New Home Company Annual Report 2019

Plain-text annual report

E H T N E W HOME C O M P A N Y THE NEW HOME COMPANY 2019 Annual Report THE NEW HOME COMPANY 2019 LETTER TO SHAREHOLDERS The New Home Company made great progress on a number of fronts in 2019 which enhanced our market positioning, improved our fi nancial condition and streamlined our cost structure. While we incurred a loss of $8 million, or $0.40 per diluted share for the year, we feel that the actions we took during 2019 have put us in a much better position to capitalize on the strong long-term housing fundamentals that exist in our markets. From a product standpoint, we continue to shift our company’s home offerings down the price point spectrum in an effort to address the affordability issues in our markets and cater to a deeper pool of buyers. Our average selling price for 2019 declined 8% year-over-year as we close out of higher-priced legacy communities and open more affordably priced ones. Thanks to the investments we’ve made the last few years, a majority of our scheduled community openings over the next two years will be priced below conforming loan limits, and many will have base pricing below FHA loan limits. These communities will shift our concentration away from the coastal areas of California and into the more affordable inland parts of the state as well as the vibrant Phoenix market. Based on our view of the long-term housing dynamics in our markets and the sales trends we’ve witnessed at our existing affordably priced communities to date, we believe this product repositioning will lead to better order activity and results over time. In terms of the balance sheet, our company is on much more solid fi nancial footing thanks to the $121 million of operating cash ﬂ ow we generated during the year. We achieved this considerable sum by accelerating our backlog conversion, curtailing our land acquisition and development efforts, and the strategic sale of several land assets. These efforts resulted in a considerably stronger balance sheet for our company, as we ended the year with a net debt to total capital ratio of 49.2%, a 980 basis point improvement over our ratio at the end of 2018. With respect to our cost structure, we lowered our SG&A expense ratio 60 basis points in 2019 after the impact of 40 basis points of severance costs, compared to 2018 thanks to our efforts to reduce overhead expenses and employ more targeted marketing and advertising methods. We believe these efforts will improve our profi tability over time, and we will continue to look for ways to keep costs under control as our business evolves. In summary, we have a lot to be optimistic about from both an industry and company-specifi c standpoint, and we are excited for what the future holds. We believe that we have found a compelling niche for our company at lower price points in each of our markets, with a continued emphasis on unique design and land planning, coupled with desirable locations that sets our homes apart from the competition. In addition, our success with respect to deleveraging our balance sheet and reducing overhead expense levels has us on more solid footing as we enter the new year. We would like to thank all of our team members for their hard work in 2019 to get us where we needed to be from a strategic and fi nancial standpoint. Your collective efforts continue to drive the company forward and set a high standard for our homes, a standard that was recognized by Professional Builder Magazine which named The New Home Company as their Builder of the Year for 2019. We would also like to thank our board members for their wisdom and guidance through the years and all of our stakeholders for their continued support. Our goal is to be a best-in-class homebuilder and deliver shareholder value over time. We believe our efforts in 2019 put us on a path to achieve both of those goals. Sincerely, Larry Webb Executive Chairman Leonard Miller President & Chief Executive Ofﬁ cer UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2019 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 27-0560089(State or other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)85 Enterprise, Suite 450Aliso 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 classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, par value $0.01 per shareNWHMNew 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 theAct. 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 SecuritiesExchange 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 submittedpursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reportingcompany, 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-acceleratedfiler☐Smaller reporting company☒Emerging growthcompany☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period forcomplying 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 28, 2019, based on theclosing price of $3.85 as reported by the New York Stock Exchange was $58,925,798. There were 20,096,969 shares of the registrant's common stock issued and outstanding as of February 11, 2020. 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 theregistrant’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held in 2020, which definitive proxy statementshall 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-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2019 PageNumberPart I Item 1Business5Item 1ARisk Factors13Item 1BUnresolved Staff Comments30Item 2Properties31Item 3Legal Proceedings31Item 4Mine Safety Disclosures31 Part II Item 5Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities32Item 6Selected Financial Data33Item 7Management’s Discussion and Analysis of Financial Condition and Results of Operations34Item 7AQuantitative and Qualitative Disclosures About Market Risk57Item 8Financial Statements and Supplementary Data58Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure58Item 9AControls and Procedures58Item 9BOther Information59 Part III Item 10Directors, Executive Officers and Corporate Governance60Item 11Executive Compensation60Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters60Item 13Certain Relationships and Related Transactions, and Director Independence60Item 14Principal Accounting Fees and Services60 Part IV Item 15Exhibits and Financial Statement Schedules61Item 16Form 10-K Summary (Not Applicable)— Signatures109 3Table of Contents 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 containforward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of1933, as amended and Section 21E of the Securities Exchange Act, as amended. All statements contained in this annual report on Form 10-Kother than statements of historical fact, including statements regarding our future results of operations and financial position, our businessstrategy and plans, and our objectives for future operations, are forward-looking statements. These forward-looking statements arefrequently 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 currentexpectations 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 arenot limited to information related to: anticipated operating results; home deliveries; the ability to acquire land and pursue real estateopportunities; our ability to reduce our leverage; our plans to sell more affordably priced homes; inventory write-downs; the ability to gainapprovals and open new communities; the ability to sell homes and properties; the ability to deliver homes from backlog; the ability to securematerials 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 andcondition; changes in revenues; changes in profitability; changes in margins; changes in accounting treatment; cost of sales; selling, generaland administrative expenses; interest expense; community openings; seasonality; home warranty claims and reserves; legal proceedings;unrecognized tax benefits; anticipated effective tax rates; seasonality; dividends; sales paces and prices; trends and effects of home buyercancellations; and growth and expansion. From time to time, forward-looking statements also are included in other reports on Forms 10-Q and 8-K, in press releases, inpresentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in thisreport 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 factorsmentioned in this report or in other reports or public statements made by us, such as market conditions, government regulation and thecompetitive environment, will be important in determining our future performance. New risks emerge from time to time. It is not possible forour management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, orcombination 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 releaseany revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not toplace 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 LitigationReform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements containedor referenced in this section. 4Table of Contents PART I Item 1.Business As used in this annual report on Form 10-K, unless the context otherwise requires or indicates, references to "the Company," "ourcompany," "we," "our" and "us" refer to The New Home Company Inc. and its subsidiaries. You should read the following in conjunctionwith 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 majormetropolitan areas within select growth markets in California and Arizona, including Southern California, the San Francisco Bay area, metroSacramento and the greater Phoenix area. We were founded in 2009, towards the end of an unprecedented downturn in the U.S. homebuilding industry, as The New HomeCompany LLC, which entity was formed in June 2009. In January 2014, we converted from a limited liability company to a corporation andrenamed our company The New Home Company Inc. when we completed our initial public offering of shares of our common stock. Webelieve our management team has extensive and complementary construction, design, marketing, development and entitlement expertise, aswell as strong relationships with key land sellers within each of our local markets, and a reputation for quality building, which provide acompetitive advantage in being able to acquire land, participate in and create masterplans, obtain entitlements and build quality homes. We are organized into three reportable segments: Arizona homebuilding, California homebuilding and fee building. Our Californiahomebuilding operation is comprised of divisions in Northern California and Southern California. Our primary business focus is building andselling homes for our own account and we also have a meaningful fee building business. For financial information about our segments, seeItem 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 15 to the ConsolidatedFinancial 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, metro Sacramento, the San FranciscoBay area and the greater Phoenix area. We seek sites where we are rewarded for thoughtful land planning and architecture, and additionaldefining characteristics of our markets generally include barriers to entry, job growth, high employment to building permit ratios andincreasing populations, which can create growing demand for new housing. We perform consumer research that helps us create land plansand design homes that meet the needs and desires of our targeted buyers. We believe our approach to market research and constructionexpertise across an extensive product offering allows us the flexibility to pursue a wide array of land acquisition opportunities and appeals toa broad range of potential homebuyers, including entry-level, move-up, move-down and luxury customers. The homes that we and ourunconsolidated joint ventures build range in price from approximately $300,000 to over $3 million, with home sizes ranging from approximately700 to 5,000 square feet. Our homebuilding operations are comprised of two reportable segments, Arizona homebuilding and Californiahomebuilding. Total homebuilding revenue contributed to 86%, 76% and 75% of total revenue for the years ended December 31, 2019, 2018and 2017, respectively. For the years ended December 31, 2019, 2018 and 2017, the average sales price of homes delivered from our whollyowned communities was approximately $927,000, $1.0 million and $1.6 million, respectively. We believe that customer-focused communitycreation and product development, our reputation for high quality construction, as well as exemplary customer service, are key componentsof the lifestyle connection we seek to establish with each homebuyer. Additionally, we strive to enhance the home-buying experience and buyers’ personal investment in their homes by actively engagingthem in the selection of design options and upgrades in many of our communities. We believe that our on-site design studios in suchcommunities allow buyers to personalize our home offerings with dedicated designers who are knowledgeable about the attributes of thehomes offered in the community. We believe that the active participation of buyers in selecting options and upgrades results in buyersbecoming more personally invested in their homes. We also believe our emphasis on customer care provides us a competitive advantage. Ourcommitment to customer satisfaction is a key element of company culture, which fosters an environment where team members can innovate. We seek to reduce upfront capital and exposure to land risk through the use of land options and other flexible land acquisition anddevelopment arrangements. The Company owned approximately 1,578 lots and had options to purchase an additional 1,123 lots as ofDecember 31, 2019. We believe our lot option 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 land development joint venture partners, enable us toacquire well-positioned land parcels in our existing markets as well as new target markets. 5Table of Contents Fee Building Operations Our fee business is comprised primarily of building for third party landowners for a fee with such third party landowners paying orreimbursing the Company for all costs associated with construction. Our fee building segment also includes our management fee revenuesthat we receive for serving as the managing member or other similar role in our joint ventures. We believe our fee building businesscomplements our homebuilding business, as most of the fee building occurs in what we believe are very attractive masterplan communities inSouthern California and in a concentrated geographic area. One of our wholly owned subsidiaries is usually the general contractor for ourand our unconsolidated joint ventures’ projects and engages third party 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 endedDecember 31, 2019, 2018 and 2017. 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) 2019 % of TotalRevenues 2018 % of TotalRevenues 2017 % of TotalRevenues Homebuilding revenues: California home sales $472,242 71% $504,029 76% $560,842 75%California land sales 41,664 6% — —% — —%Arizona home sales 60,110 9% — —% — —%Total homebuilding revenues 574,016 86% 504,029 76% 560,842 75%Fee building revenues, including management fees 95,333 14% 163,537 24% 190,324 25%Total revenues $669,349 100% $667,566 100% $751,166 100% Summary of Owned and Controlled Lots As of December 31, 2019, we owned or controlled an aggregate of 2,701 lots in our homebuilding segment and 1,135 lots through our feebuilding segment. The following table presents certain information with respect to our wholly owned and fee building lots as of December 31,2019. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - LotsOwned and Controlled" for further detail. December 31, Change Change 2019 Amount % 2018 Amount % 2017 Lots Owned 1,578 (89) (5)% 1,667 721 76% 946 Lots Controlled(1) 1,123 (22) (2)% 1,145 (661) (37)% 1,806 Total Lots Owned and Controlled - Wholly Owned 2,701 (111) (4)% 2,812 60 2% 2,752 Fee Building Lots(2) 1,135 329 41% 806 (114) (12)% 920 (1)Includes lots that we control under purchase and sales agreements or option agreements subject to customary conditions and have not yet closed. There canbe no assurance that such acquisitions will occur.(2)Lots owned by third party property owners for which we perform general contracting or construction management services. 6Table of Contents Backlog At December 31, 2019 and 2018, homes under contract, but not yet delivered ("backlog") totaled 149 and 191, respectively, with anestimated sales value of $125.8 million and $207.1 million, respectively. We expect to deliver all of the homes in backlog at December 31, 2019during 2020 under existing home order contracts or through the replacement of an existing contract with a new home order contract. Theestimated backlog sales value at December 31, 2019 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 homesover a two- to three-year period from the initiation of homebuilding activity. We also selectively acquire parcels that require land developmentactivities. 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 andcommunities. 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 anddeliver a deposit, which becomes nonrefundable upon the expiration of a specified due diligence period. The closing is generally tied to thedate on which we have obtained development entitlements for the land. For land which is part of a larger development being developed by amaster developer, we generally enter into a purchase agreement with the master developer and pay a deposit that becomes nonrefundableupon expiration of the due diligence period. The closing in master developments is generally tied to the issuance of final land developmententitlements and completion of certain infrastructure and other improvements by the master developer. In master developments we mayacquire 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 themaster 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 themaster developer the right to repurchase the land if we fail to develop the land in accordance with applicable development requirements orwish to sell the land in bulk. Our acquisition and development financing is generally obtained using one or more of the following: (i) proceedsfrom the sale of debt securities, (ii) unsecured lines of credit; (iii) secured acquisition and development loans; and/or (iv) land bankarrangements with providers who take title to the land at closing subject to agreements which obligate us to perform all developmentactivities 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 subsequentphases in the same community based on sales demand in prior phases. Our construction process is driven by sales contracts thatoften precede the start of the construction of homes, however, depending on the price point, product, and buyer demand we also engage insome speculative building. The determination that a potential home buyer is qualified to obtain the financing necessary to complete thepurchase is an integral part of our process. Once qualified, our designers, which are often at on-site design centers, work with the buyer totailor the home to meet the buyer’s needs and budget. Land Development and Construction We customarily acquire improved or unimproved land zoned for residential use. To control larger land parcels or gain access tocertain desirable parcels, we sometimes form land development joint ventures with third parties in order to provide us with a pipeline of landto acquire from the joint venture when the lots are developed. If we purchase raw land or partially developed land, we will performdevelopment 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 andrecreational facilities like parks, community centers, pools, and hiking and biking trails. 7Table of Contents The design of our homes must conform to zoning requirements, building codes and energy efficiency laws. As a result, we contractwith a number of architects, engineers, and other consultants in connection with the design process. We act as a general contractor (andcertain of our wholly owned subsidiaries hold the general contractor's licenses in California and Arizona) with our supervisory employeescoordinating most of the land development and construction work on a project. Independent architectural design, engineering and otherconsulting firms are generally engaged on a project-by-project basis to assist in project planning and community and home design, andsubcontractors and trade partners are engaged to perform all of the physical development and construction work. Although we generally donot 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 tradepartners have been enhanced through involving them prior to the start of a new community, maintaining our schedules and making timelypayments. 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. Theinformation contained in, or that can be accessed through our website, is not incorporated by reference and is not a part of this annual reporton 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 thata third party broker representing a homebuyer receives co-broker commissions in connection with a sale. One of our wholly ownedsubsidiaries holds the corporate broker's licenses in California and Arizona. Our in-house sales force works from sales offices located inmodel homes or sales centers close to, or within each community. Sales representatives assist potential buyers by providing them with floorplan, 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 featuresand options available for purchase in the design center. We believe that model homes play a significant role in helping homebuyersunderstand the efficiencies and value provided by each floor plan type. Structural changes in design from the model homes, other than thosepredetermined, are not generally permitted, but homebuyers may select various other optional construction and design amenities. Thespecific options selected for each community are based upon the price of the home and anticipated buyer preferences. Options includestructural (room configurations or pre-determined additional square footage), electrical, plumbing and finish options (flooring, cabinets,fixtures). In certain communities, we may also offer turn-key landscape options. We typically sell homes using sales contracts that include cash deposits by the purchasers. Most homebuyers utilize long-termmortgage financing to purchase a home, and mortgage lenders will usually make loans only to qualified borrowers. Before entering into salescontracts, we pre-qualify many of our customers through a third party preferred mortgage provider. However, purchasers can generally cancelsales contracts if they are unable to sell their existing homes, if they fail to qualify for financing, or under certain other circumstances. For ourcommunities, the cancellation rate of buyers who contracted to buy a home but did not close escrow as a percentage of overall orders was11%, 10% and 9% for the years ended December 31, 2019, 2018 and 2017, 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.Cancellation rates have increased gradually over the last couple years which we believe is consistent with our transition to offering moreaffordable product, which generally has higher cancellation rates than move-up and luxury product offerings. 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 toeliminate building deficiencies. The quality and workmanship of the subcontractors and trade partners we employ are monitored using ourpersonnel and third-party consultants. We make regular inspections and evaluations of our subcontractors and trade partners to seek toensure that our standards are met. We utilize a third party quality control provider and maintain customer service staff whose role includes providing a positive experiencefor each customer throughout the delivery and post-delivery periods. These employees are responsible for providing after-sales customerservice, including the coordination of warranty requests. Our quality and service initiatives include taking homebuyers on a comprehensivetour of their home during construction and prior to delivery. In addition, we generally use a third party, Eliant, to survey our homebuyers inorder to improve our performance and evaluate our standards of quality and customer satisfaction. 8Table of Contents Insurance and Warranty Program We provide a limited one-year warranty to our homeowners covering workmanship and materials. In addition, we generally provide amore limited warranty, which generally ranges from a minimum of two years up to the period covered by the applicable statute of repose, thatcovers certain defined construction defects. The limited warranty covering construction defects is transferable to subsequent buyers andprovides for the resolution of unresolved construction-related disputes through binding arbitration. Additionally, we have dedicatedcustomer service staff that work with our homebuyers and coordinate with subcontractors and trade partners, as necessary, during thewarranty period. While our subcontractors who perform our homebuilding work generally provide us with an indemnity for claims relating totheir workmanship and materials, we also purchase general liability insurance that covers development and construction activity at each ofour 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. Ingeneral, we maintain insurance, subject to deductibles and self-insured retentions, to protect us against various risks associated with ouractivities, including, among others, general liability, "all-risk" property, construction defects, workers’ compensation, automobile, andemployee fidelity. Our warranty and litigation reserves are presented on a gross basis before coverage from insurance, and expectedrecoveries from insurance carriers are presented as a receivable, the net result of which is equivalent to our expected costs associated withthe deductibles and self-insured amounts for warranty and construction defect claims. For a further discussion of the risks associated withour warranty and insurance program, please see the risk factor under the heading "Risks Related to Our Business - We are subject toconstruction defect, warranty, and personal injury claims arising in the ordinary course of business that can be significant and couldadversely affect our financial position and results of operations." Seasonality and Cycles We have experienced seasonal variations in our quarterly operating results and capital requirements in each of our Californiaand Arizona homebuilding reportable segments as well as our fee building reportable segment. We typically take orders for more homes in thefirst half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters tobuild our inventories to satisfy the deliveries in the second half of the year. Our revenues and cash flows (exclusive of the amount and timingof land purchases and land sales, if applicable) 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 inthe homebuilding industry. The homebuilding industry is cyclical. We continue to make investments in land, which is likely to utilize asignificant 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 standarditems carried by major suppliers. However, our industry experiences shortages in both raw materials and labor from time to time. Increases inthe cost of building materials and subcontracted labor may reduce gross margins from home sales to the extent that market conditionsprevent the recovery of increased costs through higher home sales prices. These shortages and delays may result in delays in the delivery ofhomes under construction, reduced gross margins from home sales, or both. We continue to monitor the supply markets to achieve favorableprices. In addition, the imposition of tariffs on building materials frequently impacts the cost of construction and increases in costs may notbe recovered by raising home prices due to affordability and market demand constraints. Joint Ventures Our joint venture strategy has assisted in leveraging our entity-level capital and establishing a homebuilding and land developmentplatform focused on high-growth, land-constrained markets. We own interests in our unconsolidated joint ventures that generally range from5% to 35%. We also earn management fees from such joint ventures. We serve as the administrative member, general partner, manager or managing member of each of our six homebuilding and four landdevelopment joint ventures. We do not, however, exercise control over the joint ventures, as the joint venture agreements generally provideour respective partners with the right to consent to certain actions. Under most joint venture agreements, certain major decisions must beapproved by the applicable joint venture’s executive committee, which is comprised of both our representatives and representatives of ourjoint venture partners. In addition, some of our joint venture agreements grant both partners a buy-sell right pursuant to which, subject tocertain exceptions, either partner may initiate procedures requiring the other partner to choose between selling its interest to the other partneror 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 andContractual Obligations." For a further discussion of the risks associated with our joint ventures, please see the risk factor regarding ourjoint venture investments under the heading "Risks Related to Financing and Indebtedness." 9Table of Contents Fee Building Services Although our primary business focus is building and selling homes for our own account, we also selectively provide generalcontracting, construction management and coordination services, sales and marketing services and escrow coordination services as part ofagreements with third-parties and the Company's unconsolidated joint ventures. We refer to these projects as "fee building projects." For theyear ended December 31, 2019, 96% of our fee building revenue represents billings to third-party land owners for general contracting andconstruction management services and 4% represents management fees from unconsolidated joint ventures and third-party land owners forconstruction and sales management services. Our services with respect to fee building projects may include design, development,construction, escrow, and sales and marketing services. We earn revenue on our fee building projects either as a flat fee for the project or as apercentage of the cost or revenue of the project depending upon the terms of the agreement with our customer. For the years endedDecember 31, 2019, 2018 and 2017, fee building revenue contributed to 14%, 24% and 25%, respectively, of total revenue. The Company’s feebuilding revenues have historically been concentrated with a small number of customers. We have several fee building agreements withIrvine Pacific, LP and revenues from this customer totaled 14%, 23%, and 25% of our total consolidated revenues for the years endedDecember 31, 2019, 2018 and 2017, respectively. Our billings to this customer are dependent upon such customer’s decision to proceed withconstruction and the agreements can be canceled at any time. We cannot predict whether these agreements will continue in the future or thecurrent 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 - Results of Operations - Fee Building" and Note1 "Revenue Recognition - Fee Building" to the Consolidated Financial Statements for further discussion of this revenue concentration. Competition The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential constructioncompanies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor, and employees. A number ofour primary competitors are significantly larger, have a longer operating history and may have greater resources or lower cost of capital thanus. 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 availablerental housing. In the past several years, we have embarked on a strategy to expand our product offerings to include more affordably-pricedhomes to reach a deeper pool of qualified buyers and in connection with growing our overall community count. We anticipate that we willcontinue to build more affordably-priced homes. We believe there is more competition among homebuilding companies in more affordableproduct offerings than in the luxury and move-up segments, however, we also believe this is a prudent strategy as there is a larger populationof qualified buyers in more affordable price points. For risks associated with the competition we face, please see the risk factor under theheading "Risks Related to Our Business - We may not be able to compete effectively against competitors in the homebuilding industry". Surety Bonds and Other Obligations In connection with the development of our communities, we are frequently required to provide performance, maintenance and otherbonds and letters of credit in support of our related obligations with respect to such developments. The amount of such obligationsoutstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit aredrawn upon, we would be obligated to reimburse the issuer of such surety bonds or letters of credit. As of December 31, 2019, we hadapproximately $47.6 million and $0 of outstanding performance bonds and letters of credit, respectively, primarily related to our obligations tolocal governments to construct roads and other improvements in various developments. Estimated cost to complete for surety bonds as ofDecember 31, 2019 was $29.1 million. 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 thenumber of homes that can be built within the boundaries of a particular area. Communities that are not entitled may be subjected to periodicdelays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. Wemay 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 regardingthe imposition of development fees and exactions for communities in their jurisdiction. Communities for which we have received land use anddevelopment entitlements or approvals may still require a variety of other governmental approvals and permits during the developmentprocess and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these communities orprevent their development. 10Table of Contents We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the environment. Theparticular environmental laws which apply to any given homebuilding site vary according to multiple factors, including the site’s location, itsenvironmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions mayresult in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity inenvironmentally sensitive regions or areas. In addition, in those cases where an endangered or threatened species is involved, environmentalrules and regulations can result in the restriction or elimination of development in identified environmentally sensitive areas. Legislationrelated to climate change and energy efficiency can impose stricter building standards, which may increase our cost to build. From time totime, the EPA and similar federal or state agencies review homebuilders’ compliance with environmental laws and may levy fines and penaltiesfor failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of pastfailures. Any such actions taken with respect to us may increase our costs. Further, we expect that increasingly stringent requirements will beimposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the availability and price of certain rawmaterials such as lumber. California, where we conduct most of our operations, is especially susceptible to restrictive government regulationsand environmental laws. Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may be requiredto investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity orto third parties for related damages, including for bodily injury, and for investigation and clean-up costs incurred by such parties inconnection with the contamination. A mitigation system may be installed during the construction of a home if a cleanup does not remove allcontaminants of concern or to address a naturally occurring condition such as methane. Some buyers may not want to purchase a home witha mitigation system. We manage compliance with environmental laws at the division level with assistance and oversight from our corporate office. As partof the land acquisition due diligence process, we utilize environmental assessments to identify environmental conditions that may exist onpotential acquisition properties. To date, environmental assessments or our compliance with environmental laws and regulations has nothad a material adverse effect on our operations, although it may do so in the future. We use and our business relies upon general contractors' licenses and corporate real estate broker's licenses in order to build and sellhomes. For a further discussion of the impact of govern regulations on our business, including the impact of environmental regulations, pleasesee the risk factors included under the heading "Risks Related to Laws and Regulations." Environmental Impact and Sustainability Homebuilding impacts the environment in a variety of ways, including through the use of water, gas and electricity, transportation ofbuilding materials, and the increase in density by constructing homes in areas that were previously undeveloped. However, our new homesutilize innovative technologies and systems to vastly improve the energy and water efficiency of our homes compared to resale homes. Forexample, beginning with all building permits issued after January 1, 2020, all of our homes in California will be equipped with a solar electricsystem. We believe that the standards for new home construction mitigate impacts to the environment by increasing home energyefficiency and reducing the impact of construction on the environment (such as limiting discharge of storm water and impacts to wetlands),all while addressing the serious need for housing in this country. California is at the forefront when it comes to sustainability, including green energy, water conservation and efficient constructionstandards. As a builder with most of its operations in California, we have made a dedicated effort to implement a variety of sustainable bestpractices in many of our communities, including the masterplan communities which we and our joint venture partners have created. Forexample, our Cannery joint venture created a visionary farm-to-table new-home community, with a working urban farm operated by theCenter for Land-Based Learning which serves as a training ground for beginning farmers while supplying the community with freshseasonal produce. Non-potable water from an onsite agricultural well was designed to irrigate landscaped areas along roadways and withinopen-space greenbelts, parks and the urban farm. In addition, a 1.5 kV photovoltaic solar system and electric vehicle charging pre-wire wasdesigned to come standard with every home, and residents could upgrade to net zero living. Similarly, our McKinley Village joint venturecreated the McKinley Village masterplan where each residence is pre-wired for solar and electric vehicle chargers. We believe ourcommitment to design and build energy-efficient homes is aligned with buyer sensitivities about how eco-friendly designs, features andmaterials help impact the environment and the livability of homes in addition to reducing cost of home ownership. In January 2020, we launched "EVO Home Tech", our advanced home automation technology packages which provide ourhomebuyers with advanced connectivity and features such as smart light controls and thermostats to allow for more convenient control ofenergy consumption and increased sustainability. 11Table of ContentsHealth and Safety MattersWe strive to provide a safe and healthy work environment for all employees. We believe that corporate social responsibility is asignificant factor for our overall success. This includes adopting ethical practices to direct how we do business while keeping the interests ofour 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 ethicshotline. We are also committed to maintaining high standards in health and safety at all of our sites. We have a health and safety audit systemthat includes comprehensive independent third-party inspections. Our Risk Management team has a training system and a safetyenforcement system in place in the field, which have led to an increase in safety awareness and effectiveness. Employees and Social Governance As of December 31, 2019, we had 260 employees, 102 of whom were executive, management and administrative personnel located in ouroffices, 56 of whom were sales and marketing personnel and 102 were involved in field construction. Although none of our employees arecovered by collective bargaining agreements, certain of the third party subcontractors and trade partners engaged by us are represented bylabor unions or are subject to collective bargaining arrangements. We believe that relations with our employees, subcontractors and tradepartners are good. The Company is committed to creating and maintaining a community in which its employees are free from all forms of harassment anddiscrimination. We require employee training and protocols for preventing, reporting and addressing behavior that is not in line with ourbusiness standards, our core values, including, but not limited to, discriminatory or harassing behavior and sexual misconduct. To ensure a positive and productive workplace, we proactively seek feedback from employees and continuously engage in two-waycommunication with our team members. We conduct an annual employee engagement survey soliciting direct feedback from our employeesutilizing a third party survey and analytics provider. Our most recent survey, from December 2019, had approximately 99% participation andreflected that approximately 91.2% of our employees are positively engaged, which was up from 90.3% in the 2018 survey. This score is basedon affirmative responses to factors such as being proud to work for New Home, a willingness to recommend New Home, and achieving afeeling of personal accomplishment associated with the employee's work. Annually, our CEO shares results in person with all team membersat divisional all-employee meetings and each division’s leader is tasked with identifying improvement plans. The insights gained from ouremployee engagement surveys have helped us drive significant improvements in the way our employees work and engage with one another. The Company engages in a variety of learning and development opportunities with its employees. Examples of such opportunitiesinclude construction best practices training, education for managers on delivering performance feedback, and sales coaching programs.Regionally, department leaders host "lunch and learns" on topics such as the land acquisition process, design and architecture, readingconstruction plans, and training on the department of real estate rules and regulations for our project management teams. In addition, we offerall employees access to an online on-demand micro-learning platform with hundreds of courses on topics that include technology,communication, business acumen, leadership and personal growth. Further, we believe it is important to treat all employees with dignity and respect. Employee diversity and inclusion are embraced andopportunities for training, growth, and advancement are strongly encouraged. 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). Wemake available through the "Investors" section of our website our annual report on Form 10-K, quarterly reports on Form 10-Q, currentreports 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 of1934 as soon as reasonably practicable after filing with, or furnishing to, the SEC. Copies of these reports, and any amendment to them, areavailable 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 theinvestment community on our Investor Relations website. Further corporate governance information, including our Code of Ethics andBusiness Conduct, corporate governance guidelines, and board committee charters, is also available on our Investor Relations website. Theinformation contained in, or that can be accessed through our website is not incorporated by reference and is not part of this annual reporton Form 10-K. 12Table of Contents Item 1A.Risk Factors You should carefully consider the following risk factors, which address the material risks concerning our business, together with theother 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, ourbusiness, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case thetrading price of our common stock could decline significantly and you could lose part or all of your investment. Some statements in thisannual report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the initial sectionof this annual report entitled "Cautionary Note Concerning Forward-Looking Statements." Risks Related to Our Business Our geographic concentration may materially and adversely affect us if demand for housing or the availability of land parcels inour current markets declines. Our current business involves the design, construction and sale of innovative single-family detached and attached homes in plannedcommunities in major metropolitan areas in Southern California, metro Sacramento, the San Francisco Bay area 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 affectingany sector of employment on which the residents of such area are dependent, or significant volatility in home prices and affordability couldhave a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionatelygreater impact on us than other homebuilders with more diversified operations. During the downturn from 2007 to 2011, land values, thedemand for new homes and home prices declined substantially in California. During the second half of fiscal 2018, demand for new homes,particularly in California, slowed which we believe stemmed from affordability concerns due to higher absolute home prices and higherinterest rates. Buyer demand and order activity improved somewhat during 2019, but there is no assurance that order activity will continue toimprove. As a homebuilder, we are often subject to market forces beyond our control. In general, housing demand is impacted by theaffordability of housing. Many homebuyers need to sell their existing homes in order to purchase a new home from us, and a weakness in thehome resale market could adversely affect that ability. If land values decrease or demand for new homes and home prices decline 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 generalavailability 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. Our future growth depends upon our ability tosuccessfully identify and acquire attractive land parcels for development of our single-family homes at reasonable prices and with terms thatmeet our underwriting criteria. We currently depend primarily on the California markets and availability of land parcels in our Californiamarkets at reasonable prices is limited. When the supply of land parcels appropriate for development of single-family homes is limitedbecause of these factors, or for any other reason, our ability to grow is significantly limited. To the extent that we are unable to purchase landparcels timely or enter into new contracts for the purchase of land parcels at reasonable prices, our home sales revenue and results ofoperations would be adversely impacted. The homebuilding industry is cyclical and affected by changes in general economic, real estate and other business conditions thatcould 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 otherbusiness 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 ofand demand for new and existing homes. The foregoing conditions, among others, are complex and interrelated. Periods of prolongedeconomic downturn, high unemployment levels, increases in the rate of inflation and uncertainty in the U.S. economy, have historicallycontributed to decreased demand for housing, declining sales prices and increasing pricing pressure. In the event that one or more of sucheconomic 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. Federalgovernment actions, policies and new legislation related to economic stimulus, trade policies, taxation, spending levels and borrowing limits,along with the related political debates, conflicts and compromises associated with such actions, may negatively impact the financial marketsand consumer confidence. Such events could hurt the U.S. economy and the housing market and, in turn, could adversely affect theoperating results of our business. Adverse economic conditions outside the U.S., such as Asia or Canada, may also adversely affect thedemand 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 homescontingent upon the sale of their existing homes. During recessionary periods, these buyers may face difficulties selling their homes, whichmay in turn adversely affect our sales. Moreover, during such periods, we may need to reduce our sales prices and offer greater incentives tobuyers to compete for sales that may result in reduced margins. 