|
|
|
Item 1.
|
Financial Statements
|
THE NEW HOME COMPANY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(Unaudited)
|
|
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
153,959
|
|
|
$
|
30,496
|
|
Restricted cash
|
88
|
|
|
585
|
|
Contracts and accounts receivable
|
18,321
|
|
|
27,833
|
|
Due from affiliates
|
2,062
|
|
|
1,138
|
|
Real estate inventories
|
365,400
|
|
|
286,928
|
|
Investment in and advances to unconsolidated joint ventures
|
55,864
|
|
|
50,857
|
|
Other assets
|
23,916
|
|
|
21,299
|
|
Total assets
|
$
|
619,610
|
|
|
$
|
419,136
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
Accounts payable
|
$
|
34,215
|
|
|
$
|
33,094
|
|
Accrued expenses and other liabilities
|
19,473
|
|
|
23,418
|
|
Unsecured revolving credit facility
|
—
|
|
|
118,000
|
|
Senior notes, net
|
318,121
|
|
|
—
|
|
Total liabilities
|
371,809
|
|
|
174,512
|
|
Commitments and contingencies (Note 10)
|
|
|
|
Equity:
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 par value, 500,000,000 shares authorized, 20,875,666 and 20,712,166, shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
|
209
|
|
|
207
|
|
Additional paid-in capital
|
197,983
|
|
|
197,161
|
|
Retained earnings
|
49,518
|
|
|
47,155
|
|
Total stockholders' equity
|
247,710
|
|
|
244,523
|
|
Noncontrolling interest in subsidiary
|
91
|
|
|
101
|
|
Total equity
|
247,801
|
|
|
244,624
|
|
Total liabilities and equity
|
$
|
619,610
|
|
|
$
|
419,136
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
THE NEW HOME COMPANY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
Home sales
|
$
|
96,929
|
|
|
$
|
78,836
|
|
|
$
|
166,335
|
|
|
$
|
121,139
|
|
Fee building, including management fees from unconsolidated joint ventures of $1,217, $2,537, $2,431 and $4,712, respectively
|
47,181
|
|
|
30,028
|
|
|
102,798
|
|
|
72,965
|
|
|
144,110
|
|
|
108,864
|
|
|
269,133
|
|
|
194,104
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
Home sales
|
82,488
|
|
|
69,390
|
|
|
142,553
|
|
|
106,060
|
|
Home sales impairments
|
1,300
|
|
|
—
|
|
|
1,300
|
|
|
—
|
|
Fee building
|
45,899
|
|
|
28,317
|
|
|
99,825
|
|
|
69,231
|
|
|
129,687
|
|
|
97,707
|
|
|
243,678
|
|
|
175,291
|
|
|
|
|
|
|
|
|
|
Gross Margin:
|
|
|
|
|
|
|
|
Home sales
|
13,141
|
|
|
9,446
|
|
|
22,482
|
|
|
15,079
|
|
Fee building
|
1,282
|
|
|
1,711
|
|
|
2,973
|
|
|
3,734
|
|
|
14,423
|
|
|
11,157
|
|
|
25,455
|
|
|
18,813
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
(6,376
|
)
|
|
(5,046
|
)
|
|
(11,377
|
)
|
|
(8,522
|
)
|
General and administrative expenses
|
(5,595
|
)
|
|
(5,833
|
)
|
|
(10,685
|
)
|
|
(11,008
|
)
|
Equity in net income of unconsolidated joint ventures
|
201
|
|
|
3,947
|
|
|
507
|
|
|
3,940
|
|
Other income (expense), net
|
(148
|
)
|
|
(286
|
)
|
|
(35
|
)
|
|
(395
|
)
|
Income before income taxes
|
2,505
|
|
|
3,939
|
|
|
3,865
|
|
|
2,828
|
|
Provision for income taxes
|
(988
|
)
|
|
(1,495
|
)
|
|
(1,512
|
)
|
|
(1,253
|
)
|
Net income
|
1,517
|
|
|
2,444
|
|
|
2,353
|
|
|
1,575
|
|
Net loss attributable to noncontrolling interest
|
—
|
|
|
65
|
|
|
10
|
|
|
120
|
|
Net income attributable to The New Home Company Inc.
|
$
|
1,517
|
|
|
$
|
2,509
|
|
|
$
|
2,363
|
|
|
$
|
1,695
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to The New Home Company Inc.:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
Diluted
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
20,869,429
|
|
|
20,709,139
|
|
|
20,819,288
|
|
|
20,654,998
|
|
Diluted
|
20,956,723
|
|
|
20,760,186
|
|
|
20,921,150
|
|
|
20,745,802
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
THE NEW HOME COMPANY INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In thousands, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
Noncontrolling Interest in Subsidiary
|
|
Total Equity
|
|
Number of Shares of
Common
Stock
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Retained Earnings
|
|
Total
Stockholders’
Equity
|
|
|
Balance at December 31, 2015
|
20,543,130
|
|
|
$
|
205
|
|
|
$
|
194,437
|
|
|
$
|
26,133
|
|
|
$
|
220,775
|
|
|
$
|
922
|
|
|
$
|
221,697
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,695
|
|
|
1,695
|
|
|
(120
|
)
|
|
1,575
|
|
Noncontrolling interest distribution
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(725
|
)
|
|
(725
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
1,742
|
|
|
—
|
|
|
1,742
|
|
|
—
|
|
|
1,742
|
|
Shares net settled with the Company to satisfy minimum employee personal income tax liabilities resulting from share based compensation plans
|
—
|
|
|
—
|
|
|
(647
|
)
|
|
—
|
|
|
(647
|
)
|
|
—
|
|
|
(647
|
)
|
Excess tax provision from stock-based compensation
|
—
|
|
|
—
|
|
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
|
—
|
|
|
(97
|
)
|
Shares issued through stock plans
|
168,822
|
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at June 30, 2016
|
20,711,952
|
|
|
$
|
207
|
|
|
$
|
195,433
|
|
|
$
|
27,828
|
|
|
$
|
223,468
|
|
|
$
|
77
|
|
|
$
|
223,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
20,712,166
|
|
|
$
|
207
|
|
|
$
|
197,161
|
|
|
$
|
47,155
|
|
|
$
|
244,523
|
|
|
$
|
101
|
|
|
$
|
244,624
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
2,363
|
|
|
2,363
|
|
|
(10
|
)
|
|
2,353
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
1,306
|
|
|
—
|
|
|
1,306
|
|
|
—
|
|
|
1,306
|
|
Shares net settled with the Company to satisfy minimum employee personal income tax liabilities resulting from share based compensation plans
|
—
|
|
|
—
|
|
|
(584
|
)
|
|
—
|
|
|
(584
|
)
|
|
—
|
|
|
(584
|
)
|
Shares issued through stock plans
|
163,500
|
|
|
2
|
|
|
100
|
|
|
—
|
|
|
102
|
|
|
—
|
|
|
102
|
|
Balance at June 30, 2017
|
20,875,666
|
|
|
$
|
209
|
|
|
$
|
197,983
|
|
|
$
|
49,518
|
|
|
$
|
247,710
|
|
|
$
|
91
|
|
|
$
|
247,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
THE NEW HOME COMPANY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
Net income
|
$
|
2,353
|
|
|
$
|
1,575
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
Deferred taxes
|
(54
|
)
|
|
(27
|
)
|
Amortization of equity based compensation
|
1,306
|
|
|
1,742
|
|
Excess income tax provision from stock-based compensation
|
—
|
|
|
97
|
|
Distributions of earnings from unconsolidated joint ventures
|
1,588
|
|
|
1,095
|
|
Inventory impairments
|
1,300
|
|
|
—
|
|
Equity in net income of unconsolidated joint ventures
|
(507
|
)
|
|
(3,940
|
)
|
Deferred profit from unconsolidated joint ventures
|
497
|
|
|
332
|
|
Depreciation
|
236
|
|
|
251
|
|
Abandoned project costs
|
206
|
|
|
329
|
|
Net changes in operating assets and liabilities:
|
|
|
|
Restricted cash
|
497
|
|
|
104
|
|
Contracts and accounts receivable
|
9,573
|
|
|
9,164
|
|
Due from affiliates
|
(671
|
)
|
|
88
|
|
Real estate inventories
|
(74,407
|
)
|
|
(164,464
|
)
|
Other assets
|
(2,900
|
)
|
|
(5,832
|
)
|
Accounts payable
|
1,160
|
|
|
3,737
|
|
Accrued expenses and other liabilities
|
(11,588
|
)
|
|
(9,711
|
)
|
Due to affiliates
|
—
|
|
|
(239
|
)
|
Net cash used in operating activities
|
(71,411
|
)
|
|
(165,699
|
)
|
Investing activities:
|
|
|
|
Purchases of property and equipment
|
(95
|
)
|
|
(296
|
)
|
Cash assumed from joint venture at consolidation
|
995
|
|
|
2,009
|
|
Contributions and advances to unconsolidated joint ventures
|
(8,517
|
)
|
|
(5,656
|
)
|
Distributions of capital from unconsolidated joint ventures
|
2,948
|
|
|
7,405
|
|
Net cash provided by (used in) investing activities
|
(4,669
|
)
|
|
3,462
|
|
Financing activities:
|
|
|
|
Borrowings from credit facility
|
72,000
|
|
|
175,000
|
|
Repayments of credit facility
|
(190,000
|
)
|
|
(11,000
|
)
|
Proceeds from senior notes
|
324,465
|
|
|
—
|
|
Borrowings from other notes payable
|
—
|
|
|
343
|
|
Repayments of other notes payable
|
—
|
|
|
(15,636
|
)
|
Payment of debt issuance costs
|
(6,440
|
)
|
|
(1,064
|
)
|
Cash distributions to noncontrolling interest in subsidiary
|
—
|
|
|
(725
|
)
|
Minimum tax withholding paid on behalf of employees for stock awards
|
(584
|
)
|
|
(647
|
)
|
Excess income tax provision from stock-based compensation
