on
September 1, 2020. Total commitments under the Credit Facility are $200 million with an accordion feature that allows the
facility size thereunder to be increased up to an aggregate of $300 million, subject to certain conditions, including the
availability of bank commitments.
As of December 31, 2018, we had $67.5 million in outstanding borrowings under the Credit Facility. 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, 2018, the interest rate under the Credit
Facility was 5.50%. Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as defined
in the Credit Facility, including, but not limited to, those listed in the following table.
Financial Covenants
Unencumbered Liquid Assets (Minimum Liquidity Covenant)
EBITDA to Interest Incurred (2)
Tangible Net Worth
Leverage Ratio
Adjusted Leverage Ratio (3)
December 31, 2018
Actual
Covenant
Requirement
(Dollars in thousands)
$
$
42,273
1.39 (2)
239,954
$
$
59.7%
NA
10,000 (1)
> 1.75 : 1.0
188,362
< 65.0%
NA
(1)
(2)
(3)
So long as the Company is in compliance with the interest coverage test (see Note 2), the minimum unencumbered liquid assets that the Company
must maintain as of the quarter end measurement date is $10 million.
If the test is not met, it will not be considered an event of default so long as the Company maintains unrestricted cash equal to not less than the
trailing 12 month consolidated interest incurred (as defined in the Credit Facility agreement) which was $28.5 million as of December 31, 2018.
The Company was in compliance with this requirement with an unrestricted cash balance of $42.3 million at December 31, 2018.
Adjusted Leverage Ratio is computed as total joint venture debt divided by total joint venture equity. The Adjusted Leverage Ratio requirement
ceases to apply as of and after the fiscal quarter in which consolidated tangible net worth is at least $250 million. During any period when the
Adjusted Leverage Ratio ceases to apply, consolidated tangible net worth shall be reduced by an adjustment equal to the aggregate amount of
investments in and advance to unconsolidated joint ventures that exceed 35% of consolidated tangible net worth as calculated without giving effect
to this adjustment (the "Adjustment Amount"). As of September 30, 2017, the Company's consolidated tangible net worth exceeded $250 million
and therefore the Adjusted Leverage Ratio ceased to apply. In addition, the Adjustment Amount was considered in the calculation of consolidated
tangible net worth.
As of December 31, 2018 and 2017, we were in compliance with all financial covenants.
Stock Repurchase Program
On May 10, 2018, our board of directors approved a stock repurchase program (the "Repurchase Program") authorizing
the repurchase of the Company's common stock with an aggregate value of up to $15 million. Repurchases of the Company's
common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in
privately negotiated transactions, in block trades or by other means in accordance with federal securities laws, including
pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The
Repurchase Program does not obligate the Company to repurchase any particular amount or number of shares of common
stock, and it may be modified, suspended or discontinued at any time. The timing and amount of repurchases are determined
by the Company’s management at its discretion and be based on a variety of factors, such as the market price of the Company’s
common stock, corporate and contractual requirements, general market and economic conditions and legal requirements. As of
50
December 31, 2018, the Company had repurchased and retired 1,003,116 shares totaling $8.5 million and had remaining
authorization to purchase $6.5 million of common shares.
Debt-to-Capital Ratios
We believe that debt-to-capital ratios provide useful information to the users of our financial statements regarding our
financial position and leverage. Net debt-to-capital ratio is a non-GAAP financial measure. See the table below reconciling
this non-GAAP measure to debt-to-capital ratio, the nearest GAAP equivalent.
Total debt, net
Equity, exclusive of non-controlling interest
Total capital
Ratio of debt-to-capital (1)
Total debt, net
Less: cash, cash equivalents and restricted cash
Net debt
Equity, exclusive of non-controlling interest
Total capital
Ratio of net debt-to-capital (2)
December 31,
2018
2017
(Dollars in thousands)
$
$
$
$
387,648
239,954
627,602
61.8%
387,648
42,542
345,106
239,954
585,060
$
$
$
$
318,656
263,990
582,646
54.7%
318,656
123,970
194,686
263,990
458,676
59.0%
42.4%
(1)
(2)
The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt, net by total capital (the sum of total debt, net plus equity),
exclusive of non-controlling interest.
The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is total debt, net less cash, cash equivalents and
restricted cash to the extent necessary to reduce the debt balance to zero) by total capital, exclusive of non-controlling interest. The most directly
comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for
investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We believe that by deducting our
cash from our debt, we provide a measure of our indebtedness that takes into account our cash liquidity. We believe this provides useful information as
the ratio of debt-to-capital does not take into account our liquidity and we believe that the ratio net of cash provides supplemental information by
which our financial position may be considered. Investors may also find this to be helpful when comparing our leverage to the leverage of our
competitors that present similar information.
Cash Flows
For the year ended December 31, 2018 as compared to the year ended December 31, 2017, the comparison of cash flows
is as follows:
• Net cash used in operating activities was $139.7 million in 2018 versus $90.9 million in 2017. The change was
primarily the result of a net increase in cash outflows for real estate inventories to $157.7 million in 2018 compared to
$114.9 million in 2017 due to increased construction in progress and lower home sales revenue, partially offset by a
decrease in land acquisition spend. Additionally, the year-over-year decrease in net income reduced cash inflow by
$30.0 million, partially offset by noncash inventory and joint venture impairment charges of $27.9 million for 2018.
• Net cash provided by investing activities was $0.3 million in 2018 compared net cash used in investing activities of
$10.6 million for 2017. For the year ended December 31, 2018, net distributions of capital and repayment of advances
from unconsolidated joint ventures was $0.4 million compared to net contributions an advances to unconsolidated
joint ventures of $11.9 million during the year ended December 31, 2017 and was the primary reason net cash
provided by investing activities increased. The decrease in net contributions and advances related primarily to a
reduction in joint venture contributions in 2018 to a land development joint venture in Folsom, CA.
• Net cash provided by financing activities was $58.0 million in 2018 compared to $194.3 million in 2017. The
decrease was primarily due to a decrease in net borrowings, in particular the issuance of $324.5 million of our senior
notes due 2022 in 2017, offset partially by increased net borrowings from our unsecured credit facility during 2018.
51
For the year ended December 31, 2017 as compared to the year ended December 31, 2016, the comparison of cash flows
is as follows:
• Net cash used in operating activities was $90.9 million in 2017 versus $42.8 million in 2016. The change was
primarily the result of a net increase in cash outflows for real estate inventories to $114.9 million in 2017 compared
to $71.4 million in 2016 due to greater land acquisition spend and increased construction in progress.
• Net cash used in investing activities was $10.6 million in 2017 compared $1.8 million provided by investing activities
in 2016. For the year ended December 31, 2017, our contributions and advances to joint ventures were $27.5
million compared to $15.1 million during the year ended December 31, 2016 and was the primary reason net cash used
in investing activities increased. The increase in contributions to joint ventures primarily related to a large contribution
to a land development joint venture in Folsom, CA.
• Net cash provided by financing activities was $194.3 million in 2017 compared to $25.2 million in 2016. The increase
was primarily due to an increase in net borrowings, in particular the issuance of $324.5 million of our senior notes due
2022, offset partially by increased repayments of the unsecured credit facility.
52
Off-Balance Sheet Arrangements and Contractual Obligations
Option Contracts
In the ordinary course of business, we enter into land option contracts in order to procure lots for the construction of our
homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved
lots. These purchase contracts typically require a cash deposit and the purchase of properties under these contracts is generally
contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development
entitlements. We also utilize option contracts with land sellers and financial intermediaries as a method of acquiring land in
staged takedowns, to help us manage the financial and market risk associated with land holdings, to reduce the use of funds
from our corporate financing sources, and to enhance our return on capital. Option contracts generally require a nonrefundable
deposit for the right to acquire lots over a specified period of time at pre-determined prices. We generally have the right, at our
discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash deposit with
no further financial responsibility to the land seller or financial intermediary. In some instances, we may also expend funds for
due diligence and development activities with respect to our option contracts prior to purchase which we would have to write
off should we not purchase the land. As of December 31, 2018, we had $18.9 million of nonrefundable and $0.9 million of
refundable cash deposits pertaining to land option contracts and purchase contracts with an estimated aggregate remaining
purchase price of $145.0 million, net of deposits ("Aggregate Remaining Purchase Price"). These cash deposits are included as
a component of our real estate inventories in our consolidated balance sheets.
Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to
enter into option arrangements, the availability of capital to financial intermediaries to finance the development of optioned
lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers
in strong housing markets and are more prevalent in certain geographic regions.
Joint Ventures
We enter into land development and homebuilding joint ventures from time to time as means of:
• leveraging our capital base
• accessing larger lot positions
• expanding our market opportunities
• managing financial and market risk associated with land holdings
These joint ventures have historically obtained secured acquisition, development and/or construction financing which
reduces the use of funds from our corporate financing sources.
We are subject to certain contingent obligations in connection with our unconsolidated joint ventures. The Company has
provided credit enhancements in connection with joint venture borrowings in the form of loan-to-value ("LTV") maintenance
agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The
Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company
and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest.
In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit
enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the
partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's
liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements comprise
acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the
loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors
including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build
outs, and the period necessary to complete the escrow process for homebuyers. As of December 31, 2018 and 2017, $41.3
million and $38.6 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV
maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV
maintenance agreement liabilities was $7.3 million and $6.7 million, respectively, as of December 31, 2018 and December 31,
2017. In addition, the Company has provided completion agreements regarding specific performance for certain projects
whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If
there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability
under such completion guaranties. Typically, under such terms of the joint venture agreements, the Company has the right to
apportion the respective share of any costs funded under such completion guaranties to its partners. However, there is no
53
guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture
agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental
indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous
materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender
from customary "bad boy acts" of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of
rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy. Additionally, in some cases,
under our joint venture agreements, our shares of profits and losses may be greater than our contribution percentage.
For more information about our off-balance sheet arrangements, please see Note 12 to our consolidated financial
statements.
As of December 31, 2018, we held membership interests in 10 unconsolidated joint ventures, six of which related to
homebuilding activities and four related to land development as noted below. We were a party to two LTV maintenance
agreements related to unconsolidated joint ventures as of December 31, 2018. The following table reflects certain financial and
other information related to our unconsolidated joint ventures as of December 31, 2018:
December 31, 2018
Total Joint Venture
Contri-
bution
%(1)
Assets Debt
(2)
Equity
NWHM
Equity
(3)
Debt-to-
Total
Capital-
ization
Loan-to-
Value
Maintenance
Agreement
(Dollars in 000's)
15%
2,150
10%
12%
944
1,881
—
—
—
343
103
—%
233
58
—%
1,613
291
—%
N/A
N/A
N/A
10%
72,669
20,254
45,586
4,559
31%
Yes
35%
35%
10%
35%
57,163
1,153
42,535
6,161
3%
No
1,640
1,108
—
1,009
469
—%
30,600
— 29,380
2,938
—%
6,319
—
5,101
1,786
—%
N/A
N/A
N/A
—
—
—
5%
210,373
25,545
171,178
8,560
13%
No
1,080
1,391
Estimated
Future
Capital
Commit-
ment
(4)
Lots
Owned
and
Controlled
—
—
—
—
—
—
—
161
476
—
8
12
Joint Venture (Project
Name)
Year
Formed
Location
TNHC-HW San Jose LLC
(Orchard Park)
TNHC-TCN Santa Clarita
LP (Villa Metro)(5)
TNHC Newport LLC
(Meridian)(5)
Encore McKinley Village
LLC (McKinley Village)
2012
2012
2013
2013
San Jose,
CA
Santa
Clarita, CA
Newport
Beach, CA
Sacramento,
CA
TNHC Russell Ranch LLC
(Russell Ranch)(5) (6) (7)
2013
Folsom, CA
TNHC-HW Foster City
LLC (Foster Square)(6)
Calabasas Village LP
(Avanti)(5)
TNHC-HW Cannery LLC
(Cannery Park)(6)
Arantine Hills Holdings
LP (Bedford Ranch) (5) (6)
2013
2013
Foster City,
CA
Calabasas,
CA
2013
Davis, CA
2014
Corona, CA
TNHC Mountain Shadows
LLC (Mountain Shadows)
2015
Paradise
Valley, AZ
Total Unconsolidated Joint Ventures
$443,988 $71,299 $329,531
33,617
25%
60,781
24,347
32,553
8,692
43%
18%
Yes
—
$
2,720
42
2,090
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Actual equity interests may differ due to current phase of underlying project's life cycle. The contribution percentage reflects the percentage of capital
we are generally obligated to contribute (subject to adjustment under the joint venture agreement) and generally (subject to waterfall provisions) aligns
with our percentage of distributions. In some cases our share of profit and losses may be greater than our contribution percentage.
The carrying value of the debt is presented net of $0.3 million in unamortized debt issuance costs. Scheduled maturities of the unconsolidated joint
venture debt as of December 31, 2018 are as follows: $45.8 million matures in 2019, $25.8 million matures in 2020. The Mountain Shadows project
has multiple debt instruments, some of which do not have LTV maintenance agreements.
Represents the Company's equity in unconsolidated joint ventures. Equity does not include $0.7 million of interest capitalized to certain investments
in unconsolidated joint ventures, which along with equity, are included in investments in and advances to unconsolidated joint ventures in the
accompanying consolidated balance sheets.
Estimated future capital commitment represents our proportionate share of estimated future contributions to the respective unconsolidated joint
ventures as of December 31, 2018. Actual contributions may differ materially.
Certain current and former members of the Company's board of directors are affiliated with entities that have an investment in these joint ventures.
See Note 12 to the consolidated financial statements.
Land development joint venture.
Estimated future capital commitment reflects our contractual contribution obligation under the joint venture agreement. We currently anticipate that
the joint venture will require aggregate contributions of approximately $30.0 million. Neither joint venture partner is currently contractually obligated
to provide this estimated additional funding and the future proportional funding must be determined.
54
As of December 31, 2018, 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, 2018.
Contractual Obligations Table
The following table summarizes our future payment obligations under existing contractual obligations as of
December 31, 2018 including payment obligations due by period. Our purchase obligations primarily represent commitments
for land purchases under purchase and land option contracts with nonrefundable 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 (2)
Operating leases
Purchase obligations (3)
Total
Payments Due By Period
Total
Less than 1
Year
1-3 Years
4-5 Years
(Dollars in thousands)
More than 5
Years
$
$
392,500
$
— $
67,500
$
325,000
$
82,766
3,327
236,241
27,275
1,739
209,288
49,600
1,588
26,953
5,891
—
—
714,834
$
238,302
$
145,641
$
330,891
$
—
—
—
—
—
(1)
(2)
(3)
For a more detailed description of our long-term debt, please see Note 9 of the notes to our consolidated financial statements.
Includes future interest payments for our senior notes due 2022 and unsecured credit facility. Future interest payments for unsecured credit facility
based on $67.5 million balance and interest rate of 5.50% at December 31, 2018.
Includes $126.8 million (net of deposits) of the remaining purchase price for land option and land purchase contracts where deposits are nonrefundable
and $108.4 million of subcontractor labor and material commitments as of December 31, 2018 for which we are responsible if the subcontractor
completes the work as specified in their respective commitments. Excluded from this number is $48.4 million in purchase obligations made on behalf
of the owner(s) of fee build projects for which we are reimbursed per our fee building agreements.
Inflation
Our homebuilding and fee building segments can be adversely impacted by inflation, primarily from higher land,
financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can
significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to
customers through increased prices, when weak housing market conditions exist, we may be unable to offset cost increases with
higher selling prices.
Seasonality
Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital
requirements. We typically experience the highest new home order activity in 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 five to nine months to construct a new home, depending on whether it is single-family detached or
multi-family attached, we typically 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 a higher level of cash receipts from home deliveries occurs
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 and the opening and closeout of communities.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting policies generally accepted in the United States of
America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
Management bases its estimates and judgments on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-
55
going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are
significantly different in the future.
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. Pre-acquisition costs, including nonrefundable land deposits, are expensed to other
income (expense), net if we determine continuation of the prospective project is not probable. Land, development and other
common costs are typically allocated to real estate inventories using a methodology that approximates the relative-sales-value
method. Home construction costs per production phase are recorded using the specific identification method. In accordance
with Accounting Standards Codification ("ASC") 360, Property, Plant and Equipment ("ASC 360") inventory is stated at cost,
unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value.
We review each real estate asset on a 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 or sales absorption rates, costs significantly in excess of budget, and actual or projected
cash flow losses.
If there are indicators of impairment, we perform a detailed budget and cash flow review of the applicable real estate
inventories to determine whether the estimated future undiscounted cash flows of the project are more or less than the asset’s
carrying value. If the estimated future undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is
required. However, if the estimated future undiscounted cash flows are less than the asset’s carrying value, then the asset is
impaired. If the asset is deemed impaired, it is written down to its fair value.
When estimating undiscounted future cash flows of a project, we make various assumptions, including: (i) expected
sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by
us or other builders in other projects, and future sales price adjustments based on market and economic trends; (ii) expected
sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs
expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction
costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings
that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the
property.
Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions.
For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home
and the level of time sensitive costs (such as indirect construction, overhead and carrying costs). Depending on the underlying
objective of the project, assumptions could have a significant impact on the projected cash flow analysis. For example, if our
objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase the
velocity of sales. These objectives may vary significantly from project to project and change over time. If a real estate asset is
deemed impaired, the impairment is calculated by determining the amount the asset’s carrying value exceeds its fair value. We
calculate fair value of real estate inventories using a land residual value analysis or a discounted cash flow analysis. Under the
land residual value analysis, we estimate what a willing buyer would pay and what a willing seller would sell a parcel of land
for (other than in a forced liquidation) in order to generate a market rate operating margin and return based on the remaining
life and status of the project. Under the discounted cash flow method, the fair value is determined by calculating the present
value of future cash flows using a risk adjusted discount rate. Some of the critical assumptions involved with measuring the
asset's fair value include estimating future revenues, sales absorption rates, development and construction costs, and other
applicable project costs. This evaluation and the assumptions used by management to determine future estimated cash flows
and fair value require a substantial degree of judgment, especially with respect to real estate projects that have a substantial
amount of development to be completed, have not started selling or are in the early stages of sales, or are longer in duration.
Actual revenues, costs and time to complete and sell a community could vary from these estimates which could impact the
calculation of fair value of the asset and the corresponding amount of impairment that is recorded in our results of operations.