13Table of Contents Inventory risks are substantial for the homebuilding business. If the value of the land we purchase declines, we have, and maycontinue, to incur impairments on the carrying values of the real estate inventories we own, some of which could be significant andcould adversely affect our business or financial results. Inventory risks are substantial for our homebuilding business. There are risks inherent in controlling, owning and developing land ashousing inventories are illiquid assets and if housing demand declines, we may own land or homesites we acquired at costs we will not beable to recover fully, or on which we cannot build and sell homes profitably. This is particularly true when entitled land becomes scarce, as ithas recently, especially in the markets in which we build, and the cost of purchasing such land is relatively high. Factors such as changes inregulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, thecondition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse taxconsequences, and interest and inflation rate fluctuations subject the market value of our land to uncertainty. Also, we own interests in jointventures which own undeveloped land and lots for which there can be significant fluctuations in the value related to changes in marketconditions. As a result, we may have to sell homes or land for lower than anticipated profit margins or we may have to record inventoryimpairment charges or sell land at a loss. For example, during fiscal year 2019, we recognized $8.3 million of homebuilding inventoryimpairments, $3.5 million of unconsolidated joint venture impairments, and recognized a $3.4 million loss on land sales (which included a $1.9million impairment charge). For more information on impairments, please see Note 4 to the Consolidated Financial Statements. We utilizeoption structures to purchase land in our wholly owned business which reduces our exposure to such fluctuations, but we may still berequired to take significant write-offs of deposits and pre-acquisition costs if we elect not to exercise our options to purchase land. Inaddition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. We regularly reviewthe value of our land holdings and continue to review our holdings on a periodic basis for indicators of impairment. Indicators of impairmentinclude a decrease in demand for housing due to soft market conditions, competitive pricing pressures which reduce the average sales priceof homes, which includes sales incentives for home buyers, sales absorption rates below management expectations, a decrease in the valueof the underlying land and a decrease in projected cash flows for a particular project. Material impairment charges, abandonment charges orother write-downs of assets could adversely affect our financial condition and results of operations. Our ability to execute on our business strategies and initiatives 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-pricedhomes or our potential entry into new markets. We have historically focused on second move up and luxury buyers and as a result ofchanging demographics and trends, have shifted our strategy to a heavier emphasis on entry level and first move up buyers. We haveinvested significant efforts to align our community offerings and designs to these buyers despite our experience in catering to a differentbuyer profile. We can provide no assurance (i) that our strategies, and any related initiatives or actions, will be successful or that they willgenerate growth, earnings or returns at any particular level or within any particular time frame; (ii) that in the future we will achieve positiveoperational or financial results or results in any particular metric or measure equal to or better than those attained in the past; or (iii) that wewill perform in any period as well as other homebuilders. We also cannot provide any assurance that we will be able to maintain ourstrategies, and any related initiatives or actions, in the future and, due to unexpectedly favorable or unfavorable market conditions or otherfactors, 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 anyrelated initiatives or actions, or the failure of any adjustments that we may pursue or implement, would likely have an adverse effect on ourability to increase the value and profitability of our business; on our ability to operate our business in the ordinary course; on our overallliquidity; 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, marketingexpenses and costs associated with the upkeep and maintenance of our model and sales complexes, and interest costs. If our salesabsorption pace decreases and the time required to close out our communities is extended, we would likely incur additional overhead costs,interest and other carrying costs, which would negatively impact our financial results. Additionally, we incur various land developmentimprovement costs for a community prior to the commencement of home construction. Such costs include infrastructure, utilities, propertytaxes, HOA assessments, interest and other related expenses. Reduction in home absorption rates increases the associated holding costsand extends our time to recover such costs. Declines in the homebuilding market may also require us to evaluate the recoverability of costsrelating to land acquired more recently. 14Table of Contents Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which couldmaterially and adversely affect us. The residential construction industry experiences labor and raw material shortages from time to time, including shortages in qualifiedtradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be more severe duringperiods of strong demand for housing or during periods where the regions in which we operate experience natural disasters that have asignificant impact on existing residential and commercial structures. We and other homebuilders have encountered increases in costs of laborin materials, which is particularly acute in the markets in which we build in California and Arizona. These increased costs are largely the resultof shortages of skilled labor. The cost of labor and raw materials may also increase during periods of shortage or high inflation. Shortages andprice increases could cause delays in and increase our costs of home construction, which we may not be able to recover by raising homeprices due to market demand which puts downward pressure on our gross margins. As a result, shortages or increased costs of labor and rawmaterials could have a material adverse effect on our business, prospects, financial condition and results of operations. The federal government has recently imposed new or increased tariffs or duties on an array of imported materials and goods that areused in connection with the construction and delivery of our homes, including steel, aluminum, lumber, solar panels and washing machines,raising our costs for these items (or products made with them), and has threatened to impose further tariffs, duties and/or trade restrictionson imports. Increases in construction costs may not be recovered from raising home prices due to being constrained by market demand. Foreign governments, including China and Canada, and the European Union, have responded by imposing or increasing tariffs, dutiesand/or trade restrictions on U.S. goods, and are reportedly considering other measures. These trading conflicts and related escalatinggovernmental actions that result in additional tariffs, duties and/or trade restrictions could increase our construction costs further, causedisruptions or shortages in our supply chains and/or negatively impact the U.S., regional or local economies, and, individually or in theaggregate, materially and adversely affect our business and our consolidated financial statements. 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 contractualcommitments with any subcontractors, and there can be no assurance that skilled subcontractors will continue to be available at reasonablerates and in the areas in which we conduct our operations. Certain of the subcontractors engaged by us are represented by labor unions orare subject to collective bargaining arrangements that require the payment of prevailing wages that are higher than normally expected on aresidential construction site. A strike or other work stoppage involving any of our subcontractors could also make it difficult for us to retainsubcontractors for our construction work. In addition, union activity could result in higher costs to retain our subcontractors. Access toqualified labor at reasonable rates may also be affected by other circumstances beyond our control, including: (i) shortages of qualifiedtradespeople, such as carpenters, roofers, drywallers, electricians and plumbers; (ii) high inflation; (iii) changes in laws relating toemployment and union organizing activity; (iv) changes in trends in labor force migration; (v) increases in contractor, subcontractor andprofessional services costs; and (vi) changes in immigration laws and policies as well as changes in immigration trends. In particular, changesin federal and state immigration laws and policies, or in the enforcement of current laws and policies, may have the effect of increasing ourlabor costs. The lack of adequate supply of skilled labor or a significant increase in labor costs could materially and adversely affect ourbusiness, 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 prevailingwages 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 theapplicable prevailing wage, as determined by the Department of Industrial Relations. Private residential projects built on private property areexempt unless the project is built pursuant to an agreement with a state agency, redevelopment agency, or local public housing authority. In2017, the California legislature made this exemption inapplicable to a project built pursuant to an agreement with a successor agency of aredevelopment agency. We expect that the imposition of a prevailing wage requirement to additional types of projects would materiallyincrease our costs of development and construction for those projects. Further extensions of prevailing wage requirements to private projectscould 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 constructionpractices or installing defective materials in our homes. When we discover these issues, we, generally through our subcontractors, repair thehomes in accordance with our new home warranty and as required by law. Reserves are established based on market practices, our historicalexperiences and our judgment of the qualitative risks associated with the types of homes built. However, the cost of satisfying our warrantyand other legal obligations in these instances may be significantly higher than our reserves, and we may be unable to recover the cost ofrepair 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. 15Table of Contents We are subject to construction defect, warranty, and personal injury claims arising in the ordinary course of business that can besignificant and could adversely affect our financial position and results of operations. As a homebuilder, we are subject to construction defect, product liability and home warranty claims, arising in the ordinary course ofbusiness or otherwise. We maintain reserves to cover the resolution of our potential liabilities associated with known and anticipatedwarranty and construction defect related claims and litigation. While we maintain reserves and general liability insurance and generally seekto require our subcontractors and design professionals to indemnify us for some portion of the liabilities arising from their work, there can beno assurance that these insurance rights and indemnities will be collectible or adequate to cover any or all construction defect and warrantyclaims for which we may be liable. Some claims may not be covered by insurance or may exceed applicable coverage limits. We may not beable to renew our insurance coverage or renew it at reasonable rates and may incur significant costs or expenses (including repair costs andlitigation expenses) surrounding possible construction defects, product liability claims, soil subsidence or building related claims. Someclaims may arise out of uninsurable events or circumstances not covered by insurance or that are not subject to effective indemnificationagreements with our trade partners. In addition, we typically act as the general contractor for the homes we build for third party landownerson fee, including our unconsolidated joint ventures. In connection with these agreements, we indemnify the landowner for liabilities arisingfrom our work. While we are covered by general liability insurance, procured either by us or the landowner, and we generally seek to requireour subcontractors to indemnify us for some portion of the liabilities arising from their work, there can be no assurance that these indemnitieswill be collectible and some claims may arise out of uninsurable events or circumstances not covered by insurance. Furthermore, mostinsurance policies have some level of a self insured retention that we are required to satisfy in order to access the underlying insurance whichlevels 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 usto 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 theseclaims will expand. Plaintiffs may seek to consolidate multiple parties in one lawsuit or seek class action status in some of these legalproceedings with potential class sizes that vary from case to case. Consolidated and class action lawsuits can be costly to defend and, if wewere 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 matterscan also result in negative publicity in the media and on the internet, which can damage our reputation and adversely affect our ability to sellhomes. In addition, we conduct most of our business in California, one of the most highly regulated and litigious jurisdictions in the UnitedStates, which imposes a ten year, strict liability tail on many construction liability claims. As a result, our potential losses and expenses due tolitigation, new laws and regulations may be greater than those of our competitors who have smaller California operations as a percentage ofthe total enterprise. 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 eachmarket in which we operate. Additionally, there are relatively low barriers to entry into our business. We compete with numerous largenational and regional homebuilding companies and with smaller local homebuilders and land developers for, among other things, homebuyers, desirable land parcels, financing, raw materials and skilled management and labor resources. Our competitors may independentlydevelop land and construct homes that are superior or substantially similar to our products. Over the past several years, we have expandedour product offerings to include more affordably-priced homes to reach a deeper pool of qualified buyers and grow our overall communitycount. We believe there is more competition among homebuilding companies in more affordable product offerings than in the luxury andmove-up segments. Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which tobuild homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase our selling incentives orreduce our prices. In past housing cycles, an oversupply of homes available for sale and heavy discounting of home prices by some of ourcompetitors have adversely affected demand for homes in the market as a whole and could do so again in the future. We also compete withthe resale, or "previously owned," home market. If we are unable to compete effectively in our markets, our business could declinedisproportionately 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 whoseoperations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturnin the housing market. We compete directly with a number of large national and regional homebuilders that may have longer operatinghistories and greater financial and operational resources than we do, including a lower cost of capital. Many of these competitors also havelongstanding relationships with subcontractors, local governments and suppliers in the markets in which we operate or in which we mayoperate in the future. This may give our competitors an advantage in securing materials and labor at lower prices, marketing their productsand allowing their homes to be delivered to customers more quickly and at more favorable prices. This competition could reduce our marketshare and limit our ability to expand our business as we have planned. 16Table of Contents Inefficient or ineffective allocation of capital, including from efforts to invest in future growth or expansion of our operations oracquisitions 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 ofthe 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 newmanagement 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 toidentify suitable additional markets or acquisition candidates as well as capital resources. We cannot guarantee that any expansion into a newmarket will be successfully executed, and our failure to do so could harm our current business. Furthermore, we may engage in other capital actions such as repurchasing our common stock or Senior Notes from time to time toreduce our indebtedness. While our goal is to allocate capital to maximize our overall long-term returns, if we do not properly allocate ourcapital, we may fail to produce optimal financial results and we may experience a reduction in stockholder value, including increased volatilityin our stock price. If we are unable to develop our communities successfully or within expected timeframes, our results of operations could beadversely affected. Before a community generates any revenue, time and material expenditures are required to acquire land, obtain development approvalsand construct significant portions of project infrastructure, amenities, model homes and sales facilities. It can take several years from the timewe 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 andsubcontractors and managing contractual commitments) efficiently and accurately is important to our success. Changes in law or regulation,including changes to FHA or other lending program guidelines for project approvals, local discretionary approvals, natural disasters,availability of subcontractors, errors by employees, failure to comply with regulatory requirements and conduct of business rules, failings orinadequacies in internal control processes, equipment failures or the failure of external systems, including those of our suppliers orcounterparties, could result in delays and operational issues that could adversely affect our business, financial condition and operatingresults and our relationships with our customers. Delays in the development of communities also expose us to the risk of changes in marketconditions for homes. A decline in our ability to develop and market our communities successfully and to generate positive cash flow fromthese operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability toservice 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. InCalifornia, upon a home order cancellation, the homebuyer’s escrow deposit is generally returned to the homebuyer (other than with respectto certain design-related deposits, which we generally retain). In Arizona, we generally retain buyer deposits following a home ordercancellation. Home order cancellations can result from a number of factors, including declines or slow appreciation in the market value ofhomes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, and changes inhomebuyers' financial condition or personal circumstances. In addition, as part of our strategy, we intend to increase the number of homes webuild at more affordable price points. Our cancellation rate may increase as we sell to a more diverse credit quality of buyers. Home ordercancellations negatively impact our financial and operating results due to a negative impact on the number of homes closed, net new homeorders, home sales revenue, results of operations and cash flows, as well as the number of homes in backlog. 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 feebuilding agreements with Irvine Pacific, LP and our billings to this customer are dependent upon such customer’s decision to proceed withconstruction and the agreements can be canceled at any time. We cannot predict whether these agreements will continue in the future or thecurrent 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 - Results of Operations - Fee Building" and Note1 "Revenue Recognition - Fee Building" to the Consolidated Financial Statements for further discussion of this revenue concentration. 17Table of Contents 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 termsof trade contracts and subcontracts within the homebuilding industry, if regulatory agencies reclassify the employees of contractors asemployees of homebuilders, homebuilders using contractors could be responsible for wage and hour labor laws, workers’ compensation andother employment-related liabilities of their contractors. Governmental rulings that make us responsible for labor practices byour subcontractors could create substantial exposures for us in situations that are not within our control. Even if we are not deemed jointemployers with our contractors, we are, and may become in the future, subject to similar measures and legislation, such as California LaborCode 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. In addition, California law makes direct contractors liable for wages, fringe benefits, or other benefitpayments or contributions owed by a subcontractor that does not fulfill these obligations to its employees. While the Company ordinarilynegotiates with its subcontractors to obtain broad indemnification rights, there is no guarantee that it will be able to recover from itssubcontractors for actions brought against the Company by its subcontractors’ employees or unions representing such employees and suchliability could have a material and adverse effect on our financial position or results of operations. Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for housing, allof 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, manyof 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, causedelays in the completion of our projects, reduce consumer demand for housing and cause shortages and price increases in labor or rawmaterials, any of which could harm our sales and profitability. Our California markets are in areas which have historically experiencedsignificant 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 withlandslides, earthquakes and other geologic events may not be insurable, and other losses, such as those arising from terrorism, may not beeconomically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial conditionand results of operations. Power, water and other natural resource shortages, including drought conditions and wildfires, or price increases could have anadverse impact on operations. The markets in which we operate have experienced power and resource shortages, including mandatory periods without electricalpower, changes to water availability (including drought conditions) and significant increases in utility and resource costs. These conditionsmay 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 anextended period of time. Shortages of natural resources, particularly water and power, may make it more difficult to obtain regulatory approvalof new developments. We may incur additional costs and may not be able to complete construction on a timely basis if such power shortagesand utility rate increases continue. We can experience significant delays due to utility company constraints which may be outside our control.For example, in January 2019, in response to potential liabilities arising from a series of recent catastrophic wildfires in Northern California,PG&E Corporation, a major gas and electric utility company servicing various geographic markets, including Northern California, initiatedvoluntary bankruptcy proceedings, which has, in many cases, resulted in service disruptions, or constraints or delays in providing suchutilities in the markets in which PG&E Corporation currently operates. Furthermore, water restrictions, drought conditions, power shortagesand rate increases may adversely affect the regional economies and the environment in which we operate, as well as increase greatly the riskof wildfires, which may both reduce demand for housing and damage our inventory currently under construction. Our operations may beadversely 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 seasonalfluctuations in our quarterly operating results and capital requirements that can have a material impact on our results and our consolidatedfinancial statements. We typically experience the highest new home order activity in late winter and spring, although this activity also highlydepends on the number of active selling communities, timing of new community openings and other market factors. Since it typically takesfive to ten months to construct a new home, depending on the nature of the product and whether it is single-family detached or multi-familyattached, we typically deliver more homes in the second half of the year as late winter and spring home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and thirdquarters, and the majority of cash receipts from home deliveries occur during the second half of the year, particularly in the fourth quarter. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry and theopening and closeout of communities. 18Table of Contents Seasonality also requires us to finance construction activities in advance of the receipt of sales proceeds. In many cases, we may notbe able to recapture increased costs by raising prices because prices are established upon signing the purchase contract. Accordingly, thereis a risk that we will invest significant amounts of capital in the acquisition and development of land and construction of homes that we donot sell at anticipated pricing levels or within anticipated time frames. If, due to market conditions, construction delays or other causes, we donot complete sales of our homes at anticipated pricing levels or within anticipated time frames, our financial performance and financialconditions 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 ofmarket conditions, surety providers have been reluctant to issue new bonds and some providers are requesting credit enhancements (such ascash 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 thefuture 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 inturn requires us to increase our home selling price in an effort to maintain satisfactory housing gross margins. Inflation typically alsoaccompanies higher interests rates, which could adversely impact potential customers’ ability to obtain financing on favorable terms, therebyfurther decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our marginscould 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 cannotsatisfactorily renegotiate the purchase price of the subject land. We may record charges against our earnings for inventory impairments if thevalue of our owned inventory, including land we decide to sell, is reduced, or for land option contract abandonments if we choose not toexercise land option contracts or other similar contracts, and these charges may be substantial. Inflation may also raise our costs of capitaland 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 reputationaldamage. Building sites are inherently dangerous, and operating in the homebuilding industry poses certain inherent health and safety risks tothose working at such sites. Due to health and safety regulatory requirements and the number of projects we work on, health and safetyperformance is critical to the success of all areas of our business. Any failure in health and safety performance may result in penalties fornon-compliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safetyincident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicityand have a corresponding impact on our reputation, our relationships with relevant regulatory agencies, governmental authorities and localcommunities, 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 ourrevenues or results of operations to decline. Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or prospectsmay 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 ornegative commentary on social media outlets, such as blogs, websites or newsletters, could hurt operating results, as consumers might avoidor 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 theoperation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by theaffected residents, and subsequent actions by these residents could adversely affect sales or our reputation. 19Table of Contents Failure to comply with privacy laws or an information systems interruption or breach in security that releases personalidentifying information or other confidential information could adversely affect us. Privacy, security, and compliance concerns have continued to increase as technology has evolved. We use information technologyand other computer resources to carry out important operational and marketing activities and to maintain our business records. Furthermore,as part of our normal business activities, we collect and store personal identifying information, including information about employees,homebuyers, customers, vendors and suppliers and may share information with vendors who assist us with certain aspects of our business.The regulatory environment in California and throughout the U.S. surrounding information security and privacy is increasingly demanding.We may share some of this confidential information with our vendors, such as escrow companies and related title services enterprises, whopartner with us to support certain aspects of our business. The information technology systems we use are dependent upon globalcommunications providers, web browsers, third-party software and data storage providers and other aspects of the Internet infrastructurethat have experienced security breaches, cyber-attacks, ransomware attacks, significant systems failures and service outages in the past. Amaterial breach in the security of our information technology systems or other data security controls could include the theft or release ofcustomer, employee, vendor or company data. A data security breach, a significant and extended disruption in the functioning of ourinformation technology systems or a breach of any of our data security controls could disrupt our business operations, damage ourreputation and cause us to lose customers, adversely impact our sales and revenue and require us to incur significant expense to address andremediate or otherwise resolve these kinds of issues. The release of confidential information as a result of a security breach could also lead tolitigation or other proceedings against us by affected individuals or business partners, or by regulators, and the outcome of suchproceedings, which could include penalties or fines, could have a significant negative impact on our business. We may also be required toincur significant costs to protect against damages caused by information technology failures or security breaches in the future. We provideemployee awareness training of cybersecurity threats and routinely utilize information technology consultants to assist us in our evaluationsof the effectiveness of the security of our information technology systems, and we regularly enhance our security measures to protect oursystems and data. However, because methods used to obtain unauthorized access, disable or degrade systems evolve frequently and oftenare not recognized until launched against a target, we may be unable to anticipate these attacks or to implement adequate preventativemeasures. Consequently, we cannot eliminate the risk that a security breach, cyber-attack, ransomware attack, data theft or other significantsystems or security failures will occur in the future, and such occurrences could have a material and adverse effect on our consolidatedresults of operations or financial position. In addition, the cost and operational consequences of implementing further data or systemprotection measure could be significant and our efforts to deter, identify, mitigate and/or eliminate any security breaches or incidents may notbe successful. Risks Related to Laws and Regulations Mortgage financing, interest rate increases or changes in federal lending programs or other regulations could lower demand foror 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 monthlymortgage costs, tightened credit requirements and underwriting standards, and an increase in indemnity claims for mortgages may lead toreduced demand for our homes and mortgage loans. In addition, as a result of the turbulence in the credit markets and mortgage financeindustry during the last significant downturn, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed intolaw. This legislation provides for a number of new requirements relating to residential mortgages and mortgage lending practices that reducethe availability of loans to borrowers or increase the costs to borrowers to obtain such loans. Fewer loan products and tighter loanqualifications, 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 apotential "move-up" buyer who wishes to purchase one of our homes. If, due to credit or consumer lending market conditions, regulatoryrequirements, or other factors or business decisions, these lenders refuse or are unable to provide mortgage loans to the Company's buyers,the number of homes that the Company delivers, the Company's business and its consolidated financial statements may be materially andadversely affected. The foregoing may also hinder our ability to realize our backlog because our home purchase contracts provide customerswith a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event that they cannotarrange for adequate financing. As a result, rising interest rates, stricter underwriting standards, and a reduction of loan products, amongother similar factors, can contribute to a decrease in our home sales. Any of these factors could have a material adverse effect on ourbusiness, prospects, liquidity, financial condition and results of operations. 20Table of Contents The federal government has also taken on a significant role in supporting mortgage lending through its conservatorship of FannieMae and Freddie Mac, both of which purchase home mortgages and mortgage-backed securities originated by mortgage lenders, and itsinsurance of mortgages originated by lenders through the Federal Housing Administration, or the FHA, and the Veterans Administration, orthe VA. The availability and affordability of mortgage loans, including interest rates for such loans, could be adversely affected by acurtailment or cessation of the federal government’s mortgage-related programs or policies. The FHA may continue to impose stricter loanqualification standards, raise minimum down payment requirements, impose higher mortgage insurance premiums and other costs, or limit thenumber of mortgages it insures. The FHA also limits the number of FHA loans within any one community, requires completion of entirebuildings in which our units are located prior to allowing project approval application to be submitted, which can delay our ability to delivercompleted homes in a timely manner and negatively impacting our results. Due to federal budget deficits or political efforts to eliminategovernment sponsorship, the U.S. Treasury may not be able to continue supporting the mortgage-related activities of Fannie Mae, FreddieMac, the FHA and the VA at present levels, or it may revise significantly the federal government’s participation in and support of theresidential mortgage market. Because the availability of Fannie Mae, Freddie Mac, FHA and VA-backed mortgage financing is an importantfactor in marketing and selling many of our homes, especially as we move down in price point, any limitations, restrictions or changes in theavailability 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. Changes in tax laws can increase the after-tax cost of owning a home, and further tax law changes or government fees couldadversely 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, theTax Cuts and Jobs Act (the "Tax Act") signed into law on December 22, 2017 now limits these deductions for some individuals. The Tax Actcaps individual state and local tax deductions at $10,000 for the aggregate of state and local real property and income taxes or state and localsales 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 andproperty 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 localgovernment fees, such as fees imposed on developers to fund schools, open space, and road improvements, and/or provide low- andmoderate-income housing, could increase our costs and have an adverse effect on our operations. We also benefit from the availability ofvarious deductions and tax credits. For example, in December 2019, energy tax credits were extended through 2020 and retroactively appliedto properties sold after December 31, 2017. Elimination of such credits or deductions could negatively impact our financial results. Inaddition, increases in local real estate taxes as well as the limitation on deductibility of such costs could adversely affect our potential homebuyers, who may consider those costs in determining whether to make a new home purchase and decide, as a result, not to purchase one ofour homes or not purchase a resale, which would negatively impact homebuyers that need to sell their home before they purchase one ofours. We may not be able to generate sufficient taxable income to fully realize our net deferred tax asset. At December 31, 2019, we had a net deferred tax asset of $17.5 million, of which $3.8 million is related to net operating loss and taxcredit carryforwards from prior periods, and the remaining $13.7 million related to the timing of the recognition of various expenses whichwere deducted from book income but are not deductible for income tax purposes until actually paid or realized. Federal net operating lossesmay be carried forward indefinitely; however, the loss can only be utilized to offset 80% of taxable income generated in a tax year. Our statenet operating loss may be carried forward 20 years and will expire in 2039, unless previously utilized. Federal tax credit carryforwards of$1.6 million begin to expire in 2039. If we are unable to generate future sufficient taxable income, we will not be able to realize the full amountof the deferred tax asset. We regularly review our deferred tax asset for recoverability and establish a valuation allowance if it is more likelythan not that some portion or all of a deferred tax asset will not be realized. Our projections of future taxable income required to fully realizethe recorded amount of the gross deferred tax asset reflect numerous assumptions about our operating businesses and investments and aresubject to change as conditions change specific to our business units, investments or general economic conditions. Changes that areadverse to us could result in the need to increase the deferred tax asset valuation allowance resulting in a charge to results of operations anda decrease to stockholders’ equity. 21Table of Contents New and existing laws and regulations, including environmental laws and regulations, or other governmental actions mayincrease our expenses, limit the number of homes that we can build, delay the completion of our projects, or otherwise negatively impactour operations. We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development,building design, construction, accessibility, anti-discrimination, and similar matters which affect the housing industry such as byimposing restrictive zoning and density requirements, which can limit the number of homes that can be built within the boundaries of aparticular area, among other things. Governmental regulation affects construction activities as well as sales activities, mortgage lendingactivities, and other dealings with home buyers, including anti-discrimination laws such as the Fair Housing Act and data privacy laws suchas the California Consumer Privacy Act. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensivedevelopment or elimination of development in certain specific areas due to government regulations. We may also be subject to periodicdelays 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 developmentfees, assessments and exactions for projects in their jurisdiction. Projects for which we have received land use and development entitlementsor approvals may still require a variety of other governmental approvals and permits during the development process and can also beimpacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development. Asa 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 multiplefactors, including the property’s location, its environmental conditions and geographic attributes or historical artifacts, the present andformer uses of the property, the presence or absence of endangered plants, animals or sensitive habitats, as well as conditions at nearbyproperties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs and candelay, prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or areas. For example, undercertain environmental laws and regulations, third parties, such as environmental groups or neighborhood associations, may challenge thepermits 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 onor even the prohibition of development in identified environmentally sensitive areas. From time to time, the EPA and similar federal, state orlocal agencies review land developers’ and homebuilders’ compliance with environmental laws and may levy fines and penalties for failure tostrictly comply with applicable environmental laws, including those applicable to control of storm water discharges during construction, orimpose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase ourcosts and result in project delays. We expect that increasingly stringent requirements will be imposed on land developers and homebuildersin the future. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber,and on other building materials. California is especially susceptible to restrictive government regulations and environmental laws. For example, California imposesnotification obligations respecting environmental conditions, sometimes recorded on deeds, and also those required to be delivered topersons accessing property or to home buyers or renters, which may cause some persons, or their financing sources, to view the subjectparcels 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 berequired to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmentalentity or to third parties for related damages, including for bodily injury, and for investigation and clean-up costs incurred by such parties inconnection with the contamination. 22Table of Contents Changes in global or regional climate conditions and legislation relating to energy and climate change could increase our coststo construct homes. Projected climate change, if it occurs, may exacerbate the scarcity or presence of water and other natural resources in affectedregions, which could limit, prevent or increase the costs of residential development in certain areas. There is a variety of new legislationbeing enacted, or considered for enactment at the federal, state and local level relating to energy, emissions and climate change. Thislegislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards. Newbuilding code requirements, including California's solar mandate that went into effect in 2020, that impose stricter energy efficiencystandards that have increased 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 climatechange concerns continue to grow, legislation and regulations of this nature are expected to continue and become more costly to complywith. This is a particular concern in the western United States, where some of the most extensive and stringent environmental laws andresidential building construction standards in the country have been enacted. For example, California has enacted the Global WarmingSolutions Act of 2006 to achieve the goal of reducing greenhouse gas emissions to 1990 levels by 2020. As a result, California has adoptedand is expected to continue to adopt significant regulations to meet this goal. Similarly, energy-related initiatives affect a wide variety ofcompanies throughout the United States and the world and because our operations are heavily dependent on significant amounts of rawmaterials, such as lumber, steel, and concrete, they could have an indirect adverse impact on our operations and profitability to the extentthe 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 inthe completion of our development projects. The homebuilding and land development industry is capital-intensive and requires significant up-front expenditures to acquire landparcels and complete development. We cannot assure you that we will maintain cash reserves and generate sufficient cash flow fromoperations in an amount to enable us to service our debt or to fund other liquidity needs. Additionally, while we have issued $325 million (ofwhich $308 million is outstanding at December 31, 2019) in aggregate principal amount of 7.25% Senior Notes due 2022 (the "Notes") and debtcommitments of $130 million under our unsecured revolving credit facility ("Credit Facility"), our ability and capacity to borrow under theCredit Facility is limited by our asset based borrowing base and our ability to meet the covenants of the facility. In addition, our senior notescontain certain restrictions on our business, including the incurrence of additional debt under certain circumstances. If our Notes, CreditFacility and internally generated funds are insufficient to cover our liquidity needs, we may seek additional capital in the form of equity ordebt financing from a variety of potential sources, including additional bank financings, formation of joint venture relationships or securitiesofferings. 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 newloans and the extension of existing loans. If we are required to seek additional financing to fund our operations, continued volatility in thesemarkets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient capital to fund our planned capitaland 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 mayincur contractual penalties and fees. Any difficulty in obtaining sufficient capital for planned development expenditures could also causeproject delays, which could increase our costs. Furthermore, if additional funds are raised through the issuance of stock, dilution tostockholders could result. If additional funds are raised through the incurrence of debt, we will incur increased debt servicing costs andwould likely become subject to additional restrictive financial and other covenants. We can give no assurance as to the terms or availabilityof additional capital. If we are not successful in obtaining or refinancing capital when needed, it could adversely impact our ability to operateour business effectively, which could reduce our sales and earnings, and adversely impact our financial position. In addition, our CreditFacility relies upon the London Interbank Offered Rate (“LIBOR”). The United Kingdom’s Financial Conduct Authority, which regulatesLIBOR, has announced plans to phase out the use of LIBOR by the end of 2021. Our Credit Facility agreement provides that if it is unlawful tomaintain any advance at a rate based on LIBOR, that our administrative agent shall select an alternate index that is reasonably comparable tothat of one-month LIBOR in its sole discretion. There remains uncertainty regarding the future utilization of LIBOR and the nature of anyreplacement rate, and any potential effects of the transition away from LIBOR. 