|
—
|
|
|
(97
|
)
|
Proceeds from exercise of stock options
|
102
|
|
|
—
|
|
Net cash provided by financing activities
|
199,543
|
|
|
146,174
|
|
Net increase (decrease) in cash and cash equivalents
|
123,463
|
|
|
(16,063
|
)
|
Cash and cash equivalents – beginning of period
|
30,496
|
|
|
45,874
|
|
Cash and cash equivalents – end of period
|
$
|
153,959
|
|
|
$
|
29,811
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
The New Home Company Inc. (the “Company”), a Delaware corporation, and its subsidiaries are primarily engaged in all aspects of residential real estate development, including acquiring land and designing, constructing and selling homes in California and Arizona.
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts have been eliminated upon consolidation.
The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
. The accompanying unaudited condensed financial statements include all adjustments (consisting of normal recurring entries) necessary for the fair presentation of our results for the interim period presented. Results for the interim period are not necessarily indicative of the results to be expected for the full year.
Unless the context otherwise requires, the terms “we”, “us”, “our” and “the Company” refer to the Company and its wholly owned subsidiaries, on a consolidated basis.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying condensed consolidated financial statements and notes. Accordingly, actual results could differ materially from these estimates.
Reclassifications
Certain items in the prior year condensed consolidated statement of cash flows related to capitalized selling and marketing expenses have been reclassified to conform with current year presentation. Effective July 1, 2016, capitalized selling and marketing costs were reclassified to other assets from real estate inventories. Prior year periods have been reclassified to conform.
Segment Reporting
Accounting Standards Codification (“ASC”) 280,
Segment Reporting
(“ASC 280”) established standards for the manner in which public enterprises report information about operating segments. In accordance with ASC 280, we have determined that our homebuilding division and our fee building division are our operating segments, which are also our reportable segments.
Cash and Cash Equivalents
We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short term liquid investments with a maturity date of less than three months from the date of purchase.
Restricted Cash
Restricted cash of
$0.1 million
and
$0.6 million
as of
June 30, 2017
and
December 31, 2016
, respectively, is held in accounts for payments of subcontractor costs incurred in connection with various fee building projects.
Real Estate Inventories and Cost of Sales
We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect construction costs. Pre-acquisition costs, including non-refundable land deposits, are expensed to other income (expense), net if we determine continuation of the prospective project is not probable.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Land, development and other common costs are typically allocated to real estate inventories using a methodology that approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost of sales for homes closed includes the estimated total construction costs of each home at completion and an allocation of all applicable land acquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value of the home within each project. Changes in estimated development and common costs are allocated prospectively to remaining homes in the project.
In accordance with Accounting Standards Codification ("ASC") 360,
Property, Plant and Equipment
(“ASC 360”), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset on a periodic basis or whenever indicators of impairment exist. Real estate assets include projects actively selling and projects under development or held for future development. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases in gross margins or sales absorption rates, costs significantly in excess of budget, and actual or projected cash flow losses.
If there are indicators of impairment, we perform a detailed budget and cash flow review of the applicable real estate inventories to determine whether the estimated remaining undiscounted future cash flows of the project are more or less than the asset’s carrying value. If the undiscounted estimated future cash flows are more than the asset’s carrying value, no impairment adjustment is required. However, if the undiscounted estimated future cash flows are less than the asset’s carrying value, the asset is deemed impaired and is written down to fair value.
When estimating undiscounted estimated future cash flows of a project, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other projects, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.
Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, the level of time sensitive costs (such as indirect construction, overhead and carrying costs), and selling and marketing costs (such as model maintenance costs and advertising costs). Depending on the underlying objective of the project, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase the velocity of sales. These objectives may vary significantly from project to project and over time.
If real estate assets are considered impaired, the impairment adjustments are calculated by determining the amount the asset's carrying value exceeds its fair value. We calculate the fair value of real estate projects using a land residual value analysis or a discounted cash flow analysis. Under the land residual value analysis, we estimate what a willing buyer would pay and what a willing seller would sell a parcel of land for (other than in a forced liquidation) in order to generate a market rate operating margin and return. Under the discounted cash flow method, the fair value is determined by calculating the present value of future cash flows using a risk adjusted discount rate. Critical assumptions that are included as part of these analyses include estimating future housing revenues, sales absorption rates, land development, construction and related carrying costs(including future capitalized interest), and all direct selling and marketing costs. This evaluation and the assumptions used by management to determine future estimated cash flows and fair value require a substantial degree of judgment, especially with respect to real estate projects that have a substantial amount of development to be completed, have not started selling or are in the early stages of sales, or are longer in duration. Actual revenues, costs and time to complete and sell a community could vary from these estimates which could impact the calculation of fair value of the asset and the corresponding amount of impairment that is recorded in our results of operations. For the three and six months ended June 30, 2017, we recorded an impairment charge of
$1.3 million
relating to
one
community in Southern California. For additional detail regarding the impairment charge, please see Note 4.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Capitalization of Interest
We follow the practice of capitalizing interest to real estate inventories during the period of development and to investments in unconsolidated joint ventures, when applicable, in accordance with ASC 835,
Interest
(“ASC 835”). Interest capitalized as a cost component of real estate inventories is included in cost of home sales as related homes or lots are sold. To the extent interest is capitalized to investment in unconsolidated joint ventures, it is included as a reduction of income from unconsolidated joint ventures when the related homes or lots are sold to third parties. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively selling or under development as well as investments in unconsolidated joint ventures accounted for under the equity method until such equity investees begin their principal operations.