Home Sales Revenue and Cost of Home Sales
In accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"), homebuilding revenue is
recognized when our performance obligations within the underlying sales contracts are fulfilled. We consider our obligations
fulfilled when closing conditions are complete, title has transferred to the homebuyer, and the collection of the purchase price is
reasonably assured. Sales incentives are recorded as a reduction of revenues when the respective home is closed. Cost of sales
56
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 sale and 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
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 builds homes on behalf of third-party
property owners. The third-party property owner funds all project costs incurred by the Company to build and sell the homes.
The Company primarily enters into cost plus fee contracts where it charges third-party property owners for all direct and
indirect costs, plus a fee. The fee is typically a per-unit fixed fee or based on a percentage of the cost or home sales revenue of
the project depending on the terms of the agreement with the third-party property owner. For these types of contracts, the
Company recognizes revenue based on the actual total costs it has incurred plus the applicable fee. In accordance with ASC
606, we apply the percentage-of-completion method, using the cost-to-cost approach, as it most accurately measures the
progress of our efforts in satisfying our obligations within the fee building agreements. Under this approach, revenue is earned
in proportion to total costs incurred, divided by total costs expected to be incurred. In the course of providing its services, the
Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are
passed through to the property owners and, in accordance with GAAP, are included in the Company’s revenue and cost of sales.
The Company also provides construction management and coordination services and sales and marketing services as
part of agreements with third parties and its unconsolidated joint ventures. In certain contracts, the Company also provides
project management and administrative services. For most services provided, the Company fulfills its related obligations as
time-based measures, according to the input method guidance described in ASC 606. Accordingly, revenue is recognized on a
straight-line basis as the Company's efforts are expended evenly throughout the performance period. The Company may also
have an obligation to manage the home or lot sales process as part of providing sales and marketing services. This obligation is
considered fulfilled when related homes or lots close escrow, as these events represent milestones reached according to the
output method guidance described in ASC 606. Accordingly, revenue is recognized in the period that the corresponding lots or
homes close escrow. Costs associated with these services are recognized as incurred.
Variable Interest Entities
The Company accounts for variable interest entities in accordance with ASC 810, Consolidation ("ASC 810"). Under
ASC 810, a variable interest entity ("VIE") is created when: (a) the equity investment at risk in the entity is not sufficient to
permit the entity to finance its activities without additional subordinated financial support provided by other parties, including
the equity holders; (b) the entity’s equity holders as a group either (i) lack the direct or indirect ability to make decisions about
the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual
returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests,
and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights.
Once we consider the sufficiency of equity and voting rights of each legal entity, we then evaluate the characteristics of
the equity holders' interests, as a group, to see if they qualify as controlling financial interests. Our real estate joint ventures
consist of limited partnerships and limited liability companies. For entities structured as limited partnerships or limited liability
companies, our evaluation of whether the equity holders (equity partners other than us in each our joint ventures) lack the
characteristics of a controlling financial interest includes the evaluation of whether the limited partners or non-managing
members (the non-controlling equity holders) lack both substantive participating rights and substantive kick-out rights, defined
as follows:
57
•
Participating rights - provide the non-controlling equity holders the ability to direct significant financial and
operational decision made in the ordinary course of business that most significantly influence the entity's economic
performance.
• Kick-out rights - allow the non-controlling equity holders to remove the general partner or managing member without
cause.
If we conclude that any of the three characteristics of a VIE are met, including if equity holders lack the characteristics
of a controlling financial interest because they lack both substantive participating rights and substantive kick-out rights, we
conclude that the entity is a VIE and evaluate it for consolidation under the variable interest model.
If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities
of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses
of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary
beneficiary and must consolidate the VIE. In accordance with ASC 810, we perform ongoing reassessments of whether an
enterprise is the primary beneficiary of a VIE.
Investments in and Advances to Unconsolidated Joint Ventures
We use the equity method to account for investments in homebuilding and land development joint ventures when any of
the following situations exist: 1) the joint venture qualifies as a VIE and we are not the primary beneficiary, 2) we do not
control the joint venture but have the ability to exercise significant influence over its operating and financial policies or 3) we
function as the managing member or general partner of the joint ventures and our joint venture partner has substantive
participating rights or can replace us as managing member or general partner without cause.
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 accounting policies of our joint ventures
are consistent with those of the Company with an exception for the requirements of ASC 606, which our joint ventures had not
adopted at December 31, 2018.
We review real estate inventory held by our unconsolidated joint ventures for impairment, consistent with how we
review our real estate inventories as described in more detail above in the section entitled "Real Estate Inventories". We also
review our investments in and advances to unconsolidated joint ventures for evidence of other-than-temporary declines in
value. To the extent we deem any portion of our investment in and advances to unconsolidated joint ventures as not
recoverable, we impair our investment accordingly.
Warranty Accrual
We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural
construction defects for one year. In addition, we provide a more limited warranty, which generally ranges from a minimum of
two years up to the period covered by the applicable statute of repose, that covers certain defined construction defects.
Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding
revenues are recognized. Amounts are accrued based upon the Company’s historical rates. In addition, the Company has
received warranty payments from third party property owners for certain of its fee building projects that have since closed out
where the Company has the contractual risk of construction. These payments are recorded as warranty accruals. We assess the
adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. 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.
58
Income Taxes
Income taxes are accounted for in accordance with ASC 740, Income Taxes ("ASC 740"). The consolidated provision
for, or benefit from, income taxes is calculated using the asset and liability method under which deferred tax assets and
liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse.
Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not
(defined as a likelihood of more than 50%) unrealizable under ASC 740. We are required to establish a valuation allowance for
any portion of the tax asset we conclude is more likely than not unrealizable. Our assessment considers, among other things,
the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory
carryforward periods, our utilization experience with net operating losses and tax credit carryforwards and the planning
alternatives, to the extent these items are applicable. 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, 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. 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.
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 and shareholder advisory votes on golden parachute compensation.
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, 2018. We have not entered into and currently do not hold derivatives for trading or
speculative purposes.
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 senior unsecured notes is derived from quoted
59
market prices. The fair value of our variable rate debt consists of the balance of our senior unsecured revolving credit facility
(the "Credit Facility"). Based on the short-term duration of LIBOR rates, the fair value of debt under the Credit Facility
approximates the carrying value.
Senior Unsecured Notes
Fixed Rate
Weighted Average Interest Rate
Senior Unsecured Credit Facility
Variable rate debt
Weighted Average Interest Rate
$
$
Expected Maturity Date
2019
2020 - 2023
Thereafter
Total
(Dollars in thousands)
Estimated Fair
Value
— $
325,000
$
— $
325,000
$
292,500
—%
7.25%
—%
7.25%
NA
— $
—%
67,500
$
5.5%
— $
—%
67,500
$
5.5%
67,500
NA
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 64.
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 periods specified by the SEC's rules
and forms is 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 evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of controls.
At the end of the period being reported upon, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of
December 31, 2018.
60
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, 2018 based on the framework established in the 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,
2018.
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 was no change in the Company’s internal control over financial reporting that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
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 2019 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 2019 Annual Meeting of
Shareholders and is incorporated herein by reference.
61
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 2019 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 2019 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 2019 Annual Meeting of
Shareholders and is incorporated herein by reference.
62
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, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
PAGE
64
65
66
67
68
69
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 the signature page, which Index is incorporated in this Item by reference.
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
The New Home Company Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of The New Home Company Inc. (“the Company”) as of
December 31, 2018 and 2017, the related consolidated statements of operations, equity and cash flows for each of
the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,
2018, in conformity with U.S. generally accepted accounting principles.
Adoption of ASU No. 2014-09
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for
revenue recognition and real estate inventories and cost of sales effective January 1, 2018 due to the adoption of
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), and related Subtopic ASC 340-40, Other
Assets and Deferred Costs - Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2010.
Irvine, California
February 15, 2019
64
THE NEW HOME COMPANY INC.
CONSOLIDATED BALANCE SHEETS
Assets
Cash and cash equivalents
Restricted cash
Contracts and accounts receivable
Due from affiliates
Real estate inventories
Investment in and advances to unconsolidated joint ventures
Other assets
Total assets
Liabilities and equity
Accounts payable
Accrued expenses and other liabilities
Unsecured revolving credit facility
Senior notes, net
Total liabilities
Commitments and contingencies (Note 11)
Equity:
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding
Common stock, $0.01 par value, 500,000,000 shares authorized, 20,058,904 and
20,876,837, shares issued and outstanding as of December 31, 2018 and December
31, 2017, respectively
Additional paid-in capital
Retained earnings
Total stockholders' equity
Non-controlling interest in subsidiary
Total equity
Total liabilities and equity
See accompanying notes to the consolidated financial statements.
December 31,
2018
2017
(Dollars in thousands, except
par value amounts)
$
$
$
$
$
$
$
42,273
269
18,265
1,218
566,290
34,330
33,452
696,097
39,391
29,028
67,500
320,148
456,067
123,546
424
23,224
1,060
416,143
55,824
24,291
644,512
23,722
38,054
—
318,656
380,432
—
—
201
193,132
46,621
239,954
76
240,030
696,097
$
209
199,474
64,307
263,990
90
264,080
644,512
65
THE NEW HOME COMPANY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues:
Home sales
Fee building, including management fees from unconsolidated joint
ventures of $3,385, $4,945 and $8,202, respectively
Cost of Sales:
Home sales
Home sales impairments
Land sales impairment
Fee building
Gross Margin:
Home sales
Land sales
Fee building
Selling and marketing expenses
General and administrative expenses
Equity in net income (loss) of unconsolidated joint ventures
Other income (expense), net
Pretax income (loss)
(Provision) benefit for income taxes
Net income (loss)
Net loss attributable to non-controlling interest
Net income (loss) attributable to The New Home Company Inc.
Earnings (loss) 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.
Year Ended December 31,
2017
2016
2018
(Dollars in thousands, except per share amounts)
$
504,029
$
560,842
$
507,949
163,537
667,566
436,530
10,000
—
159,136
605,666
57,499
—
4,401
61,900
(36,065)
(25,966)
(19,653)
(521)
(20,305)
6,075
(14,230)
14
(14,216) $
190,324
751,166
473,213
2,200
—
184,827
660,240
85,429
—
5,497
90,926
(32,702)
(26,330)
866
(229)
32,531
(15,390)
17,141
11
17,152
(0.69) $
(0.69) $
0.82
0.82
$
$
$
186,507
694,456
433,559
2,350
1,150
178,103
615,162
72,040
(1,150)
8,404
79,294
(26,744)
(25,882)
7,691
(409)
33,950
(13,024)
20,926
96
21,022
1.02
1.01
20,703,967
20,703,967
20,849,736
20,995,498
20,685,386
20,791,445
$
$
$
66
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
Non-
controlling
Interest in
Subsidiary
Total
Equity
(Dollars in thousands)
Balance at December 31, 2015
20,543,130
$
205
$ 194,437
$ 26,133
$
220,775
$
922
$ 221,697
Net income (loss)
Non-controlling interest distribution
Stock-based compensation expense
Shares net settled with the Company to satisfy
employee personal income tax liabilities resulting
from share based compensation plans
Excess tax provision from stock-based
compensation
Shares issued through stock plans
—
—
—
(62,597)
—
231,633
Balance at December 31, 2016
20,712,166
Net income (loss)
Stock-based compensation expense
Shares net settled with the Company to satisfy
employee personal income tax liabilities resulting
from share based compensation plans
Shares issued through stock plans
—
—
(56,092)
220,763
—
—
—
—
—
2
207
—
—
—
2
—
—
3,471
(648)
(97)
(2)
197,161
—
2,803
(590)
100
21,022
—
—
—
—
—
47,155
17,152
—
—
—
21,022
—
3,471
(648)
(97)
—
244,523
17,152
2,803
(590)
102
Balance at December 31, 2017
20,876,837
209
199,474
64,307
263,990
Adoption of ASC 606 and ASU 2018-07 (see
Note 1)
Net income (loss)
Stock-based compensation expense
Shares net settled with the Company to satisfy
employee personal income tax liabilities resulting
from share based compensation plans
Shares issued through stock plans
—
—
—
(86,692)
271,875
—
—
—
—
2
(18)
—
3,090
(982)
(2)
(3,347)
(14,216)
—
—
—
(3,365)
(14,216)
3,090
(982)
—
Repurchase of common stock
(1,003,116)
(10)
(8,430)
(123)
(8,563)
(96)
(725)
—
20,926
(725)
3,471
—
—
—
101
(11)
—
—
—
90
—
(14)
—
—
—
—
(648)
(97)
—
244,624
17,141
2,803
(590)
102
264,080
(3,365)
(14,230)
3,090
(982)
—
(8,563)
Balance at December 31, 2018
20,058,904
$
201
$ 193,132
$ 46,621
$
239,954
$
76
$ 240,030
See accompanying notes to the consolidated financial statements.
67
THE NEW HOME COMPANY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
$
(14,230) $
17,141
$
20,926
(7,620)
—
3,090
—
10,000
206
—
715
19,653
136
6,631
4,959
(242)
(157,705)
(11,642)
15,669
(9,305)
—
(139,685)
(246)
—
(15,066)
15,436
178
302
—
150,000
(82,500)
—
—
—
—
(8,563)
(982)
—
—
57,955
(81,428)
123,970
42,542
$
(1,073)
3,190
2,803
—
2,200
383
—
1,588
(866)
821
449
4,670
18
(114,930)
(5,255)
(9,546)
7,544
—
(90,863)
(195)
995
(27,479)
15,577
552
(10,550)
—
88,000
(206,000)
324,465
—
(4,110)
(7,565)
—
(590)
—
102
194,302
92,889
31,081
123,970
$
(918)
—
3,471
97
3,500
580
(250)
3,742
(7,691)
646
511
(3,737)
(344)
(71,388)
(756)
6,171
2,921
(293)
(42,812)
(439)
2,610
(15,088)
15,307
—
2,390
(725)
223,050
(179,974)
—
343
(15,636)
(1,064)
—
(648)
(97)
—
25,249
(15,173)
46,254
31,081
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Deferred taxes
Noncash deferred tax asset charge
Amortization of stock-based compensation
Excess income tax provision from stock-based compensation
Inventory impairments
Abandoned project costs
Gain from notes payable principal reduction
Distributions of earnings from unconsolidated joint ventures
Equity in net income (loss) of unconsolidated joint ventures
Deferred profit from unconsolidated joint ventures
Depreciation and amortization
Net changes in operating assets and liabilities:
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
Cash assumed from joint venture at consolidation
Contributions and advances to unconsolidated joint ventures
Distributions of capital and repayment of advances from unconsolidated
joint ventures
Interest collected on advances to unconsolidated joint ventures
Net cash provided by (used in) investing activities
Financing activities:
Cash distributions to non-controlling interest in subsidiary
Borrowings from credit facility
Repayments of credit facility
Proceeds from senior notes
Borrowings from other notes payable
Repayments of other notes payable
Payment of debt issuance costs
Repurchase of common stock
Tax withholding paid on behalf of employees for stock awards
Excess income tax benefit from stock-based compensation
Proceeds from exercise of stock options
Net cash provided by financing activities
Net (decrease) increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash – beginning of period
Cash, cash equivalents and restricted cash – end of period
$
See accompanying notes to the consolidated financial statements.
68
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.
The Company completed its initial public offering ("IPO") on January 30, 2014 and sold 8,984,375 shares of common
stock (including 1,171,875 shares sold pursuant to the underwriters' 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. 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.
Based on our public float of $160.9 million at June 29, 2018, we are a smaller reporting company and are subject to
reduced disclosure obligations in our periodic reports and proxy statements.
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.
Reclassifications
Certain items in the prior year consolidated financial statements have been reclassified to conform with current year
presentation. These reclassifications have not changed the results of operations of prior periods. On January 1, 2018, the
Company adopted Accounting Standards Update ("ASU") No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
("ASU 2016-18") under the full retrospective method. As a result, the Company no longer presents transfers between cash and
restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents
when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows.
The adoption of ASU 2016-18 also caused a reclassification on the statement of cash flows for cash assumed from joint venture
at consolidation for the year ended December 31, 2016. For additional detail on restricted cash, please see Restricted Cash
below.
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 reportable segments.
69
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.
Restricted Cash
Restricted cash of $0.3 million and $0.4 million as of December 31, 2018 and 2017, respectively, is held in accounts for
payments of subcontractor costs incurred in connection with various fee building projects.
The table below shows the line items and amounts of cash and cash equivalents and restricted cash as reported within the
Company's consolidated balance sheets for each period shown that sum to the total of the same such amounts at the end of the
periods shown in the accompanying consolidated statements of cash flows.
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents, and restricted cash shown in the statements of cash
flows
Real Estate Inventories and Cost of Sales
Year Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
42,273
269
$
123,546
424
30,496
585
42,542
$
123,970
$
31,081
$
$
We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect
construction costs. Pre-acquisition costs, including nonrefundable land deposits, are expensed to other income (expense), net if
we determine continuation of the prospective project is not probable.
Land, development and other common costs are typically allocated to real estate inventories using a methodology that
approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific
identification method. Cost of sales for homes closed includes the estimated total construction costs of each home at
completion and an allocation of all applicable land acquisition, land development and related common costs (both incurred and
estimated to be incurred) based upon the relative-sales-value of the home within each project. Changes in estimated
development and common costs are allocated prospectively to remaining homes in the project.
In accordance with ASC 360, Property, Plant and Equipment ("ASC 360"), inventory is stated at cost, unless the carrying
amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real
estate asset on a 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 or sales absorption rates, costs significantly in excess of budget, and actual or projected cash flow losses.
If there are indicators of impairment, we perform a detailed budget and cash flow review of the applicable real estate
inventories to determine whether the estimated future undiscounted cash flows of the project are more or less than the asset’s
carrying value. If the estimated future undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is
required. However, if the estimated future undiscounted cash flows are less than the asset’s carrying value then the asset is
impaired. If the asset is deemed impaired, it is written down to its fair value in accordance with ASC 820, Fair Value
Measurements and Disclosures ("ASC 820").
When estimating undiscounted future cash flows of a project, we make various assumptions, including: (i) expected sales
prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or
other builders in other projects, and future sales price adjustments based on market and economic trends; (ii) expected sales
pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to
date and expected to be incurred including, but not limited to, land and land development costs, home construction costs,
interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that
70
may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the
property.
Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For
example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home and
the level of time sensitive costs (such as indirect construction, overhead and carrying costs). Depending on the underlying
objective of the project, assumptions could have a significant impact on the projected cash flow analysis. For example, if our
objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase the
velocity of sales. These objectives may vary significantly from project to project and change over time.
If a real estate asset is deemed impaired, the impairment is calculated by determining the amount the asset's carrying
value exceeds its fair value in accordance with ASC 820. We calculate the fair value of real estate inventories considering a
land residual value analysis and a discounted cash flow analysis. Under the discounted cash flow method, the fair value is
determined by calculating the present value of future cash flows using a risk-adjusted discount rate. Some of the critical
assumptions involved with measuring the asset's fair value include estimating future revenues, sales absorption rates,
development and construction costs, and other applicable project costs. This evaluation and the assumptions used by
management to determine future estimated cash flows and fair value require a substantial degree of judgment, especially with
respect to real estate projects that have a substantial amount of development to be completed, have not started selling or are in
the early stages of sales, or are longer in duration. Actual revenues, costs and time to complete and sell a community could vary
from these estimates which could impact the calculation of fair value of the asset and the corresponding amount of impairment
that is recorded in our results of operations. For the years ended December 31, 2018, 2017 and 2016, we recorded inventory
impairments of $10.0 million, $2.2 million and $3.5 million, respectively. For additional detail regarding these impairment
charges, please see Note 4.
Capitalization of Interest
We follow the practice of capitalizing interest to real estate inventories during the period of development and to
investments in unconsolidated joint ventures, when applicable, in accordance with ASC 835, Interest ("ASC 835"). Interest
capitalized as a cost component of real estate inventories is included in cost of home sales as related homes or lots are sold. To
the extent interest is capitalized to investment in unconsolidated joint ventures, it is included as a reduction of income from
unconsolidated joint ventures when the related homes or lots are sold to third parties. In instances where the Company
purchases land from an unconsolidated joint venture, the pro rata share of interest capitalized to investment in unconsolidated
joint ventures is added to the basis of the land acquired and recognized as a cost of sale upon the delivery of the related land to
a third-party buyer. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the
interest incurred by us. Qualified assets represent projects that are actively selling or under development as well as investments
in unconsolidated joint ventures accounted for under the equity method until such equity investees begin their principal
operations.
Revenue Recognition
Effective January 1, 2018, we adopted the requirements of ASU 2014-09, Revenue from Contracts with Customers (Topic
606) ("ASC 606") under the modified retrospective method. For additional detail on the new standard and the impact to our
consolidated financial statements, refer to "Recently Issued Accounting Standards" below. Under ASC 606, we recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. To do this, the Company performs the following five
steps as outlined in ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract;
and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
Home Sales and Profit Recognition
In accordance with ASC 606, home sales revenue is recognized when our performance obligations within the underlying
sales contracts are fulfilled. We consider our obligations fulfilled when closing conditions are complete, title has transferred to
the homebuyer, and collection of the purchase price is reasonably assured. Sales incentives are recorded as a reduction of
revenues when the respective home is closed. The profit we record is based on the calculation of cost of sales, which is
dependent on our allocation of costs, as described in more detail above in the section entitled "Real Estate Inventories and Cost
of Sales." When it is determined that the earnings process is not complete, the related revenue and profit are deferred for
recognition in future periods.
71
For periods prior to January 1, 2018, the company recognized home sales and other real estate sales revenue in
accordance with ASC 360. Under ASC 360, revenue from home sales and other real estate sales was recorded and a profit was
recognized when the sales process was complete under the full accrual method. The sales process was considered complete for
home sales and other real estate sales when all conditions of escrow were met, including delivery of the home or other real
estate asset, title passes, appropriate consideration is received and collection of associated receivables, if any, was reasonably
assured.
Fee Building
The Company enters into fee building agreements to provide services whereby it builds homes on behalf of third-party
property owners. The third-party property owner funds all project costs incurred by the Company to build and sell the homes.
The Company primarily enters into cost plus fee contracts where it charges third-party property owners for all direct and
indirect costs plus a fee. The fee is typically a per-unit fixed fee or based on a percentage of the cost or home sales revenue of
the project, depending on the terms of the agreement with the third-party property owner. For these types of contracts, the
Company recognizes revenue based on the actual total costs it has incurred plus the applicable fee. In accordance with ASC 606
for periods after January 1, 2018 and ASC 605, Revenue Recognition ("ASC 605") for prior periods, we apply the percentage-
of-completion method, using the cost-to-cost approach, as it most accurately measures the progress of our efforts in satisfying
our obligations within the fee building agreements. Under this approach, revenue is earned in proportion to total costs incurred
divided by total costs expected to be incurred. In the course of providing fee building services, the Company routinely
subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are passed through to the
property owners and, in accordance with GAAP, are included in the Company’s revenues and cost of sales.
The Company also provides construction management and coordination services and sales and marketing services as part
of agreements with third parties and its unconsolidated joint ventures. In certain contracts, the Company also provides project
management and administrative services. For most services provided, the Company fulfills its related obligations as time-
based measures, according to the input method guidance described in ASC 606. Accordingly, revenue is recognized on a
straight-line basis as the Company's efforts are expended evenly throughout the performance period. The Company may also
have an obligation to manage the home or lot sales process as part of providing sales and marketing services. This obligation is
considered fulfilled when related homes or lots close escrow, as these events represent milestones reached according to the
output method guidance described in ASC 606. Accordingly, revenue is recognized in the period that the corresponding lots or
homes close escrow. Costs associated with these services are recognized as incurred. Prior to the adoption of ASC 606, the
Company recognized revenues from these services in accordance with ASC 605 under a proportional performance method or
completed performance method. Under ASC 605, revenue was earned as services were provided in proportion to total services
expected to be provided to the customer or on a straight-line basis if the pattern of performance could not be determined.
The Company’s fee building revenues have historically been concentrated with a small number of customers. For the
years ended December 31, 2018, 2017 and 2016, one customer comprised 95%, 97% and 96% of fee building revenue,
respectively. The balance of the fee building revenues primarily represented management fees earned from unconsolidated
joint ventures and third-party customers. As of December 31, 2018 and 2017, one customer comprised 48% and 49% of
contracts and accounts receivable, respectively, with the balance of accounts receivable primarily representing escrow
receivables from home sales.
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.
72
Once we consider the sufficiency of equity and voting rights of each legal entity, we then evaluate the characteristics of
the equity holders' interests, as a group, to see if they qualify as controlling financial interests. Our real estate joint ventures
consist of limited partnerships and limited liability companies. For entities structured as limited partnerships or limited liability
companies, our evaluation of whether the equity holders (equity partners other than us in each our joint ventures) lack the
characteristics of a controlling financial interest includes the evaluation of whether the limited partners or non-managing
members (the non-controlling equity holders) lack both substantive participating rights and substantive kick-out rights, defined
as follows:
•
Participating rights - provide the non-controlling equity holders the ability to direct significant financial and
operational decision made in the ordinary course of business that most significantly influence the entity's economic
performance.
• Kick-out rights - allow the non-controlling equity holders to remove the general partner or managing member without
cause.
If we conclude that any of the three characteristics of a VIE are met, including if equity holders lack the characteristics of
a controlling financial interest because they lack both substantive participating rights and substantive kick-out rights, we
conclude that the entity is a VIE and evaluate it for consolidation under the variable interest model.
If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of
a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses of
the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary
beneficiary and must consolidate the VIE.
Under ASC 810, a nonrefundable deposit paid to an entity may be deemed to be a variable interest that will absorb some
or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum
exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for
due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are
classified as real estate inventories, which we would have to write off should we not exercise the option. Therefore, whenever
we enter into a land option or purchase contract with an entity and make a nonrefundable deposit, a VIE may have been
created.
As of December 31, 2018 and 2017, the Company was not required to consolidate any VIEs. In accordance with ASC
810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
Non-controlling Interest
During 2013, the Company entered into a joint venture agreement with a third-party property owner. In accordance with
ASC 810, the Company analyzed this arrangement and determined that it was not a VIE; however, the Company determined it
was required to consolidate the joint venture as the Company has a controlling financial interest with the powers to direct the
major decisions of the entity. As of December 31, 2018 and 2017, the third-party investor had an equity balance of $0.1 million
and $0.1 million, respectively.
Investments in and Advances to Unconsolidated Joint Ventures
We use the equity method to account for investments in homebuilding and land development joint ventures when any of
the following situations exist: 1) the joint venture qualifies as a VIE and we are not the primary beneficiary, 2) we do not
control the joint venture but have the ability to exercise significant influence over its operating and financial policies, or 3) we
function as the managing member or general partner of the joint venture and our joint venture partner has substantive
participating rights or can replace us as managing member or general partner without cause.
As of December 31, 2018, the Company concluded that none of its joint ventures were VIEs and accounted for these
entities 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. We classify cash distributions received from
equity method investees using the cumulative earnings approach consistent with ASU No. 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). Under the cumulative earnings
73
approach, distributions received are considered returns on investment and shall be classified as cash inflows from operating
activities unless the cumulative distributions received exceed cumulative equity in earnings. When such an excess occurs, the
current-period distribution up to this excess is considered a return of investment and shall be classified as cash inflows from
investing activities. Our ownership interests in our unconsolidated joint ventures vary, but are generally less than or equal to
35%. The accounting policies of our joint ventures are consistent with those of the Company with an exception for the
requirements of ASC 606, which our joint ventures had not adopted at December 31, 2018.
We review real estate inventory held by our unconsolidated joint ventures for impairment, consistent with how we review
our real estate inventories as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales."
For the years ended December 31, 2018, 2017 and 2016, our unconsolidated joint ventures recorded noncash impairment
charges of $28.8 million, $0 and $0, respectively, of which $18.9 million, $0 and $0, respectively, was allocated to the
Company. We also review our investments in and advances to unconsolidated joint ventures for evidence of other-than-
temporary declines in value in accordance with ASC 820. To the extent we deem any portion of our investment in and advances
to unconsolidated joint ventures as not recoverable, we impair our investment accordingly. For the years ended December 31,
2018, 2017 and 2016, the Company recorded other-than-temporary, noncash impairment charges of $1.1 million, $0 and $0,
respectively, related to our investment in and advances to unconsolidated joint ventures.
Selling and Marketing Expense
Effective January 1, 2018, costs incurred for tangible assets directly used in the sales process such as our sales offices,
design studios and model landscaping and furnishings are capitalized to other assets in the accompanying consolidated balance
sheets under ASC 340, Other Assets and Deferred Costs ("ASC 340"). These costs are depreciated to selling and marketing
expenses generally over the shorter of 30 months or the actual estimated life of the selling community. All other selling and
marketing costs, such as commissions and advertising, are expensed as incurred. Prior to January 1, 2018, the Company
followed the guidance under ASC 970-340, Real Estate - Other Assets and Deferred Costs ("ASC 970"), and capitalized certain
selling and marketing costs to other assets in the consolidated balance sheet if the costs were reasonably expected to be
recovered from the sale of the project or from incidental operations, and were incurred for tangible assets that were used
directly through the selling period to aid in the sale of the project or services that had been performed to obtain regulatory
approval of sales. These capitalizable selling and marketing costs included, but were not limited to, model home design, model
home decor and landscaping, and sales office/design studio setup. These costs were amortized to selling and marketing
expense as the underlying homes were delivered.
Warranty Accrual
We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural
construction defects for one year. In addition, we provide a more limited warranty, which generally ranges from a minimum of
two years up to the period covered by the applicable statute of repose, that covers certain defined construction defects.
Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding
revenues are recognized. Amounts are accrued based upon the Company’s historical rates. In addition, the Company has
received warranty payments from third-party property owners for certain of its fee building projects that have since closed-out
where the Company has the contractual risk of construction. These payments are recorded as warranty accruals. We assess the
adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is
included in accrued expenses and other liabilities in the accompanying consolidated balance sheets and adjustments to our
warranty accrual are recorded through cost of sales.
Contracts and Accounts Receivable
Contracts and accounts receivable primarily represent the fees earned, but not collected, and reimbursable project costs
incurred in connection with fee building agreements. The Company periodically evaluates the collectability of its contracts
receivable, and, if it is determined that a receivable might not be fully collectible, an allowance is recorded for the amount
deemed uncollectible. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts
involved and the financial condition of its customers. Factors considered in such evaluations include, but are not limited to: (i)
customer type; (ii) historical contract performance; (iii) historical collection and delinquency trends; (iv) customer credit
worthiness; and (v) general economic conditions. In addition to contracts receivable, escrow receivables are included in
contracts and accounts receivable in the accompanying consolidated balance sheets. As of December 31, 2018 and 2017, no
allowance was recorded related to contracts and accounts receivable.
74
Property, Equipment and Capitalized Selling and Marketing Costs
Property, equipment and capitalized selling and marketing costs are recorded at cost and included in other assets in the
accompanying consolidated balance sheets. Property and equipment are depreciated to general and administrative expenses
using the straight-line method over their estimated useful lives ranging from three to five years. Leasehold improvements are
stated at cost and are amortized to general and administrative expenses using the straight-line method generally over the shorter
of either their estimated useful lives or the term of the lease. Capitalized selling and marketing costs are depreciated using the
straight-line method to selling and marketing expenses over the shorter of either 30 months or the actual estimated life of the
selling community. For the years ended December 31, 2018, 2017 and 2016, the Company incurred depreciation and
amortization expense of $6.6 million, $0.4 million and $0.5 million, respectively. The increase in the 2018 depreciation and
amortization expense is primarily due to capitalized selling and marketing costs that were reclassified in accordance with the
adoption of ASC 606. Please refer to "Selling and Marketing Expense" above for more detail.
Income Taxes
Income taxes are accounted for in accordance with ASC 740, Income Taxes ("ASC 740"). The consolidated provision
for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and
liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse.
Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not
(defined as a likelihood of more than 50%) unrealizable under ASC 740. We are required to establish a valuation allowance for
any portion of the tax asset we conclude is more likely than not unrealizable. Our assessment considers, among other things,
the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory
carryforward periods, our utilization experience with net operating losses and tax credit carryforwards and the planning
alternatives, to the extent these items are applicable. 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.
At December 31, 2018 and 2017, no valuation allowance was recorded.
ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance
regarding the measurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial
statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be
sustained upon examination. In addition, these provisions provide guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-
likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts
and circumstances. At December 31, 2018, the Company has concluded that there were no significant uncertain tax positions
requiring recognition in its financial statements.
The Company classifies any interest and penalties related to income taxes assessed as part of income tax expense. As of
December 31, 2018, the Company has not been assessed interest or penalties by any major tax jurisdictions related to any open
tax periods.
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. On February 16, 2017, the Company entered into an
agreement that transitioned Wayne Stelmar's role within the Company from Chief Investment Officer to a non-employee
consultant and non-employee director. Per the agreements, Mr. Davis' and Mr. Stelmar's outstanding equity awards continued
to vest in accordance with their original terms. Under ASC 505-50, if an employee becomes a non-employee and continues to
75
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 both Mr. Davis' and Mr. Stelmar's consulting agreements noted above, we accounted for their share-
based awards in accordance with ASC 505-50 through March 31, 2018. ASC 505-50 required that these awards be accounted
for prospectively, such that the fair value of the awards was 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 or Mr.
Stelmar have been completed. ASC 505-50 required 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. Mr. Davis'
outstanding awards fully vested during January 2017 and were fully expensed.
In June of 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting
("ASU 2018-07") which expanded the scope of ASC 718 to include share-based payments for acquiring goods and services
from nonemployees, with certain exceptions. Under ASC 718, the measurement date for equity-classified, share-based awards
is generally the grant date of the award. The Company early adopted ASU 2018-07 on April 1, 2018, at which time Mr.
Stelmar's award was the only nonemployee award outstanding. In accordance with the transition guidance, the Company
assessed Mr. Stelmar's award for which a measurement date had not been established. The outstanding award was re-measured
to fair value as of the April 1, 2018 adoption date. The adoption of ASU 2018-07 provides administrative relief by fixing the
remaining unamortized expense of the award and eliminating the requirement to quarterly re-measure the Company's one
remaining nonemployee award. The Company adopted this standard on a modified retrospective basis booking a cumulative-
effect adjustment of an $18,000 increase to retained earnings and equal decrease to additional paid-in capital as of the
beginning of the 2018 fiscal year. The remaining unamortized expense for Mr. Stelmar's award as of December 31, 2018 was
$24,000.
Share Repurchase and Retirement
When shares are retired, the Company’s policy is to allocate the excess of the repurchase price over the par value of
shares acquired to both retained earnings and additional paid-in capital. The portion allocated to additional paid-in capital is
determined by applying a percentage, which is determined by dividing the number of shares to be retired by the number of
shares issued, to the balance of additional paid-in capital as of the retirement date. The residual, if any, is allocated to retained
earnings as of the retirement date.
During the year ended December 31, 2018, the Company repurchased and retired 1,003,116 shares of its common stock at
an aggregate purchase price of $8.5 million. The shares were returned to the status of authorized but unissued.
Dividends
No dividends were paid on our common stock during the years ended December 31, 2018, 2017, and 2016. We currently
intend to retain our future earnings to finance the development and expansion of our business and, therefore, do not intend to
pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the
discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements,
compliance with Delaware law, restrictions contained in any financing instruments, including but not limited to, our unsecured
credit facility and senior notes indenture, and such other factors as our board of directors deem relevant.
Employee Benefit Plan
We have a defined contribution plan pursuant to Section 401(k) of the Internal Revenue Code where each employee may
elect to make before-tax or Roth contributions up to the current tax limits. The Company matches 50% of the employee's
contribution on the first 8% of compensation up to a maximum match of $11,000, on a discretionary basis. Our contributions
to the plan for the years ended December 31, 2018, 2017 and 2016 were $1.0 million, $0.8 million, and $0.9 million,
respectively.
76
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"). 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 FASB issued ASC 606, which supersedes existing accounting literature relating to how and when a
company recognizes revenue. Under ASC 606, 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. Additionally, ASC 606 supersedes existing industry-specific accounting literature relating to how a
company expenses certain selling and marketing costs. Effective January 1, 2018, the Company adopted the requirements of
ASC 606 using the modified retrospective approach.