23Table of Contents Our level of indebtedness is significant and may adversely affect our financial position and prevent us from fulfilling our debtobligations; 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 developmentand construction on such land. Accordingly, we incur substantial indebtedness to finance our homebuilding activities. As discussedelsewhere in this filing, including "Management's Discussion and Analysis of Financial Condition and Result of Operations - Liquidity andCapital Resources," the Company has outstanding $308.0 million in aggregate principal amount of the Notes. As of December 31, 2019, theNotes had a carrying value of $304.8 million, net of the unamortized discount of $1.1 million, unamortized premium of $0.9 million and$3.0 million of unamortized debt issuance costs. In addition, we have $130 million in debt commitments under our Credit Facility, none ofwhich was outstanding or utilized to provide letters of credit at December 31, 2019 leaving $130 million available for borrowing, subject tosatisfaction of the financial covenants and borrowing base requirements in our Credit Facility. As of December 31, 2019, we did not meet theminimum interest coverage ratio test under our Credit Facility. Not meeting such test is not a default under the Credit Facility agreement solong as we maintain unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred (as defined in the CreditFacility agreement) which was $28.9 million as of December 31, 2019. The Company was in compliance with this requirement with anunrestricted cash balance of $79.3 million at December 31, 2019. This requirement to maintain additional cash balances may reduce our abilityto use our cash flow for other purposes, including land investments. In August 2019, the Company entered into a second modification of itsCredit Facility agreement which extended the term of the facility to March 2021. Certain provisions were altered in the agreement, includingour ability to repurchase the Notes if our Net Leverage Ratio (as defined in the Credit Facility agreement) exceeds 55%. If our Net LeverageRatio is less than or equal to 55%, we may repurchase Notes so long as such repurchases do not exceed $5,000,000 per quarter. The limitationon our ability to repurchase the Notes limits management’s ability to reduce debt and realize a gain on debt extinguishment (depending on theprice at which the Notes are trading) which may negatively impact our financial position. The terms of the indenture governing the Notes and our Credit Facility permit us to incur additional debt, in each case, subject tocertain restrictions. Our level of indebtedness and incurring additional debt subject us to many risks that, if realized, would adversely affectus, including the risk that: •our ability to obtain additional financing as needed for working capital, land acquisition costs, building costs, other capitalexpenditures, 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 availablefor 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 wouldlikely 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 ourindustry, 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 weoperate and pressure from competitors. If we do not have sufficient funds, we may be required to refinance all or part of our existing debt, sellassets 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 torefinance 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 tosecure our obligations to foreclosure. Also, debt agreements may contain specific cross-default provisions with respect to specified otherindebtedness, giving the lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under ourdebt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. 24Table of Contents We currently have significant amounts invested in unconsolidated joint ventures with third parties - some of which are affiliatedwith certain of our board members - in which we have less than a controlling interest. These investments are highly illiquid and havesignificant risks due to, in part, a lack of sole decision-making authority and reliance on the financial condition and liquidity of ourjoint venture partners. We own interests in various joint ventures and as of December 31, 2019, our investments in and advances to our unconsolidated jointventures was $30.2 million. We have entered into joint ventures in order to acquire land positions, to manage our risk profile and to leverageour capital base. We may enter into additional joint ventures in the future. Such joint venture investments involve risks not otherwise presentin wholly owned projects, including the following: •Control and Partner Dispute Risk. We do not have exclusive control over the development, financing, management and other aspectsof the project or joint venture, which may prevent us from taking actions that are in our best interest but opposed by our partners. Wecannot exercise sole decision-making authority regarding the project or joint venture, which could create the potential risk of creatingimpasses on decisions, such as acquisitions or sales. Disputes between us and our partners may result in litigation or arbitration thatwould increase our expenses and prevent our officers and directors from focusing their time and efforts on our business and couldresult in subjecting the projects owned by the joint venture to additional risk. Our existing joint venture agreements contain, and anyfuture joint venture agreements may contain, buy-sell provisions pursuant to which one partner may initiate procedures requiring theother partner to choose between buying the other partner’s interest or selling its interest to that partner; we may not have the capitalto purchase our joint venture parties’ interest under these circumstances even if we believe it would be beneficial to do so. •Covenant Compliance Risk. Our Credit Facility prohibits us from making investments in and advances to joint ventures when we areunable to meet certain financial covenants. In addition, the Indenture governing the Notes limits our ability to make investments injoint ventures or guarantee of joint venture indebtedness when our aggregate investments in joint ventures exceeds 15% of ourconsolidated tangible assets (before the operation of general baskets and other exceptions). If we become unable to fund our jointventure obligations this could result in, among other things, our default under our joint venture operating agreements, loanagreements, and credit enhancements. And, our failure to satisfy our joint venture obligations could also affect our joint venture'sability to carry out its operations or strategy which could impair the value of our investment in the joint venture. Furthermore, a failureto 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 andone of our subsidiaries acts as the general contractor while our joint venture partner serves as the capital provider. Due to ourrespective role in these joint ventures, we may become liable for obligations beyond our proportionate equity and/or contributioninterest. In addition, the projects we build through joint ventures are often larger and have a longer time horizon than the typicalproject developed by our wholly owned homebuilding operations. Time delays associated with obtaining entitlements, unforeseendevelopment issues, unanticipated labor and material cost increases, higher carrying costs, and general market deterioration and otherchanges are more likely to impact larger, long-term projects, all of which may negatively impact the profitability and capital needs ofthese ventures and our proportionate share of income and capital. For example, as discussed in "Management's Discussion andAnalysis of Financial Condition and Results of Operations - Results of Operations - Equity in Net Income (Loss) of UnconsolidatedJoint Ventures", in 2019 one of our Southern California land development joint ventures recorded a significant impairment loss of$70.0 million, of which the Company's allocated share totaled $3.5 million. •Financing Risk. There are generally a limited number of sources willing to provide acquisition, development and constructionfinancing to land development and homebuilding joint ventures. During difficult market conditions, it may be difficult or impossible toobtain financing for our joint ventures on commercially reasonable terms, or to refinance existing joint venture borrowings as suchborrowings mature. In addition, a partner may fail to fund its share of required capital contributions or may become bankrupt, whichmay cause us and any other remaining partners to need to fulfill the obligations of the venture in order to preserve our interests andretain any benefits from the joint venture. As a result, we could be contractually required, or elect, to contribute our corporate funds tothe joint venture to finance acquisition and development and/or construction costs following termination or step-down of jointventure financing that the joint venture is unable to restructure, extend, or refinance with another third party lender. In addition, ourability to contribute our funds to or for the joint venture may be limited if we do not meet the Credit Facility conditions discussedabove. In addition, we sometimes finance projects in our unconsolidated joint ventures with debt that is secured by the underlying realproperty. Secured indebtedness increases the risk of the joint venture’s loss of ownership of the property (which would, in turn, impairthe value of our ownership interests in the joint venture). See Item 7, "Management’s Discussion and Analysis of Financial Conditionand Results of Operations-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 partnerscould be required to make additional unanticipated investments in and advances to these joint ventures, either in the form of capitalcontributions or loan repayments, to reduce such outstanding borrowings. We may have to make additional contributions that exceedour proportional share of capital if our partners fail to contribute any or all of their share. While in most instances we would be able toexercise remedies available under the applicable joint venture agreements if a partner fails to contribute its proportional share ofcapital, our partner's financial condition may preclude any meaningful cash recovery on the obligation. See Item 7, "Management’sDiscussion and Analysis of Financial Condition and Results of Operations-Off-Balance Sheet Arrangements and ContractualObligations" and Note 11 to the Consolidated Financial Statements for more information on LTV maintenance agreements andcompletion guaranties. In addition, we have an agreement in which our proportionate share of losses is equal to our percentageinterest but exceeds our contribution percentage in a project that has experienced significant cost overruns and delays. If suchventure does not recoup its costs and preferred returns, we would be obligated to contribute additional capital to share the loss inaccordance with our percentage interests. 25Table of Contents •Completion Risk. We often sign a completion agreement in connection with obtaining financing for our joint ventures. Under suchagreements, we may be compelled to complete a project, usually with costs within the budget related to the project being funded bythe lender with any budget shortfalls being borne by us, even if we no longer have an economic interest in the joint venture or thejoint 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 jointventures to sell assets, return invested capital, require additional capital contributions or take any other action without the vote of atleast one or more of our venture partners. This means that, absent partner agreement, we may not be able to liquidate our joint ventureinvestments to generate cash. •Consolidation Risk. The accounting rules for joint ventures are complex and the decision as to whether it is proper to consolidate ajoint venture onto our balance sheet is fact intensive. If the facts concerning an unconsolidated joint venture were to change and atriggering event under applicable accounting rules were to occur, we might be required to consolidate previously unconsolidated jointventures onto our balance sheet which could adversely impact our financial statements and our leverage and other financialconditions 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 futurejoint venture investments. Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive covenantsrelating to our operations. Our current financing arrangements, including the Credit Facility and the Indenture governing the Notes, contain covenants (financialand otherwise) affecting our ability to incur additional debt, make certain investments, allow liquidity to fall below certain levels, makedistributions 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, including investments in joint ventures; •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 Credit Facility provides that our maximum net leverage ratio must be less than 65%, which, as defined in our CreditFacility agreement, is calculated on a net debt basis after a minimum liquidity threshold. Our net leverage ratio as of December 31, 2019, ascalculated under our Credit Facility, was approximately 50.3.%. Our Credit Facility also contains financial covenants related to our tangible networth, liquidity, and interest coverage or a minimum unrestricted cash balance. Tables measuring our compliance with the financial conditionsand covenants under the Notes and Credit Facility are set forth in "Management's Discussion and Analysis of Financial Condition andResults of Operations - Liquidity and Capital Resources" included elsewhere in this Report on Form 10-K and incorporated herein byreference. Failure to have sufficient borrowing base availability in the future or to be in compliance with our financial covenants under ourCredit 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 eventof default under the Indenture or other such agreements. A default under our Credit Facility or the Indenture governing the Notes or other agreements governing our indebtedness may allowour creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-defaultprovision applies. In addition, an event of default under the Credit Facility agreement would permit the lenders thereunder to terminate allcommitments to extend further credit under our Credit Facility. Furthermore, if we were unable to repay the amounts due and payable underany future secured credit facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In theevent our lenders or the holders of our Notes accelerate the repayment of our borrowings, we cannot assure you that we and our subsidiarieswould 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 inaccordance with our plans. 26Table of Contents Potential future downgrades of our credit ratings could adversely affect our access to capital and could otherwise have a materialadverse 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 ourhomebuilding operations, credit metrics or other earnings-based metrics, as well as our leverage or a significant decrease in our tangible networth. These ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, andnegative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Ourcredit ratings could be downgraded or rating agencies could issue adverse commentaries in the future, which could have a material adverseeffect on our stock price, business, results of operations, financial condition and liquidity. In particular, a weakening of our financialcondition, including a significant increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability toobtain 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, 2019, our Notes had a carrying value of approximately $304.8 million, net of the unamortized discount of$1.1 million, unamortized premium of $0.9 million and $3.0 million of unamortized debt issuance costs. In addition, we have $130 million in debtcommitments under our Credit Facility, of which none was outstanding or utilized to provide letters of credit at December 31, 2019 with$130 million is available for borrowing, subject to satisfaction of the financial covenants and borrowing base requirements in our CreditFacility. As part of our financing strategy, we may incur a significant amount of additional debt. Our Credit Facility has, and any additionaldebt 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 thefuture that may be at a higher interest rate than our floating rate debt. Higher interest rates could increase debt service requirements on ourcurrent floating rate debt and on any floating or fixed rate debt we subsequently incur, and could reduce funds available for operations, futurebusiness opportunities or other purposes. If we need to repay existing debt during periods of rising interest rates, we could be required torefinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times that may not permitrealization of a favorable return on such assets and could result in a loss or lower profitability. The occurrence of either such event or bothcould 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 theirprincipal amount, plus accrued and unpaid interest thereon. In such circumstances, we cannot assure you that we would have sufficientfunds available to repay all of our indebtedness that would become payable upon a change of control and to repurchase all of the Notes. Ourfailure to purchase the Notes would be a default under the Indenture and would trigger a cross default of the 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, ourexecutive officers, each of whom would be difficult to replace. Although we have entered into employment agreements with our executiveofficers, there is no guarantee that these executives will remain employed with us. If any of our key personnel were to cease employment withus, our operating results could suffer. Our ability to retain our key personnel or to attract suitable replacements should any members of ourmanagement team leave depends on the competitive nature of the employment market. The loss of services from key personnel or a limitationin 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 lifeinsurance that would provide us with proceeds in the event of death or disability of any of our key personnel. Termination of the employment agreements with the members of our management team could be costly and prevent a change incontrol of our company. Our employment agreements with Messrs. Webb, Miller and Stephens each provide that if their employment with us terminates undercertain circumstances, we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminatetheir employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our company that mightinvolve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could materially andadversely 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 forshares of our common stock. Provisions of the Delaware General Corporation Law, our certificate of incorporation and our bylaws could have the effect of making itmore difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions coulddelay 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 commonstock. 27Table of Contents Our Board of Directors is divided into three classes, with the term of one class expiring each year, which could delay a change in ourcontrol. Our certificate of incorporation also authorizes our Board of Directors to issue new series of common stock and preferred stockwithout 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 aseries of common stock or preferred stock with preferential rights to dividends or assets upon liquidation, or with superior voting rights toour existing common stock. The ability of our Board of Directors to issue these new series of common stock and preferred stock could alsoprevent 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 Delawarecorporations from engaging in business combinations specified in the statute with an interested stockholder, as defined in the statute, for aperiod of three years after the date of the transaction in which the person first becomes an interested stockholder, unless the businesscombination is approved in advance by a majority of the independent directors or by the holders of at least two-thirds of the outstandingdisinterested shares. The application of Section 203 of the Delaware General Corporation Law could also have the effect of delaying orpreventing a change of control of us. Risks Related to Ownership of Our Common Stock We are a "smaller reporting company" and, as a result of the reduced disclosure and governance requirements applicable toemerging growth and smaller reporting companies, our common stock may be less attractive to investors. We are a "smaller reporting company" because we had public float of less than $250 million on the applicable measurement date. As asmaller reporting company, we are subject to reduced disclosure obligations in our periodic reports and proxy statements. We cannot predictwhether investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors findour common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stockprice may be more volatile. 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 sharesmay cause rapid price swings in our stock. In addition, our financial performance, government regulatory action, tax laws, additions ordepartures of key personnel, interest rates and market conditions in general could have a significant impact on the future market price of ourcommon stock. If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or ifthey 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 aboutus, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. Anyanalysts who do cover us may make adverse recommendations regarding our common stock, adversely change their recommendations fromtime to time or provide more favorable relative recommendations about our competitors. We are covered by a limited number of analysts. Ifany analyst who covers us now or may cover us in the future were to cease coverage of our company or fail to regularly publish reports onus, we could lose visibility in the financial markets, which in turn may 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 notintend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at thediscretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictionscontained 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 sellshares at or above the price paid for them. 28Table of Contents Certain stockholders have rights to cause our Company to undertake securities offerings. Future sales of our common stock orother securities convertible into our common stock could cause the market value of our common stock to decline and could result indilution of your shares. Our board of directors is authorized, without stockholder approval, to cause us to issue additional shares of our common stock or toraise capital through the issuance of preferred stock, securities (including debt securities) convertible into common stock, options, warrantsand other rights, on terms and for consideration as our board of directors in its sole discretion may determine. In addition, we entered into aregistration 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 theseholders, 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, ifany, of future sales of our common stock, or other securities on the value of our common stock. Sales of substantial amounts of our commonstock by a large stockholder or otherwise, or the perception that such sales could occur, may adversely affect the market price of our commonstock. Our Notes and future offerings of debt securities, which rank senior to our common stock upon our bankruptcy or liquidation, andfuture 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 outstanding $308.0 million in aggregate principal amount of Notes. In the future, we may attempt to increase our capitalresources by conducting offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders ofour debt securities, including the Notes, and shares of preferred stock and lenders with respect to other borrowings will receive a distributionof our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existingstockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidatingdistributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of ourcommon 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 therisk 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 maynot 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, approximately28% of our common stock. IHP and the Founders are also currently party to an investor rights agreement, pursuant to which each such holderagreed 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 owns4% or more of our then-outstanding stock. IHP has also agreed to vote its shares of common stock in favor of Messrs. Webb, Stelmar orBerchtold (or, if at that time nominated as a director, Messrs. Davis or Redwitz) in any election in which any such individual is a nominee. Inaddition to the influence such holders have due to their voting arrangement, to the extent they and their affiliates vote their shares togetheron 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. Inaddition, such persons may have an interest in pursuing transactions that, in their judgment, enhance the value of their equity investment inus, even though such transactions may involve risks to you. For example, the Institutional Investors are also in the real estate and landdevelopment 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 suchtransactions might involve risks to us. We have entered into various business relationships with some of the Institutional Investors, orentities affiliated with or controlled by them, including real estate development or homebuilding joint ventures. While our audit committee,our related party review committee, or in some cases all of our independent or disinterested board members, have reviewed and approved allsuch transactions, we do not have exclusive control over such joint ventures, which may prevent us from taking actions that are in our bestinterest but opposed by our partners. If the projects within such joint ventures do not perform well, it is possible that disputes between usand our joint venture partners may result in litigation or arbitration which would be further complicated due to the conflict of interest. Anysuch dispute would increase our expenses and prevent our officers and directors from focusing their time and efforts on our business andcould have a material and adverse effect on our business. See the Risk Factor entitled "We currently have significant amounts invested inunconsolidated joint ventures with independent third parties--some which are affiliated with certain of our board members--in which wehave less than a controlling interest. These investments are highly illiquid and have significant risks due to, in part, a lack of soledecision-making authority and reliance on the financial condition and liquidity of our joint venture partners" for a description ofadditional risks arising from our investments in joint ventures. Institutional Investors and their affiliates are involved in business thatprovides equity capital for residential housing, land and development, including for businesses that directly or indirectly compete with ourbusiness. In their capacities as principals or executives of those businesses, they may also pursue opportunities that may be complementaryto our business, and, as a result, those opportunities may not be available to us. 29Table of Contents There is no assurance that the existence of a stock repurchase program will result in additional repurchases of our common stockor enhance long term stockholder value, and repurchases, if any, could affect our stock price and increase its volatility and will diminishour cash reserves. On May 10, 2018, the Company's Board of Directors approved a stock repurchase program (the “Repurchase Program”), authorizingthe repurchase of shares of common stock with an aggregate value of up to $15 million. The repurchases of the Company’s shares may bemade in the open market, in privately negotiated transactions, or otherwise. The timing and amount of repurchases, if any, will be determinedby the Company’s management at its discretion and be based on a variety of factors such as the market price of the Company’s commonstock, corporate and contractual requirements, prevailing market and economic conditions and legal requirements. The share repurchaseprogram may be modified, suspended or discontinued at any time. The Company intends to retire any shares repurchased. In August 2019,the Company extended its Credit Facility in a second modification. In connection with the extension, additional restrictions were placed onthe Company’s ability to purchase its stock such that it is unable to purchase stock if its Net Leverage Ratio (as defined in the Credit Facilityagreement) is greater than 55%. During any calendar quarter, if the Net Leverage Ratio is greater than 50% but less than 55%, the Companycan purchase stock in an amount not to exceed the lesser of $2.5 million and $5 million, less the aggregate amount of all restricted paymentsand stock purchases made after the effective date of the second modification. During any calendar quarter, if the Net Leverage Ratio is lessthan 50%, the Company can purchase stock in an amount not to exceed the lesser of $5 million and $10 million, less the aggregate amount ofall restricted payments and stock purchases made after the effective date of the second modification. The restrictions in the Credit Facilityagreement restrict management’s ability to take advantage of the ability to purchase stock when it is most advantageous. Repurchases pursuant to the Repurchase Program or any other stock repurchase program we adopt in the future could affect our stockprice and increase its volatility and will reduce the market liquidity for our stock. The existence of a stock repurchase program could alsocause our stock price to be higher than it would be in the absence of such a program. Additionally, these repurchases will diminish our cashreserves and increase our leverage, which could impact our ability to pursue possible future strategic opportunities and acquisitions, result inlower overall returns on our cash balances and impact our debt covenants and our ability to incur more indebtedness. There can be noassurance that any stock repurchases will, in fact, occur, or, if they occur, that they will enhance stockholder value. Although stockrepurchase programs are intended to enhance long term stockholder value, short-term stock price fluctuations could reduce the effectivenessof 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 ourcommon 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) ourcommon stock is regularly traded on an established securities market, and the Non-U.S. Holder owned, actually or constructively, commonstock 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-yearperiod 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” noran 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 themeaning 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. federalincome tax purposes. Item 1B.Unresolved Staff Comments Not Applicable. 30Table of Contents Item 2.Properties We lease our corporate headquarters in Aliso Viejo, California. The lease on this facility consists of approximately 18,700 square feetand expires in November 2020. In addition, we lease divisional offices in Northern California, Southern California and Arizona, includingapproximately 6,800 square feet through May 2020 in Roseville, CA approximately 7,700 square feet through October 2021 in Walnut Creek,CA (all of which is sublet), approximately 1,400 square feet through July 2021 in Agoura Hills, CA and approximately 3,100 square feet throughFebruary 2021 in Scottsdale, AZ. For information on land owned and controlled by us and our joint ventures for use in our homebuildingactivities, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results ofOperations - Lots Owned and Controlled", "- Equity in Net Income (Loss) of Unconsolidated Joint Ventures" and "- Off-Balance SheetArrangements 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 andlitigation will have a material adverse effect upon our results of operations or financial position. Item 4.Mine Safety Disclosures Not Applicable. 31Table of Contents 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, 2020, we had 11 holders of record of our common stock. The number of holders of record is based upon the actualnumbers 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 notintend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at thediscretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, compliance withDelaware law, restrictions contained in any financing instruments, including but not limited to, our Credit Facility and Notes indenture, andsuch other factors as our board of directors deem relevant. Issuer Share Repurchases During the year ended December 31, 2019, the Company repurchased and retired 153,916 shares of its common stock at an aggregatepurchase price of $1.0 million. During the year ended December 31, 2018, the Company repurchased and retired 1,003,116 shares of itscommon stock at an aggregate purchase price of $8.5 million. None of the 2019 repurchases took place during the three month period endedDecember 31, 2019. Recent Sales of Unregistered Securities We did not sell any unregistered securities during the year ended December 31, 2019. 32Table of Contents 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 followingselected 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 annualreport on Form 10-K. The historical results presented below are not necessarily indicative of the results to be expected for any future period. Year Ended December 31, 2019 2018 2017 2016 2015 (Dollars in thousands, except per share amounts) Income Statement Data Home sales revenue $532,352 $504,029 $560,842 $507,949 $280,209 Land sales revenue 41,664 — — — — Fee building revenue, including management fees 95,333 163,537 190,324 186,507 149,890 Total revenues $669,349 $667,566 $751,166 $694,456 $430,099 Pretax income (loss): Homebuilding $(10,463) $(24,706) $27,034 $25,546 $23,698 Land (3,405) — — — — Fee building 2,052 4,401 5,497 8,404 10,213 Pretax income (loss) $(11,816) $(20,305) $32,531 $33,950 $33,911 Net income (loss) attributable to the Company $(8,037) $(14,216) $17,152 $21,022 $21,688 Basic earnings (loss) per share $(0.40) $(0.69) $0.82 $1.02 $1.29 Diluted earnings (loss) per share $(0.40) $(0.69) $0.82 $1.01 $1.28 Weighted Average Common Shares Outstanding: (1) Basic 20,063,148 20,703,967 20,849,736 20,685,386 16,767,513 Diluted 20,063,148 20,703,967 20,995,498 20,791,445 16,941,088 Balance Sheet Data Cash and cash equivalents $79,314 $42,273 $123,546 $30,496 $45,874 Real estate inventories (2) $433,938 $566,290 $416,143 $286,928 $200,636 Investment in and advances to unconsolidated joint ventures $30,217 $34,330 $55,824 $50,857 $60,572 Total assets $603,189 $696,097 $644,512 $419,136 $351,270 Total debt $304,832 $387,648 $318,656 $118,000 $83,082 Stockholders’ equity $232,647 $239,954 $263,990 $244,523 $220,775 Stockholders' equity per common share outstanding $11.58 $11.96 $12.64 $11.81 $10.75 Cash dividends declared per share $— $— $— $— $— Operating Data (excluding unconsolidated JVs) Net new home orders 532 536 412 253 174 New homes delivered 574 498 341 250 148 Average sales price of homes delivered $927 $1,012 $1,645 $2,032 $1,893 Selling communities at end of year 21 20 17 15 10 Backlog at end of year, number of homes 149 191 153 79 67 Backlog at end of year, dollar value $125,803 $207,071 $162,250 $187,296 $166,567 Average sales price of homes in backlog $844 $1,084 $1,060 $2,371 $2,486 Operating Data – Fee Building Projects (excludingunconsolidated JVs) Homes started 284 545 533 784 513 Homes delivered 309 600 820 644 537 Homes under construction at end of period 219 244 299 586 446 (1)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.(2)Effective July 1, 2016, certain capitalizable selling and marketing costs were reclassified to other assets from real estate inventories. Prior year periods havebeen reclassified to conform to current year presentation. $9.3 million was reclassified from real estate inventories to other assets for the year endedDecember 31, 2015. 33Table of Contents 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 financialstatements and related notes thereto included elsewhere in this annual report on Form 10-K. This discussion contains forward-lookingstatements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materiallyfrom 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 (orhome sales gross margin before impairments), homebuilding gross margin percentage before impairments, Adjusted EBITDA, AdjustedEBITDA margin percentage, the ratio of Adjusted EBITDA to total interest incurred, adjusted net income, adjusted earnings per share, netdebt, the ratio of net debt-to-capital, adjusted homebuilding gross margin, adjusted homebuilding gross margin percentage, general andadministrative costs excluding severance charges, general and administrative costs excluding severance charges as a percentage of homesales revenue, selling, marketing and general and administrative costs excluding severance charges, and selling, marketing and general andadministrative costs excluding severance charges as a percentage of home sales revenue. For a reconciliation of homebuilding gross marginbefore 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 "-- Consolidated Financial Data."For a reconciliation of adjusted net income and adjusted earnings per share to the comparable GAAP measures, please see "-- Overview." Fora reconciliation of adjusted homebuilding gross margin and adjusted homebuilding gross margin percentage to the comparable GAAPmeasures, please see "-- Results of Operations - Homebuilding Gross Margin." For a reconciliation of net debt and net debt-to-capital to thecomparable GAAP measures, please see "-- Liquidity and Capital Resources - Debt-to-Capital Ratios." For a reconciliation of general andadministrative costs excluding severance charges, general and administrative expenses excluding severance charges as a percentage ofhomes sales revenue, selling, marketing and general and administrative expenses excluding severance charges and selling, marketing andgeneral and administrative expenses excluding severance charges as a percentage of home sales revenue, please see "-- Results ofOperations - Selling, General and Administrative Expenses." 34Table of Contents Consolidated Financial Data Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Revenues: Home sales $532,352 $504,029 $560,842 Land sales 41,664 — — Fee building, including management fees from unconsolidated joint ventures of$1,947, $3,385, and $4,945, respectively 95,333 163,537 190,324 669,349 667,566 751,166 Cost of Sales: Home sales 469,557 436,530 473,213 Home sales impairments 8,300 10,000 2,200 Land sales 43,169 — — Land sales impairments 1,900 — — Fee building 93,281 159,136 184,827 616,207 605,666 660,240 Gross Margin: Home sales 54,495 57,499 85,429 Land sales (3,405) — — Fee building 2,052 4,401 5,497 53,142 61,900 90,926 Home sales gross margin 10.2% 11.4% 15.2%Home sales gross margin before impairments(1) 11.8% 13.4% 15.6%Land sales gross margin (8.2)% — — Fee building gross margin 2.2% 2.7% 2.9% Selling and marketing expenses (36,357) (36,065) (32,702)General and administrative expenses (25,723) (25,966) (26,330)Equity in net income (loss) of unconsolidated joint ventures (3,503) (19,653) 866 Gain on early extinguishment of debt 1,164 — — Other income (expense), net (539) (521) (229)Pretax income (loss) (11,816) (20,305) 32,531 (Provision) benefit for income taxes 3,815 6,075 (15,390)Net income (loss) (8,001) (14,230) 17,141 Net (income) loss attributable to non-controlling interest (36) 14 11 Net income (loss) attributable to The New Home Company Inc. $(8,037) $(14,216) $17,152 Interest incurred $28,819 $28,377 $21,978 Adjusted EBITDA(2) $42,471 $39,898 $50,145 Adjusted EBITDA margin percentage (2) 6.3% 6.0% 6.7% 35Table of Contents (1)Home sales gross margin before impairments (also referred to as homebuilding gross margin before impairments) is a non-GAAP measure. The table belowreconciles this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent. Year Ended December 31, 2019 % 2018 % 2017 % (Dollars in thousands) Home sales revenue $532,352 100.0% $504,029 100.0% $560,842 100.0%Cost of home sales 477,857 89.8% 446,530 88.6% 475,413 84.8%Homebuilding gross margin 54,495 10.2% 57,499 11.4% 85,429 15.2%Add: Home sales impairments 8,300 1.6% 10,000 2.0% 2,200 0.4%Homebuilding gross margin beforeimpairments(1) $62,795 11.8% $67,499 13.4% $87,629 15.6% (2)Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred are non-GAAP measures. AdjustedEBITDA 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 incompanies' 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 performancemeasure prescribed by GAAP. The table below reconciles net income (loss), calculated and presented in accordance with GAAP, to Adjusted EBITDA. Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Net income (loss) $(8,001) $(14,230) $17,141 Add: Interest amortized to cost of sales and equity in net income (loss) of unconsolidated joint ventures 28,275 19,908 11,057 Provision (benefit) for income taxes (3,815) (6,075) 15,390 Depreciation and amortization 8,957 6,631 449 Amortization of stock-based compensation 2,260 3,090 2,803 Cash distributions of income from unconsolidated joint ventures 374 715 1,588 Severance charges 1,788 — — Noncash inventory impairments and abandonments 10,294 10,206 2,583 Noncash inventory impairments and abandonments 10,294 10,206 2,583 Less: Gain on early extinguishment of debt (1,164) — — Equity in net (income) loss of unconsolidated joint ventures 3,503 19,653 (866)Adjusted EBITDA $42,471 $39,898 $50,145 Total Revenue $669,349 $667,566 $751,166 Adjusted EBITDA margin percentage 6.3% 6.0% 6.7%Interest incurred 28,819 28,377 21,978 Ratio of Adjusted EBITDA to total interest incurred 1.5x 1.4x 2.3x 36Table of Contents Overview Fiscal 2019 was a pivotal year for our Company as we committed early in the year to generating cash flow, deleveraging our balancesheet, and improving SG&A efficiency to address a weaker housing market to start the year. By the end of 2019, the Company had generated$121.3 million in operating cash flow, reduced debt by $82.8 million, and established a more streamlined cost structure which included right-sizing our operations by reducing headcount, along with improved selling, marketing and administrative expense leverage. At the end of 2019,our debt-to-capital ratio was 56.7% and our net-debt-to-capital ratio was 49.2%*, a 980 basis point improvement over 2018. 2019 net new orders of 532 were nearly flat with 2018 orders as the 2019 order volume was impacted by weaker buyer demand in thefirst half of the year that drove a year-over-year decrease in monthly sales absorption rates. Buyer demand steadily improved throughout theyear and drove year-over-year increases in our monthly net new orders for the final five months of 2019. The 2019 fourth quarter wasparticularly strong with monthly sales pace up 83% resulting in a 106% increase in net new orders over the 2018 fourth quarter. Demandduring 2019 was strongest at our more affordable, entry level communities where the monthly absorption rate increased to 3.3 for the yearcompared to the Company average of 2.1 further underscoring the benefit of our ongoing strategy to diversify our product portfolio andexpand our customer base. The Company also delivered 62% more spec homes in 2019 as compared to 2018 due in part to an increase in spechomes from a shift to more affordable product and also due to a higher beginning balance of specs to start 2019 due to slower sales in thefourth quarter of 2018. The increase in spec deliveries, along with a higher number of homes in beginning backlog, drove a 15% increase indeliveries for 2019, which contributed to a 6% increase in home sales revenue for 2019 and was partially offset by an 8% drop in averageselling price that accompanied the delivery mix shift. We expect this shift to more affordable product to continue as approximately 58% ofhomes in the 2019 ending backlog were from entry level and first time move up communities compared to only about 29% at the end of 2018. Ending backlog for 2019 totaled $125.8 million from 149 homes compared to $207.1 million from 191 homes at December 31, 2018. Total revenues for the year ended December 31, 2019 were $669.3 million compared to $667.6 million for the prior year. In addition to theincrease in homebuilding revenue, the Company also recorded land sales revenue of $41.7 million for 2019 compared to no land sales revenueduring 2018. The land sales revenue related to three land parcels sold in Northern California as part of a strategic decision to generate cashflow and reduce our concentration of capital investments in certain communities. Partially offsetting these revenue increases was a 42% year-over-year decrease in fee building revenue driven by a decrease in construction activity at fee building communities in Irvine, California dueto lower demand levels in that market. For the full year 2019, the Company reported a net loss of $8.0 million, or $(0.40) per diluted share. Adjusted net income for the yearwas $3.3 million*, or $0.16* per diluted share, after excluding $10.2 million in pretax inventory impairment charges, including $1.9 millionrelated to a land sale, a $3.5 million pretax joint venture impairment charge, and $1.5 million in land sales losses. The Company's net loss for2018 was $14.2 million, or $(0.69) per diluted share. Adjusted net income for 2018 was $7.6 million*, or $0.37* per diluted share, and excluded$10.0 million in pretax inventory impairment charges and a $20.0 million pretax joint venture impairment charge. The year-over-year decrease innet loss was primarily attributable to a $16.5 decrease in joint venture impairment charges, a 6% increase in home sales revenue, and a 60basis point improvement in selling, general and administrative expenses as percentage of home sales revenue. These increases were partiallyoffset by a 120 basis point decline in home sales margin (a 160 basis point decline before impairments*), a 42% decrease in fee buildingrevenue, and a reduction in income tax benefit. The decrease in home sales gross margin before impairments was the resultof increased incentives and higher interest costs, which were partially offset by a product mix shift. The Company's wholly owned lots owned and controlled at December 31, 2019 was 2,701, of which approximately 42% were controlledthrough option contracts. The Company ended the year with $79.3 million in cash and cash equivalents, $304.8 million in debt, of whichnone was outstanding under its $130 million unsecured revolving credit facility. The Company's debt-to-capital ratio at December 31, 2019was 56.7% and its net debt-to-capital ratio was 49.2%*. During 2019, the Company repurchased and retired approximately $17.0 million of its7.25% Senior Notes due 2022 and recognized a $1.2 million gain on the early extinguishment of debt. The Company also repurchased andretired 153,916 shares of common stock under the repurchase program authorized during 2018 and had remaining authorization to purchase$5.4 million of common shares, subject to debt covenant restrictions, under this plan. * Net-debt-to capital ratio, adjusted net income, adjusted earnings per diluted share and home sales gross margin before impairments are non-GAAP measures. For areconciliation of the net debt-to-capital ratio to the appropriate GAAP measure, please see "Liquidity and Capital Resources - Debt-to-Capital Ratios." We believethat 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 anindicator of the Company’s ability to obtain financing. We believe adjusted net income and adjusted earnings per diluted share are meaningful as the impact ofimpairments, loss on land sales and deferred tax asset adjustments are removed to provide investors with an understanding of the impact these noncash items hadon earnings. We believe home sales gross margin before impairments is meaningful, as it isolates the impact home sales impairments have on homebuilding grossmargin and provides investors better comparisons with our competitors, who may adjust gross margins in a similar fashion. 