Revenue Recognition
Home Sales and Profit Recognition
In accordance with ASC 360, revenue from home sales and other real estate sales are recorded and a profit is recognized when the respective homes are closed under the full accrual method. Home sales and other real estate sales are closed when all conditions of escrow are met, including delivery of the home or other real estate asset, title passes, appropriate consideration is received and collection of associated receivables, if any, is reasonably assured. Sales incentives are a reduction of revenues when the respective home is closed. The profit we record is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in more detail above in the section entitled “Real Estate Inventories and Cost of Sales.” When it is determined that the earnings process is not complete, the sale and related profit are deferred for recognition in future periods.
Fee Building
The Company enters into fee building agreements to provide services whereby it builds homes on behalf of independent third-party property owners. The independent third-party property owner funds all project costs incurred by the Company to build and sell the homes. The Company primarily enters into cost plus fee contracts where it charges independent third-party property owners for all direct and indirect costs plus a negotiated management fee. For these types of contracts, the Company recognizes revenue based on the actual total costs it has expended plus the applicable management fee. The management fee is typically a fixed fee based on a percentage of the cost or home sales revenue of the project depending on the terms of the agreement with the independent third-party property owner. In accordance with ASC 605,
Revenue Recognition
(“ASC 605”), revenues from fee building services are recognized using a cost-to-cost approach in applying the percentage-of-completion method. Under this approach, revenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred. The total estimated cost plus the management fee represents the total contract value. The Company recognizes revenue based on the actual labor and other direct costs incurred, plus the portion of the management fee it has earned to date. In the course of providing its services, the Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are passed through to the property owners and, in accordance with industry practice and GAAP, are included in the Company’s revenue and cost of revenue. The Company recognizes revenue for any incentive compensation when such financial thresholds are probable of being met and such compensation is deemed to be collectible, generally at the date the amount is communicated to us by the independent third-party property owner.
The Company also enters into fee building and management contracts with third parties and its unconsolidated joint ventures where it provides construction supervision services, as well as sales and marketing services, and does not bear financial risks for any services provided. In accordance with ASC 605, revenues from these services are recognized over a proportional performance method or completed performance method. Under ASC 605, revenue is earned as services are provided in proportion to total services expected to be provided to the customer or on a straight line basis if the pattern of performance cannot be determined. Costs are recognized as incurred. Revenue recognition for any portion of the fees earned from these services that are contingent upon a financial threshold or specific event is deferred until the threshold is achieved or the event occurs.
The Company’s fee building revenues have historically been concentrated with a small number of customers. For the
three and six
months ended
June 30, 2017
and
2016
,
one
customer comprised
97%
,
98%
,
92%
, and
94%
of fee building revenue, respectively. The balance of the fee building revenues represented management fees earned from unconsolidated joint ventures. As of
June 30, 2017
and
December 31, 2016
,
one
customer comprised
74%
and
87%
of contracts and accounts receivable, respectively, with the balance of accounts receivable primarily representing escrow receivables from home sales.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Variable Interest Entities
The Company accounts for variable interest entities in accordance with ASC 810,
Consolidation
(“ASC 810”). Under ASC 810, a variable interest entity (“VIE”) is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights.
Once we consider the sufficiency of equity and voting rights of each legal entity, we then evaluate the characteristics of the equity holders' interests, as a group, to see if they qualify as controlling financial interests. Our real estate joint ventures consist of limited partnerships and limited liability companies. For entities structured as limited partnerships or limited liability companies, our evaluation of whether the equity holders (equity partners other than us in each our joint ventures) lack the characteristics of a controlling financial interest includes the evaluation of whether the limited partners or non-managing members (the noncontrolling equity holders) lack both substantive participating rights and substantive kick-out rights, defined as follows:
|
|
•
|
Participating rights - provide the noncontrolling equity holders the ability to direct significant financial and operational decision made in the ordinary course of business that most significantly influence the entity's economic performance.
|
|
|
•
|
Kick-out rights - allow the noncontrolling equity holders to remove the general partner or managing member without cause.
|
If we conclude that any of the three characteristics of a VIE are met, including if equity holders lack the characteristics of a controlling financial interest because they lack both substantive participating rights and substantive kick-out rights, we conclude that the entity is a VIE and evaluate it for consolidation under the variable interest model.
If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE.
Under ASC 810, a non-refundable deposit paid to an entity may be deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are classified as real estate inventories, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a non-refundable deposit, a VIE may have been created.
As of
June 30, 2017
and
December 31, 2016
, the Company was not required to consolidate any VIEs. In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
Noncontrolling Interest
During 2013, the Company entered into a joint venture agreement with a third-party property owner. In accordance with ASC 810, the Company analyzed this arrangement and determined that it was not a VIE; however, the Company determined it was required to consolidate the joint venture as the Company has a controlling financial interest with the powers to direct the major decisions of the entity. As of
June 30, 2017
and
December 31, 2016
, 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 that qualify as VIEs where we are not the primary beneficiary and other entities that we do not control but have the ability to exercise significant influence over the operating and financial policies of the investee. The Company also uses the equity method when we function as the managing member or general partner and our venture partner has substantive participating rights or where we can be replaced by our venture partner as managing member without cause.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of
June 30, 2017
, the Company concluded that none of its joint ventures were VIEs and accounted for these entities under the equity method of accounting.
Under the equity method, we recognize our proportionate share of earnings and losses generated by the joint venture upon the delivery of lots or homes to third parties. Our proportionate share of intra-entity profits and losses are eliminated until the related asset has been sold by the unconsolidated joint venture to third parties. We classify cash distributions received from equity method investees using the cumulative earnings approach consistent with ASU No. 2016-15,
Statement of Cash Flows(Topic 230): Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"). Under the cumulative earnings approach, distributions received are considered returns on investment and shall be classified as cash inflows from operating activities unless the cumulative distributions received exceed cumulative equity in earnings. When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and shall be classified as cash inflows from investing activities. Our ownership interests in our unconsolidated joint ventures vary, but are generally less than or equal to
35%
. The accounting policies of our joint ventures are consistent with those of the Company.
We review real estate inventory held by our unconsolidated joint ventures for impairment, consistent with our real estate inventories. We also review our investments in and advances to unconsolidated joint ventures for evidence of other-than-temporary declines in value. To the extent we deem any portion of our investment in and advances to unconsolidated joint ventures as not recoverable, we impair our investment accordingly. For the
three and six
months ended
June 30, 2017
and
2016
,
no
impairments related to investment in and advances to unconsolidated joint ventures were recorded.