Under the modified retrospective approach, the Company recognized the cumulative effect of initially applying the new
standard as a $3.4 million, tax-effected decrease to the opening balance of retained earnings as of January 1, 2018. The
comparative information has not been restated and continues to be reported as it was previously, under the appropriate
accounting standards in effect for those periods. The adjustment to retained earnings related to a $4.7 million write-down of
certain recoverable selling and marketing costs included in other assets that were formerly capitalized under ASC 970, but that
no longer qualify for capitalization under the Company's accounting policy reflecting the changes upon the adoption of ASC
606. As a result of this write-down, the Company's deferred tax asset increased by $1.3 million. For the year ended December
31, 2018, the Company expensed $0.1 million more in selling and marketing costs than it would have recognized as required by
the previous guidance, ASC 970. In addition, the accounting policy change resulted in depreciation expense for capitalized
selling and marketing assets to be included in the line item "depreciation and amortization" in the consolidated statement of
cash flows for year ended December 31, 2018 compared to including the expense in the net change to other assets line item.
The adoption of ASC 606 did not have a material impact on other areas of the Company's consolidated balance sheet,
consolidated statement of operations or statement of cash flows for the year ended December 31, 2018.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASC 842"). ASC 842 will require
organizations that lease assets (referred to as "lessees") to present lease assets and lease liabilities on the balance sheet at their
gross value based on the the rights and obligations created by those leases. Under ASC 842, a lessee will be required to
recognize assets and liabilities for leases with greater than 12 month terms. Lessor accounting remains substantially similar to
current GAAP. Additional disclosures including qualitative and quantitative information regarding leasing activities are also
required. ASC 842 is effective for interim and annual reporting periods beginning after December 15, 2018 and mandates a
modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted
Improvements ("ASU 2018-11") which provides for an additional transition method that allows companies to apply the new
lease standard at the adoption date, eliminating the requirement to apply the standard to the earliest period presented in the
financial statements. The Company's lease agreements that will be impacted by ASC 842 primarily relate to our corporate
headquarters, several other office locations and office or construction equipment where we are the lessee. We believe all
applicable agreements would be considered operating leases. Upon adoption of ASC 842, we expect to add a right-of-use asset
and a related lease liability to our consolidated balance sheets. We expect to recognize lease expense on a straight-line basis
with a portion of the expense recorded as amortization of the right-of-use asset and the balance recorded as interest expense or
capitalized interest to real estate inventories, if applicable.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit
Losses on Financial Instruments ("ASU 2016-13"). Subsequently, in November 2018, the FASB issued ASU 2018-19,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses. ASU 2016-13 changes the impairment model
for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss"
methodology. The standard is effective for annual and interim periods beginning January 1, 2020, with early adoption
permitted, and requires full retrospective application upon adoption. The Company is currently evaluating the impact of these
standards and expects no material impact to its consolidated financial statements as a result of adoption.
In August 2016, the FASB issued ASU 2016-15. ASU 2016-15 provides guidance on how certain cash receipts and cash
payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual
reporting periods beginning after December 15, 2017. Our adoption of ASU 2016-15 on January 1, 2018, did not have an
impact on our consolidated financial statements and disclosures as the Company had previously classified cash distributions
received from equity method investees using the cumulative earnings approach.
77
In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and
Accounting for Partial Sales of Nonfinancial Assets ("ASU 2017-05"). ASU 2017-05 clarifies the guidance for derecognition of
nonfinancial assets and in-substance nonfinancial assets when the asset does not meet the definition of a business and is not a
not-for-profit activity. We adopted ASU 2017-05 on January 1, 2018 under the modified retrospective approach. There was no
effect of initially applying the new standard and there was no impact to our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718), Scope of
Modification Accounting ("ASU 2017-09"). The guidance provides clarity and reduces diversity in practice and cost and
complexity when accounting for a change to the terms or conditions of a share-based payment award. We adopted ASU
2017-09 on January 1, 2018 and its adoption did not have an impact on our consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to
SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"), which amends Income Taxes (Topic 740) by incorporating the
Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin 118 (“SAB 118”) issued on December 22, 2017.
SAB 118 provides guidance on accounting for the effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). We recognized
the income tax effects of the Tax Act in our 2017 financial statements in accordance with SAB 118. Please see Note 14.
In June 2018, the FASB issued ASU 2018-07, which was adopted by the Company on April 1, 2018 using the modified
retrospective basis and resulted in a cumulative-effect adjustment of an $18,000 increase to retained earnings and an equal
decrease to additional paid-in capital as of the beginning of the 2018 fiscal year. For further discussion of our adoption of this
ASU, see “Stock-Based Compensation.”
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes
to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify
certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently
evaluating the impact of ASU 2018-13 and expects no material impact to the consolidated financial statements as a result of
adoption.
2.
Computation of Earnings (Loss) Per Share
The following table sets forth the components used in the computation of basic and diluted earnings per share for the
years ended December 31, 2018, 2017 and 2016:
Year Ended December 31,
2017
2016
2018
Numerator:
Net income (loss) attributable to The New Home Company Inc.
$
(14,216) $
17,152
$
21,022
(Dollars in thousands, except per share
amounts)
Denominator:
Basic weighted-average shares outstanding
Effect of dilutive shares:
Stock options and unvested restricted stock units
Diluted weighted-average shares outstanding
20,703,967
20,849,736
20,685,386
—
20,703,967
145,762
20,995,498
106,059
20,791,445
Basic earnings (loss) per share attributable to The New Home Company Inc.
Diluted earnings (loss) per share attributable to The New Home Company Inc.
$
$
(0.69) $
(0.69) $
0.82
0.82
$
$
1.02
1.01
Antidilutive stock options and unvested restricted stock units not included in
diluted earnings per share
1,311,802
7,074
849,977
78
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,
2018
2017
(Dollars in thousands)
159,136
4,401
163,537
(154,743)
8,794
$
$
184,827
5,497
190,324
(178,704)
11,620
— $
8,794
8,794
8,787
684
18,265
$
—
11,620
11,620
11,554
50
23,224
$
$
$
$
Billed contracts receivable represent amounts billed to customers that have yet to be collected. Unbilled contracts
receivable represents the contract revenue recognized but not yet invoiced. All unbilled receivables as of December 31, 2018
and 2017 are expected to be billed and collected within 30 days. Accounts payable at December 31, 2018 and 2017 includes
$8.5 million and $11.3 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,
2017
2018
(Dollars in thousands)
$
$
20,726
115,987
380,956
48,621
566,290
$
$
35,846
47,757
302,884
29,656
416,143
All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0.9 million and $0.8
million as of December 31, 2018 and 2017, respectively.
Land held and land under development includes land costs and costs incurred during site development such as
development, indirects, and permits. Homes completed or under construction and model homes include all costs associated
with home construction, including land, development, indirects, permits, materials and labor (except for capitalized selling and
marketing costs, which are classified in other assets).
In accordance with ASC 360, inventory is stated at cost, unless the carrying amount is determined not to be recoverable,
in which case inventory is written down to its fair value. We review each real estate asset at the community-level on a quarterly
basis or whenever indicators of impairment exist. For the years ended December 31, 2018, 2017 and 2016, the Company
recognized real estate-related impairments of $10.0 million, $2.2 million and $3.5 million, respectively, in cost of sales
resulting in a decrease of the same amount to pretax income for our homebuilding segment. Fair value for the homebuilding
projects impaired during 2018 and 2017 was calculated under discounted cash flow models. Project cash flows were
79
discounted at rates ranging from 9%-16% for 2018 and 8% for 2017. Fair value for the homebuilding projects impaired during
2016 was calculated under discounted cash flow models with project cash flows discounted at rates ranging from 10%-14%.
Fair value for the land sales project impaired during 2016 was determined using the land purchase price included in the
executed sales agreement, less the Company's cost to sell. The following table summarizes inventory impairments recorded
during the years ended December 31, 2018, 2017 and 2016:
Inventory impairments:
Home sales
Land sales
Total inventory impairments
Remaining carrying value of inventory impaired at year end
Number of projects impaired during the year
Total number of projects subject to periodic impairment review during the year (1)
Year Ended December 31,
2018
2017
2016
(Dollars in Thousands)
$
$
$
$
$
$
10,000
—
10,000
57,845
2
26
$
$
$
2,200
—
2,200
5,921
1
26
2,350
1,150
3,500
30,225
3
27
(1)
Represents the peak number of real estate projects that we had during each respective year. The number of projects outstanding at the end of each year
may be less than the number of projects listed herein.
The home sales impairments of $10.0 million recorded during 2018 related to homes completed or under construction
for two, higher-priced active homebuilding communities located in Southern California. These communities were experiencing
slower monthly sales absorption rates, and the Company determined additional incentives and pricing adjustments were
required to sell the remaining homes and lots at lower estimated aggregate sales prices than the previous carrying value for
each project.
The home sales impairments of $2.2 million recorded during 2017 related to homes completed or under construction for
one active homebuilding community located in Southern California that closed out during 2018. This community was
experiencing a slow monthly sales absorption rate, and the Company determined that additional incentives were required to sell
the remaining homes and lots at estimated aggregate sales prices that would be lower than its previous carrying value.
The home sales impairments of $2.4 million recorded during 2016 related to land under development and homes
completed or under construction for two active homebuilding communities. These communities were experiencing slow
monthly sales absorption rates, and the Company determined that additional incentives were required to sell the remaining
homes and lots at estimated aggregate sales prices that would be lower than its previous carrying values. One community is
located in Southern California and the other is located in Northern California and both communities closed out during 2018.
The land sales impairments of $1.2 million related to land under development in Northern California that the Company
intended to sell after certain improvements were complete. Subsequently, the land sale was not ultimately consummated and
the Company made the determination during 2017 to develop and build homes on this land. At December 31, 2018, the
Company had delivered approximately 85% of the homes built in this community.
80
5.
Capitalized Interest
Interest is capitalized to inventory and investment in unconsolidated joint ventures during development and other
qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales as related homes are closed. Interest
capitalized to investment in unconsolidated joint ventures is amortized to equity in net income (loss) of unconsolidated joint
ventures as related joint venture homes or lots close, or in instances where lots are sold from the unconsolidated joint venture to
the Company, the interest is added to the land basis and included in cost of sales when the related lots or homes are sold to
third-party buyers. For the years ended December 31, 2018, 2017 and 2016 interest incurred, capitalized and expensed was as
follows:
2018
Year Ended December 31,
2017
(Dollars in thousands)
$
$
2016
28,377
(27,393)
(984)
21,978
(20,394)
(1,584)
Interest incurred
Interest capitalized to inventory
Interest capitalized to investment in unconsolidated joint ventures
Interest expensed
Capitalized interest in beginning inventory
Interest capitalized as a cost of inventory
Capitalized interest acquired from unconsolidated joint ventures at
consolidation
Capitalized interest transferred from investment in unconsolidated joint
ventures to inventory upon lot acquisition
Contribution to unconsolidated joint ventures
Previously capitalized interest included in cost of home sales
Capitalized interest in ending inventory
Capitalized interest in beginning investment in unconsolidated joint ventures
Interest capitalized to investment in unconsolidated joint ventures
Capitalized interest transferred from investment in unconsolidated joint
ventures to inventory upon consolidation
Capitalized interest transferred from investment in unconsolidated joint
ventures to inventory upon lot acquisition
Previously capitalized interest included in equity in net income (loss) of
unconsolidated joint ventures
Capitalized interest in ending investment in unconsolidated joint ventures
Total capitalized interest in ending inventory and investments in
unconsolidated joint ventures
$
$
$
$
$
$
$
— $
— $
16,453
27,393
$
6,342
20,394
$
—
738
513
—
(18,678)
25,681
1,472
984
—
(513)
(1,230)
713
26,394
$
$
$
$
—
—
(11,021)
16,453
$
— $
1,584
(76)
—
(36)
1,472
17,925
$
$
Capitalized interest as a percentage of inventory
Interest included in cost of home sales as a percentage of home sales revenue
4.5%
3.7%
4.0%
2.0%
7,484
(7,484)
—
—
4,190
7,484
—
—
(1)
(5,331)
6,342
—
—
—
—
—
—
6,342
2.2%
1.1%
Capitalized interest as a percentage of investment in and advances to
unconsolidated joint ventures
2.1%
2.6%
—%
For the year ended December 31, 2018, the Company expensed $1.1 million in interest previously capitalized to
investments in unconsolidated joint ventures as the result of an other-than-temporary impairment to its investment in one joint
venture. For more information, please refer to Note 6.
Contribution to unconsolidated joint ventures related to interest capitalized as a cost of inventory, which was then
contributed by the Company to an unconsolidated joint venture formed in 2016.
81
6.
Investments in and Advances to Unconsolidated Joint Ventures
As of December 31, 2018 and 2017, the Company had ownership interests in 10 unconsolidated joint ventures with
ownership percentages that generally ranged from 5% to 35%. The condensed combined balance sheets for our unconsolidated
joint ventures accounted for under the equity method were as follows:
Cash and cash equivalents
Restricted cash
Real estate inventories
Other assets
Total assets
Accounts payable and accrued liabilities
Notes payable
Total liabilities
The New Home Company's equity
Other partners' equity
Total equity
Total liabilities and equity
Debt-to-capitalization ratio
Debt-to-equity ratio
December 31,
2017
2018
(Dollars in thousands)
$
$
$
$
45,945
19,205
374,607
4,231
443,988
43,158
71,299
114,457
33,617
295,914
329,531
443,988
$
$
$
$
30,017
15,041
396,850
3,942
445,850
34,959
78,341
113,300
50,523
282,027
332,550
445,850
17.8%
21.6%
19.1%
23.6%
As of December 31, 2018 and 2017, the Company had advances outstanding of approximately $0 and $3.8 million,
respectively, to one of its unconsolidated joint ventures, which were included in the notes payable balances of the
unconsolidated joint ventures in the table above. The advances related to an unsecured promissory note entered into on October
31, 2016 and amended on February 3, 2017 with Encore McKinley Village LLC ("Encore McKinley"), an unconsolidated joint
venture of the Company. The note bore interest at 10% per annum and was fully repaid during the 2018 second quarter.
The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity
method were as follows:
Revenues
Cost of sales and expenses
Net income (loss) of unconsolidated joint ventures
Equity in net income (loss) of unconsolidated joint ventures reflected in the
accompanying consolidated statements of operations
$
$
$
2018
Year Ended December 31,
2017
(Dollars in thousands)
$
$
181,623
209,527
(27,904) $
147,447
147,976
(529) $
233,219
207,028
26,191
2016
(19,653) $
866
$
7,691
Included in cost of sales and expenses for our unconsolidated joint ventures for the year ended December 31, 2018,
was $28.8 million in real estate impairment charges. The Company's allocated share of these charges was $18.9 million. The
impairment related to the assets of a land development joint venture in Northern California. Fair value for the land
development project impaired during 2018 was calculated under a discounted cash flow model. The table below summarizes
inventory impairments recorded by our unconsolidated joint ventures during the years ended December 31, 2018, 2017 and
2016:
82
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
Joint venture impairments related to:
Homebuilding joint ventures
Land development joint ventures
Total joint venture impairments
Number of projects impaired during the year
Total number of projects included in unconsolidated joint ventures and reviewed
for impairment during the year
$
$
— $
28,776
28,776
$
1
10
— $
—
— $
—
10
—
—
—
—
13
The Company reviews its investments in and advances to unconsolidated joint ventures for other-than-temporary
declines in value in accordance with ASC 820. To the extent we deem any portion of our investment in and advances to
unconsolidated joint ventures as not recoverable, we impair our investment accordingly. For the years ended December 31,
2018, 2017 and 2016, the Company recorded other-than-temporary, noncash impairment charges of $1.1 million, $0 and $0,
respectively, related to our investment in and advances to unconsolidated joint ventures. The 2018 impairment related to our
investment in a Northern California land development joint venture and was included in equity in net income (loss) of
unconsolidated joint ventures in the accompanying consolidated statements of operations.
For the year ended December 31, 2018, the loss allocation from the Company's TNHC Russell Ranch LLC ("Russell
Ranch") unconsolidated joint venture exceeded 20% of the Company's consolidated net loss. As a smaller reporting company,
we are not subject to the provisions of Rule 3-09 of Regulation S-X, however, the table below presents select financial
information for the Russell Ranch joint venture as prescribed by Rule 8-03(b)(3) of Regulation S-X:
2018
Year Ended December 31,
2017
(Dollars in thousands)
— $
$
24,632
2016
Revenues
Cost of sales:
Land sales
Inventory impairments
Gross Margin
Expenses
Net loss
Equity in net income (loss) of unconsolidated joint ventures reflected in the
accompanying consolidated statements of operations (1)
$
$
$
24,510
28,776
(28,654)
(1,149)
(29,803) $
—
—
—
(920)
(920) $
(20,219) $
(372) $
—
—
—
—
(361)
(361)
(264)
Balance represents equity in net income (loss) of unconsolidated joint ventures included in the statements of operations related to the Company's
(1)
investment in the Russell Ranch joint venture. The balance may differ from the amount of profit or loss allocated to the Company as reflected in Russell
Ranch's financial records primarily due to the other-than-temporary impairment charge taken to the Company's interest in the joint venture and profit deferral
from lot sales from Russell Ranch to the Company.
For the years ended December 31, 2018, 2017 and 2016, the Company earned $3.4 million, $4.9 million, and $8.2
million, respectively, in management fees from its unconsolidated joint ventures. For additional detail regarding management
fees, please see Note 12.
On October 23, 2017, the Company acquired the remaining outside equity interest of our TNHC Tidelands LLC
(Tidelands) unconsolidated joint venture. TNHC Tidelands LLC was the owner of a project in Northern California (the
"Tidelands Project"). The Company paid $13.6 million to our joint venture partner for its interest and paid off the $4.1
million remaining balance on the joint venture's construction loan. Following the purchase, the Company was required to
consolidate this entity as it was now a wholly owned subsidiary of the Company, and the Tidelands Project became a wholly
owned active selling community of the Company. The purchase consideration and the cost basis of our previous investment in
unconsolidated joint ventures related to this joint venture, were included in real estate inventories at the time of consolidation.
83
In August 2017, we acquired the remaining outside equity interest of our DMB/TNHC LLC (Sterling at Silverleaf)
unconsolidated joint venture. The Company paid $2.6 million to our joint venture partner and upon the change of control was
required to consolidate this venture as it is now a wholly owned subsidiary of the Company. The purchase consideration and
the cost basis of our previous investment in unconsolidated joint ventures related to this joint venture, are included in real estate
inventories.