37Table of Contents Non-GAAP Footnote (continued) Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Net income (loss) attributable to The New Home Company Inc. $(8,037) $(14,216) $17,152 Inventory and joint venture impairments and loss on land sales, net of tax 11,313 21,810 1,366 Noncash deferred tax asset charge — — 3,190 Adjusted net income attributable to The New Home Company Inc. $3,276 $7,594 $21,708 Earnings (loss) per share attributable to The New Home Company Inc.: Basic $(0.40) $(0.69) $0.82 Diluted $(0.40) $(0.69) $0.82 Adjusted earnings per share attributable to The New Home Company Inc.: Basic $0.16 $0.37 $1.04 Diluted $0.16 $0.37 $1.03 Weighted average shares outstanding for adjusted earnings per share: Basic 20,063,148 20,703,967 20,849,736 Diluted 20,120,450 20,804,859 20,995,498 Inventory and joint venture impairments $13,700 $30,000 $2,200 Loss on land sales 1,505 — — Less: Related tax benefit (3,892) (8,190) (834)Inventory and joint venture impairments and loss on land sales, net of tax $11,313 $21,810 $1,366 After-tax loss per share attributable to The New Home Company Inc. related to inventory and jointventure impairments and loss on land sales: Basic $0.56 $1.05 $0.07 Diluted $0.56 $1.05 $0.07 Loss per share attributable to The New Home Company Inc. related to deferred tax asset charge: Basic NA NA $ (0.15) Diluted NA NA $ (0.15) 38Table of Contents Results of Operations Net New Home Orders Year Ended December 31, Change Change 2019 Amount % 2018 Amount % 2017 Net new home orders Southern California 288 (13) (4)% 301 104 53% 197 Northern California 215 13 6% 202 (13) (6)% 215 Arizona 29 (4) (12)% 33 33 NA — Total net new home orders 532 (4) (1)% 536 124 30% 412 Monthly sales absorption rate per community (1) Southern California 2.1 (0.1) (5)% 2.2 (0.1) (4)% 2.3 Northern California 2.3 (0.4) (15)% 2.7 (0.4) (13)% 3.1 Arizona 1.2 (0.5) (29)% 1.7 NA NA — Total monthly sales absorption rate percommunity (1) 2.1 (0.2) (9)% 2.3 (0.4) (15)% 2.7 Cancellation rate 11% 1% NA 10% 1% NA 9% Selling communities at end of year: Southern California 10 (3) (23)% 13 3 30% 10 Northern California 9 4 80% 5 (2) (29)% 7 Arizona 2 — —% 2 2 NA — Total selling communities 21 1 5% 20 3 18% 17 Average selling communities Southern California 11 (1) (8)% 12 5 71% 7 Northern California 8 2 33% 6 — —% 6 Arizona 2 — —% 2 NA NA NA Total average selling communities 21 1 5% 20 7 54% 13 (1)Monthly sales absorption represents the number of net new home orders divided by the number of average selling communities for the period. Net new home orders for the year ended December 31, 2019 totaled 532 and was down slightly from the prior year. The 2019 ordervolume was impacted by weaker buyer demand in the first half the year that drove a year-over-year decrease in monthly sales absorptionrates. This gap in demand tightened in the 2019 third quarter, which we believe was driven in large part by lower interest rates and higherincentives, and resulted in year-over-year increases in net new orders for the final five months of 2019. Additionally, a 5% increase in averageselling communities partially offset the slower sales pace for 2019 compared to 2018. During 2019, Northern California experienced the mostcommunity count growth with a 33% year-over-year increase in average selling communities and nine actively selling communities at the endof the year compared to only five at the end of 2018. Demand was strongest during 2019 for our more-affordable, entry-level product, which averaged a monthly sales pace of 3.3 percommunity compared to a total of 2.1 per community for the companywide average. The 2019 monthly sales pace for our entry-level productwas led by a new, popular community of attached court homes located in Southern California's Inland Empire and an existing community ofsingle family detached homes located in a Northern California masterplan community in Lathrop. Also in Northern California, two new entrylevel communities that opened late in the 2019 third quarter within a master plan in Vacaville experienced strong buyer demand and madesignificant contributions to the Company's 2019 total order activity. During the year ended December 31, 2019, the 15% decrease in Northern California's monthly absorption rate from 2018 was driven byBay Area communities where current buyer affordability constraints impacted new orders compared to the strong sales volume experienced in2018. Southern California's monthly absorption rate for the year ended December 31, 2019 compared to 2018 was relatively unchanged as webelieve an overall run up in home prices and a slowdown in demand from foreign national buyers in the market continued to temper demandfor our move-up and luxury product mostly within Orange County while our more affordable, entry level communities enjoyed a higher salespace. The Arizona monthly absorption rate for the year ended December 31, 2019 was down to 1.2 as compared to 1.7 for the prior year periodprimarily due a lack of inventory at our Belmont community in Gilbert, AZ which was nearly sold out as of the beginning of the 2019 thirdquarter. 39Table of Contents 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 averageselling communities, partially offset by a decline in the monthly sales absorption rate. Demand was healthy across our markets throughoutthe first half of 2018, however, buyer hesitancy emerged in the second half of 2018, particularly in the fourth quarter, which was spurred byhigher 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 compared to 2017 for Southern California primarily driven by a 71% increase in average sellingcommunities. The increase in more affordably priced communities helped maintain Southern California's monthly sales absorption rate at 2.2sales per community, nearly flat with the pace in 2017, as lower priced product was less impacted by the decrease in buyer demandexperienced in 2018. The decline in net new orders for Northern California was largely attributable to a 13% decrease in 2018 monthly salesabsorption rate to 2.7 sales per community from 3.1 in 2017. Northern California benefited in 2017 from strong sales activity from high-demandcommunities that sold out during 2017, two of which were located in the Bay Area and one in Davis, CA. New for 2018, were contributions of1.7 sales per month from our first wholly owned projects in Arizona which were largely driven by our Belmont community in Gilbert. The Company's cancellation rate for 2019 was 11% as compared to 10% and 9% for 2018 and 2017, respectively. Our cancellation ratehas increased moderately with our transition to lower price points where buyers are often times more credit challenged than a luxury or move-up buyer. All of the communities that opened during the year ended December 31, 2019 offered base pricing of $600,000 or less. Backlog Year Ended December 31, 2019 2018 % Change Homes DollarValue AveragePrice Homes DollarValue AveragePrice Homes DollarValue AveragePrice (Dollars in thousands) Southern California 72 $69,263 $962 90 $111,024 $1,234 (20)% (38)% (22)%Northern California 66 41,973 636 68 59,847 880 (3)% (30)% (28)%Arizona 11 14,567 1,324 33 36,200 1,097 (67)% (60)% 21%Total 149 $125,803 $844 191 $207,071 $1,084 (22)% (39)% (22)% Year Ended December 31, 2018 2017 % Change Homes DollarValue AveragePrice Homes DollarValue AveragePrice Homes DollarValue AveragePrice (Dollars in thousands) Southern California 90 $111,024 $1,234 71 $93,955 $1,323 27% 18% (7)%Northern California 68 59,847 880 82 68,295 833 (17)% (12)% 6%Arizona 33 36,200 1,097 — — — NA NA NA Total 191 $207,071 $1,084 153 $162,250 $1,060 25% 28% 2% Backlog reflects the number of homes, net of cancellations, for which we have entered into sales contracts with customers, but forwhich we have not yet delivered the homes. The number of homes in backlog as of December 31, 2019 was down 22% as compared to 2018primarily due a 15% increase in deliveries in 2019 driven by increased spec home deliveries and higher quarterly backlog conversionrates, partially offset by a higher number of backlog units to begin the year as compared to 2018. Quarterly backlog conversion rates were upyear-over-year for each the second, third and fourth quarters of 2019. The increase in the conversion rates resulted from the Company'smove to more affordably priced product, which generally has quicker build cycles, as well as the Company's success in selling and deliveringa higher number of spec homes from these communities. The decline in backlog dollar value at December 31, 2019 from December 31, 2018 wasdue to 22% fewer homes in backlog and a 22% decrease in average selling price from the Company's shift to more affordable product. InNorthern California, homes in backlog shifted to more affordable product located in the Sacramento region for the year ended December 31,2019 from higher-priced, Bay Area homes that comprised a significant portion of backlog units at December 31, 2018. In Southern California,the average selling price of homes in backlog at the end of 2019 decreased as orders increased from communities located in the more-affordable Inland Empire compared to the prior year where backlog units were concentrated in higher-priced communities in Orange Countyand Los Angeles. Backlog units and dollar value for Arizona at December 31, 2019 were down from the prior year primarily due to the nearclose-out at our Gilbert community, which had very little inventory remaining in the second half of 2019; however, the Arizona average sellingprice in backlog was up due to higher contract prices at this community at December 31, 2019. The number of homes in backlog at the end of 2018 was up 25% compared to 2017 due to a 30% increase in net new home orders from ahigher average community count, and the impact of closing delays at a few communities. The 28% increase in backlog dollar value to $207.1million 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 inaverage selling price. Northern California average sales price was up 6% year-over-year due to sales price increases at one particularcommunity 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. 40Table of Contents Lots Owned and Controlled December 31, Change Change 2019 Amount % 2018 Amount % 2017 Lots Owned Southern California 501 (125) (20)% 626 63 11% 563 Northern California 682 (60) (8)% 742 424 133% 318 Arizona 395 96 32% 299 234 360% 65 Total 1,578 (89) (5)% 1,667 721 76% 946 Lots Controlled(1) Southern California 430 225 110% 205 (73) (26)% 278 Northern California 378 (73) (16)% 451 (580) (56)% 1,031 Arizona 315 (174) (36)% 489 (8) (2)% 497 Total 1,123 (22) (2)% 1,145 (661) (37)% 1,806 Total Lots Owned and Controlled 2,701 (111) (4)% 2,812 60 2% 2,752 Fee Building Lots(2) 1,135 329 41% 806 (114) (12)% 920 (1)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.(2)Lots owned by third party property owners for which we perform general contracting or construction management services. The Company's wholly owned lots owned and controlled decreased 4% year-over-year to 2,701 lots, of which 42% were controlledthrough option contracts compared to 41% optioned in the prior year period. The decrease in wholly owned lots owned and controlled wasprimarily due to an increase in home deliveries to 574 compared to 2018, partially offset by executed contracts primarily for new developmentsin Southern California's Inland Empire, and to a lesser extent, for new developments across Northern California during the year endedDecember 31, 2019. Also in 2019, the Company sold 181 lots as part of a strategic decision to generate cash flow and reduce ourconcentration of capital investments in certain markets. The increase in fee building lots at December 31, 2019 as compared to the prior year period was primarily attributable to new contractsentered into during the year ended December 31, 2019, for 600 lots located in Irvine, California with our largest customer and an additional 38lots with a new customer. These fee lot additions were partially offset by the delivery of 309 homes to fee building customers during 2019. The Company increased the number of wholly owned lots owned and controlled by 2% for the year ended December 31, 2018 ascompared to the year ended December 31, 2017. The increase in wholly owned lots owned and controlled was due to contracts entered intoduring 2018 for new developments across all markets. In Southern California, contracts were executed in 2018 for three communities forcontrol of 272 lots within the Inland Empire. Also in 2018, purchase agreements for two new communities in the greater Phoenix area wereexecuted for a total of 226 lots that increased our geographic footprint in the Arizona market. In Northern California, we entered into anagreement 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 decrease in fee building lots at December 31, 2018 as compared to 2017 was primarily attributable to the delivery of 600 homes tocustomers during 2018. This impact was offset by fee lot additions of 486 lots for new contracts entered into during 2018, includingconstruction management contracts the Company entered into with a new customer during the 2018 second quarter that totaled 165 lotsacross five communities. 41Table of Contents Home Sales Revenue and New Homes Delivered Year Ended December 31, 2019 2018 % Change Homes DollarValue AveragePrice Homes DollarValue AveragePrice Homes DollarValue AveragePrice (Dollars in thousands) Southern California 306 $312,410 $1,021 282 $317,373 $1,125 9% (2)% (9)%Northern California 217 159,832 737 216 186,656 864 0% (14)% (15)%Arizona 51 60,110 1,179 — — — NA NA NA Total 574 $532,352 $927 498 $504,029 $1,012 15% 6% (8)% Year Ended December 31, 2018 2017 % Change Homes DollarValue AveragePrice Homes DollarValue AveragePrice Homes DollarValue AveragePrice (Dollars in thousands) Southern California 282 $317,373 $1,125 174 $433,651 $2,492 62% (27)% (55)%Northern California 216 186,656 864 167 127,191 762 29% 47% 13%Total 498 $504,029 $1,012 341 $560,842 $1,645 46% (10)% (38)% New home deliveries increased 15% for the year ended December 31, 2019 compared to the prior year period primarily due to higherquarterly backlog conversion rates including the delivery of more spec homes and a higher number of beginning backlog units. Home salesrevenue for the year ended December 31, 2019 increased 6% compared to 2018, primarily due to the increase in new home deliveries, partiallyoffset by an 8% decrease in average selling price per delivery for the period related to the Company's shift to more affordable product inCalifornia, partially offset by the addition of Arizona deliveries in 2019 where the average selling price exceeded $1.1 million. Average sellingprice in Northern California for the year ended December 31, 2019 declined year-over-year on a nearly equal number of home deliveries due tothe significant increase in deliveries from more affordable communities in the Sacramento region and fewer Bay Area deliveries, whichgenerally are higher-priced. Average selling price was down in Southern California due to a mix shift of deliveries with 2018 includingdeliveries from several higher-priced, closed-out, Orange County communities compared to 2019 which saw an increase in closings from moreaffordable, entry level and first move up homes. Partially offsetting the decline in average selling price for Southern California were the initialdeliveries from a multifamily condominium community in Los Angeles and a luxury community in South Orange County, which accounted forapproximately 25% of 2019 Southern California deliveries. New home deliveries increased 46% for the year ended December 31, 2018 compared to 2017. The increase in deliveries was the resultof a higher number of homes in backlog at December 31, 2017 compared to the prior year, 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 averagesales price per delivery that resulted from the Company's strategic shift to more affordable price points. The year-over-year decrease inaverage sales price in 2018 was most pronounced in Southern California where over half of 2018 deliveries were from communities with basepricing of $750,000 or less compared to only about 10% of total deliveries from this price point in 2017. Additionally, the 2017 average sellingprice was heavily influenced by deliveries from two Crystal Cove luxury communities in Newport Coast, CA where average selling pricesexceeded $6.0 million for the year. 2018 home sales revenue was also adversely impacted by closing delays of several homes in backlog thatwere scheduled to be delivered in the 2018 fourth quarter and an overall slowing in sales rates in the second half of 2018, particularly in thefourth quarter. Most notably, homes in backlog from our multifamily condominium community in Los Angeles, CA were scheduled to close inthe 2018 fourth quarter but were rescheduled for delivery in 2019, which negatively impacted 2018 home sales revenue by approximately $20.0million. Homebuilding Gross Margin Homebuilding gross margin for 2019 was 10.2% versus 11.4% in the prior year. The 2019 period included $8.3 million in noncashinventory impairment charges related to one luxury condominium community in Scottsdale, Arizona with slow monthly sales absorption thatrequired sales price adjustments and one higher-priced homebuilding community within the Inland Empire in Southern California that requiredmore incentives than originally expected. Homebuilding gross margin for 2018 included $10.0 million in noncash inventory impairmentcharges related to two higher-priced communities in Southern California that required sales price adjustments due to a slower sales pace. Excluding impairments, homebuilding gross margin was 11.8% for 2019 as compared to 13.4% for 2018. The 160 basis point decrease inhomebuilding gross margin before impairments was primarily due to increased incentives (particularly in Southern California) andhigher interest costs. Excluding home sales impairments and interest in cost of home sales, adjusted homebuilding gross margin percentagefor the years ended December 31, 2019 and 2018 was 16.7% and 17.1%, respectively. 42Table of Contents Homebuilding gross margin percentage for 2018 was 11.4% versus 15.2% in 2017. Homebuilding gross margin for 2018 included $10.0million in noncash inventory impairment charges discussed above. Inventory impairment charges for 2017 totaled $2.2 million and related toone homebuilding community in Southern California where slower monthly sales required additional incentives. Homebuilding gross marginpercentage before impairments was 13.4% and 15.6% for 2018 and 2017, respectively. The 220 basis point decline in homebuilding grossmargin before impairments was primarily due to higher interest costs included in cost of homes sales, and to a lesser extent a product mixshift. Interest in cost of home sales increased for 2018 as the amount of previously capitalized interest from our Senior Notes issued in 2017began to flow through cost of homes sales in greater proportion than capitalized interest from our unsecured credit facility, which carries alower interest rate. The year-over-year mix shift in 2018 included, among other things, significant deliveries in 2017 from two luxurycommunities in Newport Coast, CA, which generated higher gross margins than many of our 2018 communities. Excluding home salesimpairments and interest in cost of home sales, adjusted homebuilding gross margin percentage for the years ended December 31, 2018 and2017 was 17.1% and 17.6%, respectively. Homebuilding gross margin before impairments and adjusted homebuilding gross margin are non-GAAP measures. See the table below reconciling these non-GAAP financial measures to homebuilding gross margin, the nearest GAAPequivalent. Year Ended December 31, 2019 % 2018 % 2017 % (Dollars in thousands) Home sales revenue $532,352 100.0% $504,029 100.0% $560,842 100.0%Cost of home sales 477,857 89.8% 446,530 88.6% 475,413 84.8%Homebuilding gross margin 54,495 10.2% 57,499 11.4% 85,429 15.2%Add: Home sales impairments 8,300 1.6% 10,000 2.0% 2,200 0.4%Homebuilding gross margin before impairments (1) 62,795 11.8% 67,499 13.4% 87,629 15.6%Add: Interest in cost of home sales 26,304 4.9% 18,678 3.7% 11,021 2.0%Adjusted homebuilding gross margin(1) $89,099 16.7% $86,177 17.1% $98,650 17.6% (1)Homebuilding gross margin before impairments and adjusted homebuilding gross margin are non-GAAP financial measures. These measures isolate theimpact that home sales impairments and leverage have on homebuilding gross margin. We believe this information is meaningful as it allow investors toevaluate metrics of our ongoing homebuilding operations without the impact of isolated events and interest costs and permits investors to make bettercomparisons with our competitors who also break out and adjust gross margins in a similar fashion. Land Sales During 2019, the Company sold three land parcels in Northern California that generated $41.7 million in land sales revenue compared tono land sales revenue for 2018 and 2017. In connection with the 2019 land sales, the Company recorded a pretax loss from these sales of$3.4 million, which included a $1.9 million impairment charge booked in the 2019 third quarter related to land that closed during the 2019 fourthquarter. The Company sold 181 lots as part of a strategic decision to generate cash flow and reduce our concentration of capital investmentsin certain markets. Fee Building Year Ended December 31, 2019 % 2018 % 2017 % (Dollars in thousands) Fee building revenues $95,333 100.0% $163,537 100.0% $190,324 100.0%Cost of fee building 93,281 97.8% 159,136 97.3% 184,827 97.1%Fee building gross margin $2,052 2.2% $4,401 2.7% $5,497 2.9% For the year ended December 31, 2019, fee building revenues decreased 42% from the prior year period, driven by a decrease inconstruction activity at fee building communities in Irvine, California due to lower demand levels in that market. Included in fee buildingrevenues for the years ended December 31, 2019 and 2018 were (i) $91.5 million and $157.8 million of billings to land owners, respectively, and(ii) $3.8 million and $5.7 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively. The cost of fee building decreased for the year ended December 31, 2019 compared to 2018 primarily due to the decrease in fee buildingactivity mentioned above and to a lesser extent, lower allocated G&A expenses. The amount of G&A expenses included in the cost of feebuilding was $5.4 million and $7.2 million for the years ended December 31, 2019 and 2018, respectively. Fee building gross margindecreased to $2.1 million for the year ended December 31, 2019 from $4.4 million in the prior year period primarily due to lower fee billings andreduced management fees, offset partially by lower allocated G&A expenses. 43Table of Contents For the year ended December 31, 2018, fee building revenues decreased 14% from 2017 primarily due to a decrease in costs incurredfrom fee building activities resulting from a lower number of homes under construction during the year. Included in fee building revenues forthe years ended December 31, 2018 and 2017 were (i) $157.8 million and $185.4 million, respectively, of billings to land owners for generalcontracting services and (ii) $5.7 million and $4.9 million of management fees from our unconsolidated joint ventures and third-party landowners for 2018 and 2017, respectively. The increase in management fees related to $2.3 million in new fee revenue from construction andsales management service contracts commencing in 2018, partially offset by a $1.6 million reduction in management fees from joint venturesas 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 and2017, respectively. Fee building gross margin percentage decreased to 2.7% for the year ended December 31, 2018 from 2.9% in 2017. Thedecrease in fee building gross margin in 2018 was due to a change in the fee building business agreements on certain projects from apercentage of cost fee to a per-unit fixed fee arrangement and a decrease in fee billings and joint venture management fees, partially offset byan increase in management fees from new construction and sales service contracts and lower allocated G&A expenses. Our fee building revenue has historically been concentrated with a small number of customers. For the years ended December 31, 2019,2018 and 2017, one customer comprised 95%, 95% and 97% of fee building revenue, respectively. Selling, General and Administrative Expenses Year Ended December 31, As a Percentage of Home Sales Revenue 2019 2018 2017 2019 2018 2017 (Dollars in thousands) Selling and marketing expenses $36,357 $36,065 $32,702 6.8% 7.1% 5.8%General and administrative expenses ("G&A") 25,723 25,966 26,330 4.9% 5.2% 4.7%Total selling, marketing and G&A("SG&A") $62,080 $62,031 $59,032 11.7% 12.3% 10.5% G&A $25,723 $25,966 $26,330 4.9% 5.2% 4.7%Less: Severance charges (1,788) — — (0.4)% — — G&A, excluding severance charges $23,935 $25,966 $26,330 4.5% 5.2% 4.7% Selling and marketing expenses $36,357 $36,065 $32,702 6.8% 7.1% 5.8%G&A, excluding severance charges 23,935 25,966 26,330 4.5% 5.2% 4.7%SG&A, excluding severance charges $60,292 $62,031 $59,032 11.3% 12.3% 10.5% During 2019, our SG&A rate as a percentage of home sales revenue was 11.7%, down 60 basis points from the comparable prior yearperiod. The 2019 period included $1.8 million in pretax severance charges taken in the 2019 first quarter related to right-sizing our operationsby reducing headcount, including the departure of one of our executive officers. Excluding these charges, the Company's SG&A rate for theyear ended December 31, 2019 was 11.3% compared to 12.3% in the prior year period. The 100 basis point improvement was due tobetter leverage from higher home sales revenue, and to a lesser extent, lower personnel costs, more efficient marketing and advertising spend,and lower co-broker commissions as compared to the prior year. Partially offsetting these items were higher amortization of capitalized sellingand marketing costs and a $1.8 million reduction in G&A expenses allocated to fee building cost of sales due to lower fee building activity andlower joint venture management fees earned during the year ended December 31, 2019. SG&A excluding severance charges as a percentageof home sales revenue is a non-GAAP measure. See the table above reconciling this non-GAAP financial measure to SG&A as a percentage ofhome sales revenue, the nearest GAAP equivalent. We believe removing the impact of these charges from our SG&A rate is relevant toprovide investors with a better comparison to prior year rates that do not include these charges. 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. Theincrease was primarily due to lower home sales revenue, higher selling and marketing costs related to advertising for newly openedcommunities, increased master marketing fees, higher co-broker commissions, and higher sales personnel and advertising costs associatedwith increased community count growth. These increases were partially offset by lower amortization of capitalized selling and marketing costsin 2018 due to the 2017 close out of higher-end, luxury communities. In addition, the increase also included a net $0.1 million increase inselling and marketing expenses in 2018 related to accounting changes from the adoption of ASC 606, the updated revenue recognitionstandard. The G&A rate for 2018 was up 50 basis points due to lower home sales revenue, notwithstanding a year-over-year reduction inG&A expenses primarily due to lower incentive-based compensation costs. 44Table of Contents Equity in Net Income (Loss) of Unconsolidated Joint Ventures As of December 31, 2019 and 2018, we had ownership interests in 10 unconsolidated joint ventures, five of which had activeoperations as of the end of 2019. We own interests in our unconsolidated joint ventures that generally range from 5% to 35% and theseinterests vary by entity. The Company's share of joint venture loss for the year ended December 31, 2019 was $3.5 million as compared to $19.7 million of lossfor the year ended December 31, 2018. The Company's joint venture loss in 2019 was primarily related to a $3.5 million allocation of aninventory impairment charge from its Southern California land development joint venture. The joint venture impairment was driven by higherinfrastructure costs than originally expected and lower anticipated land sales revenue. The joint venture loss in 2018 was primarily the resultof an allocated noncash impairment loss of $18.9 million and a $1.1 million impairment to the Company's investment in unconsolidated jointventures, and to a lesser extent, lower homebuilding gross margins. The $20.0 million aggregate joint venture impairment charges in 2018related to one of the Company's unconsolidated land development joint ventures in Northern California. The joint venture impairmentresulted primarily from lower anticipated land sales revenue and higher development and carrying costs. The Company's share of 2017 jointventure income was positively impacted by buyouts and community closeouts. The following sets forth supplemental operational and financial information about our unconsolidated joint ventures. Such informationis not included in our financial data for GAAP purposes, but is reflected in our results as a component of equity in net income (loss) ofunconsolidated joint ventures. This data is included for informational purposes only. Year Ended December 31, Change Change 2019 Amount % 2018 Amount % 2017 (Dollars in thousands) Unconsolidated Joint Ventures—Homebuilding Operational Data Net new home orders 110 (32) (23)% 142 (28) (16)% 170 New homes delivered 137 (9) (6)% 146 (3) (2)% 149 Average sales price of homes delivered $946 $(5) (1)% $951 $(7) (1)% $958 Home sales revenue $129,581 $(9,311) (7)% $138,892 $(3,805) (3)% $142,697 Land sales revenue 34,457 (8,274) (19)% 42,731 37,981 800% 4,750 Total revenues $164,038 $(17,585) (10)% $181,623 $34,176 23% $147,447 Net loss $(66,915) $(39,011) (140)% $(27,904) $(27,375) NM (529) Selling communities at end of period 4 (3) (43)% 7 — —% 7 Backlog (dollar value) $42,652 $(24,240) (36)% $66,892 $256 0% $66,636 Backlog (homes) 49 (27) (36)% 76 (4) (5)% 80 Average sales price of backlog $870 $(10) (1)% $880 $47 6% $833 Homebuilding lots owned and controlled 74 (137) (65)% 211 (130) (38)% 341 Land development lots owned andcontrolled 1,798 (81) (4)% 1,879 (444) (19)% 2,323 Total lots owned and controlled 1,872 (218) (10)% 2,090 (574) (22)% 2,664 45Table of Contents Gain on Early Extinguishment of Debt During the year ended December 31, 2019, the Company repurchased and retired approximately $17.0 million of its 7.25% Senior Notesdue 2022 for a cash payment of approximately $15.6 million at an average price of 91.88% of face value. The Company recognized a total gainon early extinguishment of debt of $1.2 million and wrote off approximately $0.2 million of unamortized discount, premium and debt issuancecosts associated with the Notes retired during 2019. Provision (Benefit) for Income Taxes For the year ended December 31, 2019, the Company recorded an income tax benefit of $3.8 million compared to a $6.1 million benefitfor the prior year period. For the year ended December 31, 2019, the Company's effective tax rate was a 32.3% benefit and differed from thefederal statutory rate primarily due to federal energy credits related to homes delivered during 2018 and 2019, state income taxes, stockcompensation shortfalls and the impact of expected deduction limitations related to executive compensation. The Company's effective taxrate for the year ended December 31, 2018 was a 29.9% benefit and differed from the federal statutory rate due to state income taxes, benefitsfrom energy tax credits that were extended in February 2018 for 2017 closings, and to a lesser extent, deduction limitations and an adjustmentto the Company's deferred tax asset revaluation required as a result of the federal tax rate cut. The year-over-year increase in effective taxbenefit rate was driven by an increase in benefit for energy credits in 2019, partially offset by provisions for increased stock compensationshortfalls and executive compensation deduction limitations for 2019. For the year ended December 31, 2017, the Company recorded an income tax provision of $15.4 million. The effective tax rate for 2017was 47.3% and was impacted by a $3.2 million deferred tax asset charge related to federal tax rate cuts from the Tax Act. The federal corporatetax rate was cut to a flat 21% from a maximum 35% was the primary driver of the decrease in the Company's effective tax rate for 2018compared to 2017, partially offset by a tax benefit from production activities which was available in 2017, but eliminated as part of the Tax Actfor 2018 and beyond. The Tax Act amended the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals andbusinesses. In accordance with ASC 740, Income Taxes ("ASC 740"), the consolidated provision for income taxes is calculated using theasset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statementand 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 resultof the reduction in the corporate income tax rate from 35% to 21% under the Tax Act, the Company revalued its net deferred tax asset atDecember 31, 2017 and recorded a noncash, provisional charge of $3.2 million, which was included in the tax provision for fiscal 2017. TheCompany 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. As part of the Tax Act, the Company was no longer able to take certain taxdeductions for production activities in 2019 and 2018 that reduced our effective tax rate in prior years. Additionally, the Company becamesubject to increased deduction limitations on certain executive compensation for 2019. Liquidity and Capital Resources Overview Our principal sources of capital for the year ended December 31, 2019 were cash generated from home and land sales activities,borrowing from our credit facility, distributions from our unconsolidated joint ventures, and management fees from our fee buildingagreements. Our principal uses of capital for 2019 were land purchases, land development, home construction, repayments on our revolvingcredit facility, contributions and advances to our unconsolidated joint ventures, repurchases of the Company's common stock and bonds andpayment of operating expenses, interest and routine liabilities. Cash flows for each of our communities depend on their stage in the development cycle, and can differ substantially from reportedearnings. 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 realestate inventories and not recognized in our consolidated statement of operations until a home is delivered, we incur significant cash outlaysprior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reportedfor financial statement purposes, as the cash outflows associated with home and land construction were previously incurred. From a liquiditystandpoint, we are generally active in acquiring and developing lots to maintain or grow our lot supply and community count. As we expandour business, we expect cash outlays for land purchases, land development and home construction at times to exceed cash generated byoperations. During 2019 and currently, we have been focused on reducing our debt levels and leverage and therefore expect to spend less onland purchases than we have over the last few years. 46Table of Contents During the year ended December 31, 2019, we generated cash flows from operating activities of $121.3 million. We ended 2019 with$79.3 million of cash and cash equivalents, a $37.0 million increase from December 31, 2018, primarily due to a decrease in land acquisitionspend and an increase in home and land sales revenues, partially offset by payments made to pay off our outstanding Credit Facility balanceand repurchase our Notes. We expect to generate cash from the sale of our inventory including unsold and presold homes underconstruction as well as land sales. After reducing our debt and leverage levels within our target range, we intend to deploy a portion of thecash generated from the sale of inventory to acquire and develop strategic, well-positioned lots that represent opportunities to generatefuture income and cash flows by allocating capital to best position the Company for long-term success. As of December 31, 2019 and 2018, we had $9.6 million and $8.5 million, respectively, in accounts payable that related to costs incurredunder our fee building agreements. Funding to pay these amounts is the obligation of the third-party land owner, which is generally fundedon a monthly basis. Similarly, contracts and accounts receivable and due from affiliates as of the same dates included $10.4 million and $8.8million, 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 fromoperations, to operate our business. As of December 31, 2019, we had outstanding borrowings of $308.0 million in aggregate principal relatedto our Notes and no borrowings related to our Credit Facility. We will consider a number of factors when evaluating our level of indebtednessand when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debtfinancing, the estimated market value of our assets and the ability of particular assets, and our Company as a whole, to generate cash flow tocover the expected debt service. In addition, our debt contains certain financial covenants, among others, that limit the amount of leverage wecan maintain, and minimum tangible net worth and liquidity requirements. We intend to finance future acquisitions and developments with what we believe to be the most advantageous source of capitalavailable to us at the time of the transaction, which may include unsecured corporate level debt, property-level debt, and other public, privateor bank debt, seller land banking arrangements, 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 Notesdue 2022 (the "Existing Notes"), in a private placement. The Notes were issued at an offering price of 98.961% of their face amount, whichrepresented a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on private placement offering through the sale of anadditional $75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes"). The Additional Notes wereissued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturityof 6.438%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s revolving credit facilitywith the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, landacquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is payablesemiannually in arrears on April 1 and October 1. The maturity date of the Notes is April 1, 2022. The Notes were exchanged in an exchangeoffer for Notes that are identical to the original Notes, except that they are registered under the Securities Act of 1933 and are freely tradeablein accordance with applicable law. During the year ended December 31, 2019, the Company repurchased approximately $17.0 million of theNotes at 91.88% of face value reducing the outstanding aggregate principal amount to $308.0 million. The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restrictedpayments. 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 fromthose exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. Theleverage 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 futurebank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existingindebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certainexceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overallbasket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2017 forward and 100% of thenet 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 generalbasket of $15 million. The Notes are guaranteed by all of the Company's 100% owned subsidiaries, for more information about theseguarantees, please see Note 18 of the notes to our consolidated financial statements. 47Table of Contents December 31, 2019 Financial Conditions Actual Requirement Fixed Charge Coverage Ratio: EBITDA to Consolidated Interest Incurred; or 1.46 > 2.0 : 1.0 Leverage Ratio: Indebtedness to Tangible Net Worth 1.31 < 2.25 : 1.0 As of December 31, 2019, we were able to satisfy the leverage condition. Senior Unsecured Revolving Credit Facility The Company has a senior unsecured revolving credit facility ("Credit Facility") with a bank group. On August 7, 2019, the Companyentered into a Modification Agreement (the "Modification") to its Amended and Restated Credit Agreement. The Modification, among otherthings (i) extended the maturity date of the revolving credit facility to March 1, 2021, (ii) decreased (A) the total commitments under thefacility to $130 million from $200 million and (B) the accordion feature to $200 million from $300 million, subject to certain financial conditions,including the availability of bank commitments, (iii) provides for certain adjustments to the borrowing base calculation commencing January1, 2020; and (iv) revises the covenant limiting restricted payments to provide for basket limitations and net leverage ratio thresholds on theCompany’s stock repurchases, dividend payments, and repurchases of its Notes, subject to specified exceptions. As of December 31, 2019, we had no outstanding borrowings under the Credit Facility. Interest is payable monthly and is charged at arate 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 ofeach fiscal quarter. As of December 31, 2019, the interest rate under the Credit Facility was 4.76%. Pursuant to the Credit Facility, theCompany is required to maintain certain financial covenants as defined in the Credit Facility, including, but not limited to, those listed in thefollowing table. December 31, 2019 Covenant Financial Covenants Actual Requirement (Dollars in thousands) Unencumbered Liquid Assets (Minimum Liquidity Covenant)(1) $ 79,314 $ 10,000 EBITDA to Interest Incurred (2) 1.44 (2) > 1.75 : 1.0 Tangible Net Worth (3) $ 232,647 $ 188,362 Net Leverage Ratio 50.3% < 65.0% (1)So long as the Company is in compliance with the interest coverage test (see Note 2), the minimum unencumbered liquid assets that the Company mustmaintain as of the quarter end measurement date is $10 million.(2)If the EBITDA to Interest Incurred test is not met, it will not be considered an event of default so long as the Company maintains unrestricted cash equal tonot less than the trailing 12 month consolidated interest incurred (as defined in the Credit Facility agreement) which was $28.9 million as of December 31,2019. The Company was in compliance with this requirement with an unrestricted cash balance of $79.3 million at December 31, 2019.(3)The Credit Facility previously applied an "adjusted leverage ratio" test computed as total joint venture debt divided by total joint venture equity. Thiscovenant ceased to apply as of September 30, 2017 because our consolidated tangible net worth exceeded $250 million in that quarter. Once the adjustedleverage ratio ceased to apply, consolidated tangible net worth is reduced by an adjustment equal to the aggregate amount of investments in and advances tounconsolidated joint ventures that exceed 35% of consolidated tangible net worth as calculated without giving effect to this adjustment (the "AdjustmentAmount"). The Adjustment Amount was considered in the calculation of consolidated tangible net worth. The Credit Facility also contains a limit on secured indebtedness of $55 million, as well as certain restrictive covenants includinglimitations on incurrence of liens, dividends and other distributions, asset dispositions and investments in entities that are not guarantors,and limitations on fundamental changes. The Credit Facility contains customary events of default, subject to cure periods in certaincircumstances, that would result in the termination of the commitments and permit the Lenders to accelerate payment on outstandingborrowings and require cash collateralization of letters of credit. These events of default include nonpayment of principal, interest and fees orother amounts; violation of covenants; inaccuracy of representations and warranties; cross default to certain other indebtedness; unpaidjudgments; change in control; and certain bankruptcy and other insolvency events. As of December 31, 2019 and 2018, we were incompliance with all covenants under our Credit Facility. 48Table of Contents Letters of Credit and Surety Bonds The following table summarizes our letters of credit and surety bonds as of the dates indicated: December 31, 2019 2018 (Dollars in thousands) Letters of credit(1) $— $2,279 Surety bonds 47,593 50,458 Total outstanding letters of credit and surety bonds $47,593 $52,737 (1)As of December 31, 2019, there is a $17.5 million sublimit for letters of credit available under our Credit Facility. Stock Repurchase Program On May 10, 2018, our board of directors approved a stock repurchase program (the "Repurchase Program") authorizing the repurchaseof the Company's common stock with an aggregate value of up to $15 million. Repurchases of the Company's common stock may be made inopen-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in block trades orby other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance withRule 10b5-1 of the Securities Exchange Act of 1934. The Repurchase Program does not obligate the Company to repurchase any particularamount or number of shares of common stock, and it may be modified, suspended or discontinued at any time. The timing and amount ofrepurchases are determined by the Company’s management at its discretion and be based on a variety of factors, such as the market price ofthe Company’s common stock, corporate and contractual requirements, general market and economic conditions and legal requirements. Asof December 31, 2019, the Company had repurchased and retired 1,157,032 shares totaling $9.6 million and had remaining authorization topurchase $5.4 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 financialposition and leverage. Net debt-to-capital ratio is a non-GAAP financial measure. See the table below reconciling this non-GAAP measure todebt-to-capital ratio, the nearest GAAP equivalent. December 31, 2019 2018 (Dollars in thousands) Total debt, net of unamortized discount, premium and debt issuance costs $304,832 $387,648 Equity, exclusive of non-controlling interest 232,647 239,954 Total capital $537,479 $627,602 Ratio of debt-to-capital (1) 56.7% 61.8% Total debt, net of unamortized discount, premium and debt issuance costs $304,832 $387,648 Less: Cash, cash equivalents and restricted cash 79,431 42,542 Net debt 225,401 345,106 Equity, exclusive of non-controlling interest 232,647 239,954 Total capital $458,048 $585,060 Ratio of net debt-to-capital (2) 49.2% 59.0% (1)The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt, net of unamortized discount, premium and debt issuance costs bytotal capital (the sum of total debt, net of unamortized discount, premium and debt issuance costs plus equity), exclusive of non-controlling interest. (2)The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is total debt, net of unamortized discount, premium anddebt issuance costs less cash, cash equivalents and restricted cash to the extent necessary to reduce the debt balance to zero) by total capital, exclusive ofnon-controlling interest. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capitalis 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 thisprovides 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 providessupplemental information by which our financial position may be considered. Investors may also find this to be helpful when comparing our leverage tothe leverage of our competitors that present similar information. 