Selling and Marketing Expense
Selling and marketing costs incurred to sell real estate projects are capitalized to other assets in the accompanying condensed consolidated balance sheets if they are reasonably expected to be recovered from the sale of the project or from incidental operations, and are incurred for tangible assets that are used directly through the selling period to aid in the sale of the project or services that have been performed to obtain regulatory approval of sales. These capitalizable selling and marketing costs include, but are not limited to, model home design, model home decor and landscaping, and sales office/design studio setup. All other selling and marketing costs, such as commissions and advertising, are expensed in the period incurred and included in selling and marketing expense in the accompanying condensed consolidated statements of operations.
Warranty Accrual
We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural construction defects for one year. In addition, we generally provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered by the applicable statute of repose, that covers certain defined construction defects. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts are accrued based upon the Company’s historical rates. In addition, the Company has received warranty payments from third-party property owners for certain of its fee building projects that have since closed-out where the Company has the contractual risk of construction. These payments are recorded as warranty accruals. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets and adjustments to our warranty accrual are recorded through cost of sales.
Contracts and Accounts Receivable
Contracts and accounts receivable primarily represent the fees earned, but not collected, and reimbursable project costs incurred in connection with fee building agreements. The Company periodically evaluates the collectability of its contracts receivable, and, if it is determined that a receivable might not be fully collectible, an allowance is recorded for the amount deemed uncollectible. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts involved and the financial condition of its customers. Factors considered in such evaluations include, but are not limited to: (i) customer type; (ii) historical contract performance; (iii) historical collection and delinquency trends; (iv) customer credit worthiness; and (v) general economic conditions. In addition to contracts receivable, escrow receivables are included in contracts and accounts receivable in the accompanying condensed consolidated balance sheets. As of
June 30, 2017
and
December 31, 2016
,
no
allowance was recorded related to contracts and accounts receivable.
Property and Equipment
Property and equipment are recorded at cost and included in other assets in the accompanying condensed consolidated balance sheets and depreciated using the straight-line method over their estimated useful lives ranging from three to five years.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Leasehold improvements are stated at cost and are amortized using the straight-line method over the shorter of either their estimated useful lives or the term of the lease.
Income Taxes
Income taxes are accounted for in accordance with ASC 740,
Income Taxes
(“ASC 740”). The consolidated provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are evaluated on a quarterly basis to determine if adjustments to the valuation allowance are required. In accordance with ASC 740, we assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial statements.
ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. In addition, these provisions provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances.
Stock-Based Compensation
We account for share-based awards in accordance with ASC 718,
Compensation – Stock Compensation
(“ASC 718”) and ASC 505-50,
Equity – Equity Based Payments to Non-Employees
(“ASC 505-50”).
ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in a company's financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.
On June 26, 2015, the Company entered into an agreement that transitioned Joseph Davis' role within the Company from Chief Investment Officer to a non-employee consultant to the Company. On February 16, 2017, the Company entered into an agreement that transitioned Wayne Stelmar's role within the Company from Chief Investment Officer to a non-employee consultant and non-employee director. Per the agreements, Mr. Davis' and Mr. Stelmar's outstanding equity awards will continue to vest in accordance with their original terms. Under ASC 505-50, if an employee becomes a non-employee and continues to vest in an award pursuant to the award's original terms, that award will be treated as an award to a non-employee prospectively, provided the individual is required to continue providing services to the employer (such as consulting services). Based on the terms and conditions of both Mr. Davis' and Mr. Stelmar's consulting agreements noted above, we account for their share-based awards in accordance with ASC 505-50. ASC 505-50 requires that these awards be accounted for prospectively, such that the fair value of the awards will be re-measured at each reporting date until the earlier of (a) the performance commitment date or (b) the date the services required under the transition agreement with Mr. Davis or Mr. Stelmar have been completed. ASC 505-50 requires that compensation cost ultimately recognized in the Company's financial statements be the sum of (a) the compensation cost recognized during the period of time the individual was an employee (based on the grant-date fair value) plus (b) the fair value of the award determined on the measurement date determined in accordance with ASC 505-50 for the pro-rata portion of the vesting period in which the individual was a non-employee. Mr. Davis' outstanding awards fully vested during January 2017 and were fully expensed.
Beginning January 1, 2017, the Company adopted ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The adoption of ASU 2016-09 had no effect on beginning retained earnings or any other components of equity or net assets. The Company has elected to apply the amendments in ASC 2016-09 related to the presentation of excess income tax provisions on the statement of cash flows using a prospective
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
transition method resulting in no adjustment to the classification of the prior year excess income tax provision from stock-based compensation in the accompanying condensed consolidated statement of cash flows.
Recently Issued Accounting Standards
The Company qualifies as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 102 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. As previously disclosed, the Company has chosen, irrevocably, to “opt out” of such extended transition period, and as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which supersedes existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. Additionally, ASU 2014-09 supersedes existing industry specific accounting literature relating to how a company expenses certain selling and marketing costs. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date
, which delayed the effective date of ASU 2014-09 by one year. As a public company, ASU 2014-09 is effective for our interim and annual reporting periods beginning after December 15, 2017, and at that time, we expect to adopt the new standard under the modified retrospective approach.
Under the modified retrospective approach, we will recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. In anticipation of this adoption, we have developed an implementation plan and are working to identify significant changes to our financial statements and accounting policies. At this time, we do not believe the adoption of ASU 2014-09 will have a material impact on the amount of our revenues. We will continue to evaluate the impact that adoption of ASU 2014-09 will have on the timing of recognition of our revenues. Although we are still evaluating the accounting for selling and marketing costs under the new standard, adoption of ASU 2014-09 may impact the timing of recognition and classification of certain capitalized selling and marketing costs we incur to obtain sales contracts from our customers. Currently, these costs are capitalized and amortized to selling and marketing expenses as homes are delivered. Upon adoption of ASU 2014-09, portions of these costs may be expensed as incurred to selling and marketing expenses. The adoption of ASU 2014-09 by our unconsolidated joint ventures may impact the timing of recognition of income or loss allocations from these entities. We continue to evaluate the impact the adoption may have on other aspects of our business and on our consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 will require organizations that lease assets (referred to as “lessees”) to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method. The Company's lease contracts primarily consist of rental agreements for office space and copiers or printers where we are the lessee. The Company has begun the process of evaluating these lease contracts and believes all would be considered operating leases. Upon adoption, we expect to add a right-of-use asset and a lease liability to our consolidated balance sheet. The Company will recognize lease expense on a straight-line basis, consistent with our current policy for office rent. ASU 2016-02 is not expected to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07,
Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
("ASU 2016-07"), which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Our adoption of ASU 2016-07 on January 1, 2017 did not have an effect on our condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15. ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We do not expect the adoption of ASU 2016-15 to have a material effect on our consolidated financial statements and disclosures.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
("ASU 2016-18"). ASU 2016-16 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The guidance is not expected to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805), Clarifying the Definition of a Business
("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets, held directly or in a subsidiary, should be accounted for as acquisitions or disposals of nonfinancial assets or of businesses. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for transactions, including acquisitions or dispositions, which occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The adoption of ASU 2017-01 is not expected to have a material effect on the Company’s consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
("ASU 2017-05"). ASU 2017-05 clarifies the guidance for derecognition of nonfinancial assets and in-substance nonfinancial assets when the asset does not meet the definition of a business and is not a not-for-profit activity. ASU 2017-05 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but entities are required to adopt ASU 2017-05 at the same time they adopt ASU 2014-09. We expect to adopt the new standard under the modified retrospective approach. Under the modified retrospective approach, we will recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. We are still evaluating the effects ASU 2017-05 will have on our consolidated financial statements. We expect that adoption may decrease our accrued expenses and other liabilities due to certain non-financial assets that were previously exchanged for a noncontrolling interest in an unconsolidated joint venture.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting
("ASU 2017-09").