During the 2017 second quarter, our Larkspur Land 8 Investors LLC (Larkspur) unconsolidated joint venture allocated
$0.1 million of income to the Company from a reduction in cost to complete reserves, which was included in equity in net
income (loss) of unconsolidated joint ventures in the accompanying consolidated statements of operations, and our outside
equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly
owned subsidiary and the Company assumed the cash, other assets, and accrued liabilities, including warranty and the
remaining costs to complete reserves, of the joint venture. As part of this transaction, the Company also recognized a gain of
$0.3 million, which was included in equity in net income (loss) of unconsolidated joint ventures in the accompanying
consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.
During June 2016, our LR8 Investors LLC (LR8) unconsolidated joint venture made its final distributions, allocated $0.5
million of income to the Company from a reduction in warranty reserves, which was included in equity in net income (loss) of
unconsolidated joint ventures in the accompanying consolidated statements of operations, and our outside equity partner exited
the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and
the Company assumed the cash, accounts receivable, accounts payable, and accrued liabilities, including the remaining
warranty reserve, of the joint venture. As part of this transaction, the Company also recognized a gain of $1.1 million, which
was included in equity in net income (loss) of unconsolidated joint ventures in the accompanying consolidated statements of
operations, due to the purchase of our JV partner's interest for less than its carrying value.
On January 15, 2016, the Company entered into an assignment and assumption of membership interest agreement (the
"Buyout Agreement") for its partner's interest in the TNHC San Juan LLC unconsolidated joint venture. Per the terms of the
Buyout Agreement, the Company contributed $20.6 million to the joint venture, and the joint venture made a liquidating cash
distribution to our partner for the same amount in exchange for its membership interest. Prior to the buyout, the Company
accounted for its investment in TNHC San Juan LLC as an equity method investment. After the buyout, TNHC San Juan LLC
became a wholly owned subsidiary of the Company.
7.
Other Assets
Other assets consist of the following:
Property, equipment and capitalized selling and marketing costs, net(1)(2)
Deferred tax asset, net
Prepaid income taxes
Prepaid expenses
Warranty insurance receivable(3)
Capitalized selling and marketing costs(1)(4)
December 31,
2018
2017
(Dollars in thousands)
$
$
11,738
13,937
514
6,348
915
—
33,452
$
$
603
6,317
—
4,937
1,202
11,232
24,291
(1)
(2)
(3)
(4)
Under the adoption of the requirements of ASC 606 on January 1, 2018, certain selling and marketing costs that were previously capitalized under
former accounting guidance were written off. For the current year, remaining selling and marketing costs and those incurred during 2018 that are
permitted to be capitalized under ASC 340 are included as "Property, equipment and capitalized selling and marketing costs, net" within "Other
Assets." Under the modified retrospective adoption approach, the December 31, 2017 balance has not been restated. For more information on the
adoption of ASC 606, please refer to Note 1.
The Company depreciated $6.2 million of capitalized selling and marketing costs to selling and marketing expenses during the year ended
December 31, 2018. The Company depreciated $0.4 million, $0.4 million and $0.5 million of property and equipment to general and administrative
expenses during the years ended December 31, 2018, 2017 and 2016, respectively.
Of the $1.2 million amount for December 31, 2017, approximately $0.6 million related to 2016 estimated warranty insurance recoveries. For
further discussion, please see Note 8.
The Company amortized $11.3 million and $9.2 million of capitalized selling and marketing costs to selling and marketing expenses during the
years ended December 31, 2017 and 2016, respectively.
84
8.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
Warranty accrual(1)
Accrued compensation and benefits
Accrued interest
Completion reserve
Income taxes payable
Deferred profit from unconsolidated joint ventures
Other accrued expenses
December 31,
2018
2017
(Dollars in thousands)
6,898
5,749
6,497
4,192
—
—
5,692
29,028
$
$
6,859
9,164
6,217
5,792
6,368
136
3,518
38,054
$
$
(1)
Included in the amount for 2018 is approximately $0.9 million of additional warranty liabilities estimated to be covered by our insurance policies.
Included in the amount for 2017 is approximately $1.2 million of additional warranty liabilities estimated to be covered by our insurance policies
that were adjusted to present the warranty reserves and related estimated warranty insurance receivable on a gross basis at December 31, 2017. Of
$1.2 million of this amount, approximately $0.6 million related to 2016 estimated warranty insurance recoveries.
Changes in our warranty accrual are detailed in the table set forth below:
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
Beginning warranty accrual for homebuilding projects
Warranty provision for homebuilding projects
Warranty assumed from joint ventures at consolidation
Warranty payments for homebuilding projects
Adjustment to warranty accrual(1)
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
Adjustment to warranty accrual for fee building projects(2)
Ending warranty accrual for fee building projects
Total ending warranty accrual
$
$
6,634
2,330
—
(2,006)
(277)
6,681
225
—
(70)
62
217
6,898
$
$
4,608
1,825
781
(989)
409
6,634
323
—
(3)
(95)
225
6,859
$
$
3,846
1,921
469
(563)
(1,065)
4,608
335
—
(12)
—
323
4,931
(1)
Included in the amount for 2017 is approximately $1.2 million of additional warranty liabilities estimated to be covered by our insurance policies
that were adjusted to present the warranty reserves and related estimated warranty insurance receivable on a gross basis at December 31, 2017. Of
the $1.2 million adjusted in 2017, approximately $0.6 million related to prior year estimated warranty insurance recoveries. During 2018, the
estimated amount to be covered by our insurance policies was reduced by $0.3 million. Netted against the amount recorded in 2017 is a warranty
accrual adjustment of $0.8 million related to a lower experience rate of expected warranty expenditures. Netted against the amount recorded in
2018 is a warranty accrual adjustment of $43,000 related to higher expected warranty expenditures.
(2)
During 2018, the estimated amount to be covered by our insurance policies was increased by approximately $32,000. Netted with this amount is a
warranty accrual adjustment of approximately $30,000 related to higher expected warranty expenditures.
We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-
related warranty and construction defect claims. Our warranty accrual and related estimated insurance recoveries are based on
historical claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance
claims and amounts determined using our warranty accrual estimates, our insurance policy coverage limits for the applicable
85
policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual
insurance recoveries could differ significantly from amounts currently estimated.
During 2018, we recorded an adjustment of $0.1 million to our warranty accrual due to higher expected warranty
expenditures. Of which, $43,000 is included in "Adjustment to warranty accrual" and $30,000 is included in "Adjustment to
warranty accrual for fee building projects" above and resulted in corresponding increases to cost of home sales and cost of fee
building sales in the consolidated statements of operations. During 2017 and 2016, we recorded adjustments of $0.9 million
and $1.1 million, respectively, to our warranty accrual due to a lower experience rate of expected warranty expenditures. In
2017, $0.8 million is included in "Adjustment to warranty accrual" and $63,000 is included in "Adjustment to warranty accrual
for fee building projects" above and resulted in respective reductions of cost of homes sales and cost of fee building sales in the
consolidated statements of operations.
9.
Senior Notes and Unsecured Revolving Credit Facility
Notes payable consisted of the following:
7.25% Senior Notes due 2022, net
Unsecured revolving credit facility
Total Notes Payable
December 31,
2018
2017
(Dollars in thousands)
$
$
320,148
67,500
387,648
$
$
318,656
—
318,656
The carrying amount of our senior notes listed above at December 31, 2018 is net of the unamortized discount of $1.7
million, unamortized premium of $1.3 million, and unamortized debt issuance costs of $4.5 million, each of which are
amortized and capitalized to interest costs on a straight-line basis over the respective terms of the notes, which approximates
the effective interest method. The carrying amount for the senior notes listed above at December 31, 2017, is net of the
unamortized discount of $2.2 million, unamortized premium of $1.8 million, and unamortized debt issuance costs of $5.9
million. Debt issuance costs for the unsecured revolving credit facility are included in other assets and amortized and
capitalized to interest costs on a straight-line basis over the term of the agreement.
On March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior
Notes due 2022 (the "Existing Notes"), in a private placement. The Existing Notes were issued at an offering price of 98.961%
of their face amount, which represents a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on
private placement offering through the sale of an additional $75 million in aggregate principal amount of the 7.25% Senior
Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of 102.75% of their face amount
plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438%. Net proceeds from the Existing
Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the
remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land
acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is
paid semiannually in arrears on April 1 and October 1. The Notes were exchanged in an exchange offer for Notes that are
identical to the original Notes, except that they are registered under the Securities Act of 1933, and are freely tradeable in
accordance with applicable law.
The Notes are general senior unsecured obligations that rank equally in right of payment to all existing and future senior
indebtedness, including borrowings under the Company's senior unsecured revolving credit facility. The Notes contain certain
restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted
payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the
limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside
from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest
coverage condition. Exceptions to the limitation include, among other things, borrowings of up to $260 million under existing
or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying
certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted
payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments
that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net
income from January 1, 2017 and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing
limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other
investments up to 15% of our consolidated tangible net assets and a general basket of $15 million. The Notes are guaranteed,
86
on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries. See Note 18 for information
about the guarantees and supplemental financial statement information about our guarantor subsidiaries group and non-
guarantor subsidiaries group.
The Company's unsecured revolving credit facility ("Credit Facility") is with a bank group and matures on September 1,
2020. Total commitments under the Credit Facility are $200 million with an accordion feature that allows the facility size
thereunder to be increased up to an aggregate of $300 million subject to certain financial conditions, including the availability
of bank commitments. As of December 31, 2018, we had $67.5 million of outstanding borrowings under the credit facility.
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, 2018, the interest rate
under the facility was 5.50%. Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as
defined in the Credit Facility, including (i) a minimum tangible net worth; (ii) maximum leverage ratios; (iii) a minimum
liquidity covenant; and (iv) a minimum fixed charge coverage ratio based on EBITDA (as detailed in the Credit Facility) to
interest incurred or if this test is not met, the Company maintains unrestricted cash equal to not less than the trailing 12 month
consolidated interest incurred. As of December 31, 2018, the Company was in compliance with all financial covenants.
The Credit Facility also provides a $25.0 million sublimit for letters of credit, subject to conditions set forth in the
agreement. As of December 31, 2018 and 2017, the Company had $2.3 million and $3.4 million in outstanding letters of credit
issued under the Credit Facility, respectively.
In December 2016, the Company retired a term loan with a land seller. The loan was secured by real estate, and bore
interest at 7.0% per annum. Immediately prior to payoff, the land seller reduced the principal balance of $4.0 million by $0.3
million in exchange for the immediate payoff of the note. The Company paid off the new principal balance of $3.75 million
and recognized the $0.3 million principal reduction as a gain in other expense, net, in the accompanying consolidated
statements of operations.
Notes payable have stated maturities as follows for the years ending December 31 (dollars in thousands):
2019
2020
2021
2022
2023
$
$
—
67,500
—
325,000
—
392,500
10.
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
87
Fair Value of Financial Instruments
The following table presents an estimated fair value of the Company's Notes and Credit Facility. The Notes are
classified as Level 2 and primarily reflect estimated prices obtained from outside pricing sources. The Company's Credit
Facility is classified as Level 3 within the fair value hierarchy. The Company had an outstanding balance of $67.5 million under
its Credit Facility at December 31, 2018, and the estimated fair value of the outstanding balance approximated the carrying
value due to the short-term nature of LIBOR contracts.
December 31, 2018
December 31, 2017
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
(dollars in thousands)
7.25% Senior Notes due 2022, net (1)
Unsecured revolving credit facility
$
$
320,148
67,500
$
$
292,500
67,500
$
$
318,656
$
336,375
— $
—
(1) The carrying value for the Senior Notes, as presented at December 31, 2018, is net of the unamortized discount of $1.7 million, unamortized premium of
$1.3 million, and unamortized debt issuance costs of $4.5 million. The carrying value of the Senior Notes, as presented at December 31, 2017, is net of the
unamortized discount of $2.2 million, unamortized premium of $1.8 million, and unamortized debt issuance costs of $5.9 million. The unamortized discount,
unamortized premium and debt issuance costs are not factored into the estimated fair value.
The Company considers the carrying value of cash and cash equivalents, restricted cash, contracts and accounts
receivable, accounts payable, and accrued expenses and other liabilities to approximate the fair value of these financial
instruments based on the short duration between origination of the instruments and their expected realization. The fair value of
amounts due from affiliates is not determinable due to the related party nature of such amounts.
Non-Recurring Fair Value Adjustments
Nonfinancial assets and liabilities include items such as real estate inventory and long-lived assets that are measured at
cost when acquired and adjusted for impairment to fair value, if deemed necessary. For the years ended December 31, 2018 and
2017, the Company recognized real estate-related impairment adjustments of $10.0 million and $2.2 million, respectively,
related to two homebuilding communities for 2018 and one homebuilding community for 2017. For the year ended December
31, 2016, the Company recognized real-estate related impairments of $3.5 million. Of this amount, $2.4 million related to two
active homebuilding communities and $1.2 million related to land the Company had under development and intended to sell.
The impairment adjustments were made using Level 3 inputs and assumptions, and the remaining carrying value of the real
estate inventories subject to the impairment adjustments were $57.8 million, $5.9 million and $30.2 million at December 31,
2018, 2017 and 2016, respectively. For more information on real estate impairments, please refer to Note 4.
For the years ended December 31, 2018 and 2017, the Company recognized an other-than-temporary impairment to its
investment in unconsolidated joint ventures of $1.1 million and $0, respectively. The 2018 impairment related to a land
development joint venture in Northern California. The impairment adjustment was made using Level 3 inputs and
assumptions. For more information on the investment in unconsolidated joint ventures impairment, please refer to Note 6.
11.
Commitments and Contingencies
From time-to-time, the Company is involved in various legal matters arising in the ordinary course of business. These
claims and legal proceedings are of a nature that we believe are normal and incidental to a homebuilder. We make provisions
for loss contingencies when they are probable and the amount of the loss can be reasonably estimated. Such provisions are
assessed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings,
advice of legal counsel, and other information and events pertaining to a particular case. In view of the inherent unpredictability
of litigation, we generally cannot predict their ultimate resolution, related timing or eventual loss. At this time, we do not
believe that our loss contingencies individually or in the aggregate, are material to our consolidated financial statements.
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.
88
The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV
maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV
ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the
Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital
interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit
enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the
partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's
liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements comprise acquisition
and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are
satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including
the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and
the period necessary to complete the escrow process for homebuyers. As of December 31, 2018 and 2017, $41.3 million and
$38.6 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance
agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance
agreement liabilities was $7.3 million and $6.7 million, respectively, as of December 31, 2018 and 2017. In addition, the
Company has provided completion agreements regarding specific performance for certain projects whereby the Company is
required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds
available under the specific project loans, the Company would then be subject to financial liability under such completion
agreements. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective
share of any costs funded under such completion agreements to its partners. However, there is no guarantee that we will be
able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In
connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to
the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the
property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from "bad boy acts" of
the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and
condemnation proceeds, waste and mechanic liens, and bankruptcy.
We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of
our projects. As of December 31, 2018 and 2017, the Company had outstanding surety bonds totaling $50.5 million and $52.1
million, respectively. The estimated remaining costs to complete of such improvements as of December 31, 2018 and 2017
were $20.3 million and $24.4 million, respectively. The beneficiaries of the bonds are various municipalities and other
organizations. In the event that any such surety bond issued by a third party is called because the required improvements are
not completed, the Company could be obligated to reimburse the issuer of the bond.
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 Southern California, Northern
California and Arizona totaling approximately 19,000 square feet (of which approximately 5,800 square feet is sublet) expiring
at various times through 2021. As of December 31, 2018, the future minimum lease payments under non-cancelable operating
leases, primarily associated with our office facilities, are as follows (dollars in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
1,739
1,266
322
—
—
—
3,327
For the years ended December 31, 2018, 2017 and 2016, rent expense was $1.1 million for each year.
12.
Related Party Transactions
During the years ended December 31, 2018, 2017 and 2016, the Company incurred construction-related costs on behalf
of its unconsolidated joint ventures totaling $6.4 million, $7.3 million and $9.4 million, respectively. As of December 31, 2018
and 2017, $0.4 million and $0.1 million, respectively, are included in due from affiliates in the accompanying consolidated
balance sheets related to such costs.
89
The Company has entered into agreements with its unconsolidated joint ventures to provide management services related
to the underlying projects (collectively referred to as the "Management Agreements"). Pursuant to the Management
Agreements, the Company receives a management fee based on each project’s revenues. During the years ended December 31,
2018, 2017 and 2016, the Company earned $3.4 million, $4.9 million and $8.2 million, respectively, in management fees,
which have been recorded as fee building revenue in the accompanying consolidated statements of operations. As of
December 31, 2018 and 2017, $0.2 million and $0.3 million, respectively, of management fees are included in due from
affiliates in the accompanying consolidated balance sheets.
One member of the Company's board of directors beneficially owns more than 10% of the Company's outstanding
common stock through an affiliated entity, IHP Capital Partners VI, LLC, and is also affiliated with entities that have
investments in two of the Company's unconsolidated joint ventures, TNHC Meridian Investors LLC and TNHC Russell Ranch
LLC ("Russell Ranch"). A former member of the Company's board of directors is affiliated with entities that have investments
in three of the Company's unconsolidated joint ventures, Arantine Hills Holdings LP ("Bedford"), Calabasas Village LP, and
TNHC-TCN Santa Clarita, LP. As of December 31, 2018, the Company's investment in these five unconsolidated joint ventures
totaled $18.5 million. During the 2017 second quarter, the Bedford joint venture agreement was amended to increase the
Company's funding obligation by $4.0 million over the existing contribution cap. During the 2017 third quarter, the Company
amended the Russell Ranch joint venture agreement pursuant to which it, among other things, agreed to acquire lots in Phase 1
of the project which were taken down in July 2018. At December 31, 2017, the Company had a $5.1 million nonrefundable
deposit outstanding related to this purchase, which was subsequently applied to the $34.0 million purchase price of the land.
TL Fab LP, an affiliate of 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,
2018, 2017 and 2016, the Company incurred $0.3 million, $0.6 million and $0.3 million, respectively, for these services. For
the same periods, the Company's unconsolidated joint ventures incurred $0.4 million, $0.9 million and $0.6 million,
respectively, for these services. Of these costs, $7,000 and $10,700 was due to TL Fab LP from the Company at December 31,
2018 and 2017, respectively, and $8,000 and $0 was due to TL Fab LP from the Company's unconsolidated joint ventures at
December 31, 2018 and 2017, respectively.