49Table of Contents Cash Flows For the year ended December 31, 2019 as compared to the year ended December 31, 2018, the comparison of cash flows is as follows: •Net cash provided by operating activities was $121.3 million for the year ended December 31, 2019 versus net cash used in operatingactivities of $139.7 million for the year ended December 31, 2018, a $260.9 million year-over-year improvement. The year-over-yearchange was primarily a result of a net increase in cash inflow related to the reduction in real estate inventories of $123.2 million for2019 as compared to an outflow of $157.7 million for the 2018 period. The change in real estate inventories cash flow was drivenprimarily by the year-over-year decrease in land acquisition and development spend, increase in proceeds from home and land sales($41.7 million in land sales in 2019), and reduction in construction in progress spend during 2019. •Net cash provided by investing activities was $0.3 million for the years ended December 31, 2019 and 2018. While net distributionsfrom unconsolidated joint ventures were nearly equal for both years, contributions decreased $6.2 million year-over-year primarilydriven by a reduction in funding to one land development joint venture in Northern California. The $6.2 million decrease in 2019distributions was primarily due to a large distribution in 2018 from a land development joint venture as a result of a land sale and therepayment of advances and a higher distribution in 2019 compared to 2018 for one Northern California joint venture, partially offsetby an increase in distributions from our Arizona joint venture in 2019. •Net cash used in financing activities was $84.6 for the year ended December 31, 2019 versus $58.0 million of net cash provided byfinancing activities for the year ended December 31, 2018. The outflow in 2019 reflects a $67.5 million net paydown of the Company'sunsecured credit facility and $15.6 million of cash paid to repurchase and retire approximately $17.0 million of our Notes compared tonet borrowings of $67.5 million in the prior year. 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 anet increase in cash outflows for real estate inventories to $157.7 million in 2018 compared to $114.9 million in 2017 due to increasedconstruction in progress and lower home sales revenue, partially offset by a decrease in land acquisition spend. Additionally, theyear-over-year decrease in net income reduced cash inflow by $30.0 million, partially offset by noncash inventory and joint ventureimpairment 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 for2017. For the year ended December 31, 2018, net distributions of capital and repayment of advances from unconsolidated jointventures was $0.4 million compared to net contributions an advances to unconsolidated joint ventures of $11.9 million during theyear ended December 31, 2017 and was the primary reason net cash provided by investing activities increased. The decrease in netcontributions and advances related primarily to a reduction in joint venture contributions in 2018 to a land development jointventure 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 primarilydue to a decrease in net borrowings, in particular the issuance of $324.5 million of our Senior Notes due 2022 in 2017, offset partiallyby increased net borrowings from our unsecured credit facility during 2018. 50Table of Contents 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. Weare subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchasecontracts typically require a cash deposit and the purchase of properties under these contracts is generally contingent upon satisfaction ofcertain requirements by the sellers, including obtaining applicable property and development entitlements. We also utilize option contractswith land sellers and financial intermediaries as a method of acquiring land in staged takedowns, to help us manage the financial and marketrisk 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-determinedprices. We generally have the right, at our discretion, to terminate our obligations under both purchase contracts and option contracts byforfeiting our cash deposit with no further financial responsibility to the land seller or financial intermediary. In some instances, we may alsoexpend funds for due diligence and development activities with respect to our option contracts prior to purchase which we would have towrite off should we not purchase the land. As of December 31, 2019, we had $15.8 million of nonrefundable and $0.1 million of refundable cashdeposits pertaining to land option contracts and purchase contracts with an estimated aggregate remaining purchase price of $100.8 million,net of deposits. 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 optionarrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing marketconditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are moreprevalent 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 theuse of funds from our corporate financing sources. We are subject to certain contingent obligations in connection with our unconsolidated joint ventures. The Company has providedcredit enhancements in connection with joint venture borrowings in the form of loan-to-value ("LTV") maintenance agreements in order tosecure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreementswith its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTVmaintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent itspartner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture thatwould otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover theCompany's liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements include acquisition anddevelopment loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to thenature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, themix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrowprocess for homebuyers. As of December 31, 2019 and 2018, $28.6 million and $41.3 million, respectively, was outstanding under loans that arecredit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company'sproportionate share of LTV maintenance agreement liabilities was $5.8 million and $7.3 million, respectively, as of December 31, 2019 andDecember 31, 2018. In addition, the Company has provided completion agreements regarding specific performance for certain projectswhereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are notadequate funds available under the specific project loans, the Company would then be subject to financial liability under such completionguaranties. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of anycosts funded under such completion guaranties to its partners. However, there is no guarantee that we will be able to recover against ourpartners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, theCompany also selectively provides (a) an environmental indemnity provided to the lender that holds the lender harmless from and againstlosses 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 ornon-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy. Additionally, in somecases, under our joint venture agreements, our shares of profits and losses are greater than our contribution percentage. 51Table of Contents For more information about our off-balance sheet arrangements, please see Note 11 to the Consolidated Financial Statements. As of December 31, 2019, we held membership interests in 10 unconsolidated joint ventures, six of which related to homebuildingactivities and four related to land development as noted below. Of the 10 joint ventures, five have active homebuilding or land developmentactivities ongoing and the balance are effectively inactive with only limited warranty activities. We were a party to two loan-to-value maintenance agreements related to unconsolidated joint ventures as of December 31, 2019. The following table reflects certain financialand other information related to our unconsolidated joint ventures as of December 31, 2019: December 31, 2019 Debt-to- Loan-to- Estimated Lots Total Value Future Owned Year Contribution Total Joint Venture NWHM Capital- Maintenance Capital and Joint Venture(Project Name)FormedLocation%(1) Assets Debt(2) Equity Equity(3) ization Agreement Commitment(4) Controlled (Dollars in 000's) TNHC-HW San JoseLLC (Orchard Park)2012San Jose, CA15% $2,108 $— $331 $99 —% N/A $ — — TNHC-TCN SantaClarita LP (VillaMetro)(5)2012Santa Clarita,CA10% 873 — 222 55 —% N/A — — TNHC Newport LLC(Meridian)(5)2013NewportBeach, CA12% 1,279 — 1,155 275 —% N/A — — Encore McKinleyVillage LLC(McKinley Village)2013Sacramento,CA10% 32,102 9,140 19,043 1,906 32% Yes — 51 TNHC Russell RanchLLC (Russell Ranch)(5) (6) (7)2013Folsom, CA35% 59,435 — 57,334 11,453 —% N/A 6,797 631 TNHC-HW FosterCity LLC (FosterSquare)(6)2013Foster City,CA35% 333 — 333 155 —% N/A — — Calabasas Village LP(Avanti)(5)2013Calabasas, CA10% 12,409 — 11,471 1,146 —% N/A — — TNHC-HW CanneryLLC (Cannery)(6)2013Davis, CA35% 4,090 — 4,031 1,281 —% N/A — 8 Arantine HillsHoldings LP(Bedford) (5) (6)2014Corona, CA5% 136,366 84 132,274 6,589 —% No 2,258 1,159 TNHC MountainShadows LLC(Mountain Shadows)2015ParadiseValley, AZ25% 41,600 19,441 18,958 4,763 51% Yes — 23 Total Unconsolidated Joint Ventures $290,595 $28,665 $245,152 $27,722 10% $9,055 1,872 (1)Actual equity interests may differ due to current phase of underlying project's life cycle. The contribution percentage reflects the percentage of capital weare generally obligated to contribute (subject to adjustment under the joint venture agreement) and generally (subject to waterfall provisions) aligns withour percentage of distributions. In some cases our share of profit and losses may be greater than our contribution percentage.(2)The carrying value of the debt is presented net of $15,000 in unamortized debt issuance costs. Scheduled maturities of the unconsolidated joint venture debtas of December 31, 2019 are as follows: $19.6 million matures in 2020 and $9.1 million matures in 2021. The $19.4 million of Mountain Shadows debtwas due December 14, 2019; however, pursuant to the loan agreement, advances made related to the construction of a presold home shall be due andpayable 12 months after the initial advance of such loan with the option to extend an additional three months (provided no event of default has occurred).(3)Represents the Company's equity in unconsolidated joint ventures as reflected in the financial records of the respective joint ventures. Equity does notinclude $2.5 million of interest capitalized to certain investments in unconsolidated joint ventures and certain basis differences, which along with equity,are included in investment in and advances to unconsolidated joint ventures in the accompanying consolidated balance sheets.(4)Estimated future capital commitment represents our proportionate share of estimated future contributions to the respective unconsolidated joint venturesas of December 31, 2019. Actual contributions may differ materially.(5)Certain current and former members of the Company's board of directors are affiliated with entities that have an investment in these joint ventures. SeeNote 12 to the Consolidated Financial Statements.(6)Land development joint venture.(7)The Company's share of capital contributions for certain improvements in the aggregate amount of approximately $26 million is 50%. As of December 31, 2019, 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, 2019 or 2018. 52Table of Contents Contractual Obligations As a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, we have elected to comply with certain scaleddisclosure reporting obligations, and therefore are not providing the table of contractual obligations pursuant to Item 303 of Regulation S-K. 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 ofmortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housingmarket 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. Wetypically experience the highest new home order activity in late winter and spring, although this activity also highly depends on the numberof active selling communities, timing of new community openings and other market factors. Since it typically takes five to ten months toconstruct a new home, depending on the nature of the product and whether it is single-family detached or multi-family attached, we typicallydeliver more homes in the second half of the year as late winter and spring home orders convert to home deliveries. Because of thisseasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, andthe majority of cash receipts from home deliveries occur during the second half of the year, particularly in the fourth quarter. We expect thisseasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry and the opening andcloseout of communities. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting policies generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases itsestimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from othersources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actualresults could differ from these estimates if conditions are significantly different in the future. Our significant accounting policies are outlinedin Note 1 to the Consolidated Financial Statements included in the Form 10-K. The following are accounting policies that we believe arecritical because of the significance of the activity to which they relate or because they require the use of significant estimates, judgmentsand/or other assumptions in their application. Real Estate Inventories We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect constructioncosts to real estate inventories. Pre-acquisition costs, including nonrefundable land deposits, are expensed to other income (expense), net ifwe determine continuation of the prospective project is not probable. Land, development and other common costs are typically allocated toreal estate inventories using a methodology that approximates the relative-sales-value method. Home construction costs per productionphase 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 caseinventory is written down to its fair value. We review each real estate asset on a quarterly basis or whenever indicators of impairment exist. Real estate assets include projectsactively 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 salesabsorption 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 todetermine whether the estimated future undiscounted cash flows of the project are more or less than the asset’s carrying value. If theestimated future undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. However, if the estimatedfuture undiscounted cash flows are less than the asset’s carrying value, then the asset is impaired. If the asset is deemed impaired, it iswritten down to its fair value in accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"). 53Table of Contents When estimating undiscounted future cash flows of a project, we make various assumptions, including: (i) expected sales prices andsales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in otherprojects, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based onlocal housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but notlimited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and sellingand marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/orbuilding 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 timesensitive 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 operatingmargins, our cash flow analysis will be different than if the objective is to increase the velocity of sales. These objectives may varysignificantly from project to project and change over time. If a real estate asset is deemed impaired, the impairment is calculated bydetermining the amount the asset’s carrying value exceeds its fair value in accordance with ASC 820. We calculate the fair value of real estateinventories considering a land residual value analysis and a discounted cash flow analysis. Under the land residual value analysis, weestimate 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 togenerate a market rate operating margin and return based on the remaining life and status of the project. Under the discounted cash flowmethod, the fair value is determined by calculating the present value of future cash flows using a risk adjusted discount rate. Some of thecritical assumptions involved with measuring the asset's fair value include estimating future revenues, sales absorption rates, developmentand construction costs, and other applicable project costs. This evaluation and the assumptions used by management to determine futureestimated cash flows and fair value require a substantial degree of judgment, especially with respect to real estate projects that have asubstantial 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 fairvalue 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"), home sales revenue is recognized when ourperformance obligations within the underlying sales contracts are fulfilled. We consider our obligations fulfilled when closing conditions arecomplete, title has transferred to the homebuyer, and collection of the purchase price is reasonably assured. Sales incentives are recorded asa reduction of revenues when the respective home is closed. Cost of sales is recorded based upon total estimated costs to be allocated toeach home within a community. Any changes to the estimated costs are allocated to the remaining undelivered lots and homes within theirrespective community. The estimation and allocation of these costs requires a substantial degree of judgment by management. When it isdetermined that the earnings process is not complete, the related revenue and profit are deferred for recognition in future periods. The estimation process involved in determining relative sales or fair values is inherently uncertain because it involves estimatingfuture sales values of homes before sale and delivery. Additionally, in determining the allocation of costs to a particular land parcel orindividual home, we rely on project budgets that are based on a variety of assumptions, including assumptions about construction schedulesand future costs to be incurred. It is common that actual results differ from budgeted amounts for various reasons, including constructiondelays, increases in costs that have not been committed or unforeseen issues encountered during development and construction that falloutside the scope of existing contracts, or costs that come in less than originally anticipated. While the actual results for a particularconstruction project are accurately reported over time, a variance between the budget and actual costs could result in the understatement oroverstatement of costs and have a related impact on gross margins between reporting periods. To reduce the potential for such variances, wehave 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 toestimate costs. We believe that these policies and procedures provide for reasonably dependable estimates for purposes of calculatingamounts to be relieved from inventories and expensed to cost of sales in connection with the delivery of homes. Land Sales In accordance with ASC 606, land sales revenue is recognized when our performance obligations within the underlying salescontracts are fulfilled. The performance obligations in land sales contracts are typically satisfied at the point in time consideration andtitle is transferred through escrow at closing. Total revenue is typically recognized simultaneously with transfer of title to the customer. In instances where material performance obligations may exist after the closing date, a portion of the price is allocated to eachperformance obligation with revenue recognized as such obligations are completed. Variable consideration, such as profit participation,may be included within the land sales transaction price based on the terms of a contract. The Company includes the estimated amount ofvariable consideration to which it will be entitled only to the extent it is probable that a significant reversal in the amount of cumulativerevenue will not occur when any uncertainty associated with the variable consideration is subsequently resolved. 54Table of Contents Fee Building The Company enters into fee building agreements to provide services whereby it builds homes on behalf of third-party propertyowners. The third-party property owner funds all project costs incurred by the Company to build and sell the homes. The Company primarilyenters into cost plus fee contracts where it charges third-party property owners for all direct and indirect costs, plus a fee. The fee is typicallya 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 withthe third-party property owner. For these types of contracts, the Company recognizes revenue based on the actual total costs it has incurredplus the applicable fee. In accordance with ASC 606, we apply the percentage-of-completion method, using the cost-to-cost approach, as itmost 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 feebuilding services, the Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. Thesecosts 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 ofagreements with third parties and its unconsolidated joint ventures. In certain contracts, the Company also provides project management andadministrative services. For most services provided, the Company fulfills its related obligations as time-based measures, according to theinput method guidance described in ASC 606. Accordingly, revenue is recognized on a straight-line basis as the Company's efforts areexpended evenly throughout the performance period. The Company may also have an obligation to manage the home or lot sales process aspart of providing sales and marketing services. This obligation is considered fulfilled when related homes or lots close escrow, as theseevents represent milestones reached according to the output method guidance described in ASC 606. Accordingly, revenue is recognized inthe period that the corresponding lots or homes close escrow. Costs associated with these services are recognized as incurred. 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 followingsituations 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 havethe ability to exercise significant influence over its operating and financial policies or 3) we function as the managing member or generalpartner of the joint venture and our joint venture partner has substantive participating rights or can replace us as managing member orgeneral partner without cause. Under the equity method, we recognize our proportionate share of earnings and losses generated by the joint venture upon thedelivery of lots or homes to third parties. Our proportionate share of intra-entity profits and losses are eliminated until the related asset hasbeen sold by the unconsolidated joint venture to third parties. Our ownership interests in our unconsolidated joint ventures vary, but aregenerally less than or equal to 35%. The accounting policies of our joint ventures are generally consistent with those of the Company. We review real estate inventory held by our unconsolidated joint ventures for impairment on a quarterly basis, consistent with how wereview our real estate inventories as described in more detail above in the section entitled "Real Estate Inventories". We also review ourinvestments in and advances to unconsolidated joint ventures for evidence of other-than-temporary declines in value in accordance withASC 820. To the extent we deem any portion of our investment in and advances to unconsolidated joint ventures as not recoverable, weimpair our investment accordingly. Warranty and Litigation Accruals We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural construction defectsfor one year. In addition, we provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered bythe applicable statute of repose, that covers certain defined construction defects. Estimated future direct warranty costs are accrued andcharged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts are accrued based upon theCompany’s historical rates. In addition, the Company has received warranty payments from third party property owners for certain of its feebuilding projects that have since closed out where the Company has the contractual risk of construction. These payments are recorded aswarranty 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 differsignificantly from our currently estimated amounts. 55Table of Contents While our subcontractors who perform our homebuilding work generally provide us with an indemnity for claims relating to theirworkmanship and materials, we also purchase general liability insurance that covers development and construction activity at each of ourcommunities. 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. Ingeneral, we maintain insurance, subject to deductibles and self-insured retentions, to protect us against various risks associated with ouractivities, including, among others, general liability, "all-risk" property, construction defects, workers’ compensation, automobile, andemployee fidelity. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insuredretention requirements. We establish a separate reserve for warranty and for known and incurred but not reported (“IBNR”) constructiondefect claims based on our historical claim and expense data. Our warranty accrual and litigation reserves for construction defect claims arepresented on a gross basis within accrued expenses and other liabilities in our consolidated financial statements without consideration ofinsurance recoveries. Expected recoveries from insurance carriers are presented as receivables within other assets in our consolidatedfinancial statements and are recorded based on actual insurance claims and amounts determined using our construction defect claim andwarranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of theinherent uncertainty and variability in these assumptions, our actual costs and related insurance recoveries could differ significantly fromamounts currently estimated. Income Taxes Income taxes are accounted for in accordance with ASC 740. The consolidated provision for, or benefit from, income taxes is calculatedusing the asset and liability method under which deferred tax assets and liabilities are recorded based on the difference between the financialstatement 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 alikelihood of more than 50%) unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the tax assetwe conclude is more likely than not unrealizable. Our assessment considers, among other things, the nature, frequency and severity of priorcumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with netoperating losses and tax credit carryforwards and available planning alternatives, to the extent these items are applicable. The ultimaterealization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differencesbecome deductible. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining thefuture tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differencesbetween anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financialstatements. 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 themeasurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax positionwhen it is more likely than not, based on the technical merits, that the position will be sustained upon examination. In addition, theseprovisions 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 bymanagement based on the individual facts and circumstances. Changes in the recognition or measurement of uncertain tax positions couldresult in material increases or decreases in our income tax expense in the period in which we make the change. 56Table of Contents Recently Issued Accounting Standards See Note 1 to the accompanying notes to Consolidated Financial Statements included in this annual report on Form 10-K. 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 endedDecember 31, 2019. 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 theexpected maturity or disposition dates. The fair value of our Notes is derived from quoted market prices. The fair value of our variable ratedebt consists of the balance of our Credit Facility. Based on the short-term duration of LIBOR rates, the fair value of debt under the CreditFacility approximates the carrying value. Expected Maturity Date 2020 2021 - 2024 Thereafter Total EstimatedFair Value (Dollars in thousands) Senior Unsecured Notes Fixed Rate $— $308,015 $— $308,015 $298,775 Weighted Average Interest Rate —% 7.25% —% 7.25% NA Senior Unsecured Credit Facility Variable rate debt $— $— $— $— $— Weighted Average Interest Rate —% 4.76% —% 4.76% NA We do not believe that the future market rate risks related to the above securities will have a material adverse impact on our financialposition, results of operations or liquidity. 57Table of Contents Item 8.Financial Statements and Supplementary Data The information required by this item is set forth beginning on page 61. 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 ExchangeAct reports is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms is communicatedto the our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regardingrequired 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 controlobjectives. In designing controls and procedures specified in the SEC's rules and forms, and evaluating the disclosure controls andprocedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Theseinherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simpleerror and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people orby 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 ourmanagement, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019. 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 Rules13a-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, 2019 based on the frameworkestablished in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the TreadwayCommission (2013 Framework). Based on this framework, our management concluded that our internal control over financial reporting waseffective as of December 31, 2019. Ernst & Young LLP, the independent registered public accounting firm that audited the Company's consolidated financial statementsincluded in this annual report, has issued its report on the effectiveness of the Company's internal control over financial reporting as ofDecember 31, 2019. 58Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The New Home Company Inc. Opinion on Internal Control over Financial Reporting We have audited The New Home Company Inc.’s internal control over financial reporting as of December 31, 2019, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(2013 framework) (the COSO criteria). In our opinion, The New Home Company Inc. (the Company) maintained, in all material respects,effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theconsolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, equity andcash flows for each of the three years in the period ended December 31, 2019, and the related notes and our report dated February 13, 2020expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control OverFinancial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordancewith the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Irvine, CaliforniaFebruary 13, 2020 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 thathas materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B.Other Information None. 59Table of Contents PART III Item 10.Directors, Executive Officers and Corporate Governance Information required by Item 10 of Part III is included in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders and isincorporated herein by reference. Item 11.Executive Compensation Information required by Item 11 of Part III is included in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders and isincorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by Item 12 of Part III is included in our Proxy Statement relating to our 2020 Annual Meeting of Shareholders and isincorporated 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 2020 Annual Meeting of Shareholders and isincorporated 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 2020 Annual Meeting of Shareholders and isincorporated herein by reference. 60Table of Contents PART IV Item 15.Exhibits and Financial Statement Schedules (a) The following documents are filed as part of this annual report on Form 10-K: (1)Financial Statements: The New Home Company Inc.PAGEReport of Independent Registered Public Accounting Firm62Consolidated Balance Sheets as of December 31, 2019 and 201863Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 201764Consolidated Statements of Equity for the Years Ended December 31, 2019, 2018 and 201765Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 201766Notes to Consolidated Financial Statements67 (2)Financial Statement Schedules All other schedules have been omitted since the required information is presented in the financial statements and the related notes or isnot 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 thesignature page, which Index is incorporated in this Item by reference. 61Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of The New Home Company Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The New Home Company Inc. (“the Company”) as of December 31,2019 and 2018, the related consolidated statements of operations, equity and cash flows for each of the three years in the period endedDecember 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, theconsolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and ourreport dated February 13, 2020 expressed an unqualified opinion thereon. 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 recognitionand real estate inventories and cost of sales effective January 1, 2018 due to the adoption of ASU No. 2014-09, Revenue from Contractswith 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 theCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations ofthe 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 toobtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Ouraudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error orfraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regardingthe amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used andsignificant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that ouraudits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2010. Irvine, CaliforniaFebruary 13, 2020 62Table of Contents THE NEW HOME COMPANY INC.CONSOLIDATED BALANCE SHEETS December 31, 2019 2018 (Dollars in thousands, except par value amounts) Assets Cash and cash equivalents $79,314 $42,273 Restricted cash 117 269 Contracts and accounts receivable 15,982 18,265 Due from affiliates 238 1,218 Real estate inventories 433,938 566,290 Investment in and advances to unconsolidated joint ventures 30,217 34,330 Other assets 43,383 33,452 Total assets $603,189 $696,097 Liabilities and equity Accounts payable $25,044 $39,391 Accrued expenses and other liabilities 40,554 29,028 Unsecured revolving credit facility — 67,500 Senior notes, net 304,832 320,148 Total liabilities 370,430 456,067 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, 20,096,969 and 20,058,904,shares issued and outstanding as of December 31, 2019 and December 31, 2018, respectively 201 201 Additional paid-in capital 193,862 193,132 Retained earnings 38,584 46,621 Total stockholders' equity 232,647 239,954 Non-controlling interest in subsidiary 112 76 Total equity 232,759 240,030 Total liabilities and equity $603,189 $696,097 See accompanying notes to the consolidated financial statements. 63Table of Contents THE NEW HOME COMPANY INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2019 2018 2017 (Dollars in thousands, except per shareamounts) Revenues: Home sales $532,352 $504,029 $560,842 Land sales 41,664 — — Fee building, including management fees from unconsolidated joint ventures of$1,947, $3,385 and $4,945, respectively 95,333 163,537 190,324 669,349 667,566 751,166 Cost of Sales: Home sales 469,557 436,530 473,213 Home sales impairments 8,300 10,000 2,200 Land sales 43,169 — — Land sales impairments 1,900 — — Fee building 93,281 159,136 184,827 616,207 605,666 660,240 Gross Margin: Home sales 54,495 57,499 85,429 Land sales (3,405) — — Fee building 2,052 4,401 5,497 53,142 61,900 90,926 Selling and marketing expenses (36,357) (36,065) (32,702)General and administrative expenses (25,723) (25,966) (26,330)Equity in net income (loss) of unconsolidated joint ventures (3,503) (19,653) 866 Gain on early extinguishment of debt 1,164 — — Other income (expense), net (539) (521) (229)Pretax income (loss) (11,816) (20,305) 32,531 (Provision) benefit for income taxes 3,815 6,075 (15,390)Net income (loss) (8,001) (14,230) 17,141 Net (income) loss attributable to non-controlling interest (36) 14 11 Net income (loss) attributable to The New Home Company Inc. $(8,037) $(14,216) $17,152 Earnings (loss) per share attributable to The New Home Company Inc.: Basic $(0.40) $(0.69) $0.82 Diluted $(0.40) $(0.69) $0.82 Weighted average shares outstanding: Basic 20,063,148 20,703,967 20,849,736 Diluted 20,063,148 20,703,967 20,995,498 See accompanying notes to the consolidated financial statements. 64Table of Contents THE NEW HOME COMPANY INC.CONSOLIDATED STATEMENTS OF EQUITY Stockholders’ Equity Number ofShares ofCommonStock CommonStock AdditionalPaid-inCapital RetainedEarnings TotalStockholders’Equity Non-controllingInterest inSubsidiary TotalEquity (Dollars in thousands) Balance at December 31, 2016 20,712,166 $207 $197,161 $47,155 $244,523 $101 $244,624 Net income (loss) — — — 17,152 17,152 (11) 17,141 Stock-based compensation expense — — 2,803 — 2,803 — 2,803 Shares net settled with the Company tosatisfy employee personal income taxliabilities resulting from share basedcompensation plans (56,092) — (590) — (590) — (590)Shares issued through stock plans 220,763 2 100 — 102 — 102 Balance at December 31, 2017 20,876,837 $209 $199,474 $64,307 $263,990 $90 $264,080 Adoption of ASC 606 and ASU 2018-07 (seeNote 1) — — (18) (3,347) (3,365) — (3,365)Net income (loss) — — — (14,216) (14,216) (14) (14,230)Stock-based compensation expense — — 3,090 — 3,090 — 3,090 Shares net settled with the Company tosatisfy employee personal income taxliabilities resulting from share basedcompensation plans (86,692) — (982) — (982) — (982)Shares issued through stock plans 271,875 2 (2) — — — — Repurchase of common stock (1,003,116) (10) (8,430) (123) (8,563) — (8,563)Balance at December 31, 2018 20,058,904 $201 $193,132 $46,621 $239,954 $76 $240,030 Net income (loss) — — — (8,037) (8,037) 36 (8,001)Stock-based compensation expense — — 2,260 — 2,260 — 2,260 Shares net settled with the Company tosatisfy employee personal income taxliabilities resulting from share basedcompensation plans (85,420) — (488) — (488) — (488)Shares issued through stock plans 277,401 2 (2) — — — — Repurchase of common stock (153,916) (2) (1,040) — (1,042) — (1,042)Balance at December 31, 2019 20,096,969 $201 $193,862 $38,584 $232,647 $112 $232,759 See accompanying notes to the consolidated financial statements. 65Table of Contents THE NEW HOME COMPANY INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Operating activities: Net income (loss) $(8,001) $(14,230) $17,141 Adjustments to reconcile net income (loss) to net cash provided by (used in) operatingactivities: Deferred taxes (3,566) (7,620) (1,073)Noncash deferred tax asset charge — — 3,190 Amortization of stock-based compensation 2,260 3,090 2,803 Distributions of earnings from unconsolidated joint ventures 374 715 1,588 Inventory impairments 10,200 10,000 2,200 Abandoned project costs 94 206 383 Equity in net (income) loss of unconsolidated joint ventures 3,503 19,653 (866)Deferred profit from unconsolidated joint ventures — 136 821 Depreciation and amortization 8,957 6,631 449 Gain on early extinguishment of debt (1,164) — — Net changes in operating assets and liabilities: Contracts and accounts receivable 2,283 4,959 4,670 Due from affiliates 930 (242) 18 Real estate inventories 123,239 (157,705) (114,930)Other assets (2,326) (11,642) (5,255)Accounts payable (14,347) 15,669 (9,546)Accrued expenses and other liabilities (1,178) (9,305) 7,544 Net cash provided by (used in) operating activities 121,258 (139,685) (90,863)Investing activities: Purchases of property and equipment (41) (246) (195)Cash assumed from joint venture at consolidation — — 995 Contributions and advances to unconsolidated joint ventures (8,826) (15,066) (27,479)Distributions of capital and repayment of advances from unconsolidated jointventures 9,133 15,436 15,577 Interest collected on advances to unconsolidated joint ventures — 178 552 Net cash provided by (used in) investing activities 266 302 (10,550)Financing activities: Borrowings from credit facility 50,000 150,000 88,000 Repayments of credit facility (117,500) (82,500) (206,000)Proceeds from senior notes — — 324,465 Repurchases of senior notes (15,605) — — Repayments of other notes payable — — (4,110)Payment of debt issuance costs — — (7,565)Repurchases of common stock (1,042) (8,563) — Tax withholding paid on behalf of employees for stock awards (488) (982) (590)Proceeds from exercise of stock options — — 102 Net cash (used in) provided by financing activities (84,635) 57,955 194,302 Net increase (decrease) in cash, cash equivalents and restricted cash 36,889 (81,428) 92,889 Cash, cash equivalents and restricted cash – beginning of year 42,542 123,970 31,081 Cash, cash equivalents and restricted cash – end of year $79,431 $42,542 $123,970 See accompanying notes to the consolidated financial statements. 66Table of Contents 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 ofresidential real estate development, including acquiring land and designing, constructing and selling homes in California and Arizona. Based on our public float of $58.9 million at June 28, 2019, we are a smaller reporting company and are subject to reduced disclosureobligations 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 significantintercompany 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 ownedsubsidiaries, on a consolidated basis. Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimatesand assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Accordingly, actualresults 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. Effective January 1, 2019, the Company updated itsreportable segments. Prior year comparative data has been reclassified to align with the composition of the current year reportablesegments. Please refer to Note 15 for more information. The Company also changed its classification of certain real estate inventory from"Homes completed or under construction" to "Land held and land under development" in the Real Estate Inventories footnote at December31, 2019. The prior year balances have been reclassified to conform with the current year classification. Segment Reporting ASC 280, Segment Reporting ("ASC 280") established standards for the manner in which public enterprises report information aboutoperating segments. The Company's reportable segments are Arizona homebuilding, California homebuilding, and fee building. Inaccordance with ASC 280, our California homebuilding reportable segment aggregates the Northern California and Southern Californiahomebuilding operating segments based on the similarities in long-term economic characteristics. Cash and Cash Equivalents We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short term liquid investmentswith a maturity date of less than three months from the date of purchase. Restricted Cash Restricted cash of $0.1 million and $0.3 million as of December 31, 2019 and 2018, respectively, is held in accounts for payments ofsubcontractor 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'sconsolidated balance sheets for each period shown that sum to the total of the same such amounts at the end of the periods shown in theaccompanying consolidated statements of cash flows. Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Cash and cash equivalents $79,314 $42,273 $123,546 Restricted cash 117 269 424 Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $79,431 $42,542 $123,970 67Table of Contents Real Estate Inventories and Cost of Sales We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect constructioncosts. Pre-acquisition costs, including nonrefundable land deposits, are expensed to other income (expense), net if we determine continuationof the prospective project is not probable. Land, development and other common costs are typically allocated to real estate inventories using a methodology that approximatesthe relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost ofsales for homes closed includes the estimated total construction costs of each home at completion and an allocation of all applicable landacquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value ofthe home within each project. Changes in estimated development and common costs are allocated prospectively to remaining homes in theproject. In accordance with ASC 360, Property, Plant and Equipment ("ASC 360"), inventory is stated at cost, unless the carrying amount isdetermined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset on aquarterly basis or whenever indicators of impairment exist. Real estate assets include projects actively selling and projects underdevelopment or held for future development. Indicators of impairment include, but are not limited to, significant decreases in local housingmarket values and selling prices of comparable homes, significant decreases in gross margins or sales absorption rates, costs significantly inexcess 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 todetermine whether the estimated future undiscounted cash flows of the project are more or less than the asset’s carrying value. If theestimated future undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. However, if the estimatedfuture undiscounted cash flows are less than the asset’s carrying value then the asset is impaired. If the asset is deemed impaired, it is writtendown 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 andsales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in otherprojects, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based onlocal housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but notlimited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and sellingand marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/orbuilding 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 timesensitive 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 operatingmargins, our cash flow analysis will be different than if the objective is to increase the velocity of sales. These objectives may varysignificantly 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 itsfair value in accordance with ASC 820. We calculate the fair value of real estate inventories considering a land residual value analysis and adiscounted cash flow analysis. Under the discounted cash flow method, the fair value is determined by calculating the present value of futurecash flows using a risk-adjusted discount rate. Some of the critical assumptions involved with measuring the asset's fair value includeestimating future revenues, sales absorption rates, development and construction costs, and other applicable project costs. This evaluationand 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 arein the early stages of sales, or are longer in duration. Actual revenues, costs and time to complete and sell a community could vary from theseestimates which could impact the calculation of fair value of the asset and the corresponding amount of impairment that is recorded in ourresults of operations. For the years ended December 31, 2019, 2018 and 2017, we recorded inventory impairments of $10.2 million, $10.0 millionand $2.2 million, respectively. For additional detail regarding these impairment charges, please see Note 4. 