The guidance provides clarity and reduces diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The adoption of ASU 2017-09 is not expected to have a material impact on our consolidated financial statements.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Computation of Earnings (Loss) Per Share
The following table sets forth the components used in the computation of basic and diluted earnings (loss) per share for the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands, except share and per share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to The New Home Company Inc.
|
$
|
1,517
|
|
|
$
|
2,509
|
|
|
$
|
2,363
|
|
|
$
|
1,695
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
20,869,429
|
|
|
20,709,139
|
|
|
20,819,288
|
|
|
20,654,998
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
Stock options and unvested restricted stock units
|
87,294
|
|
|
51,047
|
|
|
101,862
|
|
|
90,804
|
|
Diluted weighted-average shares outstanding
|
20,956,723
|
|
|
20,760,186
|
|
|
20,921,150
|
|
|
20,745,802
|
|
|
|
|
|
|
|
|
|
Basic earnings per share attributable to The New Home Company Inc.
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
Diluted earnings per share attributable to The New Home Company Inc.
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
Antidilutive stock options and unvested restricted stock units not included in diluted earnings (loss) per share
|
22,077
|
|
|
888,953
|
|
|
846,725
|
|
|
867,272
|
|
3. Contracts and Accounts Receivable
Contracts and accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Contracts receivable:
|
|
|
|
Costs incurred on fee building projects
|
$
|
99,825
|
|
|
$
|
178,103
|
|
Estimated earnings
|
2,973
|
|
|
8,404
|
|
|
102,798
|
|
|
186,507
|
|
Less: amounts collected during the period
|
(89,321
|
)
|
|
(162,203
|
)
|
Contracts receivable
|
$
|
13,477
|
|
|
$
|
24,304
|
|
|
|
|
|
Contracts receivable:
|
|
|
|
Billed
|
$
|
—
|
|
|
$
|
—
|
|
Unbilled
|
13,477
|
|
|
24,304
|
|
|
13,477
|
|
|
24,304
|
|
Accounts receivable:
|
|
|
|
Escrow receivables
|
4,721
|
|
|
3,385
|
|
Other receivables
|
123
|
|
|
144
|
|
Contracts and accounts receivable
|
$
|
18,321
|
|
|
$
|
27,833
|
|
Billed contracts receivable represent amounts billed to customers that have yet to be collected. Unbilled contracts receivable represents the contract revenue recognized but not yet billable pursuant to contract terms or administratively not invoiced. All unbilled receivables as of
June 30, 2017
and
December 31, 2016
are expected to be billed and collected within 30
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
days. Accounts payable at
June 30, 2017
and
December 31, 2016
includes
$12.1 million
and
$22.8 million
, respectively, related to costs incurred under the Company’s fee building contracts.
4. Real Estate Inventories and Capitalized Interest
Real estate inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Deposits and pre-acquisition costs
|
$
|
45,480
|
|
|
$
|
38,723
|
|
Land held and land under development
|
107,998
|
|
|
98,596
|
|
Homes completed or under construction
|
179,885
|
|
|
93,628
|
|
Model homes
|
32,037
|
|
|
55,981
|
|
|
$
|
365,400
|
|
|
$
|
286,928
|
|
All of our deposits and pre-acquisition costs are non-refundable, except for refundable deposits of
$0.2 million
and
$4.1 million
as of
June 30, 2017
and
December 31, 2016
, 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 (except for capitalized selling and marketing costs, which are classified in other assets) include all costs associated with home construction, including land, development, indirects, permits, materials and labor.
In accordance with Accounting Standards Codification ("ASC") 360,
Property, Plant and Equipment
(“ASC 360”), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset at the community-level, on a quarterly basis or whenever indicators of impairment exist. For the three and six months ended
June 30, 2017
, the Company recognized real estate-related impairments of
$1.3 million
in cost of sales resulting in a decrease of the same amount to income before income taxes for our homebuilding segment. Fair value for the homebuilding project impaired during the quarter was calculated under a discounted cash flow model. The following table summarizes inventory impairments recorded during the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in Thousands)
|
Inventory impairments:
|
|
|
|
|
|
|
|
Home sales
|
$
|
1,300
|
|
|
$
|
—
|
|
|
$
|
1,300
|
|
|
$
|
—
|
|
Total inventory impairments
|
$
|
1,300
|
|
|
$
|
—
|
|
|
$
|
1,300
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Remaining carrying value of inventory impaired at period end
|
$
|
12,550
|
|
|
$
|
—
|
|
|
$
|
12,550
|
|
|
$
|
—
|
|
Number of projects impaired during the period
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Total number of projects subject to periodic impairment review during the year
(1)
|
25
|
|
|
23
|
|
|
26
|
|
|
23
|
|
(1)
Represents the peak number of real estate projects that we had during each respective period. The number of projects outstanding at the end of each period
may be less than the number of projects listed herein.
The home sales impairments of
$1.3 million
related to homes completed or under construction for one active homebuilding community located in Southern California. This community was experiencing a slow monthly sales absorption
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
rate, and the Company determined that additional incentives were required to sell the remaining homes and lots at estimated aggregate sales prices that would be lower than its previous carrying value.