In its ordinary course of business, the Company enters into agreements to purchase lots from unconsolidated land
development joint ventures of which it is a member. In accordance with ASC 360-20, Property, Plant and Equipment - Real
Estate Sales ("ASC 360-20"), the Company defers its portion of the underlying gain from the joint venture's sale of these lots.
When the Company purchases lots directly from the joint venture, the deferred gain is recorded as a reduction to the Company's
land basis on the purchased lots. In certain instances, a third party may purchase lots from our unconsolidated joint ventures
with the intent to finish the lots with the Company having an option to acquire these finished lots from the third party. In these
instances, the Company defers its portion of the underlying gain and records the deferred gain as deferred profit from
unconsolidated joint ventures which is included in accrued expenses and other liabilities in the accompanying consolidated
balance sheets. Once the lot is purchased by the Company, the pro-rata share of the previously deferred profit is recorded as a
reduction to the Company's land basis in the purchased lots. In both instances, the gain is ultimately recognized when the
Company delivers lots to third-party home buyers at the time of the home closing. At December 31, 2018 and 2017, $0 and
$0.1 million, respectively, of deferred gain from lot sale transactions is included in accrued expenses and other liabilities in the
accompanying consolidated balance sheets as deferred profit from unconsolidated joint ventures for lot transactions between
the Company and its TNHC-HW Cannery LLC ("Cannery") unconsolidated joint venture. In addition, at December 31, 2018,
$0.2 million of deferred gain from lot transactions with the Cannery, Bedford and Russell Ranch unconsolidated joint ventures
remained unrecognized and included as a reduction to land basis in the accompanying consolidated balance sheets. At
December 31, 2017, $0.5 million of deferred gain from the Cannery lot transactions remained unrecognized and was included
as a reduction to land basis in the accompanying consolidated balance sheets.
The Company’s land purchase agreement with the Cannery requires profit participation payments due upon the closing
of each home. Payment amounts are calculated based upon a percentage of estimated net profits and are due every 90 days
after the first home closing. During the year ended December 31, 2017, the Company was refunded $0.2 million from the
Cannery for profit participation overpayments from prior periods due to a modification of the underlying calculation related to
profit participation, and as of December 31, 2018 and 2017, no profit participation was due to the Cannery. Also per the
purchase agreement, the Company was reimbursed $0.1 million in fee credits from the Cannery during 2018. As of
December 31, 2018 and 2017, $37,000 and $0.1 million, respectively, in fee credits was due to the Company from the Cannery,
which amount is included in due from affiliates in the accompanying consolidated balance sheets.
On June 18, 2015, the Company entered into an agreement that effectively transitioned Joseph Davis' role within the
Company from that of Chief Investment Officer to that of a non-employee consultant to the Company effective June 26, 2015
("Transition Date"). As of the Transition Date, Mr. Davis ceased being an employee of the Company and became an
90
independent contractor performing consulting services. For his services, he is compensated $5,000 per month. His current
agreement terminates on June 26, 2019 with the option to extend the agreement one year, if mutually consented to by the
parties. Either party may terminate the agreement at any time for any or no reason. At December 31, 2018, no fees were due to
Mr. Davis for his consulting services. Additionally, the Company entered into a construction agreement effective September 7,
2017, with The Joseph and Terri Davis Family Trust Dated August 25, 1999 ("Davis Family Trust") of which Joseph Davis is a
trustee. The agreement is a fee building contract pursuant to which the Company acts in the capacity of a general contractor to
build a single family detached home on land owned by the Davis Family Trust. For its services, the Company will receive a
contractor's fee and the Davis Family Trust will reimburse the Company's field overhead costs. During the years ended
December 31, 2018 and 2017, the Company billed the Davis Family Trust $3.0 million and $0.5 million, respectively, including
reimbursable construction costs and the Company's contractor's fees which are included in fee building revenues in the
accompanying consolidated statements of operations. Contractor's fees comprised $83,000 and $13,000 of the total billings for
the years ended ended December 31, 2018 and 2017, respectively. The Company recorded $2.9 million and $0.5 million for
the years ended December 31, 2018 and 2017, respectively, for the cost of this fee building revenue which is included in fee
building cost of sales in the accompanying consolidated statements of operations. At December 31, 2018 and 2017, the
Company was due $0.6 million and $0.5 million, respectively, from the Davis Family Trust for construction draws, which are
included in due from affiliates in the accompanying consolidated balance sheets.
On February 17, 2017, the Company entered into a consulting agreement that transitioned Mr. Stelmar's role from that of
Chief Investment Officer to a non-employee consultant to the Company. While an employee of the Company, Mr. Stelmar
served as an employee director of the Company's Board of Directors. The agreement provides that effective upon Mr. Stelmar's
termination of employment, he shall become a non-employee director and shall receive the compensation and be subject to the
requirements of a non-employee director pursuant to the Company's policies. For his consulting services, Mr. Stelmar is
compensated $6,000 per month. The current term is through August 17, 2019 and may be extended upon mutual consent of the
parties. Additionally, Mr. Stelmar's outstanding restricted stock unit equity award granted in 2016 continues to vest in
accordance with its original terms based on his continued provision of consulting services rather than continued employment.
At December 31, 2018, no fees were due to Mr. Stelmar for his consulting services.
On June 29, 2015, the Company formed a new unconsolidated joint venture TNHC Tidelands LLC ("Tidelands"), 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 for the year ended December 31, 2015. During the years ended December 31, 2017 and 2016, $0.2 million and
$0.1 million, respectively, of the previously deferred revenue was recognized as equity in net income of unconsolidated joint
ventures. During the third quarter of 2017, the Company acquired its partner's equity interest in the Tidelands joint venture. As
part of this transaction, the remaining $0.1 million deferred profit was written off. The Company paid $13.6 million to our
joint venture partner for its interest and paid off the $4.1 million remaining balance on the joint venture's construction loan.
Following the purchase, the Company was required to consolidate this entity as a wholly owned subsidiary of the Company,
and the underlying homebuilding project became a wholly owned active selling community of the Company. The purchase
consideration and the cost basis of our previous investment in unconsolidated joint ventures related to this joint venture was
included in real estate inventories at the time of consolidation.
On January 15, 2016, the Company entered into an assignment and assumption of membership interest agreement (the
"Buyout Agreement") for its partner's interest in the TNHC San Juan LLC unconsolidated joint venture. Per the terms of the
Buyout Agreement, the Company contributed $20.6 million to the joint venture, and the joint venture made a liquidating cash
distribution to our partner for the same amount in exchange for its membership interest. Prior to the buyout, the Company
accounted for its investment in TNHC San Juan LLC as an equity method investment. After the buyout, TNHC San Juan LLC
became a wholly owned subsidiary of the Company.
During June 2016, our LR8 Investors LLC ("LR8") unconsolidated joint venture made its final distributions, allocated
$0.5 million of income to the Company from a reduction in warranty reserves, which was included in equity in net income
(loss) of unconsolidated joint ventures in the accompanying consolidated statements of operations, and our outside equity
partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned
subsidiary, and the Company assumed the cash, accounts receivable, accounts payable, and accrued liabilities, including the
remaining warranty reserve, of the joint venture. As part of this transaction, the Company also recognized a gain of $1.1
million, which was included in equity in net income (loss) of unconsolidated joint ventures in the accompanying consolidated
statement of operations, due to the purchase of our JV partner's interest for less than its carrying value.
As of December 31, 2018 and 2017, the Company had advances outstanding of approximately $0 and $3.8 million,
respectively, to an unconsolidated joint venture, Encore McKinley. The note bore interest at 10% per annum and was fully
repaid during the 2018 second quarter. For the year ended December 31, 2018 and 2017, the Company earned $0.1 million and
91
$0.5 million in interest income on the unsecured promissory note which is included in equity in net income (loss) of
unconsolidated joint ventures in the accompanying consolidated statements of operations. As of December 31, 2018 and 2017,
$0 and $34,000, respectively, of interest income was due to the Company and included in due from affiliates in the
accompanying consolidated balance sheets.
During the 2017 second quarter, our Larkspur Land 8 Investors LLC ("Larkspur") unconsolidated joint venture allocated
$0.1 million of income to the Company from a reduction in cost to complete reserves, which was included in equity in net
income (loss) of unconsolidated joint ventures in the accompanying consolidated statements of operations, and our outside
equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly
owned subsidiary and the Company assumed the cash, other assets, and accrued liabilities, including warranty and the
remaining costs to complete reserves, of the joint venture. As part of this transaction, the Company also recognized a gain of
$0.3 million, which was included in equity in net income (loss) of unconsolidated joint ventures in the accompanying
consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.
The Company entered into two transactions in each 2018 and 2017 to purchase land from affiliates of IHP Capital
Partners VI, LLC, which owns more than 10% of the Company's outstanding common stock and is affiliated with one member
of the Company's board of directors. The first 2017 agreement allows the Company the option to purchase lots in Northern
California in a phased takedown for a gross purchase price of $16.1 million with profit participation and master marketing fees
due to the seller as outlined in the contract. As of December 31, 2018, the Company has taken down approximately two-thirds
of the lots, paid $0.3 million in master marketing fees, and has a $0.3 million nonrefundable deposit outstanding on the
remaining lots. The second 2017 transaction allows the Company to purchase finished lots in Northern California, which
includes customary profit participation, and is structured as an optioned takedown. The total purchase price, including the cost
for the finished lot development and the option, is expected to be approximately $56.3 million, and depends on timing of
takedowns, as well as our obligation to pay certain fees and costs during the option maintenance period. As of December 31,
2018, the Company has made a $5.3 million nonrefundable deposit, reimbursed the owner $0.1 million for fees and costs, paid
$5.9 million in option payments, and had taken down approximately 8% of the lots. In 2018, the Company agreed to purchase
and completed the takedown of finished lots in Northern California for a gross purchase price of $8.0 million with additional
profit participation, marketing fees and certain reimbursements due to the seller as outlined in the agreement. At December 31,
2018, the Company had paid $0.3 million in master marketing fees and reimbursed the land seller $0.2 million in costs related
to this contract. Also during 2018, the Company entered an agreement to purchase land in a master-plan community in Arizona
for an estimated purchase price of $3.8 million plus profit participation and marketing fees pursuant to contract terms. The
Company has an outstanding, nonrefundable deposit of $0.3 million related to this contract and had not taken down any lots as
of December 31, 2018.
In August 2017, we acquired the remaining outside equity interest of our DMB/TNHC LLC (Sterling at Silverleaf)
unconsolidated joint venture. The Company paid $2.6 million to our joint venture partner and upon the change of control was
required to consolidate this venture as a wholly-owned subsidiary of the Company. There was no remeasurement gain or loss
on our unconsolidated interest prior to the change in control. The purchase consideration and the cost basis of our previous
investment in unconsolidated joint ventures related to this joint venture are included in real estate inventories at December 31,
2018 and 2017.
In the first quarter 2018, the Company entered into an agreement with its Bedford joint venture that is affiliated with one
former member of the Company's board of directors for the option to purchase lots in phased takedowns. As of December 31,
2018, the Company has made a $1.5 million nonrefundable deposit as consideration for this option, and a portion of the deposit
will be applied to the purchase price across the phases. The gross purchase price of the land is $10.0 million with profit
participation due to seller as outlined in the contract. The Company has taken down approximately one-half of the contracted
lots and $0.9 million of the nonrefundable deposit remains outstanding. During the fourth quarter 2018, the Company entered
into a second option agreement with the Bedford joint venture to purchase lots in phased takedowns. As of December 31,
2018, the Company has made a $1.4 million nonrefundable deposit as consideration for the option, and a portion of the deposit
will be applied to the purchase price across the phases. The gross purchase price of the land is $10.5 million with profit
participation due to the seller pursuant to the agreement. At December 31, 2018, the Company had not taken down any of the
optioned lots and the full deposit remained outstanding.
FMR LLC beneficially owns over 10% of the Company's common stock, and an affiliate of FMR LLC ("Fidelity")
provides investment management and record keeping services to the Company’s 401(k) Plan. For the years ended
December 31, 2018, 2017 and 2016 the Company paid Fidelity approximately $14,000, $11,000 and $0, respectively, for
401(k) Plan record keeping and investment management services. The participants in the Company's 401(k) Plan paid Fidelity
approximately $6,000, $4,000 and $0 for the years ended December 31, 2018, 2017 and 2016, respectively, for record keeping
and investment management services.
92
The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV
maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV
ratios. In addition, the Company has provided completion agreements regarding specific performance for certain projects
whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. For
more information regarding these agreements please refer to Note 11.
13.
Stock-Based Compensation
The Company's 2014 Long-Term Incentive Plan (the "2014 Incentive Plan"), was adopted by our board of directors in
January 2014. The 2014 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of
common stock, stock appreciation rights, restricted and unrestricted stock awards, restricted stock units and performance
awards. The 2014 Incentive Plan will automatically expire on the tenth anniversary of its effective date.
The number of shares of our common stock authorized to be issued under the 2014 Incentive Plan is 1,644,875 shares.
To the extent that shares of the Company's common stock subject to an outstanding 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.
At our 2016 Annual Meeting of Shareholders on May 24, 2016, our shareholders approved the Company's 2016
Incentive Award Plan (the "2016 Incentive Plan"). The 2016 Incentive Plan provides for the grant of stock options, stock
appreciation rights, restricted stock, restricted stock units and other stock- or cash-based awards. Non-employee directors of the
Company and employees and consultants of the Company, or any of its subsidiaries, are eligible to receive awards under the
2016 Incentive Plan. On May 22, 2018, our shareholders approved the amended and restated 2016 Incentive Plan which
increased the number of shares authorized for issuance under the plan from 800,000 to 2,100,000 shares. The amended and
restated 2016 Incentive Plan will expire on April 4, 2028.
The Company has issued stock option and restricted stock unit awards under the 2014 Incentive Plan and restricted stock
unit awards and performance share unit awards under the 2016 Incentive Plan. As of December 31, 2018, 51,681 shares remain
available for grant under the 2014 Incentive Plan and 1,465,834 shares remain available for grant under the 2016 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, restricted stock unit awards, and performance share unit awards typically vest
over a one to three year period and the stock options expire ten years from the date of grant.
A summary of the Company’s common stock option activity as of and for the years ended December 31, 2018, 2017 and
2016 is presented below:
2018
Year Ended December 31,
2017
2016
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Weighted-
Average
Exercise
Price per
Share
Number
of Shares
Outstanding Stock Option Activity
Outstanding, beginning of period
Granted
Exercised
Forfeited
Outstanding, end of period
Exercisable, end of period
826,498
$
— $
— $
(5,028) $
$
$
821,470
821,470
11.00
—
—
11.00
11.00
11.00
93
835,786
$
— $
(9,288) $
— $
$
$
826,498
826,498
11.00
—
11.00
—
11.00
11.00
840,298
$
— $
— $
(4,512) $
$
$
835,786
42,042
11.00
—
—
11.00
11.00
11.00
A summary of the Company’s restricted stock unit activity as of and for the years ended December 31, 2018, 2017 and
2016 is presented below:
2018
Year Ended December 31,
2017
2016
Weighted-
Average
Grant-
Date Fair
Value per
Share
Number
of Shares
Weighted-
Average
Grant-
Date Fair
Value per
Share
Number
of Shares
Weighted-
Average
Grant-
Date Fair
Value per
Share
Number
of Shares
$
562,082
179,268
$
(271,875) $
(248) $
$
469,227
10.72
11.24
11.02
10.05
10.75
$
474,989
343,933
$
(211,475) $
(45,365) $
$
562,082
10.66
10.84
10.76
10.79
10.72
$
308,386
414,045
$
(231,633) $
(15,809) $
$
474,989
14.20
10.05
14.22
11.62
10.66
Restricted Stock Unit Activity
Outstanding, beginning of period
Granted
Vested
Forfeited
Outstanding, end of period
A summary of the Company’s performance share unit activity as of and for the years ended ended December 31, 2018 is
presented below:
Year Ended December 31,
2018
Weighted-
Average
Grant-Date
Fair Value
per Share
Number of
Shares
Performance Share Unit Activity
Outstanding, beginning of period
Granted (at target)
Vested
Forfeited
Outstanding, end of period (at target)
— $
$
— $
— $
$
125,422
125,422
—
11.68
—
—
11.68
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:
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
Expense related to:
Stock options
Restricted stock units and performance share units
$
$
— $
3,090
3,090
$
11
2,792
2,803
$
$
1,054
2,417
3,471
94
The Company granted stock options on January 30, 2014 that fully vested on January 30, 2017. Assumptions used to
calculate the weighted-average grant date fair value of the common stock options included an expected term of 4.3 years,
expected volatility of 49.0%, a risk-free interest rate of 1.2% and no expected dividends. Based on these inputs, the weighted-
average grant date fair value per share equaled $4.43.
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. Mr Davis' stock
options fully vested on January 30, 2017 and were fully expensed. The below reflects fair value assumptions at January 30,
2017.
Expected term (in years)
Expected volatility
Risk-free interest rate
Expected dividends
Re-measurement date fair value per share
Period
Ended
January 30,
2017
Year Ended
December
31,
2016
1.0
34.9%
0.8%
—
1.32
$
1.1
36.7%
0.9%
—
2.14
$
We used the "simplified method" to establish the expected term of the common stock options granted by the Company.
Our restricted stock unit awards and performance share unit awards are valued based on the closing price of our common stock
on the date of grant. The number of performance share units that will vest ranges from 50%-150% of the target amount
awarded based on actual cumulative earnings per share and return on equity growth from 2018-2019, subject to initial
achievement of minimum thresholds. We evaluate the probability of achieving the performance targets established under each
of the performance share unit awards quarterly and estimate the number of underlying units that are probable of being issued.
Compensation expense for restricted stock unit and performance share unit awards is being recognized using the straight-line
method over the requisite service period, subject to cumulative catch-up adjustments required as a result of changes in the
number shares probable of being issued for performance share unit awards. At December 31, 2018, the probability of achieving
the performance targets associated with the outstanding performance share unit awards was estimated to be 0%. Forfeitures are
recognized in compensation cost during the period that the award forfeiture occurs.
At December 31, 2018, the amount of unearned stock-based compensation currently estimated to be expensed through
2021 is $2.6 million. The weighted-average period over which the unearned stock-based compensation is expected to be
recognized is 1.4 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.
14.