68Table of Contents Capitalization of Interest We follow the practice of capitalizing interest to real estate inventories during the period of development and to investments inunconsolidated joint ventures, when applicable, in accordance with ASC 835, Interest ("ASC 835"). Interest capitalized as a cost componentof real estate inventories is included in cost of home sales as related homes or lots are sold. To the extent interest is capitalized to investmentin unconsolidated joint ventures, it is included as a reduction of equity in net income (loss) of unconsolidated joint ventures when the relatedhomes or lots are sold to third parties. In instances where the Company purchases land from an unconsolidated joint venture, the pro ratashare of interest capitalized to investment in unconsolidated joint ventures is added to the basis of the land acquired and recognized as acost of sale upon the delivery of the related homes or land to a third-party buyer. To the extent our debt exceeds our qualified assets asdefined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively selling or underdevelopment as well as investments in unconsolidated joint ventures accounted for under the equity method until such equity investeesbegin their principal operations. Revenue Recognition Effective January 1, 2018, the Company adopted the requirements of ASU 2014-09, Revenue from Contracts with Customers (Topic606) ("ASC 606") under the modified retrospective method. Under ASC 606, we recognize revenue to depict the transfer of promised goodsor services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods orservices. 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 performanceobligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. Under the modified retrospective adoption of ASC 606, the Company recognized the cumulative effect of initially applying the newstandard as a $3.4 million, tax-effected decrease to the opening balance of retained earnings as of January 1, 2018. The comparativeinformation for the year ended December 31, 2017 was not restated and continued to be reported as it was previously, under the appropriateaccounting standards in effect for the period. The adjustment to retained earnings related to a $4.7 million write-down of certain recoverableselling and marketing costs included in other assets that were formerly capitalized under ASC 970, but that no longer qualify for capitalizationunder the Company's accounting policy reflecting the changes upon the adoption of ASC 606. As a result of this write-down, the Company'sdeferred tax asset increased by $1.3 million. Home Sales and Profit Recognition In accordance with ASC 606, home sales revenue is recognized when our performance obligations within the underlying salescontracts are fulfilled. We consider our obligations fulfilled when closing conditions are complete, title has transferred to the homebuyer, andcollection of the purchase price is reasonably assured. Sales incentives are recorded as a reduction of revenues when the respective home isclosed. The profit we record is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in moredetail above in the section entitled "Real Estate Inventories and Cost of Sales." When it is determined that the earnings process is notcomplete, the related revenue and profit are deferred for recognition in future periods. For periods prior to January 1, 2018, the company recognized home sales and other real estate sales revenue in accordance with ASC360. Under ASC 360, revenue from home sales and other real estate sales was recorded and a profit was recognized when the sales processwas complete under the full accrual method. The sales process was considered complete for home sales and other real estate sales when allconditions of escrow were met, including delivery of the home or other real estate asset, title passes, appropriate consideration is receivedand collection of associated receivables, if any, was reasonably assured. Land Sales and Profit Recognition In accordance with ASC 606, land sales revenue is recognized when our performance obligations within the underlying sales contractsare fulfilled. The performance obligations in land sales contracts are typically satisfied at the point in time consideration and title istransferred through escrow at closing. Total revenue is typically recognized simultaneously with transfer of title to the customer. Ininstances where material performance obligations may exist after the closing date, a portion of the price is allocated to each performanceobligation with revenue recognized as such obligations are completed. Variable consideration, such as profit participation, may be includedwithin the land sales transaction price based on the terms of a contract. The Company includes the estimated amount of variableconsideration to which it will be entitled only to the extent it is probable that a significant reversal in the amount of cumulative revenue willnot occur when any uncertainty associated with the variable consideration is subsequently resolved. 69Table of Contents Fee Building The Company enters into fee building agreements to provide services whereby it builds homes on behalf of third-party propertyowners. The third-party property owner funds all project costs incurred by the Company to build and sell the homes. The Company primarilyenters into cost plus fee contracts where it charges third-party property owners for all direct and indirect costs plus a fee. The fee is typicallya 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 withthe third-party property owner. For these types of contracts, the Company recognizes revenue based on the actual total costs it has incurredplus the applicable fee. In accordance with ASC 606 for periods after January 1, 2018 and ASC 605, Revenue Recognition ("ASC 605") forprior periods, we apply the percentage-of-completion method, using the cost-to-cost approach, as it most accurately measures the progressof our efforts in satisfying our obligations within the fee building agreements. Under this approach, revenue is earned in proportion to totalcosts incurred divided by total costs expected to be incurred. In the course of providing fee building services, the Company routinelysubcontracts for services and incurs other direct costs on behalf of the property owners. These costs are passed through to the propertyowners 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 ofagreements with third parties and its unconsolidated joint ventures. In certain contracts, the Company also provides project management andadministrative services. For most services provided, the Company fulfills its related obligations as time-based measures, according to theinput method guidance described in ASC 606. Accordingly, revenue is recognized on a straight-line basis as the Company's efforts areexpended evenly throughout the performance period. The Company may also have an obligation to manage the home or lot sales process aspart of providing sales and marketing services. This obligation is considered fulfilled when related homes or lots close escrow, as theseevents represent milestones reached according to the output method guidance described in ASC 606. Accordingly, revenue is recognized inthe period that the corresponding lots or homes close escrow. Costs associated with these services are recognized as incurred. Prior to theadoption of ASC 606, the Company recognized revenues from these services in accordance with ASC 605 under a proportional performancemethod or completed performance method. Under ASC 605, revenue was earned as services were provided in proportion to total servicesexpected 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 endedDecember 31, 2019, 2018 and 2017, one customer comprised 95%, 95% and 97% of fee building revenue, respectively. The balance of the feebuilding revenues primarily represented management fees earned from unconsolidated joint ventures and third-party customers. As ofDecember 31, 2019 and 2018, one customer comprised 65% and 48% of contracts and accounts receivable, respectively, with the balance ofcontracts and 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, avariable interest entity ("VIE") is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance itsactivities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equityholders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expectedlosses 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 havevoting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of theequity 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 equityholders' interests, as a group, to see if they qualify as controlling financial interests. Our real estate joint ventures consist of limitedpartnerships and limited liability companies. For entities structured as limited partnerships or limited liability companies, our evaluation ofwhether the equity holders (equity partners other than us in each our joint ventures) lack the characteristics of a controlling financial interestincludes the evaluation of whether the limited partners or non-managing members (the non-controlling equity holders) lack both substantiveparticipating 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 decisionmade 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 controllingfinancial interest because they lack both substantive participating rights and substantive kick-out rights, we conclude that the entity is a VIEand 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 thatmost significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses of the entity or right toreceive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate theVIE. 70Table of Contents 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 theentity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land sellerif we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development andconstruction activities with respect to optioned land prior to takedown. Such costs are classified as real estate inventories, which we wouldhave to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity andmake a nonrefundable deposit, a VIE may have been created. At December 31, 2019, the Company had outstanding nonrefundable cashdeposits of $15.8 million pertaining to land option contracts and purchase contracts. As of December 31, 2019 and 2018, the Company was not required to consolidate any VIEs. In accordance with ASC 810, we performongoing 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, theCompany analyzed this arrangement and determined that it was not a VIE; however, the Company determined it was required to consolidatethe joint venture as the Company has a controlling financial interest with the powers to direct the major decisions of the entity. As ofDecember 31, 2019 and 2018, 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 followingsituations 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 havethe ability to exercise significant influence over its operating and financial policies, or 3) we function as the managing member or generalpartner of the joint venture and our joint venture partner has substantive participating rights or can replace us as managing member orgeneral partner without cause. As of December 31, 2019, the Company concluded that none of its joint ventures were VIEs and accounted for these entities under theequity method of accounting. Under the equity method, we recognize our proportionate share of earnings and losses generated by the joint venture upon thedelivery of lots or homes to third parties. Our proportionate share of intra-entity profits and losses are eliminated until the related asset hasbeen sold by the unconsolidated joint venture to third parties. We classify cash distributions received from equity method investees usingthe cumulative earnings approach consistent with ASC 230, Statement of Cash Flows ("ASC 230"). Under the cumulative earnings approach,distributions received are considered returns on investment and is classified as cash inflows from operating activities unless the cumulativedistributions received exceed cumulative equity in earnings. When such an excess occurs, the current-period distribution up to this excess isconsidered a return of investment and is classified as cash inflows from investing activities. Our ownership interests in our unconsolidatedjoint ventures vary, but are generally less than or equal to 35%. The accounting policies of our joint ventures are consistent with those of theCompany. We review real estate inventory held by our unconsolidated joint ventures for impairment on a quarterly basis, consistent with how wereview our real estate inventories as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales." For theyears ended December 31, 2019, 2018 and 2017, our unconsolidated joint ventures recorded noncash impairment charges of $70.0 million,$28.8 million and $0, respectively, of which $3.5 million, $18.9 million and $0, respectively, was allocated to the Company. We also review ourinvestments in and advances to unconsolidated joint ventures for evidence of other-than-temporary declines in value in accordance withASC 820. To the extent we deem any portion of our investment in and advances to unconsolidated joint ventures as not recoverable, weimpair our investment accordingly. For the years ended December 31, 2019, 2018 and 2017, the Company recorded other-than-temporary,noncash impairment charges of $0, $1.1 million and $0, respectively, related to our investment in and advances to unconsolidated jointventures. 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 studiosand 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 30months or the actual estimated life of the selling community. All other selling and marketing costs, such as commissions and advertising, areexpensed as incurred. Prior to January 1, 2018, the Company followed the guidance under ASC 970-340, Real Estate - Other Assets andDeferred Costs ("ASC 970"), and capitalized certain selling and marketing costs to other assets in the consolidated balance sheet if the costswere reasonably expected to be recovered from the sale of the project or from incidental operations, and were incurred for tangible assets thatwere used directly through the selling period to aid in the sale of the project or services that had been performed to obtain regulatoryapproval of sales. These capitalizable selling and marketing costs included, but were not limited to, model home design, model home decorand landscaping, and sales office/design studio setup. These costs were amortized to selling and marketing expense as the underlying homeswere delivered. 71Table of Contents Warranty and Litigation Accruals We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural construction defectsfor one year. In addition, we provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered bythe applicable statute of repose, that covers certain defined construction defects. Estimated future direct warranty costs are accrued andcharged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts are accrued based upon theCompany’s historical rates. In addition, the Company has received warranty payments from third-party property owners for certain of its feebuilding projects that have since closed-out where the Company has the contractual risk of construction. These payments are recorded aswarranty accruals. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Ourwarranty accrual is included in accrued expenses and other liabilities in the accompanying consolidated balance sheets and adjustments toour warranty accrual are recorded through cost of sales. While our subcontractors who perform our homebuilding work generally provide us with an indemnity for claims relating to theirworkmanship and materials, we also purchase general liability insurance that covers development and construction activity at each of ourcommunities. 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. Ingeneral, we maintain insurance, subject to deductibles and self-insured retentions, to protect us against various risks associated with ouractivities, including, among others, general liability, "all-risk" property, construction defects, workers’ compensation, automobile, andemployee fidelity. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insuredretention requirements. We establish a separate reserve for warranty and for known and incurred but not reported (“IBNR”) constructiondefect claims based on our historical claim and expense data. Our warranty accrual and litigation reserves for construction defect claims arepresented on a gross basis within accrued expenses and other liabilities in our consolidated financial statements without consideration ofinsurance recoveries. Expected recoveries from insurance carriers are presented as receivables within other assets in our consolidatedfinancial statements and are recorded based on actual insurance claims and amounts determined using our construction defect claim andwarranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Contracts and Accounts Receivable Contracts and accounts receivable primarily represent the fees earned, but not collected, and reimbursable project costs incurred inconnection with fee building agreements. The Company periodically evaluates the collectability of its contracts receivable, and, if it isdetermined that a receivable might not be fully collectible, an allowance is recorded for the amount deemed uncollectible. This allowance fordoubtful 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) historicalcollection 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 31,2019 and 2018, no allowance was recorded related to contracts and accounts receivable. Property, Equipment and Capitalized Selling and Marketing Costs Property, equipment and capitalized selling and marketing costs are recorded at cost and included in other assets in the accompanyingconsolidated balance sheets. Property and equipment are depreciated to general and administrative expenses using the straight-line methodover their estimated useful lives ranging from three to five years. Leasehold improvements are stated at cost and are amortized to general andadministrative 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 ofCapitalized selling and marketing costs are depreciated using the straight-line method to selling and marketing expenses over the shorter ofeither 30 months or the actual estimated life of the selling community. For the years ended December 31, 2019, 2018 and 2017, the Companyincurred depreciation and amortization expense of $9.0 million, $6.6 million and $0.4 million, respectively. The increase in depreciation andamortization expense starting in 2018 is primarily due to capitalized selling and marketing costs that were reclassified in accordance with theadoption of ASC 606. In addition, the accounting policy change resulted in depreciation expense for capitalized selling and marketing assetsto be included in the line item "depreciation and amortization" in the consolidated statement of cash flows for years ended December 31,2019 and 2018 compared to including the expense in the net change to other assets line item. 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 benefitfrom, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on thedifference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. 72Table of Contents 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 alikelihood of more than 50%) unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the tax assetwe conclude is more likely than not unrealizable. Our assessment considers, among other things, the nature, frequency and severity of priorcumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with netoperating losses and tax credit carryforwards and the available tax planning alternatives, to the extent these items are applicable. The ultimaterealization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differencesbecome deductible. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining thefuture tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differencesbetween anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financialstatements. At December 31, 2019 and 2018, no valuation allowance was recorded. ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding themeasurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax positionwhen it is more likely than not, based on the technical merits, that the position will be sustained upon examination. In addition, theseprovisions 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 bymanagement based on the individual facts and circumstances. At December 31, 2019, the Company has concluded that there were nosignificant 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 31,2019, 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 withemployees 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 ChiefInvestment Officer to a non-employee consultant to the Company. On February 16, 2017, the Company entered into an agreement thattransitioned Wayne Stelmar's role within the Company from Chief Investment Officer to a non-employee consultant and non-employeedirector. 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 vest in an award pursuant to the award's original terms, thataward will be treated as an award to a non-employee prospectively, provided the individual is required to continue providing services to theemployer (such as consulting services). Based on the terms and conditions of both Mr. Davis' and Mr. Stelmar's consulting agreements notedabove, we accounted for their share-based awards in accordance with ASC 505-50 through March 31, 2018. ASC 505-50 required that theseawards 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 havebeen 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) thefair value of the award determined on the measurement date determined in accordance with ASC 505-50 for the pro-rata portion of the vestingperiod in which the individual was a non-employee. Mr. Davis' outstanding awards fully vested during January 2017 and were fully expensedat that time. 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, withcertain 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 beenestablished. The outstanding award was re-measured to fair value as of the April 1, 2018 adoption date. The adoption of ASU 2018-07provided 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 acumulative-effect adjustment of an $18,000 increase to retained earnings and equal decrease to additional paid-in capital as of the beginningof the 2018 fiscal year. Mr. Stelmar's award was fully expensed as of March 31, 2019. 73Table of Contents 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 toboth retained earnings and additional paid-in capital. The portion allocated to additional paid-in capital is determined by applying apercentage, which is determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additionalpaid-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, 2019, the Company repurchased and retired 153,916 shares of its common stock at an aggregatepurchase price of $1.0 million. During the year ended December 31, 2018, the Company repurchased and retired 1,003,116 shares of itscommon stock at an aggregate purchase price of $8.5 million All repurchased 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, 2019, 2018 and 2017. We currently intend to retainour future earnings to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on ourcommon stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and willdepend on our financial condition, results of operations, capital requirements, compliance with Delaware law, restrictions contained in anyfinancing instruments, including but not limited to, our unsecured credit facility and senior notes indenture, and such other factors as ourboard 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 makebefore-tax or Roth contributions up to the current tax limits. The Company matches 50% of the employee's contribution on the first 8% ofcompensation up to a maximum match of $11,200, on a discretionary basis. Our contributions to the plan for the years ended December 31,2019, 2018 and 2017 were $1.0 million, $1.0 million, and $0.8 million, respectively. Recently Issued Accounting Standards The Company's status as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act of2012 (the "JOBS Act") ended on December 31, 2019. Section 102 of the JOBS Act provides that an "emerging growth company" can takeadvantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with newor revised accounting standards. As previously disclosed and prior to the expiration of its "emerging growth company" status, the Companyhad chosen, irrevocably, to "opt out" of such extended transition period, and as a result, complied with new or revised accounting standardson the relevant dates on which adoption of such standards was required for non-emerging growth companies. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASC 842"). ASC 842 requires organizations that leaseassets (referred to as "lessees") to present lease assets and lease liabilities on the balance sheet at their gross value based on the rights andobligations created by those leases. Under ASC 842, a lessee is required to recognize assets and liabilities for leases with greater than 12month terms. Lessor accounting remains substantially similar to prior GAAP. The Company's lease agreements impacted by ASC 842primarily relate to our corporate headquarters, other office locations and office or construction equipment where we are the lessee and are allclassified as operating leases. The Company adopted ASC 842 on January 1, 2019 under the modified retrospective approach. Under the modified retrospectiveapproach, the Company applied the requirements of ASC 842 to its leases as of the adoption date and recognized a $3.1 million right-of-useasset and a related $3.5 million liability. 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. For additional information on our operating leases, please seeNote 11. For leases that commenced before the January 1, 2019 adoption date, the Company has elected the practical expedient packageoutlined in ASC 842-10-65-1(f) which prescribes the following: 1.An entity need not reassess whether any expired or existing contracts contain leases. 2.An entity need not reassess the lease classification for any expired or existing leases (for example, all existing leases that wereclassified as operating leases in accordance with ASC 840, Leases, will be classified as operating leases, and all existing leasesthat were classified as capital leases in accordance with ASC 840 will be classified as finance leases). 3.An entity need not reassess initial direct costs for any existing lease. 74Table of Contents In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses onFinancial Instruments ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an"incurred loss" approach to a new "expected credit loss" methodology. The FASB followed up with ASU 2019-04, Codification Improvementsto Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments in April2019, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326) in May 2019, and ASU 2019-11, Codification Improvements to Topic326, Financial Instruments - Credit Losses in November 2019 to provide further clarification on this topic. The standard is effective forannual and interim periods beginning January 1, 2020, and requires full retrospective application upon adoption. During November 2019, theFASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases(Topic 842) Effective Dates that provides for additional implementation time for smaller reporting companies with the standard being effectivefor smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Earlyadoption is permitted. As a smaller reporting company, we are not adopting the requirements of ASU 2016-13 for the year beginning January1, 2020, however we do not anticipate a material impact to our consolidated financial statements as a result of adoption. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to theDisclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify certain disclosurerequirements 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 expects no material impact to the consolidated financialstatements as a result of the adoption of ASC 2018-13. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)- Simplifying the Accounting for Income Taxes ("ASU2019-12"), which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscalyears, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently inthe process of evaluating the effects on our financial statements of adopting ASU 2019-12. In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and JointVentures (Topic 323), and Derivative and Hedging (Topic 815) ("ASU 2020-01"). ASU 2020-01 clarifies the interaction of the accounting forequity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting forcertain forward contracts and purchased options accounted for under Topic 815. The standard is effective for fiscal years beginning afterDecember 31, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating ASU2020-01 and expects no material impact to our consolidated financial statements as a result of adoption. 75Table of Contents 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 endedDecember 31, 2019, 2018 and 2017: Year Ended December 31, 2019 2018 2017 (Dollars in thousands, except per share amounts) Numerator: Net income (loss) attributable to The New Home Company Inc. $(8,037) $(14,216) $17,152 Denominator: Basic weighted-average shares outstanding 20,063,148 20,703,967 20,849,736 Effect of dilutive shares: Stock options and unvested restricted stock units — — 145,762 Diluted weighted-average shares outstanding 20,063,148 20,703,967 20,995,498 Basic earnings (loss) per share attributable to The New Home Company Inc. $(0.40) $(0.69) $0.82 Diluted earnings (loss) per share attributable to The New Home Company Inc. $(0.40) $(0.69) $0.82 Antidilutive stock options and unvested restricted stock units not included in dilutedearnings per share 1,320,400 1,311,802 7,074 3. Contracts and Accounts Receivable Contracts and accounts receivable consist of the following: December 31, 2019 2018 (Dollars in thousands) Contracts receivable: Costs incurred on fee building projects $93,281 $159,136 Estimated earnings 2,052 4,401 95,333 163,537 Less: amounts collected during the period (84,979) (154,743)Contracts receivable 10,354 8,794 Contracts receivable: Billed $— $— Unbilled 10,354 8,794 10,354 8,794 Accounts receivable: Escrow receivables 5,392 8,787 Other receivables 236 684 Contracts and accounts receivable $15,982 $18,265 Billed contracts receivable represent amounts billed to customers that have yet to be collected. Unbilled contracts receivablerepresents the contract revenue recognized but not yet invoiced. All unbilled receivables as of December 31, 2019 and 2018 are expected to bebilled and collected within 30 days. Accounts payable at December 31, 2019 and 2018 includes $9.6 million and $8.5 million, respectively,related to costs incurred under the Company’s fee building contracts. 76Table of Contents 4. Real Estate Inventories Real estate inventories are summarized as follows: December 31, 2019 2018 (Dollars in thousands) Deposits and pre-acquisition costs $17,865 $20,726 Land held and land under development 180,823 210,527 Homes completed or under construction 183,711 286,416 Model homes 51,539 48,621 $433,938 $566,290 All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0.1 million and $0.9 million as ofDecember 31, 2019 and 2018, 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 inother assets). In accordance with ASC 360, inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which caseinventory is written down to its fair value. We review each real estate asset at the community-level on a quarterly basis or wheneverindicators of impairment exist. For the years ended December 31, 2019, 2018 and 2017, the Company recognized real estate-related impairmentsof $10.2 million, $10.0 million and $2.2 million, respectively, in cost of sales. For 2019, these charges resulted in a decrease of $3.6 million and$6.6 million to pretax income (loss) for our California and Arizona homebuilding segments, respectively, and decreases of $10.0 million and$2.2 million to pretax income (loss) for our California homebuilding segment for the years ended December 31, 2018 and 2017, respectively. Fair value for the homebuilding projects impaired during 2019, 2018 and 2017 was calculated under discounted cash flow models using adiscount rate or discount rate range of 17%-19%, 9%-16%, and 8%, respectively. Fair value for the land sales project impaired during 2019was determined using the land purchase price included in the executed sales agreement, including commissions, less the Company's cost tosell. The following table summarizes inventory impairments recorded during the years ended December 31, 2019, 2018 and 2017: Year Ended December 31, 2019 2018 2017 (Dollars in Thousands) Inventory impairments: Home sales $8,300 $10,000 $2,200 Land sales 1,900 — — Total inventory impairments $10,200 $10,000 $2,200 Remaining carrying value of inventory impaired at year end $81,622 $57,845 $5,921 Number of projects impaired during the year 3 2 1 Total number of projects subject to periodic impairment review during the year (1) 27 26 26 (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 yearmay be less than the number of projects listed herein. The $8.3 million home sales impairment recorded during 2019 related to two homebuilding communities. $1.7 million of the impairmentcharges related to a higher-priced community in Southern California and $6.6 million were recorded against the Company's luxurycondominium project in Scottsdale, AZ. In both instances, these communities were experiencing slower monthly sales absorption ratesand the Company determined that additional incentives were required to sell the remaining homes and lots at estimated aggregate sales pricesthat would be lower than its previous carrying value. The $1.9 million land sales impairment recorded in 2019 related to land the Company hadunder contract in Northern California that closed during the year. The impairment charges represented the loss expected from the sale of thecontracted land for less than its carrying value. 77Table of Contents 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 salesabsorption rates, and the Company determined additional incentives and pricing adjustments were required to sell the remaining homes andlots 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 activehomebuilding community located in Southern California that closed out during 2018. This community was experiencing a slow monthly salesabsorption rate, and the Company determined that additional incentives were required to sell the remaining homes and lots at estimatedaggregate sales prices that would be lower than its previous carrying value. For more information on fair value measurements, please refer to Note 10. 5. Capitalized Interest Interest is capitalized to inventory and investment in unconsolidated joint ventures during development and other qualifyingactivities. Interest capitalized as a cost of inventory is included in cost of sales as related homes and land parcels are closed. Interestcapitalized to investment in unconsolidated joint ventures is amortized to equity in net income (loss) of unconsolidated joint ventures asrelated joint venture homes or lots close, or in instances where lots are sold from the unconsolidated joint venture to the Company, theinterest 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 yearsended December 31, 2019, 2018 and 2017 interest incurred, capitalized and expensed was as follows: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Interest incurred $28,819 $28,377 $21,978 Interest capitalized to inventory (28,819) (27,393) (20,394)Interest capitalized to investment in unconsolidated joint ventures — (984) (1,584)Interest expensed $— $— $— Capitalized interest in beginning inventory $25,681 $16,453 $6,342 Interest capitalized as a cost of inventory 28,819 27,393 20,394 Capitalized interest acquired from unconsolidated joint ventures at consolidation — — 738 Capitalized interest transferred from investment in unconsolidated joint ventures toinventory upon lot acquisition 31 513 — Previously capitalized interest included in cost of home and land sales (28,134) (18,678) (11,021)Capitalized interest in ending inventory $26,397 $25,681 $16,453 Capitalized interest in beginning investment in unconsolidated joint ventures $713 $1,472 $— Interest capitalized to investment in unconsolidated joint ventures — 984 1,584 Capitalized interest transferred from investment in unconsolidated joint ventures toinventory upon consolidation — — (76)Capitalized interest transferred from investment in unconsolidated joint ventures toinventory upon lot acquisition (31) (513) — Previously capitalized interest included in equity in net income (loss) ofunconsolidated joint ventures (141) (1,230) (36)Capitalized interest in ending investment in unconsolidated joint ventures 541 713 1,472 Total capitalized interest in ending inventory and investments in unconsolidated jointventures $26,938 $26,394 $17,925 Capitalized interest as a percentage of inventory 6.1% 4.5% 4.0%Interest included in cost of home sales as a percentage of home sales revenue 4.9% 3.7% 2.0% Capitalized interest as a percentage of investment in and advances to unconsolidatedjoint ventures 1.8% 2.1% 2.6% For the year ended December 31, 2018, the Company expensed $1.1 million in interest previously capitalized to investments inunconsolidated joint ventures as the result of an other-than-temporary impairment to its investment in one joint venture. For moreinformation, please refer to Note 6. 78Table of Contents 6. Investments in and Advances to Unconsolidated Joint Ventures As of December 31, 2019 and 2018, the Company had ownership interests in 10 unconsolidated joint ventures with ownershippercentages that generally ranged from 5% to 35%. The condensed combined balance sheets for our unconsolidated joint venturesaccounted for under the equity method were as follows: December 31, 2019 2018 (Dollars in thousands) Cash and cash equivalents $31,484 $45,945 Restricted cash 13,852 19,205 Real estate inventories 241,416 374,607 Other assets 3,843 4,231 Total assets $290,595 $443,988 Accounts payable and accrued liabilities $16,778 $43,158 Notes payable 28,665 71,299 Total liabilities 45,443 114,457 The New Home Company's equity(1) 27,722 33,617 Other partners' equity 217,430 295,914 Total equity 245,152 329,531 Total liabilities and equity $290,595 $443,988 Debt-to-capitalization ratio 10.5% 17.8%Debt-to-equity ratio 11.7% 21.6% (1)Balance represents the Company's interest, as reflected in the financial records of the respective joint ventures. This balance differs from the investment inand advances to unconsolidated joint ventures balance reflected in the Company's consolidated balance sheets by $2.5 million due to interest capitalized tothe Company's investment in joint ventures and certain other differences in outside basis. The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity method wereas follows: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Revenues $164,038 $181,623 $147,447 Cost of sales and expenses 230,953 209,527 147,976 Net loss of unconsolidated joint ventures $(66,915) $(27,904) $(529)Equity in net income (loss) of unconsolidated joint ventures reflected in theaccompanying consolidated statements of operations $(3,503) $(19,653) $866 Included in cost of sales and expenses for our unconsolidated joint ventures for the years ended December 31, 2019 and 2018, was$70.0 million and $28.8 million in real estate impairment charges, respectively. The Company's allocated share of these charges was $3.5 millionand $18.9 million for 2019 and 2018, respectively. The 2019 impairment related to the assets of a land development joint venture inSouthern California while the 2018 impairment related to the assets of a land development joint venture in Northern California. Fair values forthe land development projects impaired during 2019 and 2018 were calculated under discounted cash flow models. The table belowsummarizes inventory impairments recorded by our unconsolidated joint ventures during the years ended December 31, 2019, 2018 and 2017. Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Joint venture impairments related to: Homebuilding joint ventures $— $— $— Land development joint ventures 70,000 28,776 — Total joint venture impairments $70,000 $28,776 $— Number of projects impaired during the year 1 1 — Total number of projects included in unconsolidated joint ventures and reviewed forimpairment during the year 10 10 10 79Table of Contents The Company reviews its investments in and advances to unconsolidated joint ventures for other-than-temporary declines in value inaccordance with ASC 820. To the extent we deem any portion of our investment in and advances to unconsolidated joint ventures as notrecoverable, we impair our investment accordingly. For the years ended December 31, 2019, 2018 and 2017, the Company recorded other-than-temporary, noncash impairment charges of $0, $1.1 million, and $0, respectively, related to our investment in and advances to unconsolidatedjoint ventures. The 2018 impairment related to our investment in a Northern California land development joint venture and was included inequity in net income (loss) of unconsolidated joint ventures in the accompanying consolidated statements of operations. As a smaller reporting company, the Company is subject to the provisions of Rule 8-03(b)(3) of Regulation S-X which requires thedisclosure of certain financial information for equity investees that constitute 20% or more of the Company's consolidated net income (loss).For the year ended December 31, 2019, the loss allocation from one of the Company's unconsolidated joint ventures accounted for under theequity method exceeded 20% of the Company's consolidated net loss. For the year ended December 31, 2018, the loss allocation from anotherone of the Company's unconsolidated joint ventures accounted for under the equity method exceeded 20% of the Company's consolidatednet loss. The table below presents select combined financial information for both of these unconsolidated joint ventures for the years endedDecember 31, 2019, 2018 and 2017: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Revenues $33,144 $38,789 $— Cost of sales: Land sales 31,103 36,676 — Inventory impairments 70,000 28,776 — Gross Margin (67,959) (26,663) — Expenses (2,879) (3,289) (2,680)Net loss $(70,838) $(29,952) $(2,680)Equity in net income (loss) of unconsolidated joint ventures reflected in theaccompanying consolidated statements of operations (1) $(3,656) $(20,283) $(462) (1)Balance represents equity in net income (loss) of unconsolidated joint ventures included in the statements of operations related to the Company'sinvestment in these two unconsolidated joint ventures. The balance may differ from the amount of profit or loss allocated to the Company as reflected ineach joint venture's financial records primarily due to basis differences such as other-than-temporary impairment charges, interest capitalized to theCompany's investment in joint ventures, and/or profit deferral from lot sales from the joint ventures to the Company. For the years ended December 31, 2019, 2018 and 2017, the Company earned $1.9 million, $3.4 million, and $4.9 million, respectively, inmanagement 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 Companypaid $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 constructionloan. 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 basisof our previous investment in unconsolidated joint ventures related to this joint venture were included in real estate inventories at the time ofconsolidation. In August 2017, we acquired the remaining outside equity interest of our DMB/TNHC LLC (Sterling at Silverleaf) unconsolidated jointventure. The Company paid $2.6 million to our joint venture partner and upon the change of control was required to consolidate this ventureas it is now a wholly owned subsidiary of the Company. The purchase consideration and the cost basis of our previous investment inunconsolidated 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 ofincome to the Company from a reduction in cost to complete reserves, which was included in equity in net income (loss) of unconsolidatedjoint ventures in the accompanying consolidated statements of operations, and our outside equity partner exited the joint venture. Upon thechange in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, otherassets, and accrued liabilities, including warranty and the remaining costs to complete reserves, of the joint venture. As part of thistransaction, the Company also recognized a gain of $0.3 million, which was included in equity in net income (loss) of unconsolidated jointventures in the accompanying consolidated statements of operations, due to the purchase of our JV partner's interest for less than itscarrying value. 80Table of Contents 7. Other Assets Other assets consist of the following: December 31, 2019 2018 (Dollars in thousands) Capitalized selling and marketing costs, net(1) $7,148 $11,282 Deferred tax asset, net 17,503 13,937 Prepaid income taxes 1,032 514 Insurance receivable(2) 10,900 — Warranty insurance receivable(3) 1,852 915 Prepaid expenses 2,729 6,348 Right-of-use lease asset(4) 1,988 — Other 231 456 $43,383 $33,452 (1)Capitalized selling and marketing costs includes costs incurred for tangible assets directly used in the sales process such as our sales offices, design studiosand model furnishings, and also includes model landscaping costs, which were $2.6 million and $5.4 million as of December 31, 2019 and 2018,respectively. The Company depreciated $8.7 million and $6.2 million, of capitalized selling and marketing costs to selling and marketing expenses duringthe years ended December 31, 2019 and 2018, respectively.(2)The Company recorded insurance receivables of $10.9 million in connection with $10.9 million of litigation reserves recorded as of December 31, 2019.For more information, please refer to Note 8 . (3)The Company adjusted its warranty insurance receivable upward by $1.4 million during 2019 to true-up the receivable to its estimate of qualifyingreimbursable expenditures which resulted in pretax income of the same amount.(4)In conjunction with the adoption of ASC 842, the Company established a right-of-use asset of $3.1 million on January 1, 2019. For more information,please refer to Note 1 and Note 11. 8. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following: December 31, 2019 2018 (Dollars in thousands) Warranty accrual(1) $7,223 $6,898 Litigation reserves(2) 10,900 — Accrued interest 5,796 6,497 Accrued compensation and benefits 5,350 5,749 Completion reserve 3,167 4,192 Customer deposits 3,574 2,192 Lease liabilities(3) 2,243 — Other accrued expenses 2,301 3,500 $40,554 $29,028 (1)Included in the amount for 2019 and 2018 is approximately $1.9 million and $0.9 million, respectively, of warranty liabilities estimated to be recovered byour insurance policies.(2)During 2019, we recorded litigation reserves totaling $5.9 million related to ordinary course litigation which developed and became probable and estimablewithin the 2019 fourth quarter. Further, as a result of the development of the construction defect related claims within the litigation reserve and theirimpact to the Company’s litigation reserve estimates for incurred but not reported ("IBNR") future construction defect claims, we recorded an additional$5.0 million of IBNR construction defect claim reserves resulting in aggregate litigation reserves totaling $10.9 million as of December 31, 2019. Becausethe self-insured retention deductibles had been met for each claim covered by the $5.9 million reserve, and the self-insured retention deductibles areexpected to be met for the $5.0 million IBNR construction defect claim reserves, the Company recorded estimated insurance receivables of $10.9 millionoffsetting the litigation reserves as of December 31, 2019.(3)In conjunction with the adoption of ASC 842, the Company established a $3.5 million lease liability on January 1, 2019. For more information, pleaserefer to Note 1 and Note 11. 