Interest is capitalized to inventory during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales as related homes are closed. Interest capitalized to investment in unconsolidated joint ventures is amortized to equity in net income of unconsolidated joint ventures as related joint venture homes or lots close. For the
three and six
months ended
June 30, 2017
and
2016
interest incurred, capitalized and expensed was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Interest incurred
|
$
|
6,401
|
|
|
$
|
1,689
|
|
|
$
|
8,437
|
|
|
$
|
2,970
|
|
Interest capitalized to inventory
|
(5,878
|
)
|
|
(1,689
|
)
|
|
(7,750
|
)
|
|
(2,970
|
)
|
Interest capitalized to investments in unconsolidated joint ventures
|
(523
|
)
|
|
—
|
|
|
(687
|
)
|
|
—
|
|
Interest expensed
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Capitalized interest in beginning inventory
|
$
|
6,663
|
|
|
$
|
4,823
|
|
|
$
|
6,342
|
|
|
$
|
4,190
|
|
Interest capitalized as a cost of inventory
|
5,878
|
|
|
1,689
|
|
|
7,750
|
|
|
2,970
|
|
Previously capitalized interest included in cost of sales
|
(1,720
|
)
|
|
(1,063
|
)
|
|
(3,271
|
)
|
|
(1,711
|
)
|
Capitalized interest in ending inventory
|
$
|
10,821
|
|
|
$
|
5,449
|
|
|
10,821
|
|
|
5,449
|
|
|
|
|
|
|
|
|
|
Capitalized interest in beginning investment in unconsolidated joint ventures
|
164
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest capitalized to investments in unconsolidated joint ventures
|
523
|
|
|
—
|
|
|
687
|
|
|
—
|
|
Previously capitalized interest included in equity in net income of unconsolidated joint ventures
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capitalized interest in ending investments in unconsolidated joint ventures
|
687
|
|
|
—
|
|
|
687
|
|
|
—
|
|
Total capitalized interest in ending inventory and investments in unconsolidated joint ventures
|
$
|
11,508
|
|
|
$
|
5,449
|
|
|
$
|
11,508
|
|
|
$
|
5,449
|
|
|
|
|
|
|
|
|
|
Capitalized interest as a percentage of inventory
|
3.0
|
%
|
|
1.4
|
%
|
|
3.0
|
%
|
|
1.4
|
%
|
Interest included in cost of sales as a percentage of home sales revenue
|
1.8
|
%
|
|
1.3
|
%
|
|
2.0
|
%
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
Capitalized interest as a percentage of investments in and advances to unconsolidated joint ventures
|
1.2
|
%
|
|
—
|
%
|
|
1.2
|
%
|
|
—
|
%
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Investments in and Advances to Unconsolidated Joint Ventures
As of
June 30, 2017
and
December 31, 2016
, the Company had ownership interests in
12
and
13
, respectively, unconsolidated joint ventures with ownership percentages that generally range from
5%
to
35%
. The condensed combined balance sheets for our unconsolidated joint ventures accounted for under the equity method are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Cash and cash equivalents
|
$
|
31,304
|
|
|
$
|
33,683
|
|
Restricted cash
|
16,176
|
|
|
8,374
|
|
Real estate inventories
|
407,239
|
|
|
386,487
|
|
Other assets
|
1,922
|
|
|
1,664
|
|
Total assets
|
$
|
456,641
|
|
|
$
|
430,208
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
28,109
|
|
|
$
|
28,706
|
|
Notes payable
|
106,111
|
|
|
97,664
|
|
Total liabilities
|
134,220
|
|
|
126,370
|
|
The New Home Company's equity
|
49,226
|
|
|
46,857
|
|
Other partners' equity
|
273,195
|
|
|
256,981
|
|
Total equity
|
322,421
|
|
|
303,838
|
|
Total liabilities and equity
|
$
|
456,641
|
|
|
$
|
430,208
|
|
Debt-to-capitalization ratio
|
24.8
|
%
|
|
24.3
|
%
|
Debt-to-equity ratio
|
32.9
|
%
|
|
32.1
|
%
|
As of
June 30, 2017
and
December 31, 2016
, the Company had advances outstanding of approximately
$6.0 million
and
$4.0 million
, respectively, to these unconsolidated joint ventures, which were included in the notes payable balances of the unconsolidated joint ventures in the table above. The advances relate to an unsecured promissory note entered into on October 31, 2016 and amended on February 3, 2017 with Encore McKinley Village LLC ("Encore McKinley"), an unconsolidated joint venture of the Company. The note bears interest at
10%
per annum and matures on October 31, 2017, with the right to extend to October 31, 2018.
The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity method are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Revenues
|
$
|
35,171
|
|
|
$
|
70,104
|
|
|
$
|
61,791
|
|
|
$
|
112,061
|
|
Cost of sales and expenses
|
35,825
|
|
|
59,909
|
|
|
63,309
|
|
|
99,725
|
|
Net (loss) income of unconsolidated joint ventures
|
$
|
(654
|
)
|
|
$
|
10,195
|
|
|
$
|
(1,518
|
)
|
|
$
|
12,336
|
|
Equity in net income of unconsolidated joint ventures reflected in the accompanying consolidated statements of operations
|
$
|
201
|
|
|
$
|
3,947
|
|
|
$
|
507
|
|
|
$
|
3,940
|
|
For the
three and six
months ended
June 30, 2017
and
2016
, the Company earned
$1.2 million
,
$2.4 million
,
$2.5 million
, and
$4.7 million
, respectively, in management fees from its unconsolidated joint ventures. For additional detail regarding management fees, please see Note 11 to the unaudited condensed consolidated financial statements.
During the 2017 second quarter, our Larkspur Land 8 Investors LLC unconsolidated joint venture (Larkspur) allocated
$0.1 million
of income to the Company from a reduction in cost to complete reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our outside equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
owned subsidiary and the Company assumed the cash, other assets, and accrued liabilities, including warranty and the remaining costs to complete reserves, of the joint venture. As part of this transaction, and in accordance with ASC 805, Business Combinations, the Company also recognized a gain of $
0.3 million
, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.
During June 2016, our LR8 Investors LLC unconsolidated joint venture (LR8) made its final distributions, allocated
$0.5 million
of income to the Company from a reduction in warranty reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our outside equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, accounts receivable, accounts payable, and accrued liabilities, including the remaining warranty reserve, of the joint venture. As part of this transaction, and in accordance with ASC 805, Business Combinations, the Company also recognized a gain of
$1.1 million
, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.
6. Other Assets
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Capitalized selling and marketing costs
(1)
|
$
|
11,878
|
|
|
$
|
10,101
|
|
Deferred tax asset, net
|
8,488
|
|
|
8,434
|
|
Property and equipment, net of accumulated depreciation
|
716
|
|
|
857
|
|
Prepaid expenses
|
2,834
|
|
|
1,907
|
|
|
$
|
23,916
|
|
|
$
|
21,299
|
|
(1) The Company amortized
$2.1 million
,
$3.2 million
,
$1.6 million
, and
$2.4 million
of capitalized selling and marketing project costs to selling and marketing expenses during the three and
six
months ended
June 30, 2017
and
2016
, respectively.
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Warranty accrual
|
$
|
5,399
|
|
|
$
|
4,931
|
|
Accrued compensation and benefits
|
3,181
|
|
|
6,786
|
|
Accrued interest
|
6,872
|
|
|
648
|
|
Completion reserve
|
1,471
|
|
|
1,355
|
|
Income taxes payable
|
—
|
|
|
7,147
|
|
Deferred profit from unconsolidated joint ventures
|
460
|
|
|
957
|
|
Other accrued expenses
|
2,090
|
|
|
1,594
|
|
|
$
|
19,473
|
|
|
$
|
23,418
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes in our warranty accrual are detailed in the table set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Beginning warranty accrual for homebuilding projects
|
$
|
4,678
|
|
|
$
|
4,057
|
|
|
$
|
4,608
|
|
|
$
|
3,846
|
|
Warranty provision for homebuilding projects
|
331
|
|
|
493
|
|
|
602
|
|
|
805
|
|
Warranty assumed from joint venture at consolidation
|
358
|
|
|
469
|
|
|
358
|
|
|
469
|
|
Warranty payments for homebuilding projects
|
(291
|
)
|
|
(145
|
)
|
|
(492
|
)
|
|
(246
|
)
|
Ending warranty accrual for homebuilding projects
|
5,076
|
|
|
4,874
|
|
|
5,076
|
|
|
4,874
|
|
|
|
|
|
|
|
|
|
Beginning warranty accrual for fee building projects
|
323
|
|
|
332
|
|
|
323
|
|
|
335
|
|
Warranty provision for fee building projects
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Warranty efforts for fee building projects
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(4
|
)
|
Ending warranty accrual for fee building projects
|
323
|
|
|
331
|
|
|
323
|
|
|
331
|
|
Total ending warranty accrual
|
$
|
5,399
|
|
|
$
|
5,205
|
|
|
$
|
5,399
|
|
|
$
|
5,205
|
|
8. Senior Notes and Unsecured Revolving Credit Facility
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
7.25% Senior Notes due 2022, net
|
$
|
318,121
|
|
|
$
|
—
|
|
Senior unsecured revolving credit facility
|
—
|
|
|
118,000
|
|
Total Notes Payable
|
$
|
318,121
|
|
|
$
|
118,000
|
|
The carrying amount of our senior notes listed above is net of the unamortized discount of
$2.5 million
, unamortized premium of
$2.0 million
, and
$6.4 million
of debt issuance costs that are amortized to interest costs over the respective terms of the notes.