Income Taxes
The provision (benefit) for income taxes includes the following:
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
Current provision (benefit) for income taxes:
Federal
State
Deferred provision (benefit) for income taxes:
Federal
State
Provision (benefit) for income taxes
$
$
(67) $
304
237
(4,208)
(2,104)
(6,312)
(6,075) $
10,243
3,030
13,273
2,341
(224)
2,117
15,390
$
$
10,321
3,375
13,696
(506)
(166)
(672)
13,024
95
The effective tax rate differs from the federal statutory rate of 21% for the year ended December 31, 2018 and 35% for
the years ended December 31, 2017 and 2016, due to the following items:
Income (loss) before taxes of taxable entities
(Provision) benefit for income taxes at federal statutory rate
(Increases) decreases in tax resulting from:
Provisional rate adjustment - tax reform
State income taxes, net of federal benefit
Manufacturing deduction
Return to provision difference
Other
(Provision) benefit for income taxes
Effective tax rate
$
$
$
2018
Year Ended December 31,
2017
(Dollars in thousands)
$
$
32,531
(11,386)
$
$
(20,305)
4,264
2016
33,950
(11,883)
148
1,396
—
388
(121)
6,075
29.9%
$
(3,190)
(1,860)
958
159
(71)
(15,390)
47.3%
$
—
(1,977)
1,142
(145)
(161)
(13,024)
38.4%
With the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), the corporate federal income tax rate dropped from a
maximum of 35% to a flat 21% rate effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin 118 ("SAB
118"), which provides guidance on accounting for the tax effects of the Tax Act and provides a measurement period that should
not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. As
of December 31, 2017, we had completed the majority of our accounting for the tax effects of the Tax Act. As a result of the
rate change, the Company was required to revalue its net deferred tax asset at December 31, 2017 and recorded a provisional
adjustment to reduce its value by $3.2 million. The Company completed its accounting for the tax effects of the Tax Act in
2018, within the one-year measurement period prescribed by the SEC, and recorded a $0.1 million adjustment to the
provisional amount.
The components of our deferred income tax asset, net are as follows:
State taxes
Reserves and accruals
Intangible assets
Share based compensation
Inventory
Investments in joint ventures
Depreciation and amortization
Deferred tax asset, net
December 31,
2018
2017
(Dollars in thousands)
$
$
74
2,258
28
1,594
3,699
6,318
(34)
13,937
$
$
633
1,893
207
1,585
627
1,411
(39)
6,317
The Company classifies any interest and penalties related to income taxes assessed as part of income tax provision.
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. We are subject to U.S. federal income tax examination for calendar tax years ending 2015 through 2018 and various
state income tax examinations for 2014 through 2018 calendar tax years.
15.
Segment Information
The Company’s operations are organized into two reportable segments: homebuilding and fee building. The
homebuilding reportable segment aggregates the Southern California, Northern California and Arizona homebuilding operating
segments. 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
96
environments, land acquisition results, and underlying demand and supply in accordance with ASC Topic 280, Segment
Reporting.
Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached
homes. Our fee building operations build homes and manage construction related activities on behalf of third-party property
owners and our joint ventures. In addition, our corporate operations develop and implement strategic initiatives and support
our operating segments by centralizing key administrative functions such as accounting, finance and treasury, information
technology, insurance and risk management, litigation, marketing and human resources. A portion of the expenses incurred by
corporate are allocated to the fee building segment primarily based on its respective percentage of revenues. The assets of our
fee building segment primarily consist of cash, restricted cash and accounts receivable. The majority of our corporate
personnel and resources are primarily dedicated to activities relating to our homebuilding segment, and, therefore, the balance
of any unallocated corporate expenses and assets are included in our homebuilding segment.
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:
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
Revenues:
Homebuilding
Fee building, including management fees
Total
Pretax income (loss):
Homebuilding
Fee building, including management fees
Total
Assets:
Homebuilding
Fee building
Total
$
$
$
$
504,029
163,537
667,566
$
$
560,842
190,324
751,166
(24,706) $
4,401
(20,305) $
27,034
5,497
32,531
$
$
$
$
507,949
186,507
694,456
25,546
8,404
33,950
December 31,
2018
2017
(Dollars in thousands)
$
$
685,218
10,879
696,097
$
$
631,087
13,425
644,512
97
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.
First
Quarter
Second
Quarter
Third
Quarter
(Dollars in thousands, except per share amounts)
Fourth
Quarter
2018
Home sales revenue
Cost of home sales
Home sales impairments
Homebuilding gross margin
Fee building revenue
Cost of fee building
Fee building gross margin
Pretax income (loss)
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)
2017
Home sales revenue
Cost of home sales
Home sales impairments
Homebuilding gross margin
Fee building revenue
Cost of fee building
Fee building gross margin
Pretax income
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)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
79,437
69,694
—
9,743
43,794
42,699
1,095
$
(1,511) $
$
$
(640) $
(0.03) $
(0.03) $
69,406
60,065
—
9,341
55,617
53,926
1,691
1,360
846
0.04
0.04
$
$
$
$
$
$
$
$
117,460
102,678
—
14,782
38,095
37,038
1,057
182
115
0.01
0.01
96,929
82,488
1,300
13,141
47,181
45,899
1,282
2,505
1,517
0.07
0.07
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
119,874
102,124
—
17,750
39,240
38,124
1,116
3,400
2,459
0.12
0.12
114,622
95,992
—
18,630
43,309
41,808
1,501
6,974
4,318
0.21
0.21
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Total
504,029
436,530
10,000
57,499
163,537
159,136
4,401
(20,305)
$
187,258
162,034
10,000
15,224
42,408
41,275
1,133
$
(22,376) $
$
$
(16,150) $
(14,216)
(0.80) $
(0.69)
(0.80) $
(0.69)
279,885
234,668
900
44,317
44,217
43,194
1,023
21,692
10,471
0.50
0.50
$
$
$
$
$
$
$
$
560,842
473,213
2,200
85,429
190,324
184,827
5,497
32,531
17,152
0.82
0.82
(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.
98
17. Supplemental Disclosure of Cash Flow Information
The following table presents certain supplemental cash flow information:
2018
Year Ended December 31,
2017
(Dollars in thousands)
2016
Supplemental disclosures of cash flow information
Interest paid, net of amounts capitalized
Income taxes paid
Supplemental disclosures of non-cash transactions
Contribution of real estate to unconsolidated joint ventures
Assets assumed from unconsolidated joint ventures
Liabilities and equity assumed from unconsolidated joint ventures
18. Supplemental Guarantor Information
$
$
$
$
$
— $
$
7,110
— $
$
14,050
— $
— $
— $
— $
$
$
26,613
27,608
—
13,670
798
46,811
47,197
The Company's 7.25% Senior Notes due 2022 (the "Notes") are guaranteed, on an unsecured basis, jointly and
severally, by all of the Company's 100% owned subsidiaries (collectively, the "Guarantors"). The guarantees are full and
unconditional. The Indenture governing the Notes provides that the guarantees of a Guarantor will be automatically and
unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or
otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a "Restricted
Subsidiary" (as defined in the Indenture), which sale, transfer, exchange or other disposition is made in compliance with
applicable provisions of the Indenture; (2) upon the proper designation of such Guarantor as an "Unrestricted Subsidiary" (as
defined in the Indenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’
certificate provided to the trustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the
indenture), so long as such Guarantor would not otherwise be required to provide a guarantee pursuant to the Indenture;
provided that, if immediately after giving effect to such release the consolidated tangible assets of all Immaterial Subsidiaries
that are not Guarantors would exceed 5.0% of consolidated tangible assets, no such release shall occur, (4) if the Company
exercises its legal defeasance option or covenant defeasance option under the Indenture or if the obligations of the Company
and the Guarantors are discharged in compliance with applicable provisions of the Indenture, upon such exercise or discharge;
(5) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any
indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be
required to provide a guarantee pursuant to the Indenture; or (6) upon the full satisfaction of the Company’s obligations under
the Indenture; provided that in each case if such Guarantor has incurred any indebtedness in reliance on its status as a
Guarantor in compliance with applicable provisions of the Indenture, such Guarantor’s obligations under such indebtedness, as
the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted
Subsidiary (other than a Guarantor) in compliance with applicable provisions of the Indenture. The Company has determined
that separate, full financial statements of the Guarantors would not be material to investors and, accordingly, supplemental
financial information for the guarantors is presented.
99
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
Assets
Cash and cash equivalents
Restricted cash
Contracts and accounts receivable
Intercompany receivables
Due from affiliates
Real estate inventories
Investment in and advances to
unconsolidated joint ventures
Investment in subsidiaries
Other assets
Total assets
Liabilities and equity
Accounts payable
Accrued expenses and other liabilities
Intercompany payables
Due to affiliates
Unsecured revolving credit facility
Senior notes, net
Total liabilities
Stockholders' equity
Non-controlling interest in subsidiary
Total equity
Total liabilities and equity
Assets
Cash and cash equivalents
Restricted cash
Contracts and accounts receivable
Intercompany receivables
Due from affiliates
Real estate inventories
Investment in and advances to
unconsolidated joint ventures
Investment in subsidiaries
Other assets
Total assets
Liabilities and equity
Accounts payable
Accrued expenses and other liabilities
Intercompany payables
Due to affiliates
Senior notes, net
Total liabilities
Stockholders' equity
Non-controlling interest in subsidiary
Total equity
Total liabilities and equity
December 31, 2018
NWHM Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
NWHM
(Dollars in thousands)
$
$
$
$
28,877
—
7
192,341
—
—
—
396,466
18,643
636,334
240
8,492
—
—
67,500
320,148
396,380
239,954
—
239,954
636,334
$
$
$
$
13,249
269
18,926
—
1,218
566,290
34,330
—
14,812
649,094
39,151
21,129
192,341
7
—
—
252,628
396,466
—
396,466
649,094
$
$
$
$
147
—
—
—
—
—
—
—
—
147
$
— $
—
(668)
(192,341)
—
—
—
(396,466)
(3)
$
(589,478) $
— $
71
—
—
—
—
71
—
76
76
147
$
— $
(664)
(192,341)
(7)
—
—
(193,012)
(396,466)
—
(396,466)
(589,478) $
42,273
269
18,265
—
1,218
566,290
34,330
—
33,452
696,097
39,391
29,028
—
—
67,500
320,148
456,067
239,954
76
240,030
696,097
NWHM Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
NWHM
December 31, 2017
(Dollars in thousands)
$
$
$
$
99,586
—
10
129,414
—
—
—
356,443
8,464
593,917
237
11,034
—
—
318,656
329,927
263,990
—
263,990
593,917
$
$
$
$
23,772
424
24,238
—
1,060
416,143
55,824
—
15,827
537,288
23,479
27,954
129,414
10
—
180,857
356,431
—
356,431
537,288
$
$
$
$
$
100
188
—
—
—
—
—
—
—
—
188
6
80
—
—
—
86
12
90
102
188
$
$
$
$
— $
—
(1,024)
(129,414)
—
—
—
(356,443)
—
(486,881) $
— $
(1,014)
(129,414)
(10)
—
(130,438)
(356,443)
—
(356,443)
(486,881) $
123,546
424
23,224
—
1,060
416,143
55,824
—
24,291
644,512
23,722
38,054
—
—
318,656
380,432
263,990
90
264,080
644,512
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Revenues:
Home sales
Fee building
Cost of Sales:
Home sales
Home sales impairments
Fee building
Gross Margin:
Home sales
Fee building
Selling and marketing expenses
General and administrative expenses
Equity in net loss of unconsolidated joint
ventures
Equity in net loss of subsidiaries
Other income (expense), net
Pretax loss
(Provision) benefit for income taxes
Net loss
Net loss attributable to non-controlling
interest in subsidiary
Net loss attributable to The New Home
Company Inc.
Year Ended December 31, 2018
NWHM Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
NWHM
(Dollars in thousands)
$
— $
—
—
—
—
—
—
$
504,029
163,537
667,566
436,508
10,000
159,136
605,644
—
—
—
—
4,330
—
(17,372)
(66)
(13,108)
(1,108)
(14,216)
—
57,521
4,401
61,922
(36,065)
(30,293)
(19,653)
—
(455)
(24,544)
7,183
(17,361)
—
— $
—
—
— $
—
—
22
—
—
22
(22)
—
(22)
—
(3)
—
—
—
(25)
—
(25)
14
—
—
—
—
—
—
—
—
—
—
17,372
—
17,372
—
17,372
—
504,029
163,537
667,566
436,530
10,000
159,136
605,666
57,499
4,401
61,900
(36,065)
(25,966)
(19,653)
—
(521)
(20,305)
6,075
(14,230)
14
$
(14,216) $
(17,361) $
(11) $
17,372
$
(14,216)
101
Year Ended December 31, 2017
NWHM Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
NWHM
(Dollars in thousands)
$
— $
—
—
—
—
—
—
$
560,842
190,324
751,166
473,181
2,200
184,827
660,208
—
—
—
—
(2,403)
—
21,773
107
19,477
(2,325)
17,152
—
85,461
5,497
90,958
(32,702)
(23,927)
866
—
(336)
34,859
(13,065)
21,794
—
— $
—
—
— $
—
—
32
—
—
32
(32)
—
(32)
—
—
—
—
—
(32)
—
(32)
11
—
—
—
—
—
—
—
—
—
—
(21,773)
—
(21,773)
—
(21,773)
—
560,842
190,324
751,166
473,213
2,200
184,827
660,240
85,429
5,497
90,926
(32,702)
(26,330)
866
—
(229)
32,531
(15,390)
17,141
11
Revenues:
Home sales
Fee building
Cost of Sales:
Home sales
Home sales impairments
Fee building
Gross Margin:
Home sales
Fee building
Selling and marketing expenses
General and administrative expenses
Equity in net income of unconsolidated joint
ventures
Equity in net income of subsidiaries
Other income (expense), net
Pretax income (loss)
Provision for income taxes
Net income (loss)
Net loss attributable to non-controlling
interest in subsidiary
Net income (loss) attributable to The New
Home Company Inc.
$
17,152
$
21,794
$
(21) $
(21,773) $
17,152
102
Year Ended December 31, 2016
NWHM Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
NWHM
(Dollars in thousands)
$
— $
—
—
—
—
—
2,240
2,240
—
—
(2,240)
(2,240)
—
(14,719)
—
32,091
(119)
15,013
6,009
21,022
—
$
502,792
186,662
689,454
428,881
2,350
1,150
175,863
608,244
71,561
(1,150)
10,799
81,210
(26,058)
(11,163)
7,691
—
(303)
51,377
(19,033)
32,344
—
5,157
—
5,157
4,678
—
—
—
4,678
479
—
—
479
(686)
—
—
—
(142)
(349)
—
(349)
96
$
— $
(155)
(155)
—
—
—
—
—
—
—
(155)
(155)
—
—
—
(32,091)
155
(32,091)
—
(32,091)
—
507,949
186,507
694,456
433,559
2,350
1,150
178,103
615,162
72,040
(1,150)
8,404
79,294
(26,744)
(25,882)
7,691
—
(409)
33,950
(13,024)
20,926
96
Revenues:
Home sales
Fee building
Cost of Sales:
Home sales
Home sales impairments
Land sales impairment
Fee building
Gross Margin:
Home sales
Land sales
Fee building
Selling and marketing expenses
General and administrative expenses
Equity in net income of unconsolidated joint
ventures
Equity in net income of subsidiaries
Other income (expense), net
Pretax income (loss)
Benefit (provision) for income taxes
Net income (loss)
Net loss attributable to non-controlling
interest in subsidiary
Net income (loss) attributable to The New
Home Company Inc.
$
21,022
$
32,344
$
(253) $
(32,091) $
21,022
103
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Net cash used in operating activities
Investing activities:
Purchases of property and equipment
Contributions and advances to
unconsolidated joint ventures
Contributions to subsidiaries from corporate
Distributions of capital from subsidiaries
Distributions of capital and repayment of
advances to unconsolidated joint ventures
Interest collected on advances to
unconsolidated joint ventures
Net cash (used in) provided by investing
activities
Financing activities:
Borrowings from credit facility
Repayments of credit facility
Contributions to subsidiaries from corporate
Distributions to corporate from subsidiaries
Repurchase of common stock
Tax withholding paid on behalf of employees
for stock awards
Net cash provided by financing activities
Net decrease in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash –
beginning of period
Cash, cash equivalents and restricted cash –
end of period
Year Ended December 31, 2018
NWHM Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
NWHM
$
(63,076) $
(71,789) $
(41) $
(4,779) $
(139,685)
(Dollars in thousands)
(49)
(197)
—
(249,435)
183,896
—
—
(15,066)
—
—
15,436
178
—
—
—
—
—
—
—
—
249,435
(183,896)
—
—
$
(65,588) $
351
$
— $
65,539
$
150,000
(82,500)
—
—
(8,563)
—
—
249,435
(188,675)
—
—
—
—
—
—
—
—
(249,435)
188,675
—
(982)
57,955
$
—
60,760
$
$
—
— $
—
(60,760) $
(70,709)
(10,678)
99,586
24,196
(41)
188
—
—
(246)
(15,066)
—
—
15,436
178
302
150,000
(82,500)
—
—
(8,563)
(982)
57,955
(81,428)
123,970
$
28,877
$
13,518
$
147
$
— $
42,542
104
Net cash used in operating activities
Investing activities:
Purchases of property and equipment
Cash assumed from joint venture at
consolidation
Contributions and advances to
unconsolidated joint ventures
Contributions to subsidiaries from corporate
Distributions of capital from subsidiaries
Distributions of capital and repayment of
advances to unconsolidated joint ventures
Interest collected on advances to
unconsolidated joint ventures
Net cash used in investing activities
Financing activities:
Borrowings from credit facility
Repayments of credit facility
Proceeds from senior notes
Repayments of other notes payable
Payment of debt issuance costs
Contributions to subsidiaries from corporate
Distributions to corporate from subsidiaries
Tax withholding paid on behalf of employees
for stock awards
Proceeds from exercise of stock options
Year Ended December 31, 2017
NWHM Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
NWHM
$
(31,824) $
(41,900) $
(81) $
(17,058) $
(90,863)
(Dollars in thousands)
(71)
—
—
(275,794)
192,478
—
—
(124)
995
(27,479)
—
—
15,577
552
—
—
—
—
—
—
—
—
—
—
275,794
(192,478)
—
—
(195)
995
(27,479)
—
—
15,577
552
$
(83,387) $
(10,479) $
— $
83,316
$
(10,550)
88,000
(206,000)
324,465
—
(7,565)
—
—
(590)
102
—
—
—
(4,110)
—
275,794
(209,536)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(275,794)
209,536
—
—
88,000
(206,000)
324,465
(4,110)
(7,565)
—
—
(590)
102
Net cash provided by financing activities
$
198,412
$
62,148
$
— $
(66,258) $
194,302
Net increase (decrease) in cash, cash
equivalents and restricted cash
Cash, cash equivalents and restricted cash –
beginning of period
Cash, cash equivalents and restricted cash –
end of period
83,201
16,385
9,769
14,427
(81)
269
—
—
92,889
31,081
$
99,586
$
24,196
$
188
$
— $
123,970
105
Net cash (used in) provided by operating
activities
Investing activities:
Purchases of property and equipment
Cash assumed from joint venture at
consolidation
Contributions and advances to
unconsolidated joint ventures
Contributions to subsidiaries from corporate
Distributions of capital from subsidiaries
Distributions of capital from unconsolidated
joint ventures
Net cash (used in) provided by investing
activities
Financing activities:
Borrowings from credit facility
Repayments of credit facility
Borrowings from other notes payable
Repayments of other notes payable
Payment of debt issuance costs
Cash distributions to non-controlling interest
in subsidiary
Contributions to subsidiaries from corporate
Distributions to corporate from subsidiaries
Tax withholding paid on behalf of employees
for stock awards
Excess income tax provision from stock-
based compensation
Net cash provided by (used in) financing
activities
Net decrease in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash –
beginning of period
Cash, cash equivalents and restricted cash –
end of period
Year Ended December 31, 2016
NWHM Inc.