81Table of Contents We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related warrantyand construction defect claims. Our master general liability policies which cover most of our projects allow for our warranty spend to erodeour self-insured retention requirements. We establish and track separately our warranty accrual and litigation reserves for both known andincurred but not reported (“IBNR”) construction defect claims. Our warranty accrual and litigation reserves for construction defect claims arepresented on a gross basis within accrued expenses and other liabilities in the accompanying consolidated financial statements withoutconsideration of insurance recoveries. Expected recoveries from insurance carriers are tracked separately between warranty insurancereceivables and insurance receivables related to litigated claims and are presented within other assets in the accompanying consolidatedfinancial statements. Our warranty accrual and related estimated insurance recoveries are based on historical warranty claim and expensedata, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using ourwarranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Our litigationreserves for both known and IBNR future construction defect claims based on historical claim and expense data, and expected recoveriesfrom insurance carriers are recorded based on actual insurance claims and amounts determined using our construction defect claim accrualestimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherentuncertainty and variability in these assumptions, our actual costs and related insurance recoveries could differ significantly from amountscurrently estimated. Changes in our warranty accrual are detailed in the table set forth below: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Beginning warranty accrual for homebuilding projects $6,681 $6,634 $4,608 Warranty provision for homebuilding projects 2,363 2,330 1,825 Warranty assumed from joint ventures at consolidation — — 781 Warranty payments for homebuilding projects (2,341) (2,006) (989)Adjustment to warranty accrual(1) 492 (277) 409 Ending warranty accrual for homebuilding projects 7,195 6,681 6,634 Beginning warranty accrual for fee building projects 217 225 323 Warranty provision for fee building projects 9 — — Warranty efforts for fee building projects (67) (70) (3)Adjustment to warranty accrual for fee building projects(2) (131) 62 (95)Ending warranty accrual for fee building projects 28 217 225 Total ending warranty accrual $7,223 $6,898 $6,859 (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 wereadjusted to present the warranty reserves and related estimated warranty insurance receivable on a gross basis at December 31, 2017. Of the $1.2 millionadjusted in 2017, approximately $0.6 million related to prior year estimated warranty insurance recoveries. Netted against the amount recorded in 2017 isa warranty accrual adjustment of $0.8 million related to a lower experience rate of expected warranty expenditures which resulted in a credit to cost ofhome sales of the same amount in the accompanying consolidated statement of operations. During 2018, the estimated amount to be covered by ourinsurance policies was reduced by $0.3 million. Netted against the amount recorded in 2018 is a warranty accrual adjustment of $43,000 related to higherexpected warranty expenditures which resulted in an increase of $43,000 to cost of home sales in the accompanying consolidated statement of operations.During 2019, the Company recorded a warranty accrual adjustment of $0.5 million due to higher expected warranty expenditures which resulted in anincrease of the same amount to cost of home sales in the accompanying consolidated statement of operations. (2)Included in the amount for 2017 is a reduction of approximately $31,000 to warranty liabilities made in conjunction with adjustments made to present thewarranty reserve and related estimated warranty insurance receivable on a gross basis at December 31, 2017. Netted with the 2017 amount is a $63,000adjustment related to lower experience rate of expected warranty expenditures which resulted in a credit to fee cost of sales in the accompanyingconsolidated statement of operations. During 2018, the estimated amount to be covered by our insurance policies was increased by approximately$32,000. Netted with this amount was a warranty accrual adjustment of approximately $30,000 related to higher expected warranty expenditures whichresulted in an increase to fee cost of sales of the same amount in the accompanying consolidated statement of operations. In 2019, the Company recordedan adjustment of $0.1 million due to a lower experience rate of expected warranty expenditures for fee building projects which resulted in a reduction ofthe same amount to fee cost of sales in the accompanying consolidated statement of operations. 82Table of Contents 9. Senior Notes and Unsecured Revolving Credit Facility Indebtedness consisted of the following: December 31, 2019 2018 (Dollars in thousands) 7.25% Senior Notes due 2022, net $304,832 $320,148 Unsecured revolving credit facility — 67,500 Total Indebtedness $304,832 $387,648 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, whichrepresented a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on private placement offering through the sale of anadditional $75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes"). The Additional Notes wereissued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturityof 6.438%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecuredrevolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used forworking 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 identicalto the original Notes, except that they are registered under the Securities Act, and are freely tradeable in accordance with applicable law. The carrying amount of our Senior Notes listed above at December 31, 2019 is net of the unamortized discount of $1.1 million,unamortized premium of $0.9 million, and unamortized debt issuance costs of $3.0 million, each of which are amortized and capitalized tointerest costs on a straight-line basis over the respective terms of the notes, which approximates the effective interest method. The carryingamount for the 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. Debt issuance costs for the unsecured revolving credit facility are includedin other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement. 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 permittedto incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do notsatisfy either a leverage condition or an interest coverage condition. Exceptions to the limitation include, among other things, borrowings ofup to $260 million under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose ofrefinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from makingrestricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments thatwe can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income fromJanuary 1, 2017 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on ourability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of ourconsolidated tangible net assets and a general basket of $15 million. The Notes are guaranteed, on an unsecured basis, jointly and severally,by all of the Company's 100% owned subsidiaries. See Note 18 for information about the guarantees and supplemental financial statementinformation about our guarantor subsidiaries group and non-guarantor subsidiaries group. During 2019, the Company repurchased and retired approximately $17.0 million in face value of the Notes at 91.88% of the face valuefor a cash payment of approximately $15.6 million. The Company recognized a total gain on early extinguishment of debt of $1.2 million andwrote off approximately $0.2 million of unamortized discount, premium and debt issuance costs associated with the Notes retired. The Company has an unsecured revolving credit facility ("Credit Facility") with a bank group. On August 7, 2019, the Companyentered into a Modification Agreement (the "Modification") to its Amended and Restated Credit Agreement. The Modification, among otherthings, (i) extends the maturity date of the revolving credit facility to March 1, 2021, (ii) decreases (A) the total commitments under the facilityto $130 million from $200 million and (B) the accordion feature to $200 million from $300 million, subject to certain financial conditions,including the availability of bank commitments, (iii) provides for certain adjustments to the borrowing base calculation commencing January1, 2020; and (iv) revises the covenant limiting restricted payments to provide for basket limitations and net leverage ratio thresholds on theCompany’s stock repurchases, dividend payments, and repurchases of its Notes, subject to specified exceptions. As of December 31, 2019,we had $0 of outstanding borrowings under the Credit Facility. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus amargin ranging from 2.25% to 3.00% depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter. As ofDecember 31, 2019, the interest rate under the Credit Facility was 4.76%. Pursuant to the Credit Facility, the Company is required to maintaincertain financial covenants as defined in the Credit Facility, including (i) a minimum tangible net worth; (ii) maximum leverage ratios; (iii) aminimum liquidity covenant; and (iv) a minimum fixed charge coverage ratio based on EBITDA (as detailed in the Credit Facility) to interestincurred or if this test is not met, the Company maintains unrestricted cash equal to not less than the trailing 12 month consolidated interestincurred. As of December 31, 2019, the Company was in compliance with all financial covenants. 83Table of Contents The Credit Facility, as amended by the Modification, also provides a $17.5 million sublimit for letters of credit, subject to conditions setforth in the agreement. As of December 31, 2019 and 2018, the Company had $0 and $2.3 million, respectively, in outstanding letters of creditissued under the Credit Facility. Notes payable have stated maturities as follows for the years ending December 31 (dollars in thousands): 2020 $— 2021 — 2022 308,015 2023 — 2024 — $308,015 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 paidto transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried atfair 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 marketsthat are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable inactive markets at measurement date •Level 3 – Valuations derived from techniques where one or more significant inputs or significant value drivers areunobservable in active markets at measurement date Fair Value of Financial Instruments The following table presents an estimated fair value of the Company's Notes and Credit Facility. The Notes are classified as Level 2and primarily reflect estimated prices obtained from outside pricing sources. The Company's Credit Facility is classified as Level 3 within thefair value hierarchy. The Company had an outstanding balance of $67.5 million under its Credit Facility at December 31, 2018, and theestimated fair value of the outstanding balance approximated the carrying value due to the short-term nature of LIBOR contracts. December 31, 2019 December 31, 2018 CarryingAmount Fair Value CarryingAmount Fair Value (Dollars in thousands) 7.25% Senior Notes due 2022, net (1) $304,832 $298,775 $320,148 $292,500 Unsecured revolving credit facility $— $— $67,500 $67,500 (1)The carrying value for the Senior Notes, as presented at December 31, 2019, is net of the unamortized discount of $1.1 million, unamortized premium of$0.9 million, and unamortized debt issuance costs of $3.0 million. The carrying value of the Senior Notes, as presented at December 31, 2018, is net of theunamortized discount of $1.7 million, unamortized premium of $1.3 million, and unamortized debt issuance costs of $4.5 million. The unamortizeddiscount, 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, accountspayable, and accrued expenses and other liabilities to approximate the fair value of these financial instruments based on the short durationbetween origination of the instruments and their expected realization. The fair value of amounts due from affiliates is not determinable due tothe 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 whenacquired and adjusted for impairment to fair value, if deemed necessary. For the years ended December 31, 2019, 2018 and 2017, the Companyrecognized real estate-related impairment adjustments of $10.2 million, $10.0 million and $2.2 million, respectively. For the year endedDecember 31, 2019, $8.3 million of the impairment charges related to two homebuilding communities and $1.9 million related to land undercontract to sell that closed during the 2019 fourth quarter. For the year ended December 31, 2018 the impairment charges related to twohomebuilding communities. The impairment adjustments were made using Level 3 inputs and assumptions, and the remaining carrying valueof the real estate inventories subject to the impairment adjustments was $81.6 million and $57.8 million at December 31, 2019 and 2018,respectively. For more information on real estate impairments, please refer to Note 4. 84Table of Contents For the years ended December 31, 2019 and 2018, the Company recognized an other-than-temporary impairment to its investment inunconsolidated joint ventures of $0 and $1.1 million, respectively. The 2018 impairment related to a land development joint venture inNorthern California. The impairment adjustment was made using Level 3 inputs and assumptions. For more information on the investment inunconsolidated 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 legalproceedings are of a nature that we believe are normal and incidental to a homebuilder. We make provisions for loss contingencies when theyare probable and the amount of the loss can be reasonably estimated. Such provisions are assessed at least quarterly and adjusted to reflectthe impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and eventspertaining to a particular case. During 2019, we recorded litigation reserves totaling $5.9 million related to ordinary course litigation whichdeveloped and became probable and estimable within the 2019 fourth quarter. Further, as a result of the development of the constructiondefect related claims within the litigation reserve and their impact to the Company’s litigation reserve estimates for IBNR future constructiondefect claims, we recorded an additional $5.0 million of IBNR construction defect claim reserves resulting in aggregate litigation reservestotaling $10.9 million as of December 31, 2019. Because the self-insured retention deductibles had been met for each claim covered by the $5.9million reserve, and the self-insured retention deductibles are expected to be met for the $5.0 million IBNR construction defect claim reserves,the Company recorded estimated insurance receivables of $10.9 million offsetting the related litigation reserves as of December 31, 2019. Dueto the inherent uncertainty and judgement used in these assumptions, our actual costs and related insurance recoveries could differsignificantly from amounts currently estimated. Please refer to Note 1 and Note 8 for more information on litigation reserves for constructiondefect claims. In view of the inherent unpredictability of litigation, we generally cannot predict their ultimate resolution, related timing oreventual loss. As an owner and developer of real estate, the Company is subject to various environmental laws of federal, state and localgovernments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition orresults of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of real estate in thevicinity of the Company’s real estate and other environmental conditions of which the Company is unaware with respect to the real estatecould result in future environmental liabilities. The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV maintenanceagreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has alsoentered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportionedliability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide theCompany, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from theunconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will bemade or will be sufficient to cover the Company's liability under such LTV maintenance agreements. The loans underlying the LTVmaintenance agreements include acquisition and development loans, construction revolvers and model home loans, and the agreementsremain 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 offactors 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, 2019 and 2018, $28.6 million and $41.3 million,respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the termsof the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was $5.8 million and $7.3 million,respectively, as of December 31, 2019 and 2018. In addition, the Company has provided completion agreements regarding specificperformance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary ofthe agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financialliability under such completion agreements. Typically, under such terms of the joint venture agreements, the Company has the right toapportion the respective share of any costs funded under such completion agreements to its partners. However, there is no guarantee that wewill be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connectionwith joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender that holds thelender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance withapplicable 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, andbankruptcy. We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects.As of December 31, 2019 and 2018, the Company had outstanding surety bonds totaling $47.6 million and $50.5 million, respectively. Theestimated remaining costs to complete of such improvements as of December 31, 2019 and 2018 were $29.1 million and $20.3 million,respectively. The beneficiaries of the bonds are various municipalities, homeowners' associations, and other organizations. In the event thatany such surety bond issued by a third party is called because the required improvements are not completed, the Company could beobligated to reimburse the issuer of the bond. 85Table of Contents The Company accounts for contracts deemed to contain a lease under ASC 842. At the inception of a lease, or if a lease issubsequently modified, we determine whether the lease is an operating or financing lease. Our lease population is fully comprised ofoperating leases and includes leases for certain office space and equipment for use in our operations. For all leases with an expected term thatexceeds one year, right-of-use assets and lease liabilities are recorded within our consolidated balance sheets. The depreciable lives of right-of-use assets are limited to the expected term which would include any renewal options we expect to exercise. The exercise of lease renewaloptions is generally at our discretion and we expect that in the normal course of business, leases that expire will be renewed or replaced byother leases. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Variable lease paymentsconsist of non-lease services related to the lease. Variable lease payments are excluded from the right-of-use asset and lease liabilities and areexpensed as incurred. Right-of-use lease assets are included in other assets and lease liabilities are recorded in accrued expenses and otherliabilities within our consolidated balance sheets and total $2.0 million and $2.2 million, respectively, at December 31, 2019. For the year ended December 31, 2019, lease costs and cash flow information for leases with terms in excess of one year was asfollows: Year EndedDecember 31,2019 Lease cost: Lease costs included in general and administrative expenses $1,226 Lease costs included in real estate inventories 503 Lease costs included in selling and marketing expenses 202 Net lease cost $1,931 Other information: Lease cash flows (included in operating cash flows)(1) $2,056 (1)Does not include the cost of short-term leases with terms of less than one year which totaled approximately $0.8 million for the year ended December 31,2019 or the benefit from a sublease agreement of one of our office spaces which totaled approximately $0.2 million for year ended December 31, 2019. Future minimum lease payments under our operating leases are as follows (dollars in thousands):2020 $1,703 2021 577 2022 34 2023 18 2024 2 Thereafter — Total lease payments (1) $2,334 Less: interest (2) 91 Present value of lease liabilities (3) $2,243 (1)Lease payments include options to extend lease terms that are reasonably certain of being exercised.(2)Our leases do not provide a readily determinable implicit rate. Therefore, we utilized our incremental borrowing rate for such leases to determine thepresent value of lease payments at the lease commencement date. There were no legally binding minimum lease payments for leases signed but not yetcommenced at December 31, 2019.(3)The weighted average remaining lease term and weighted average incremental borrowing rate used in calculating our lease liabilities were 1.9 years and4.4%, respectively, at December 31, 2019. 86Table of Contents We lease our corporate headquarters in Aliso Viejo, California. The lease on this facility consists of approximately 18,700 square feetand expires in November 2020. In addition, we lease divisional offices in Southern California, Northern California and Arizona totalingapproximately 19,000 square feet (of which approximately 7,700 square feet is sublet) expiring at various times through 2021. As of December31, 2019, the future minimum lease payments under non-cancelable operating leases, primarily associated with our office facilities, are asfollows (dollars in thousands): 2020 $1,238 2021 322 2022 — 2023 — 2024 — Thereafter — $1,560 For the years ended December 31, 2019, 2018 and 2017, rent expense was $1.2 million, $1.1 million, and $1.1 million, respectively. 12. Related Party Transactions During the years ended December 31, 2019, 2018 and 2017, the Company incurred construction-related costs on behalf of itsunconsolidated joint ventures totaling $5.5 million, $6.4 million, and $7.3 million, respectively. As of December 31, 2019 and 2018, $0.2million and $0.4 million, respectively, are included in due from affiliates in the accompanying consolidated balance sheets related to suchcosts. The Company has entered into agreements with its unconsolidated joint ventures to provide management services related to theunderlying projects (collectively referred to as the "Management Agreements"). Pursuant to the Management Agreements, the Companyreceives a management fee based on each project’s revenues. During the years ended December 31, 2019, 2018 and 2017, the Company earned$1.9 million, $3.4 million, and $4.9 million, respectively, in management fees, which have been recorded as fee building revenue in theaccompanying consolidated statements of operations. As of December 31, 2019 and 2018, $0 and $0.2 million, respectively, of managementfees 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 stockthrough an affiliated entity, IHP Capital Partners VI, LLC ("IHP"), and is also affiliated with entities that have investments in two of theCompany's unconsolidated joint ventures, TNHC Meridian Investors LLC (which is owner of another entity, TNHC Newport LLC, whichentity owned our "Meridian" project) and TNHC Russell Ranch LLC ("Russell Ranch"). The Company's investment in these two jointventures was $13.7 million and $6.5 million at December 31, 2019 and 2018, respectively. A former member of the Company's board of directorswho served during 2018 is affiliated with entities that have investments in three of the Company's unconsolidated joint ventures, ArantineHills Holdings LP ("Bedford"), Calabasas Village LP, and TNHC-TCN Santa Clarita, LP. As of December 31, 2019 and 2018, the Company'sinvestment in these three unconsolidated joint ventures totaled $8.2 million and $12.0 million, respectively. During the 2019 third quarter, theBedford joint venture partners entered an agreement that increased the Company's funding obligation by $2.8 million over the existingcontribution cap. During the 2017 second quarter, the Bedford joint venture agreement was amended to increase the Company's fundingobligation by $4.0 million over the existing contribution cap. During the 2019 second quarter, the Company entered into a second amendment to the limited liability company agreement of RussellRanch between the Company and IHP. Prior to the execution of the second amendment, each of IHP and the Company had contributed itsmaximum capital commitments pursuant to the joint venture agreement. Pursuant to the second amendment, the parties agreed to fundadditional required capital in the aggregate amount of approximately $26 million for certain remaining backbone improvements for the Project(the “Phase 1 Backbone Improvements”) as follows: 50% by IHP and 50% by the Company (“Amendment Additional Capital”). TheAmendment Additional Capital will be returned to IHP and the Company ahead of any other contributed capital; provided that none of theAmendment Additional Capital accrues a preferred return that base capital contributions are generally afforded under the joint ventureagreement. To the extent of overruns on the Phase 1 Backbone Improvements, the Company is required to fund such overrun capital (“TNHCOverrun Capital”); provided that such contributions shall receive capital account credit. Pursuant to the second amendment, the distributionof cash flow under the agreement was amended to provide that Amendment Additional Capital would be returned prior to TNHC OverrunCapital, which would, in turn, be returned ahead of the base capital preferred return and base capital. The Company previously purchasedlots from the Russell Ranch joint venture as described below (the "Phase 1 Purchase"). The parties also amended the purchase and salecontract for the Phase 1 Purchase to provide relief from the profit participation provisions of this transaction under certain circumstances. During the 2017 third quarter, the Company amended the Russell Ranch joint venture agreement pursuant to which it, among otherthings, 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 $5.1million nonrefundable deposit outstanding related to this purchase, which was subsequently applied to the $34.0 million purchase price of theland. 87Table of Contents TL Fab LP, an affiliate of one of the Company's non-employee directors, was engaged by the Company and some of its unconsolidatedjoint ventures as a trade contractor to provide metal fabrication services. For the years ended December 31, 2019, 2018 and 2017, the Companyincurred $0.2 million, $0.3 million, and $0.6 million, respectively, for these services. For the same periods, the Company's unconsolidated jointventures incurred $0, $0.4 million, and $0.9 million, respectively, for these services. Of these costs, $0 and $7,000 was due to TL Fab LP fromthe Company at December 31, 2019 and 2018, respectively, and $0 and $8,000 was due to TL Fab LP from the Company's unconsolidated jointventures at December 31, 2019 and 2018, respectively. In its ordinary course of business, the Company enters into agreements to purchase lots from unconsolidated land development jointventures of which it is a member. In accordance with ASC 360-20, the Company defers its portion of the underlying gain from the jointventure's sale of these lots. When the Company purchases lots directly from the joint venture, the deferred gain is recorded as a reduction tothe Company's land basis on the purchased lots. In this instance, 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, 2019 and 2018, $0.2 million and $0.2 million, respectively, of deferred gainfrom lot transactions with the Cannery, Bedford and Russell Ranch unconsolidated joint ventures remained unrecognized and included as areduction to land basis in the accompanying consolidated balance sheets. The Company’s land purchase agreement with the Cannery requires profit participation payments due to the seller upon the closing ofeach home. Profit participation payment amounts are calculated based upon a percentage of estimated net profits and are due every 90 daysafter the first home closing. During the years ended December 31, 2019 and 2018, the Company made no profit participation payments, andfor the year ended December 31, 2017, the Company was refunded $0.2 million from the Cannery for profit participation overpayments fromprior periods due to a modification of the underlying calculation related to profit participation. As of December 31, 2019 and 2018, no profitparticipation was due to the Cannery. The Company's purchase agreement with the Cannery also provides for reimbursements of certain feecredits. The Company was reimbursed $0.1 million, $0.1 million and $0 in fee credits from the Cannery during 2019, 2018 and 2017,respectively. As of December 31, 2019 and 2018, $15,000 and $37,000, 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 fromthat of Chief Investment Officer to that of a non-employee consultant to the Company effective June 26, 2015 ("Transition Date"). As of theTransition Date, Mr. Davis ceased being an employee of the Company and became an independent contractor performing consulting services.For his services, Mr. Davis was compensated $5,000 per month through June 26, 2019 when his contract was amended to extend its term oneyear and reduce his scope of services and compensation to $1,000 per month. At December 31, 2019 and 2018, no fees were due to Mr. Davisfor his consulting services. Additionally, the Company entered into a construction agreement effective September 7, 2017, with The Josephand Terri Davis Family Trust Dated August 25, 1999 ("Davis Family Trust") of which Joseph Davis is a trustee. The agreement was a feebuilding contract pursuant to which the Company acted in the capacity of a general contractor to build a single family detached home on landowned by the Davis Family Trust. Construction of the home was completed during the 2019 first quarter. For its services, the Companyreceived a contractor's fee and the Davis Family Trust reimbursed the Company's field overhead costs. During the years ended December 31,2019, 2018 and 2017, the Company billed the Davis Family Trust $0.5 million, $3.0 million and $0.5 million, respectively, including reimbursableconstruction costs and the Company's contractor's fees which are included in fee building revenues in the accompanying consolidatedstatements of operations. Contractor's fees comprised $15,000, $83,000 and $13,000 of the total billings for the years ended December 31, 2019,2018 and 2017, respectively. The Company recorded $0.5 million, $2.9 million and $0.5 million for the years ended December 31, 2019, 2018 and2017, respectively, for the cost of this fee building revenue which is included in fee building cost of sales in the accompanying consolidatedstatements of operations. At December 31, 2019 and 2018, the Company was due $0 and $0.6 million, respectively, from the Davis Family Trustfor 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 ChiefInvestment Officer to a non-employee consultant to the Company. While an employee of the Company, Mr. Stelmar served as an employeedirector of the Company's Board of Directors. The agreement provided that effective upon Mr. Stelmar's termination of employment, hebecame a non-employee director and received the compensation and was subject to the requirements of a non-employee director pursuant tothe Company's policies. For his consulting services, Mr. Stelmar was compensated $48,000, $90,000 and $175,000 for the years endedDecember 31, 2019, 2018 and 2017, respectively. Additionally, Mr. Stelmar's outstanding restricted stock unit equity award granted in 2016continued to vest in accordance with its original terms based on his continued provision of consulting services rather than continuedemployment and fully vested during 2019. Mr. Stelmar's vested stock options remain outstanding based on Mr. Stelmar's continued serviceas a Board member. The contract expired in August 2019 and was not extended. At December 31, 2019 and 2018, no fees were due to Mr.Stelmar for his consulting services. On February 14, 2019, the Company entered into a consulting agreement that transitioned Thomas Redwitz's role from that of ChiefInvestment Officer to a non-employee consultant to the Company effective March 1, 2019. For his consulting services, Mr. Redwitz iscompensated $10,000 per month. The agreement terminates March 1, 2020 and may be extended upon mutual consent of the parties. AtDecember 31, 2019, no fees were due to Mr. Redwitz for his consulting services. 88Table of Contents On June 29, 2015, the Company formed an unconsolidated joint venture TNHC Tidelands LLC ("Tidelands"), and received capital creditin excess of our contributed land basis. As a result, the Company recognized $1.6 million in equity in net income of unconsolidated jointventures and deferred $0.4 million in profit from unconsolidated joint ventures related to this transaction for the year ended December 31,2015. During the year ended December 31, 2017, $0.2 million of the previously deferred revenue was recognized as equity in net income ofunconsolidated joint ventures. During the third quarter of 2017, the Company acquired its partner's equity interest in the Tidelands jointventure. As part of this transaction, the remaining $0.1 million deferred profit was written off. The Company paid $13.6 million to our jointventure partner for its interest and paid off the $4.1 million remaining balance on the joint venture's construction loan. Following thepurchase, the Company was required to consolidate this entity as a wholly owned subsidiary of the Company, and the underlyinghomebuilding project became a wholly owned active selling community of the Company. The purchase consideration and the cost basis ofour previous investment in unconsolidated joint ventures related to this joint venture was included in real estate inventories at the time ofconsolidation. During 2018 and 2017, the Company had advances outstanding to an unconsolidated joint venture, Encore McKinley Village LLC. Thenote bore interest at 10% per annum and was fully repaid during the 2018 second quarter. For the years ended December 31, 2018 and2017, the Company earned $0.1 million and $0.5 million, respectively, in interest income on the unsecured promissory note which is included inequity in net income (loss) of unconsolidated joint ventures in the accompanying consolidated statements of operations. During the 2017 second quarter, our Larkspur Land 8 Investors LLC ("Larkspur") unconsolidated joint venture allocated $0.1 million ofincome to the Company from a reduction in cost to complete reserves, which was included in equity in net income (loss) of unconsolidatedjoint ventures in the accompanying consolidated statements of operations, and our outside equity partner exited the joint venture. Upon thechange in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, otherassets, and accrued liabilities, including warranty and the remaining costs to complete reserves, of the joint venture. As part of thistransaction, the Company also recognized a gain of $0.3 million, which was included in equity in net income (loss) of unconsolidated jointventures in the accompanying consolidated statements of operations, due to the purchase of our JV partner's interest for less than itscarrying value. The Company entered into two transactions in each of 2018 and 2017 to purchase land from affiliates of IHP which owns more than10% 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 grosspurchase price of $16.1 million with profit participation and master marketing fees due to the seller as outlined in the contract. As of December31, 2019, the Company has taken down all of the lots and paid $0.4 million in master marketing fees and also as of December 31, 2019, IHP wasno longer affiliated with this development. The second 2017 transaction allowed the Company to purchase finished lots in NorthernCalifornia, which includes customary profit participation, and was structured as an optioned takedown. The total purchase price, includingthe cost for the finished lot development and the option, was expected to be approximately $56.3 million, dependent on the timing oftakedowns, as well as our obligation to pay certain fees and costs during the option maintenance period. During 2019, anunrelated third party entered into agreements to purchase from the IHP affiliate some of the lots under the Company's option. The Companyhas in turn entered into an arrangement pursuant to which it shall purchase such lots on a rolling take down basis from suchunrelated third party. The unrelated third party purchased 67% of the lots originally under contract with the IHP affiliate. Following thepurchase of the lots by the unrelated third party in 2019, the Company has no remaining lots to purchase from the IHP affiliate. As ofDecember 31, 2019, the Company (i) had no nonrefundable deposits with the IHP affiliate that will be applied to the Company's takedown oflots from the unrelated third party and (ii) has paid (A) $0.2 million for fees and costs, (B) $3.0 million in option payments, and (C)$18.0 million for the purchase of lots directly from the IHP affiliate. The first 2018 agreement allowed the Company to purchase finished lots in Northern California for a gross purchase price of $8.0million with additional profit participation, marketing fees and certain reimbursements due to the seller as outlined in the agreement. As ofDecember 31, 2019, the Company has taken down all of the lots, paid $0.3 million in master marketing fees and reimbursed the land seller $0.2million in costs related to this contract. Also as of December 31 2019, IHP is no longer affiliated with this development. The second 2018agreement allows the Company to purchase land in a master-plan community in Arizona for an estimated purchase price of $3.8 million plusprofit participation and marketing fees pursuant to contract terms. As of December 31, 2019, the Company has an outstanding, nonrefundabledeposit of $0.3 million related to this contract, the Company had not taken down any lots, and IHP was no longer affiliated with thisdevelopment. In August 2017, we acquired the remaining outside equity interest of our DMB/TNHC LLC (Sterling at Silverleaf) unconsolidated jointventure. The Company paid $2.6 million to our joint venture partner and upon the change of control was required to consolidate this ventureas a wholly owned subsidiary of the Company. There was no remeasurement gain or loss on our unconsolidated interest prior to the changein control. The purchase consideration and the cost basis of our previous investment in unconsolidated joint ventures related to this jointventure are included in real estate inventories at December 31, 2019 and 2018. 89Table of Contents In the first quarter 2018, the Company entered into an agreement with its Bedford joint venture that is affiliated with one former memberof the Company's board of directors for the option to purchase lots in phased takedowns. As of December 31, 2019, the Company has made a$1.5 million nonrefundable deposit as consideration for this option, with a portion of the deposit applied to the purchase price across thephases. The gross purchase price of the land was $10.0 million with profit participation and master marketing fees due to seller as outlined inthe contract. During the 2019 third quarter, the Company entered into an amendment to this agreement to reduce the gross purchase price ofthe land to $9.3 million. At December 31, 2019, the Company has taken down all of the contracted lots and the deposit was fully applied to thepurchase and has paid $0.1 million in master marketing fees. During the fourth quarter 2018, the Company entered into a second optionagreement with the Bedford joint venture to purchase lots in phased takedowns. The Company made a $1.4 million nonrefundable deposit asconsideration for the option, and a portion of the deposit will be applied to the purchase price across the phases. The gross purchase price ofthe land is $10.5 million with profit participation and master marketing fees due to the seller pursuant to the agreement. At December 31, 2019,the Company had taken down approximately 92% of the optioned lots, paid $0.2 million in master marketing fees, and no deposit remainedoutstanding. FMR LLC beneficially owned over 10% of the Company's common stock during 2018, and an affiliate of FMR LLC ("Fidelity") providesinvestment management and record keeping services to the Company’s 401(k) Plan. For the year ended December 31, 2018, the Company paidFidelity approximately $14,000 for 401(k) Plan record keeping and investment management services. The participants in the Company's 401(k)Plan paid Fidelity approximately $6,000 year ended December 31, 2018 for record keeping and investment management services. For the yearsended December 31, 2019 and 2017, FMR LLC owned less than 10% of the Company's common stock. The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV maintenanceagreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. In addition, theCompany has provided completion agreements regarding specific performance for certain projects whereby the Company is required tocomplete the given project with funds provided by the beneficiary of the agreement. For more information regarding these agreements pleaserefer 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, stockappreciation rights, restricted and unrestricted stock awards, restricted stock units and performance awards. The 2014 Incentive Plan willautomatically 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 extentthat shares of the Company's common stock subject to an outstanding award granted under the 2014 Incentive Plan or any predecessor planare not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award incash, 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 theCompany, or any of its subsidiaries, are eligible to receive awards under the 2016 Incentive Plan. On May 22, 2018, our shareholders approvedthe amended and restated 2016 Incentive Plan which increased the number of shares authorized for issuance under the plan from 800,000 to2,100,000 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 stock option, restrictedstock unit awards and performance share unit awards under the 2016 Incentive Plan. As of December 31, 2019, 61,443 shares remain availablefor grant under the 2014 Incentive Plan and 934,657 shares remain available for grant under the 2016 Incentive Plan. The exercise price ofstock-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 stockoptions 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 year to three years period and the stock optionsexpire ten years from the date of grant. 90Table of Contents A summary of the Company’s common stock option activity as of and for the years ended December 31, 2019, 2018 and 2017 ispresented below: Year Ended December 31, 2019 2018 2017 Number ofShares Weighted-AverageExercisePrice perShare Number ofShares Weighted-AverageExercisePrice perShare Number ofShares Weighted-AverageExercisePrice perShare Outstanding Stock Option Activity Outstanding, beginning of period 821,470 $11.00 826,498 $11.00 835,786 $11.00 Granted 249,283 $5.76 — $— — $— Exercised — $— — $— (9,288) $11.00 Forfeited (2,736) $11.00 (5,028) $11.00 — $— Outstanding, end of period 1,068,017 $9.78 821,470 $11.00 826,498 $11.00 Exercisable, end of period 818,734 $11.00 821,470 $11.00 826,498 $11.00 A summary of the Company’s restricted stock unit activity as of and for the years ended December 31, 2019, 2018 and 2017 is presentedbelow: Year Ended December 31, 2019 2018 2017 Number ofShares Weighted-AverageGrant-DateFair Valueper Share Number ofShares Weighted-AverageGrant-DateFair Valueper Share Number ofShares Weighted-AverageGrant-DateFair Valueper Share Restricted Stock Unit Activity Outstanding, beginning of period 469,227 $10.75 562,082 $10.72 474,989 $10.66 Granted 448,468 $4.82 179,268 $11.24 343,933 $10.84 Vested (277,401) $10.50 (271,875) $11.02 (211,475) $10.76 Forfeited (48,178) $10.91 (248) $10.05 (45,365) $10.79 Outstanding, end of period 592,116 $6.36 469,227 $10.75 562,082 $10.72 A summary of the Company’s performance share unit activity as of and for the years ended December 31, 2019 and 2018 is presentedbelow: Years Ended December 31, 2019 2018 Number ofShares Weighted-AverageGrant-DateFair Valueper Share Number ofShares Weighted-AverageGrant-DateFair Valueper Share Performance Share Unit Activity Outstanding, beginning of period 125,422 $11.68 — $— Granted (at target) — $— 125,422 $11.68 Vested — $— — $— Forfeited (125,422) $11.68 — $— Outstanding, end of period (at target) — $— 125,422 $11.68 91Table of Contents The expense related to the Company's stock-based compensation programs, included in general and administrative expense in theaccompanying consolidated statements of operations, was as follows: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Expense related to: Stock options $174 $— $11 Restricted stock units and performance share units 2,086 3,090 2,792 $2,260 $3,090 $2,803 The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stockoptions granted by the Company in each year: Year Ended December 31, 2019 2018 2017 Expected term (in years) 6.0 — — Expected volatility 39.9% — — Risk-free interest rate 2.5% — — Expected dividends — — — Weighted-average grant date fair value per share $2.43 $— $— The following table presents details of the assumptions used to calculate the re-measurement date fair value of common stock optionsgranted to Mr. Davis by the Company in accordance with ASC 505-50 as discussed in Note 1. Mr Davis' stock options fully vested onJanuary 30, 2017 and were fully expensed. The below reflects fair value assumptions at January 30, 2017. Period EndedJanuary 30, 2017 Expected term (in years) 1.0 Expected volatility 34.9%Risk-free interest rate 0.8%Expected dividends — Re-measurement date fair value per share $1.32 We used the "simplified method" to establish the expected term of the common stock options granted by the Company. Our restrictedstock unit awards and performance share unit awards are valued based on the closing price of our common stock on the date of grant. Thenumber of performance share units that would vest ranged from 50%-150% of the target amount awarded based on actual cumulativeearnings per share and return on equity growth from 2018-2019, subject to initial achievement of minimum thresholds. We evaluated theprobability of achieving the performance targets established under each of the outstanding performance share unit awards quarterly during2018 and 2019 and estimated the number of underlying units that were probable of being issued. Compensation expense for restricted stockunit and performance share unit awards was being recognized using the straight-line method over the requisite service period, subject tocumulative catch-up adjustments required as a result of changes in the number shares probable of being issued for performance share unitawards. Forfeitures are recognized in compensation cost during the period that the award forfeiture occurs. For the years ended December31, 2019 and 2018, no expense was recognized for our performance share units. At December 31, 2019, the performance targets associatedwith the outstanding performance share unit awards were not met and all outstanding awards were forfeited. At December 31, 2019, the amount of unearned stock-based compensation currently estimated to be expensed through 2022 is $2.6million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 1.9 years. If thereare any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel anyremaining unearned stock-based compensation expense. 