On March 17, 2017, the Company completed the sale of
$250 million
in aggregate principal amount of
7.25%
Senior Notes due 2022 (the "Existing Notes"), in a private placement. The Existing Notes were issued at an offering price of
98.961%
of their face amount, which represents a yield to maturity of
7.50%
. On May 4, 2017, the Company completed a tack-on private placement offering through the sale of an additional
$75 million
in aggregate principal amount of the
7.25%
Senior Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of
102.75%
of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturity of
6.438%
. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the remainder to be used for general corporate purposes. Net proceeds from the Additional Notes will be used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (collectively, the “Notes”) will be paid semiannually in arrears on April 1 and October 1, commencing October 1, 2017. The Notes will mature on April 1, 2022.
The Notes are general senior unsecured obligations that rank equally in right of payment to all existing and future senior indebtedness, including borrowings under the Company's senior unsecured revolving credit facility. The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. Exceptions to the limitation include, among other things, borrowings of up to
$260 million
under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
making restricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things,
50%
of consolidated net income from January 1, 2017 and
100%
of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to
15%
of our consolidated tangible net assets and a general basket of
$15,000,000
. The Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries. See Note 16 for information about the guarantees and supplemental financial statement information about our guarantor subsidiaries group and non-guarantor subsidiaries group. The Company executed registration rights agreements pursuant to which it agreed to register the Notes. If we fail to register the Notes by mid-November 2017, as set forth in the registration rights agreements, we have agreed to pay additional interest to the holders of the effected Notes at a rate of 0.25% per annum for the first 90-day period immediately following the occurrence of such default, which such rate increasing by an additional 0.25% per annum with respect to each subsequent 90-day period until all such defaults have been cured, up to a maximum additional interest rate of 1.0% per annum.
The Company's unsecured revolving credit facility ("Credit Facility") is with a bank group with a total commitment of
$260 million
and an accordion feature that allows borrowings thereunder to be increased up to an aggregate of
$350 million
, subject to certain conditions, including the availability of bank commitments, and a maturity date of April 30, 2019. As of
June 30, 2017
, we had
no
outstanding borrowings under the credit facility. We may repay advances at any time without premium or penalty. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin ranging from
2.25%
to
3.00%
depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter. As of
June 30, 2017
, the interest rate under the Credit Facility was
3.72%
. Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as defined in the Credit Facility, including (i) a minimum tangible net worth; (ii) maximum leverage ratios; (iii) a minimum liquidity covenant; and (iv) a minimum fixed charge coverage ratio based on EBITDA (as detailed in the Credit Facility) to interest incurred. As of
June 30, 2017
, the Company was in compliance with all financial covenants.
9. Fair Value Disclosures
ASC 820,
Fair Value Measurements and Disclosures
, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:
|
|
|
•
|
Level 1 – Quoted prices for identical instruments in active markets
|
•
|
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date
|
•
|
Level 3 – Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date
|
Fair Value of Financial Instruments
The following table presents an estimated fair value of the Company's senior notes measured on a recurring basis. The estimated value is based on Level 2 inputs, which primarily reflect estimated prices for our Notes obtained from outside pricing sources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
(dollars in thousands)
|
7.25% Senior Notes due 2022, net
(1)
|
$
|
318,121
|
|
|
$
|
334,750
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1) The carrying value for the Senior Notes, as presented, is net of the unamortized discount of
$2.5 million
, unamortized premium of
$2.0 million
, and
$6.4 million
of debt issuance costs. The unamortized discount, unamortized premium and debt issuance costs are not factored into the estimated fair value.
The Company determined that the fair value estimate of its unsecured revolving credit facility is classified as Level 3 within the fair value hierarchy. The Company had no outstanding balance on the revolving credit facility at
June 30, 2017
, and the estimated fair value of the outstanding revolving credit facility balance at
December 31, 2016
approximated the carrying value due to the short-term nature of LIBOR contracts.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company considers the carrying value of cash and cash equivalents, restricted cash, contracts and accounts receivable, accounts payable, and accrued expenses and other liabilities to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due from affiliates is not determinable due to the related party nature of such amounts.
Non-Recurring Fair Value Adjustments
Nonfinancial assets and liabilities include items such as inventory and long-lived assets that are measured at cost when acquired and adjusted for impairment to fair value, if deemed necessary. For the three and six months ended June 30, 2017, the Company recognized a real estate-related impairment adjustment of
$1.3 million
. related to one homebuilding community. The impairment adjustment was made using Level 3 inputs and assumptions. The fair value of the real estate inventories subject to the impairment adjustments was
$12.6 million
at June 30, 2017.
10. Commitments and Contingencies
From time-to-time, the Company is involved in various legal matters arising in the ordinary course of business. These claims and legal proceedings are of a nature that we believe are normal and incidental to a homebuilder. We make provisions for loss contingencies when they are probable and the amount of the loss can be reasonably estimated. Such provisions are assessed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. In view of the inherent unpredictability of litigation, we generally cannot predict their ultimate resolution, related timing or eventual loss. At this time, we do not believe that our loss contingencies, individually or in the aggregate, are material to our consolidated financial statements.
As an owner and developer of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of real estate in the vicinity of the Company’s real estate and other environmental conditions of which the Company is unaware with respect to the real estate could result in future environmental liabilities.
The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the share of the liability apportioned to us. The loans underlying the LTV maintenance agreements comprise acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of
June 30, 2017
and
December 31, 2016
,
$61.0 million
and
$56.0 million
, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was
$9.6 million
and
$8.6 million
, respectively, as of
June 30, 2017
and
December 31, 2016
. In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion agreements. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion agreements to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from “bad boy acts” of the unconsolidated entity.
We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. As of
June 30, 2017
and
December 31, 2016
, the Company had outstanding surety bonds totaling
$47.5 million
and
$44.0 million
, respectively. The estimated remaining costs to complete of such improvements as of
June 30, 2017
and
December 31, 2016
were
$15.0 million
and
$15.7 million
, respectively. The beneficiaries of the bonds are various
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
municipalities and other organizations. In the event that any such surety bond issued by a third party is called because the required improvements are not completed, the Company could be obligated to reimburse the issuer of the bond.
On May 6, 2015, the Company entered into a letter of credit facility agreement that allows the Company and certain affiliated unconsolidated joint ventures to issue up to
$5.0 million
in letters of credit. The agreement includes an option to increase this amount to
$7.5 million
, subject to certain conditions. As of
June 30, 2017
, our affiliated unconsolidated joint ventures had
$1.8 million
in outstanding letters of credit issued under this facility and the Company had no obligations associated with such outstanding JV letters of credit.