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Consolidated
NWHM
(Dollars in thousands)
$
(7,041) $
(12,149) $
3,272
$
(26,894) $
(42,812)
(193)
—
—
(225,169)
189,392
(246)
2,610
(15,088)
—
725
—
15,307
—
—
—
—
—
—
—
—
—
225,169
(190,117)
—
(439)
2,610
(15,088)
—
—
15,307
$
(35,970) $
3,308
$
— $
35,052
$
2,390
223,050
(179,974)
—
—
(1,064)
—
—
—
(648)
(97)
—
—
—
(13,135)
—
—
225,169
(216,286)
—
—
—
—
343
(2,501)
—
(725)
—
(725)
—
—
—
—
—
—
—
—
(225,169)
217,011
—
—
223,050
(179,974)
343
(15,636)
(1,064)
(725)
—
—
(648)
(97)
$
41,267
$
(4,252) $
(3,608) $
(8,158) $
25,249
(1,744)
(13,093)
18,129
27,520
(336)
605
—
—
(15,173)
46,254
$
16,385
$
14,427
$
269
$
— $
31,081
106
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
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
State of Delaware Certificate of Change of Registered Agent and/or Registered Office (incorporated by
reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on August 1, 2016)
Amended and Restated Bylaws of The New Home Company Inc. (incorporated by reference to Exhibit 3.2
of the Company’s Current Report on Form 8-K filed on August 1, 2016)
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)
Indenture, dated as of March 17, 2017, among the Company, the Guarantors and U.S. Bank National
Association, as trustee, including form of 7.25% Senior Notes due 2022 (incorporated by reference to
Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on March 20, 2017)
Form of 7.250% Senior Notes due 2022 (incorporated by reference to Exhibit 4.2 to the Company’s Current
Report on Form 8-K filed on March 20, 2017)
First Supplemental Indenture dated as of April 28, 2017 between the Company and U.S. Bank National
Association (incorporated by reference to Exhibit 4.4 to the Company's Form 10-Q for the quarter ended
June 30, 2017)
Officers' Certificate, dated May 4, 2017, delivered pursuant to the Indenture, and setting forth the terms of
the Additional Notes 7.25% Senior Notes due 2022 (incorporated by reference to Exhibit 4.3 to the
Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5,
2017)
Second Supplemental Indenture dated as of July 28, 2017 between the Company, the guaranteeing
subsidiaries, as defined herein, and U.S. Bank National Association (incorporated by reference to Exhibit
4.3 to the Company's Form 10-Q for the quarter ended September 30, 2017)
Third Supplemental Indenture dated as of September 18, 2017 between the Company, DMB/TNHC LLC
and U.S. Bank National Association (incorporated by reference to Exhibit 4.4 to the Company's Form 10-Q
for the quarter ended September 30, 2017)
Fourth Supplemental Indenture, dated as of October 27, 2017 between the Company, TNHC Tidelands
LLC, TNHC Arizona Marketing LLC and U.S. Bank National Association (incorporated by reference to
Exhibit 4.9 of the Company's Annual Report on Form 10-K for the year ended December 31, 2017)
4.10
Fifth Supplemental Indenture dated as of March 5, 2018, among TNHC Holdings LLC, TNHC Holdings 1
LLC and U.S. Bank National Association (incorporated by reference to Exhibit 4.3 to the Company's Form
10-Q for the quarter ended March 31, 2018)
107
10.1
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.8(a)†
10.8(b)†
10.9†
10.10
10.11+
10.12†
10.13†
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 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)
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)
The New Home Company Inc. 2014 Long-Term Incentive Plan form of Restricted Stock Unit Award
Agreement for Nonemployee Directors (incorporated by reference to Exhibit 10.11(a) of the Company's
Annual Report on Form 10-K for the year ended December 31, 2015)
The New Home Company Inc. Non-Employee Director Compensation Program (incorporated by reference
to Exhibit 10.12 of the Company's Annual Report on Form 10-K for the year ended December 31, 2015)
Amended and Restated Credit Agreement, dated May 10, 2016, among The New Home Company Inc., U.S.
Bank National Association d/b/a Housing Capital Company, as Administrative Agent, and the other lenders
party thereto (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed
May 11, 2016)
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)
The New Home Company Inc. 2016 Incentive Award Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on May 24, 2016)
The New Home Company Inc. 2016 Incentive Award Plan form of Restricted Stock Unit Award Agreement
(incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q for the quarter ended June 30,
2016)
108
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20
10.21+
10.22+
10.23
10.24†
10.25†
10.26†
10.27†
Amendment to Employment Agreement, dated February 16, 2017, by and between The New Home
Company Inc. and H. Lawrence Webb (incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 2017)
Amendment to Employment Agreement, dated February 16, 2017, by and between The New Home
Company Inc. and John Stephens (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q
for the quarter ended March 31, 2017)
Amendment to Employment Agreement, dated February 16, 2017, by and between The New Home
Company Inc. and Thomas Redwitz (incorporated by reference to Exhibit 10.4 to the Company's Form 10-
Q for the quarter ended March 31, 2017)
Employment Agreement, dated February 16, 2017, by and between The New Home Company Inc. and
Leonard Miller (incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q for the quarter
ended March 31, 2017)
Consulting Agreement, dated February 16, 2017, by and between The New Home Company Inc. and Wayne
Stelmar (incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q for the quarter ended
March 31, 2017)
Second Amendment to Employment Agreement, dated March 23, 2017, by and between The New Home
Company Inc. and Thomas Redwitz (incorporated by reference to Exhibit 10.7 to the Company's Form 10-
Q for the quarter ended March 31, 2017)
Letter agreement re: Arantine Hills Holdings LP - funding Excess Shortfall among TNHC-Arantine GP
LLC, TNHC Land Company LLC and Arantine Hills Equity LP dated as of June 28, 2017 (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended June 30, 2017)
Limited Liability Company Agreement of TNHC Russell Ranch LLC, dated as of May 22, 2013, between
TNHC Land Company LLC and IHP Capital Partners VI, LLC (incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended September 30, 2017)
First Amendment to Limited Liability Company Agreement of TNHC Russell Ranch LLC, dated as of
August 4, 2017, between TNHC Land Company LLC and IHP Capital Partners VI, LLC (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended September 30, 2017)
Modification Agreement, dated as of September 27, 2017, among The New Home Company Inc., U.S.
Bank National Association, d/b/a Housing Capital Company, and the lenders party thereto (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 2, 2017)
Amendment to Consulting Agreement, dated February 13, 2017, by and between The New Home Company
Inc. and Wayne Stelmar (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2017)
The New Home Company Inc. Non-Employee Director Compensation Program (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on February 16, 2018)
The New Home Company Inc. 2016 Incentive Award Plan form of Restricted Stock Unit Award Agreement
(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on
February 16, 2018)
The New Home Company Inc. 2016 Incentive Award Plan form of Performance Share Unit Award
Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed
on February 16, 2018)
109
10.28†
10.29†
10.30†
10.31†
10.32†
10.33
10.34†
10.35
First Amendment to The New Home Company Inc. 2014 Long-Term Incentive Plan dated February 12,
2018 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March
31, 2018)
Amendment to Employment Agreement, dated February 16, 2018, by and between The New Home
Company Inc. and H. Lawrence Webb (incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 2018)
Amendment to Employment Agreement, dated February 16, 2018, by and between The New Home
Company Inc. and John M. Stephens (incorporated by reference to Exhibit 10.3 to the Company's Form 10-
Q for the quarter ended March 31, 2018)
Amendment to Employment Agreement, dated February 16, 2018, by and between The New Home
Company Inc. and Leonard Miller (incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q
for the quarter ended March 31, 2018)
Amendment to Employment Agreement, dated February 16, 2018, by and between The New Home
Company Inc. and Thomas Redwitz (incorporated by reference to Exhibit 10.5 to the Company's Form 10-
Q for the quarter ended March 31, 2018)
Amendment No. 1 to Investor Rights Agreement among The New Home Company Inc., TNHC Partners
LLC, IHP Capital Partners VI, LLC, WATT/TNHC, LLC, TCN/TNHC LP and collectively H. Lawrence
Webb, Wayne J. Stelmar, Joseph D. Davis and Thomas Redwitz (incorporated by reference to Exhibit 10.1
of the Company's Current Report on Form 8-K filed on May 23, 2018)
The New Home Company Inc. Amended and Restated 2016 Incentive Award Plan (incorporated by
reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed on May 23, 2018)
First Amendment to Agreement of Limited Partnership of Arantine Hills Holdings LP, dated July 27, 2018,
among TNHC-Arantine GP LLC, Arantine Hills Equity LP and TNHC Land Company LLC (incorporated
by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 2018)
21.1*
List of subsidiaries of The New Home Company Inc.
23.1*
Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP
31.1*
Chief Executive Officer Section 302 Certification of Periodic Report dated February 15, 2019
31.2*
Chief Financial Officer Section 302 Certification of Periodic Report dated February 15, 2019
32.1**
Chief Executive Officer Section 906 Certification of Periodic Report dated February 15, 2019
32.2**
Chief Financial Officer Section 906 Certification of Periodic Report dated February 15, 2019
101*
The following materials from The New Home Company Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated
Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Equity, (iv)
Consolidated Statements of Cash Flows, and (v) Notes to Audited Consolidated Financial Statements.
110
†
+
*
**
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.
111
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 15, 2019
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/ 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
William A. Witte
Chief Executive Officer and Chairman of the
February 15, 2019
Board (Principal Executive Officer)
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
Director
Director
Director
Director
Director
Director
Director
Director
112
THE NEW HOME COMPANY INC.
SUBSIDIARIES
Exhibit 21.1
Subsidiary
TNHC Realty and Construction Inc.(2)
The New Home Company Southern California LLC
TNHC-Santa Clarita GP, LLC
TNHC-TCN Santa Clarita, LP*
TNHC Meridian Investors LLC*
TNHC Newport LLC*
TNHC-Calabasas GP LLC
Calabasas Village LP*
TNHC San Juan LLC
LR8 Investors, LLC (1)
LR8 Owner, LLC
The New Home Company Northern California LLC
Larkspur Land 8 Investors LLC (3)
Larkspur Land 8 Owner LLC
TNHC-HW San Jose LLC*
McKinley Village LLC*
Encore McKinley Village LLC*
TNHC Grove Investment LLC
The Grove at Granite Bay, LLC*
TNHC Tidelands LLC (5)
TNHC Land Company LLC
TNHC Canyon Oaks LLC
TNHC Russell Ranch LLC*
TNHC-HW Foster City LLC*
TNHC-HW Cannery LLC*
TNHC-Arantine GP LLC
Arantine Hills Holdings LP*
TNHC Arizona LLC
TNHC Mountain Shadows LLC*
DMB/TNHC LLC (4)
TNHC Arizona Marketing LLC
TNHC Holdings LLC
TNHC Holdings 1 LLC
State of Incorporation or Formation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
* Entities marked with * are our joint ventures at December 31, 2018. Some such entities are lower tier investees in which we only hold an indirect interest
through our ownership interest in the higher tier joint venture entity.
(1) During June 2016, the Company's outside equity partner exited this joint venture and upon the change in control, we were required to consolidate this
venture as a wholly owned subsidiary.
(2) TNHC Realty and Construction Inc. has the following fictitious business names (d/b/a): The New Home Company, NWHM, New Home, New Home
Company, TNHC, and New Home Co.
(3) During May 2017, the Company's outside equity partner exited this joint venture and upon the change in control, we were required to consolidate this
venture as a wholly owned subsidiary.
(4) During August 2017, the Company's outside equity partner exited this joint venture and upon the change in control, we were required to consolidate this
venture as a wholly owned subsidiary.
(5) During October 2017, the Company's outside equity partner exited this joint venture and upon the change in control, we were required to consolidate this
venture as a wholly owned subsidiary.
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. 333-222645) and related prospectus of The New Home Company Inc.;
(2) Registration Statement (Form S-8 No. 333-193753) pertaining to The New Home Company Inc. 2014 Long-Term Incentive
Plan; and
(3) Registration Statements (Form S-8 No. 333-211756 and No. 333-217515) pertaining to The New Home Company Inc. 2016
Incentive Award plan;
of our report dated February 15, 2019, 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, 2018, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Irvine, California
February 15, 2019
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 15, 2019
/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 15, 2019
/s/ John M. Stephens
John M. Stephens
Chief Financial Officer (Principal Financial
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 Annual Report on Form 10-K of The New Home Company Inc. (the “Company”) for the
period ended December 31, 2018 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 15, 2019
/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 Annual Report on Form 10-K of The New Home Company Inc. (the “Company”) for the
period ended December 31, 2018 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 15, 2019
/s/ John M. Stephens
John M. Stephens
Chief Financial Officer (Principal Financial
Officer)
Sam Bakhshandehpour (1)(2)
CEO & Managing Partner,
The Silverstone Companies, LLC
Paul Heeschen (1) (3)
General Partner,
Sequoia Enterprises
Douglas C. Neff
President,
IHP Capital Partners
H. Lawrence Webb
Chairman and Chief Executive Officer,
The New Home Company
BOARD OF DIRECTORS
Michael J. Berchtold (3)
Lead Independent Director,
The New Home Company
Chief Executive Officer,
Berchtold Capital Partners
Gregory P. Lindstrom (2)(3)
Alternative Dispute Resolution
Professional and Former General Counsel,
The Irvine Company
Wayne Stelmar
Former Chief Investment Officer,
The New Home Company
William A. Witte
Chairman and Chief Executive Officer,
Related California
Cathey S. Lowe (1)(2)
Owner,
Cathey Lowe Consulting, LLC
(1) Audit Committee Member
(2) Compensation Committee Member
(3) Nominating & Corporate
Governance Committee Member
EXECUTIVE OFFICERS
H. Lawrence Webb
Chairman and Chief Executive Officer
Leonard S. Miller
President & Chief Operating Officer
John M. Stephens
Chief Financial Officer
INFORMATION REQUESTS
The Company’s annual report to shareholders and
proxy statement together contain substantially
all the information presented in the Form 10-K
report filed with the Securities and Exchange
Commission. Individuals interested in receiving
the annual report, Form 10-K, Form 10-Qs
or other printed corporate literature should
email the Investor Relations Department at
investorrelations@nwhm.com.
INVESTOR INQUIRIES
Shareholders, securities analysts, portfolio
managers and others with inquiries about the
Company should contact Drew Mackintosh,
(949) 382-7838, investorrelations@nwhm.com.
Shareholders with inquiries relating to
shareholder records, stock transfers, change of
ownership, and change of address or dividend
payments should contact:
Transfer Agent and Registrar
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
www.amstock.com
Our Board of Directors has an audit committee,
a compensation committee and a nominating
and corporate governance committee. Each of
these committees has a formal charter. We have
Corporate Governance Guidelines and a Code of
Ethics and Business Conduct which applies to all
directors, officers and employees. We also have a
Code of Ethics for the Principal Executive Officer
and Senior Financial Officers that applies to our
principal executive officer and senior financial
officers. Copies of these charters, guidelines, and
codes can be obtained on our website and are also
available upon request from Investor Relations at
the contact information above.
INTERNET ADDRESS
Additional information about The New Home
Company Inc. may be obtained by visiting our
website at www.NWHM.com
ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of The New
Home Company Inc., will be held on May 21, 2019
at 8:30 a.m. local time, at the Renaissance Aliso
Viejo Hotel, located at 50 Enterprise, Aliso Viejo,
CA 92656.
COMMON STOCK INFORMATION
Ticker Symbol: NWHM
Common stock of The New Home Company
Inc. is listed and traded on the New York Stock
Exchange, which is the principal market for the
common stock.
Various statements contained in this annual report, including those that express a belief, anticipation, expectation or intention, as well as those that are not
statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing
and success of specific projects, community counts and openings and our future production, our ability to execute our strategic growth objectives, gross
margins, revenues, projected results, income, earnings per share and capital spending. Our forward-looking statements are generally accompanied by words
such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal,” “will,” “guidance,” or other words that convey
the uncertainty of future events or outcomes. The forward-looking statements in this press release speak only as of the date of this release, and we disclaim any
obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements
on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they
are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to
predict and many of which are beyond our control. 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; changes in sales conditions, including home prices, in the markets where we build homes, volatility and uncertainty in the credit markets and broader
financial markets; our business and investment strategy; availability of land to acquire and our ability to acquire such land on favorable terms or at all; our
liquidity and 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 competition; our leverage and debt service obligations; the
impact of recent accounting standards; restrictive covenants relating to our operations in our current of future financing arrangements; availability of qualified
personnel and our ability to retain our key personnel; and additional factors discussed under the sections captioned “Risk Factors” included in our annual report
on Form 10-K for the fiscal year ended December 31, 2018 and other reports filed with the Securities and Exchange Commission. The Company reserves the right
to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this press
release. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide
any other updates.
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