92Table of Contents 14. Income Taxes The provision (benefit) for income taxes includes the following: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Current provision (benefit) for income taxes: Federal $(203) $(67) $10,243 State (101) 304 3,030 (304) 237 13,273 Deferred provision (benefit) for income taxes: Federal (2,933) (4,208) 2,341 State (578) (2,104) (224) (3,511) (6,312) 2,117 Provision (benefit) for income taxes $(3,815) $(6,075) $15,390 The effective tax rate differs from the federal statutory rate of 21% for the years ended December 31, 2019 and 2018 and 35% for theyear ended December 31, 2017, due to the following items: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Income (loss) before taxes of taxable entities $(11,816) $(20,305) $32,531 (Provision) benefit for income taxes at federal statutory rate $2,481 $4,264 $(11,386)(Increases) decreases in tax resulting from: Provisional rate adjustment - tax reform — 148 (3,190)State income taxes, net of federal benefit 781 1,396 (1,860)Manufacturing deduction — — 958 Tax credits 1,238 346 — Stock compensation (389) (12) (44)Non-deductible expenses related to Section 162(m) (163) — — Other (133) (67) 132 (Provision) benefit for income taxes $3,815 $6,075 $(15,390)Effective tax rate 32.3% 29.9% 47.3% 93Table of Contents With the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), the corporate federal income tax rate dropped from a maximum of35% to a flat 21% rate effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provided guidance onaccounting for the tax effects of the Tax Act and provided a measurement period should not extend beyond one year from the Tax Actenactment date for companies to complete the accounting under ASC 740. As of December 31, 2017, we had completed the majority of ouraccounting 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 atDecember 31, 2018 and recorded a provisional adjustment to reduce its value by $3.2 million. The Company completed its accounting for thetax effects of the Tax Act in 2018, within the one-year measurement period prescribed by the SEC, and recorded a $0.1 million adjustment tothe provisional amount. The components of our deferred income tax asset, net are as follows: December 31, 2019 2018 (Dollars in thousands) State taxes $3 $74 Net operating loss and tax credit carryforwards 3,848 — Reserves and accruals 2,563 2,258 Intangible assets 24 28 Share based compensation 1,392 1,594 Inventory 3,536 3,699 Investments in joint ventures 7,080 6,318 Depreciation and amortization (393) (34)Right of use asset (550) — Deferred tax asset, net $17,503 $13,937 At December 31, 2019, the Company had federal and state net operating loss carryforwards of approximately $9.0 million and$4.9 million, respectively. The federal net operating loss may be carried forward indefinitely; however the loss can only be utilized to offset80% of taxable income generated in a year. Our state net operating loss may be carried forward 20 years and will expire in 2039, unlesspreviously utilized. At December 31, 2019, the Company had federal tax credits of approximately $1.6 million related to tax credits for energy efficient homessold during 2018 and 2019 that begin to expire in 2039. The Company classifies any interest and penalties related to income taxes assessed as part of income tax provision. The Company hasconcluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company beenassessed interest or penalties by any major tax jurisdictions related to any open tax periods. We are subject to U.S. federal income taxexamination for calendar tax years ending 2016 through 2018 and various state income tax examinations for 2015 through 2018 calendar taxyears. 94Table of Contents 15. Segment Information The Company’s operations are organized into three reportable segments: two homebuilding segments (Arizona and California) and feebuilding. In determining the most appropriate reportable segments, we considered similar economic and other characteristics, includingproduct types, average selling prices, gross margins, production processes, suppliers, subcontractors, regulatory environments, landposition, and underlying demand and supply in accordance with ASC 280. Our California homebuilding reportable segment aggregates theNorthern California and Southern California homebuilding operating segments Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached homes and may sellland. Our fee building operations build homes and manage construction and sales related activities on behalf of third-party property ownersand our joint ventures. In addition, our corporate operations develop and implement strategic initiatives and support our operating segmentsby centralizing key administrative functions such as accounting, finance and treasury, information technology, insurance and riskmanagement, litigation, marketing and human resources. A portion of the expenses incurred by corporate are allocated to the fee buildingsegment primarily based on its respective percentage of revenues and to each homebuilding segment based on its respective investment inand advances to unconsolidated joint ventures and real estate inventories balances. The assets of our fee building segment primarily consistof cash, restricted cash and contracts and accounts receivable. The majority of our corporate personnel and resources are primarily dedicatedto activities relating to our homebuilding segment, and, therefore, the balance of any unallocated corporate expenses are allocated within ourhomebuilding reportable segments. The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 1. Operationalresults of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segmentbeen an independent, stand-alone entity during the periods presented. Financial information relating to reportable segments was as follows: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Homebuilding revenues: California home sales $472,242 $504,029 $560,842 California land sales 41,664 — — Arizona home sales 60,110 — — Total homebuilding revenues 574,016 504,029 560,842 Fee building revenues, including management fees 95,333 163,537 190,324 Total revenues $669,349 $667,566 $751,166 Homebuilding pretax income (loss): California $(5,724) $(19,594) $27,881 Arizona (8,144) (5,112) (847)Total homebuilding pretax income (loss) (13,868) (24,706) 27,034 Fee building pretax income, including management fees 2,052 4,401 5,497 Total pretax income (loss) $(11,816) $(20,305) $32,531 December 31, 2019 2018 (Dollars in thousands) Homebuilding assets: California $416,179 $551,807 Arizona 82,234 86,205 Total homebuilding assets 498,413 638,012 Fee building assets 11,193 10,879 Corporate unallocated assets 93,583 47,206 Total assets $603,189 $696,097 95Table of Contents 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 basisconsistent with that of our audited consolidated financial statements and all necessary material adjustments, consisting of normal recurringaccruals and adjustments, have been included to present fairly the unaudited quarterly financial data. Our quarterly results of operations forthese periods are not necessarily indicative of future results of operations. FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Total (Dollars in thousands, except per share amounts) 2019 Home sales revenue $99,186 $140,464 $118,781 $173,921 $532,352 Cost of home sales 86,569 123,525 105,763 153,700 469,557 Home sales impairments — — 1,700 6,600 8,300 Homebuilding gross margin $12,617 $16,939 $11,318 $13,621 $54,495 Land sales revenue $— $— $24,573 $17,091 $41,664 Cost of land sales — — 26,078 17,091 43,169 Land sales impairments — — 1,900 — 1,900 Land sales gross margin $— $— $(3,405) $— $(3,405)Fee building revenue $19,662 $22,285 $22,262 $31,124 $95,333 Cost of fee building 19,268 21,770 21,615 30,628 93,281 Fee building gross margin $394 $515 $647 $496 $2,052 Pretax income (loss) $(2,651) $2,565 $(4,778) $(6,952) $(11,816)Net income (loss) attributable to The New Home Company Inc. $(1,987) $1,572 $(4,624) $(2,998) $(8,037)Basic earnings (loss) per share attributable to The New HomeCompany Inc.(1) $(0.10) $0.08 $(0.23) $(0.15) $(0.40)Diluted earnings (loss) per share attributable to The New HomeCompany Inc.(1) $(0.10) $0.08 $(0.23) $(0.15) $(0.40) 2018 Home sales revenue $79,437 $117,460 $119,874 $187,258 $504,029 Cost of home sales 69,694 102,678 102,124 162,034 436,530 Home sales impairments — — — 10,000 10,000 Homebuilding gross margin $9,743 $14,782 $17,750 $15,224 $57,499 Fee building revenue $43,794 $38,095 $39,240 $42,408 $163,537 Cost of fee building 42,699 37,038 38,124 41,275 159,136 Fee building gross margin $1,095 $1,057 $1,116 $1,133 $4,401 Pretax income (loss) $(1,511) $182 $3,400 $(22,376) $(20,305)Net income (loss) attributable to The New Home Company Inc. $(640) $115 $2,459 $(16,150) $(14,216)Basic earnings (loss) per share attributable to The New HomeCompany Inc.(1) $(0.03) $0.01 $0.12 $(0.80) $(0.69)Diluted earnings (loss) per share attributable to The New HomeCompany Inc.(1) $(0.03) $0.01 $0.12 $(0.80) $(0.69) (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 annualweighted average share calculations. 96Table of Contents 17. Supplemental Disclosure of Cash Flow Information The following table presents certain supplemental cash flow information: Year Ended December 31, 2019 2018 2017 (Dollars in thousands) Supplemental disclosures of cash flow information Interest paid, net of amounts capitalized $— $— $— Income taxes paid $270 $7,110 $14,050 Supplemental disclosures of non-cash transactions Assets assumed from unconsolidated joint ventures $— $— $26,613 Liabilities and equity assumed from unconsolidated joint ventures $— $— $27,608 18. Supplemental Guarantor Information The Company's Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% ownedsubsidiaries (collectively, the "Guarantors"). The guarantees are full and unconditional. The Indenture governing the Notes provides that theguarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or otherdisposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is nolonger a "Restricted Subsidiary" (as defined in the Indenture), which sale, transfer, exchange or other disposition is made in compliance withapplicable provisions of the Indenture; (2) upon the proper designation of such Guarantor as an "Unrestricted Subsidiary" (as defined in theIndenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’ certificate provided to thetrustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the indenture), so long as such Guarantor wouldnot otherwise be required to provide a guarantee pursuant to the Indenture; provided that, if immediately after giving effect to such releasethe consolidated tangible assets of all Immaterial Subsidiaries that are not Guarantors would exceed 5.0% of consolidated tangible assets, nosuch release shall occur, (4) if the Company exercises its legal defeasance option or covenant defeasance option under the Indenture or if theobligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the Indenture, upon such exerciseor discharge; (5) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of anyindebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required toprovide a guarantee pursuant to the Indenture; or (6) upon the full satisfaction of the Company’s obligations under the Indenture; providedthat in each case if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicableprovisions of the Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full anddischarged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicableprovisions of the Indenture. The Company has determined that separate, full financial statements of the Guarantors would not be material toinvestors and, accordingly, supplemental financial information for the guarantors is presented. 97Table of Contents SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS December 31, 2019 NWHM Inc. GuarantorSubsidiaries Non-GuarantorSubsidiaries ConsolidatingAdjustments ConsolidatedNWHM (Dollars in thousands) Assets Cash and cash equivalents $66,166 $12,978 $170 $— $79,314 Restricted cash — 117 — — 117 Contracts and accounts receivable 3 16,403 — (424) 15,982 Intercompany receivables 258,372 — — (258,372) — Due from affiliates — 238 — — 238 Real estate inventories — 433,938 — — 433,938 Investment in and advances to unconsolidated jointventures — 30,217 — — 30,217 Investment in subsidiaries 198,448 — — (198,448) — Other assets 26,508 16,840 35 — 43,383 Total assets $549,497 $510,731 $205 $(457,244) $603,189 Liabilities and equity Accounts payable $68 $24,973 $3 $— $25,044 Accrued expenses and other liabilities 11,950 28,999 26 (421) 40,554 Intercompany payables — 258,372 — (258,372) — Due to affiliates — 3 — (3) — Senior notes, net 304,832 — — — 304,832 Total liabilities 316,850 312,347 29 (258,796) 370,430 Total stockholders' equity 232,647 198,384 64 (198,448) 232,647 Non-controlling interest in subsidiary — — 112 — 112 Total equity 232,647 198,384 176 (198,448) 232,759 Total liabilities and equity $549,497 $510,731 $205 $(457,244) $603,189 December 31, 2018 NWHM Inc. GuarantorSubsidiaries Non-GuarantorSubsidiaries ConsolidatingAdjustments ConsolidatedNWHM (Dollars in thousands) Assets Cash and cash equivalents $28,877 $13,249 $147 $— $42,273 Restricted cash — 269 — — 269 Contracts and accounts receivable 7 18,926 — (668) 18,265 Intercompany receivables 192,341 — — (192,341) — Due from affiliates — 1,218 — — 1,218 Real estate inventories — 566,290 — — 566,290 Investment in and advances to unconsolidated jointventures — 34,330 — — 34,330 Investment in subsidiaries 396,466 — — (396,466) — Other assets 18,643 14,812 — (3) 33,452 Total assets $636,334 $649,094 $147 $(589,478) $696,097 Liabilities and equity Accounts payable $240 $39,151 $— $— $39,391 Accrued expenses and other liabilities 8,492 21,129 71 (664) 29,028 Intercompany payables — 192,341 — (192,341) — Due to affiliates — 7 — (7) — Unsecured revolving credit facility 67,500 — — — 67,500 Senior notes, net 320,148 — — — 320,148 Total liabilities 396,380 252,628 71 (193,012) 456,067 Total stockholders' equity 239,954 396,466 — (396,466) 239,954 Non-controlling interest in subsidiary — — 76 — 76 Total equity 239,954 396,466 76 (396,466) 240,030 Total liabilities and equity $636,334 $649,094 $147 $(589,478) $696,097 98Table of Contents SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2019 NWHM Inc. GuarantorSubsidiaries Non-GuarantorSubsidiaries ConsolidatingAdjustments ConsolidatedNWHM (Dollars in thousands) Revenues: Home sales $— $532,352 $— $— $532,352 Land sales — 41,664 — — 41,664 Fee building — 95,333 — — 95,333 — 669,349 — — 669,349 Cost of Sales: Home sales — 469,661 (104) — 469,557 Home sales impairments — 8,300 — — 8,300 Land sales — 43,169 — — 43,169 Land sales impairments — 1,900 — — 1,900 Fee building — 93,281 — — 93,281 — 616,311 (104) — 616,207 Gross Margin: Home sales — 54,391 104 — 54,495 Land sales — (3,405) — — (3,405)Fee building — 2,052 — — 2,052 — 53,038 104 — 53,142 Selling and marketing expenses — (36,357) — — (36,357)General and administrative expenses (387) (25,333) (3) — (25,723)Equity in net loss of unconsolidated joint ventures — (3,503) — — (3,503)Equity in net loss of subsidiaries (7,963) — — 7,963 — Gain on early extinguishment of debt 1,164 — — — 1,164 Other income (expense), net (286) (253) — — (539)Pretax income (loss) (7,472) (12,408) 101 7,963 (11,816)(Provision) benefit for income taxes (565) 4,380 — — 3,815 Net income (loss) (8,037) (8,028) 101 7,963 (8,001)Net income attributable to non-controlling interest insubsidiary — — (36) — (36)Net income (loss) attributable to The New HomeCompany Inc. $(8,037) $(8,028) $65 $7,963 $(8,037) 99Table of Contents Year Ended December 31, 2018 NWHM Inc. GuarantorSubsidiaries Non-GuarantorSubsidiaries ConsolidatingAdjustments ConsolidatedNWHM (Dollars in thousands) Revenues: Home sales $— $504,029 $— $— $504,029 Fee building — 163,537 — — 163,537 — 667,566 — — 667,566 Cost of Sales: Home sales — 436,508 22 — 436,530 Home sales impairments — 10,000 — — 10,000 Fee building — 159,136 — — 159,136 — 605,644 22 — 605,666 Gross Margin: Home sales — 57,521 (22) — 57,499 Fee building — 4,401 — — 4,401 — 61,922 (22) — 61,900 Selling and marketing expenses — (36,065) — — (36,065)General and administrative expenses 4,330 (30,293) (3) — (25,966)Equity in net loss of unconsolidated joint ventures — (19,653) — — (19,653)Equity in net loss of subsidiaries (17,372) — — 17,372 — Other income (expense), net (66) (455) — — (521)Pretax loss (13,108) (24,544) (25) 17,372 (20,305)(Provision) benefit for income taxes (1,108) 7,183 — — 6,075 Net loss (14,216) (17,361) (25) 17,372 (14,230)Net loss attributable to non-controlling interest insubsidiary — — 14 — 14 Net loss attributable to The New Home CompanyInc. $(14,216) $(17,361) $(11) $17,372 $(14,216) 100Table of Contents Year Ended December 31, 2017 NWHM Inc. GuarantorSubsidiaries Non-GuarantorSubsidiaries ConsolidatingAdjustments ConsolidatedNWHM (Dollars in thousands) Revenues: Home sales $— $560,842 $— $— $560,842 Fee building — 190,324 — — 190,324 — 751,166 — — 751,166 Cost of Sales: Home sales — 473,181 32 — 473,213 Home sales impairments — 2,200 — — 2,200 Fee building — 184,827 — — 184,827 — 660,208 32 — 660,240 Gross Margin: Home sales — 85,461 (32) — 85,429 Fee building — 5,497 — — 5,497 — 90,958 (32) — 90,926 Selling and marketing expenses — (32,702) — — (32,702)General and administrative expenses (2,403) (23,927) — — (26,330)Equity in net income of unconsolidated joint ventures — 866 — — 866 Equity in net income of subsidiaries 21,773 — — (21,773) — Other income (expense), net 107 (336) — — (229)Pretax income (loss) 19,477 34,859 (32) (21,773) 32,531 Provision for income taxes (2,325) (13,065) — — (15,390)Net income (loss) 17,152 21,794 (32) (21,773) 17,141 Net loss attributable to non-controlling interest insubsidiary — — 11 — 11 Net income (loss) attributable to The New HomeCompany Inc. $17,152 $21,794 $(21) $(21,773) $17,152 101Table of Contents SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2019 NWHM Inc. GuarantorSubsidiaries Non-GuarantorSubsidiaries ConsolidatingAdjustments ConsolidatedNWHM (Dollars in thousands) Net cash provided by (used in) operating activities $(66,965) $189,352 $23 $(1,152) $121,258 Investing activities: Purchases of property and equipment (14) (27) — — (41)Contributions and advances to unconsolidated jointventures — (8,826) — — (8,826)Contributions to subsidiaries from corporate (98,620) — — 98,620 — Distributions of capital from subsidiaries to corporate 287,523 — — (287,523) — Distributions of capital and repayment of advancesfrom unconsolidated joint ventures — 9,133 — — 9,133 Net cash provided by investing activities $188,889 $280 $— $(188,903) $266 Financing activities: Borrowings from credit facility 50,000 — — — 50,000 Repayments of credit facility (117,500) — — — (117,500)Repurchases of senior notes (15,605) — — — (15,605)Contributions to subsidiaries from corporate — 98,620 — (98,620) — Distributions to corporate from subsidiaries — (288,675) — 288,675 — Repurchases of common stock (1,042) — — — (1,042)Tax withholding paid on behalf of employees for stockawards (488) — — — (488)Net cash used in financing activities $(84,635) $(190,055) $— $190,055 $(84,635)Net increase (decrease) in cash, cash equivalents andrestricted cash 37,289 (423) 23 — 36,889 Cash, cash equivalents and restricted cash – beginningof period 28,877 13,518 147 — 42,542 Cash, cash equivalents and restricted cash – end ofperiod $66,166 $13,095 $170 $— $79,431 102Table of Contents Year Ended December 31, 2018 NWHM Inc. GuarantorSubsidiaries Non-GuarantorSubsidiaries ConsolidatingAdjustments ConsolidatedNWHM (Dollars in thousands) Net cash used in operating activities $(63,076) $(71,789) $(41) $(4,779) $(139,685)Investing activities: Purchases of property and equipment (49) (197) — — (246)Contributions and advances to unconsolidated jointventures — (15,066) — — (15,066)Contributions to subsidiaries from corporate (249,435) — — 249,435 — Distributions of capital from subsidiaries to corporate 183,896 — — (183,896) — Distributions of capital and repayment of advancesfrom unconsolidated joint ventures — 15,436 — — 15,436 Interest collected on advances to unconsolidated jointventures — 178 — — 178 Net cash (used in) provided by investing activities $(65,588) $351 $— $65,539 $302 Financing activities: Borrowings from credit facility 150,000 — — — 150,000 Repayments of credit facility (82,500) — — — (82,500)Contributions to subsidiaries from corporate — 249,435 — (249,435) — Distributions to corporate from subsidiaries — (188,675) — 188,675 — Repurchases of common stock (8,563) — — — (8,563)Tax withholding paid on behalf of employees for stockawards (982) — — — (982)Net cash provided by financing activities $57,955 $60,760 $— $(60,760) $57,955 Net decrease in cash, cash equivalents and restrictedcash (70,709) (10,678) (41) — (81,428)Cash, cash equivalents and restricted cash – beginningof period 99,586 24,196 188 — 123,970 Cash, cash equivalents and restricted cash – end ofperiod $28,877 $13,518 $147 $— $42,542 103Table of Contents Year Ended December 31, 2017 NWHM Inc. GuarantorSubsidiaries Non-GuarantorSubsidiaries ConsolidatingAdjustments ConsolidatedNWHM (Dollars in thousands) Net cash used in operating activities $(31,824) $(41,900) $(81) $(17,058) $(90,863)Investing activities: Purchases of property and equipment (71) (124) — — (195)Cash assumed from joint venture at consolidation — 995 — — 995 Contributions and advances to unconsolidated jointventures — (27,479) — — (27,479)Contributions to subsidiaries from corporate (275,794) — — 275,794 — Distributions of capital from subsidiaries to corporate 192,478 — — (192,478) — Distributions of capital and repayment of advancesfrom unconsolidated joint ventures — 15,577 — — 15,577 Interest collected on advances to unconsolidated jointventures — 552 — — 552 Net cash used in investing activities $(83,387) $(10,479) $— $83,316 $(10,550)Financing activities: Borrowings from credit facility 88,000 — — — 88,000 Repayments of credit facility (206,000) — — — (206,000)Proceeds from senior notes 324,465 — — — 324,465 Repayments of other notes payable — (4,110) — — (4,110)Payment of debt issuance costs (7,565) — — — (7,565)Contributions to subsidiaries from corporate — 275,794 — (275,794) — Distributions to corporate from subsidiaries — (209,536) — 209,536 — Tax withholding paid on behalf of employees for stockawards (590) — — — (590)Proceeds from exercise of stock options 102 — — — 102 Net cash provided by financing activities $198,412 $62,148 $— $(66,258) $194,302 Net increase (decrease) in cash, cash equivalents andrestricted cash 83,201 9,769 (81) — 92,889 Cash, cash equivalents and restricted cash – beginningof period 16,385 14,427 269 — 31,081 Cash, cash equivalents and restricted cash – end ofperiod $99,586 $24,196 $188 $— $123,970 104Table of Contents ExhibitNumber Exhibit Description 3.1 Amended and Restated Certificate of Incorporation of The New Home Company Inc. (incorporated by reference to Exhibit3.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013) 3.2 State of Delaware Certificate of Change of Registered Agent and/or Registered Office (incorporated by reference toExhibit 3.1 of the Company's Current Report on Form 8-K filed on August 1, 2016) 3.3 Amended and Restated Bylaws of The New Home Company Inc. (incorporated by reference to Exhibit 3.II of theCompany's Current Report on Form 8-K filed on November 1, 2019) 4.1 Specimen Common Stock Certificate of The New Home Company Inc. (incorporated by reference to Exhibit 4.1 of theCompany’s Registration Statement on Form S-1 (Amendment No. 10, filed on January 24, 2014)) 4.2 Investor Rights Agreement among The New Home Company Inc., TNHC Partners LLC, IHP Capital Partners VI, LLC,WATT/TNHC LLC, TCN/TNHC LP and collectively H. Lawrence Webb, Wayne J. Stelmar, Joseph D. Davis and ThomasRedwitz (incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2013) 4.3 Indenture, dated as of March 17, 2017, among the Company, the Guarantors and U.S. Bank National Association, astrustee, including form of 7.25% Senior Notes due 2022 (incorporated by reference to Exhibit 4.1 to the Company’s CurrentReport on Form 8-K filed on March 20, 2017) 4.4 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) 4.5 Officers' Certificate, dated May 4, 2017, delivered pursuant to the Indenture, and setting forth the terms of the AdditionalNotes 7.25% Senior Notes due 2022 (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed on May 5, 2017) 4.6 Second Supplemental Indenture dated as of July 28, 2017 between the Company, the guaranteeing subsidiaries, asdefined herein, and U.S. Bank National Association (incorporated by reference to Exhibit 4.3 to the Company's Form 10-Qfor the quarter ended September 30, 2017) 4.7 Third Supplemental Indenture dated as of September 18, 2017 between the Company, DMB/TNHC LLC and U.S. BankNational Association (incorporated by reference to Exhibit 4.4 to the Company's Form 10-Q for the quarter endedSeptember 30, 2017) 4.8 Fourth Supplemental Indenture, dated as of October 27, 2017 between the Company, TNHC Tidelands LLC, TNHCArizona Marketing LLC and U.S. Bank National Association (incorporated by reference to Exhibit 4.9 of the Company'sAnnual Report on Form 10-K for the year ended December 31, 2017) 4.9 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 endedMarch 31, 2018) 4.10* Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 10.1 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 onForm 10-K for the year ended December 31, 2013) 10.2† The New Home Company Inc. 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 of the Company'sAnnual Report on Form 10-K for the year ended December 31, 2013) 10.3† The New Home Company Inc. Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.4 of theCompany's Annual Report on Form 10-K for the year ended December 31, 2013) 10.4† 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)105Table of Contents 10.5† 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 December31, 2013) 10.5(a)† 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 December31, 2013) 10.5(b)† The New Home Company Inc. 2014 Long-Term Incentive Plan form of Restricted Stock Unit Award Agreement forNonemployee Directors (incorporated by reference to Exhibit 10.11(a) of the Company's Annual Report on Form 10-K forthe year ended December 31, 2015) 10.6 Amended and Restated Credit Agreement, dated May 10, 2016, among The New Home Company Inc., U.S. Bank NationalAssociation d/b/a Housing Capital Company, as Administrative Agent, and the other lenders party thereto (incorporatedby reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on May 11, 2016) 10.7+ Agreement of Limited Partnership of Arantine Hills Holdings LP (incorporated by reference to Exhibit 10.1 of theCompany's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014) 10.8† 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2016) 10.9† 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 Quarterly Report on Form 10-Q for the quarter ended March31, 2017) 10.10 Letter agreement re: Arantine Hills Holdings LP - funding Excess Shortfall among TNHC-Arantine GP LLC, TNHC LandCompany LLC and Arantine Hills Equity LP dated as of June 28, 2017 (incorporated by reference to Exhibit 10.2 to theCompany's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017) 10.11+ Limited Liability Company Agreement of TNHC Russell Ranch LLC, dated as of May 22, 2013, between TNHC LandCompany LLC and IHP Capital Partners VI, LLC (incorporated by reference to Exhibit 10.1 to the Company's QuarterlyReport on Form 10-Q for the quarter ended September 30, 2017) 10.12+ 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 theCompany's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017) 10.13 Modification Agreement, dated as of September 27, 2017, among The New Home Company Inc., U.S. Bank NationalAssociation, d/b/a Housing Capital Company, and the lenders party thereto (incorporated by reference to Exhibit 10.1 tothe Company's Current Report on Form 8-K filed on October 2, 2017) 10.14† 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) 10.15† 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) 10.16† First Amendment to The New Home Company Inc. 2014 Long-Term Incentive Plan dated February 12, 2018 (incorporatedby reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2018) 10.17 Amendment No. 1 to Investor Rights Agreement among The New Home Company Inc., TNHC Partners LLC, IHP CapitalPartners 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 filedon May 23, 2018) 10.18† The New Home Company Inc. Amended and Restated 2016 Incentive Award Plan (incorporated by reference to Exhibit10.2 of the Company's Current Report on Form 8-K filed on May 23, 2018)106Table of Contents 10.19 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 tothe Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018) 10.20† The New Home Company Inc. 2016 Incentive Award Plan form of Stock Option Award Agreement (incorporated byreference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019) 10.21† The New Home Company Inc. 2016 Incentive Award Plan form of Restricted Stock Unit Award Agreement (incorporatedby reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2019) 10.22 Separation and Release Agreement, dated February 14, 2019, by and between The New Home Company Inc. and ThomasRedwitz (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2019) 10.23 Consulting Agreement, dated February 14, 2019, by and between The New Home Company Inc. and ThomasRedwitz (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2019) 10.24† The New Home Company Inc. Non-Employee Director Compensation Program, amended and restated on April 30,2019 (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2019) 10.25† Amended and Restated Employment Agreement by and between The New Home Company Inc. and Leonard Miller, datedJuly 30, 2019 (incorporated by reference to Exhibit 10.1 for the Company's Current Report on Form 8-K filed on July 30,2019) 10.26† Amended and Restated Employment Agreement by and between The New Home Company Inc. and H. Lawrence Webb,dated July 30, 2019 (incorporated by reference to Exhibit 10.2 for the Company's Current Report on Form 8-K filed on July30, 2019) 10.27† Amended and Restated Employment Agreement by and between The New Home Company Inc. and John Stephens,dated July 30, 2019 (incorporated by reference to Exhibit 10.3 for the Company's Current Report on Form 8-K filed on July30, 2019) 10.28 Second Amendment to Limited Liability Company Agreement of TNHC Russell Ranch between TNHC Land CompanyLLC and IHP Capital Partners VI, LLC (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report onForm 10-Q for the quarter ended June 30, 2019) 10.29 Second Modification Agreement, dated as of August 7, 2019, among The New Home Company Inc., U.S. Bank NationalAssociation, d/b/a Housing Capital Company, and the lenders party thereto. (incorporated by reference to Exhibit 10.1 forthe Company's Current Report on Form 8-K filed on August 12, 2019) 10.30 Letter agreement re: Arantine Hills Holdings LP - Funding of Excess Shortfall among TNHC-Arantine GP LLC, TNHC LandCompany LLC, and Arantine Hills Equity LP dated as of September 24, 2019 (incorporated by reference to Exhibit 10.5 tothe Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019) 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 13, 2020 31.2* Chief Financial Officer Section 302 Certification of Periodic Report dated February 13, 2020 32.1** Chief Executive Officer Section 906 Certification of Periodic Report dated February 13, 2020 32.2** Chief Financial Officer Section 906 Certification of Periodic Report dated February 13, 2020107Table of Contents 101* The following materials from The New Home Company Inc.’s Annual Report on Form 10-K for the year ended December31, 2019, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii)Consolidated Statements of Operations, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of CashFlows, and (v) Notes to Audited Consolidated Financial Statements. 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags areembedded within the Inline XBRL document. 104* Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document andcontained in Exhibit 101).†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 withthe 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 Actof 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall they be deemedincorporated 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. 108Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized. The New Home Company Inc. By: /s/ Leonard S. Miller Leonard S. Miller President and Chief Executive Officer Date: February 13, 2020 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Leonard S. Miller President and Chief ExecutiveOfficer (Principal Executive Officer) February 13, 2020Leonard S. Miller /s/ John M. Stephens Executive Vice President andChief Financial Officer (Principal FinancialOfficer and Principal Accounting Officer) February 13, 2020John M. Stephens /s/ H. Lawrence Webb Chairman of the Board February 13, 2020H. Lawrence Webb /s/ Sam Bakhshandehpour Director February 13, 2020Sam Bakhshandehpour /s/ Michael Berchtold Director February 13, 2020Michael Berchtold /s/ Paul Heeschen Director February 13, 2020Paul Heeschen /s/ Gregory P. Lindstrom Director February 13, 2020Gregory P. Lindstrom /s/ Cathey S. Lowe Director February 13, 2020Cathey S. Lowe /s/ Douglas C. Neff Director February 13, 2020Douglas C. Neff /s/ Wayne Stelmar Director February 13, 2020Wayne Stelmar 109Exhibit 4.10 DESCRIPTION OF THE REGISTRANT’S SECURITIESREGISTERED PURSUANT TO SECTION 12 OF THE SECURITIESEXCHANGE ACT OF 1934 The New Home Company Inc. has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended:our common stock DESCRIPTION OF COMMON STOCK As used in this exhibit only, the “Company,” “we,” “our” or “us” refer to The New Home Company Inc., excluding our subsidiaries,unless expressly stated or the context otherwise requires. The following description is intended as a summary of our Amended and Restated Certificate of Incorporation, or our Charter, ourAmended and Restated Bylaws, or our Bylaws, and to applicable provisions of the Delaware General Corporation Law, or the DGCL. Thefollowing description is only a summary of the material provisions of our capital stock, the Charter, and the Bylaws and does not purport tobe complete and is qualified in its entirety by reference to the provisions of the Charter and the Bylaws. GeneralOur authorized capital stock consists of 500,000,000 shares of common stock, par value of $0.01 per share, and 50,000,000 shares ofpreferred stock, par value $0.01 per share. Our common stock is traded on the New York Stock Exchange under the symbol “NWHM.” The registrar and transfer agent for our common stock is American Stock Transfer & Trust Company, LLC. Common StockShares of our common stock have the following rights, preferences and privileges: •Voting Rights. Each outstanding share of common stock entitles its holder to one vote on all matters submitted to a vote of ourstockholders, including the election of directors. There are no cumulative voting rights. Generally, all matters to be voted on bystockholders must be approved by a majority of the votes cast by the shares of common stock present in person or represented byproxy and entitled to vote. •Dividends. Subject to the rights of the holders of any preferred stock that may be outstanding from time to time, the holders ofcommon stock are entitled to receive dividends as, when and if dividends are declared by our board of directors out of assets legallyavailable for the payment of dividends. Any future determination to pay dividends will be at the discretion of our board of directorsand will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financinginstruments and such other factors as our board of directors deems relevant. •Liquidation. In the event of a liquidation, dissolution or winding up of our affairs, whether voluntary or involuntary, after paymentof our liabilities and obligations to creditors and any holders of preferred stock, our remaining assets, if any, will be distributedratably among the holders of shares of common stock on a per share basis. •Rights and Preferences. Holders of our common stock have no preference, exchange, sinking fund, redemption, appraisal rights orpreemptive rights to subscribe for any of our securities. The rights, powers, preferences and privileges of holders of our commonstock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that wemay designate and issue in the future. •Merger. In the event we merge or consolidate with or into another entity, holders of each share of common stock generally will beentitled to receive the same per share consideration. Preferred StockOur Charter provides that our board of directors has the authority, without action by the stockholders, to designate and issue up to50,000,000 shares of preferred stock in one or more classes or series and to fix the powers, rights, preferences and privileges of each class orseries, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of sharesconstituting any class or series. The rights fixed as to any class or series of preferred stock may be greater than the rights of the holders ofthe common stock. Any issuance of shares of preferred stock could adversely affect the voting power and liquidation rights of holders ofcommon stock, and the likelihood that the holders will receive dividend payments and payments upon liquidation could have the effect ofdelaying, deferring or preventing a change in control that might otherwise be favorable to our common stockholders. Anti-Takeover Effects of Our Charter, Our Bylaws and Delaware LawSome provisions of Delaware law, our Charter and our Bylaws contain provisions that could have the effect of delaying, deterring orpreventing another party from acquiring or seeking to acquire control of us. These provisions are intended to discourage certain types ofcoercive takeover practices and inadequate takeover bids and to encourage anyone seeking to acquire control of us to negotiate first withour board of directors. However, these provisions may also delay, deter or prevent a change in control or other takeover of our company thatour stockholders might consider to be in their best interests, including transactions that might result in a premium being paid over the marketprice of our common stock, and also may limit the price that investors are willing to pay in the future for our common stock. These provisionsmay also have the effect of preventing changes in our management. Our Charter divides our board of directors into three classes. Our stockholders elect directors for three-year terms upon theexpiration of their current terms. Our stockholders will elect only one class of directors each year. The classified board provision could havethe effect of making the replacement of incumbent directors more time consuming and difficult. At least two annual meetings of ourstockholders will generally be required to effect a change in a majority of our board of directors. Our Charter and BylawsOur Charter and Bylaws include provisions that: •authorize our board of directors, without further action by the stockholders, to issue up to 50,000,000 shares of preferred stock in oneor more classes or series, and to fix the number of shares constituting each class or series and establish the rights and other terms ofthat class or series; •require that actions to be taken by our stockholders may be taken only at an annual or special meeting of our stockholders and notby written consent; •specify that special meetings of our stockholders can be called only by our board of directors pursuant to a resolution adopted by amajority of the total number of directors then in office, the chairman of our board of directors or our chief executive officer; •establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of directors andother proposals to be brought before a stockholders’ meeting; •provide that our bylaws may be amended by our board of directors without stockholder approval; •allow our directors to establish the size of our board of directors by action of our board, subject to a minimum of three members; •provide that vacancies on our board of directors or newly created directorships resulting from an increase in the number of ourdirectors may be filled only by a majority of directors then in office, even though less than a quorum; and •prohibit us from engaging in certain business combinations with any “interested stockholder” unless specified conditions aresatisfied as described below under “--Business Combinations.” Business CombinationsWe have opted out of Section 203 of the DGCL, which regulates corporate takeovers. However, our Charter contains provisions thatare similar to Section 203 of the DGCL. Specifically, our Charter provides that we may not engage in certain “business combinations” with any“interested stockholder” for a three-year period following the time that the person became an interested stockholder, unless: •prior to the time that person became an interested stockholder, our board of directors approved either the business combination orthe transaction which resulted in the person becoming an interested stockholder; •upon consummation of the transaction which resulted in the person becoming an interested stockholder, the interested stockholderowned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding certainshares; or •at or subsequent to the time the person became an interested stockholder, the business combination is approved by our board ofdirectors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interestedstockholder. Generally, a business combination includes a merger, consolidation, asset or stock sale or other transaction resulting in a financialbenefit to the interested stockholder. Subject to certain exceptions, an interested stockholder is a person who, together with that person’saffiliates and associates, owns, or within the previous three years owned, 15% or more of our voting stock. This provision could prohibit ordelay mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us intransactions that may otherwise be favorable to our stockholders. Exhibit 21.1THE NEW HOME COMPANY INC.SUBSIDIARIES Subsidiary State of Incorporation or FormationTNHC Realty and Construction Inc.(2) DelawareThe New Home Company Southern California LLC DelawareTNHC-Santa Clarita GP, LLC DelawareTNHC-TCN Santa Clarita, LP* DelawareTNHC Meridian Investors LLC* DelawareTNHC Newport LLC* DelawareTNHC-Calabasas GP LLC DelawareCalabasas Village LP* DelawareTNHC San Juan LLC DelawareLR8 Investors, LLC (1) DelawareLR8 Owner, LLC DelawareThe New Home Company Northern California LLC DelawareLarkspur Land 8 Investors LLC (3) DelawareLarkspur Land 8 Owner LLC DelawareTNHC-HW San Jose LLC* DelawareMcKinley Village LLC* DelawareEncore McKinley Village LLC* DelawareTNHC Grove Investment LLC DelawareThe Grove at Granite Bay, LLC* CaliforniaTNHC Tidelands LLC (4) DelawareTNHC Land Company LLC DelawareTNHC Canyon Oaks LLC DelawareTNHC Russell Ranch LLC* DelawareTNHC-HW Foster City LLC* DelawareTNHC-HW Cannery LLC* DelawareTNHC-Arantine GP LLC DelawareArantine Hills Holdings LP* DelawareTNHC Arizona LLC DelawareTNHC Mountain Shadows LLC* DelawareDMB/TNHC LLC (5) DelawareTNHC Arizona Marketing LLC DelawareTNHC Holdings LLC DelawareTNHC Holdings 1 LLC Delaware * Entities marked with * are our joint ventures at December 31, 2019. Some such entities are lower tier investees in which we only hold an indirectinterest 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 toconsolidate 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, NewHome 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 toconsolidate this venture as a wholly owned subsidiary. (4) During October 2017, the Company's outside equity partner exited this joint venture and upon the change in control, we were required toconsolidate this venture as a wholly owned subsidiary. (5) During August 2017, the Company's outside equity partner exited this joint venture and upon the change in control, we were required toconsolidate this venture as a wholly owned subsidiary.Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 IncentivePlan; and 3.Registration Statements (Form S-8 No. 333-211756 and No. 333-217515) pertaining to The New Home Company Inc. 2016Incentive Award plan; of our reports dated February 13, 2020, with respect to the consolidated financial statements of The New Home Company Inc. and theeffectiveness of internal controls over financial reporting of The New Home Company Inc., included in this Annual Report (Form 10-K) for theyear ended December 31, 2019, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Irvine, CaliforniaFebruary 13, 2020Exhibit 31.1Section 302 CERTIFICATIONI, Leonard S. Miller, certify that: (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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; (3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects 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 (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial 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 conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably 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 financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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’sinternal control over financial reporting. Date:February 13, 2020 /s/ Leonard S. Miller Leonard S. Miller President and Chief Executive Officer (Principal ExecutiveOfficer) Exhibit 31.2Section 302 CERTIFICATIONI, John M. Stephens, certify that: (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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report; (3)Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects 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 (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known tous 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 designedunder our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial 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 conclusionsabout the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably 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 financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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’sinternal control over financial reporting. Date:February 13, 2020 /s/ John M. Stephens John M. Stephens Executive Vice President and Chief Financial Officer(Principal Financial Officer) Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of The New Home Company Inc. (the “Company”) for the period ended December 31, 2019as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leonard S. Miller, President and Chief Executive Officerof 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 operationsof the Company. Date:February 13, 2020 /s/ Leonard S. Miller Leonard S. Miller President and Chief Executive Officer (Principal ExecutiveOfficer) Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of The New Home Company Inc. (the “Company”) for the period ended December 31, 2019as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John M. Stephens, Executive Vice President and ChiefFinancial 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 operationsof the Company. Date:February 13, 2020 /s/ John M. Stephens John M. Stephens Executive Vice President and Chief Financial Officer(Principal Financial Officer) H. Lawrence Webb Chairman of the Board, Executive Chairman, The New Home Company Michael J. Berchtold (3) Lead Independent Director, The New Home Company Chief Executive Officer, Berchtold Capital Partners Sam Bakhshandehpour (1)(2)(4) CEO & Managing Partner, The Silverstone Companies, LLC BOARD OF DIRECTORS Paul Heeschen (1)(3)(4) Principal, Heeschen & Associates Douglas C. Neff President, IHP Capital Partners Gregory P. Lindstrom (2)(3)(4) Alternative Dispute Resolution Professional & Former General Counsel, The Irvine Company Wayne Stelmar Former Chief Investment Officer, The New Home Company Cathey S. Lowe (1)(2)(4) Owner, Cathey Lowe Consulting, LLC (1) Audit Committee Member (2) Compensation Committee Member (3) Nominating & Corporate Governance Committee Member (4) Related Party Review Committee Member EXECUTIVE OFFICERS H. Lawrence Webb Executive Chairman Leonard S. Miller President & Chief Executive Officer John M. Stephens Executive Vice President & 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 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, 2019 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. E H T N E W HOME C O M P A N Y

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