11
. Related Party Transactions
During the
three and six
months ended
June 30, 2017
and
2016
, the Company incurred construction-related costs on behalf of its unconsolidated joint ventures totaling
$1.7 million
,
$4.0 million
,
$1.7 million
and
$4.4 million
, respectively. As of
June 30, 2017
and
December 31, 2016
,
$0.1 million
and
$0.2 million
, respectively, are included in due from affiliates in the accompanying condensed consolidated balance sheets related to such costs.
The Company has entered into agreements with its unconsolidated joint ventures to provide management services related to the underlying projects (collectively referred to as the “Management Agreements”). Pursuant to the Management Agreements, the Company receives a management fee based on each project’s revenues. During the
three and six
months ended
June 30, 2017
and
2016
, the Company earned
$1.2 million
,
$2.4 million
,
$2.5 million
and
$4.7 million
, respectively, in management fees, which have been recorded as fee building revenue in the accompanying condensed consolidated statements of operations. As of
June 30, 2017
and
December 31, 2016
,
$0.1 million
and
$0.6 million
, respectively, of management fees are included in due from affiliates in the accompanying condensed consolidated balance sheets.
One member of the Company's board of directors beneficially owns more than
10%
of the Company's outstanding common stock through an affiliated entity and is also affiliated with an entity that has investments in
two
of the Company's unconsolidated joint ventures. A separate member of the Company's board of directors is also affiliated with an entity that has investments in
three
of the Company's unconsolidated joint ventures. As of
June 30, 2017
, the Company's investment in these
five
unconsolidated joint ventures totaled
$24.1 million
.
TL Fab LP, an affiliate of one of the Company's non-employee directors, was engaged by the Company and some of its unconsolidated joint ventures as a trade contractor to provide metal fabrication services. For the
three and six
months ended
June 30, 2017
and
2016
, the Company incurred
$0.1 million
,
$0.3 million
,
$0.1 million
and
$0.2 million
, respectively, for these services. The Company's unconsolidated joint ventures incurred
$0.3 million
,
$0.6 million
,
$0.2 million
and
$0.4 million
, respectively, for these services. Of these costs,
$10,000
and
$33,000
was due to TL Fab LP from the Company at
June 30, 2017
and
December 31, 2016
, respectively, and
$130,000
and
$14,000
was due to TL Fab LP from the Company's unconsolidated joint ventures at
June 30, 2017
and
December 31, 2016
, respectively.
In its ordinary course of business, the Company enters into agreements to purchase lots from unconsolidated land development joint ventures of which it is a member. In accordance with ASC 360-20,
Property, Plant and Equipment - Real Estate Sales
("ASC 360-20"), the Company defers its portion of the underlying gain from the joint venture's sale of these lots. When the Company purchases lots directly from the joint venture, the deferred gain is recorded as a reduction to the Company's land basis on the purchased lots. In certain instances, a third party may purchase lots from our unconsolidated joint ventures with the intent to finish the lots. Then, the Company has an option to acquire these finished lots from the third party. In these instances, the Company defers its portion of the underlying gain and records the deferred gain as deferred profit from unconsolidated joint ventures included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Once the lot is purchased by the Company, the pro-rata share of the previously deferred profit is recorded as a reduction to the Company's land basis in the purchased lots. In both instances, the gain is ultimately recognized when the Company delivers lots to third-party home buyers at the time of the home closing. At
June 30, 2017
and
December 31, 2016
,
$0.3 million
and
$0.6 million
, respectively, of deferred gain from lot sale transactions is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets as deferred profit from unconsolidated joint ventures. In addition, at
June 30, 2017
and
December 31, 2016
,
$0.8 million
and
$0.7 million
, respectively, of deferred gain from lot sale transactions remained unrecognized and included as a reduction to land basis in the accompanying condensed consolidated balance sheets.
The Company’s land purchase agreement with one of its unconsolidated joint ventures, TNHC-HW Cannery LLC ("TNHC-HW Cannery"), requires profit participation payments due upon the closing of each home. Payment amounts are calculated based upon a percentage of estimated net profits and are due every 90 days after the first home closing. During the
six
months ended
June 30, 2017
, the Company was refunded
$0.2 million
from TNHC-HW Cannery for profit participation overpayments from prior periods due to a modification of the underlying calculation related to profit participation, and as of
June 30, 2017
,
no
profit participation was due to TNHC-HW Cannery. Also per the purchase agreement, the Company is due
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
$0.1 million
in fee credits from TNHC-HW Cannery LLC at
June 30, 2017
which is included in due from affiliates in the accompanying condensed consolidated balance sheets. As of
December 31, 2016
,
$0.2 million
of profit participation overpayments and
$0.1 million
in fee credits was due to the Company from TNHC-HW Cannery and included in due from affiliates in the accompanying consolidated balance sheets.
On June 18, 2015, the Company entered into an agreement that effectively transitioned Joseph Davis' role within the Company from that of Chief Investment Officer to that of a non-employee consultant to the Company effective June 26, 2015 ("Transition Date"). As of the Transition Date, Mr. Davis ceased being an employee of the Company and became an independent contractor performing consulting services. Mr. Davis is expected to work approximately, but not more than, 20 consulting hours per month. For his services, he is compensated
$5,000
per month. His current agreement terminates on July 26, 2018 with the option to extend the agreement one year, if mutually consented to by the parties. Either party may terminate the agreement at any time for any or no reason. At
June 30, 2017
,
no
fees were due to Mr. Davis for his consulting services.
On June 29, 2015, the Company formed a new unconsolidated joint venture and received capital credit in excess of our contributed land basis. As a result, the Company recognized
$1.6 million
in equity in net income of unconsolidated joint ventures and deferred
$0.4 million
in profit from unconsolidated joint ventures related to this transaction for the year ended December 31, 2015. During the three and six months ended
June 30, 2017
,
$34,000
and
$0.1 million
,
respectively, o
f the previously deferred revenue was recognized as equity in net income of unconsolidated joint ventures, and at
June 30, 2017
,
$0.2 million
remained unrecognized and included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.
On January 15, 2016, the Company entered into an assignment and assumption of membership interest agreement (the “Buyout Agreement”) for its partner's interest in the TNHC San Juan LLC unconsolidated joint venture. Per the terms of the Buyout Agreement, the Company contributed
$20.6 million
to the joint venture, and the joint venture made a liquidating cash distribution to our partner for the same amount in exchange for its membership interest. Prior to the buyout, the Company accounted for its investment in TNHC San Juan LLC as an equity method investment. After the buyout, TNHC San Juan LLC is now a wholly owned subsidiary of the Company.
During June 2016, our LR8 Investors LLC unconsolidated joint venture (LR8) made its final distributions, allocated
$0.5 million
of income to the Company from a reduction in warranty reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our outside equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, accounts receivable, accounts payable, and accrued liabilities, including the remaining warranty reserve, of the joint venture. As part of this transaction, and in accordance with ASC 805, Business Combinations, the Company also recognized a gain of
$1.1 million
, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.
As of
June 30, 2017
and
December 31, 2016
, the Company had advances outstanding of approximately
$6.0 million
and
$4.0 million
, respectively, to an unconsolidated joint venture, Encore McKinley Village. The note bears interest at
10%
per annum and matures on October 31, 2017, with the right to extend to October 31, 2018. For the
three and six
months ended
June 30, 2017
, the Company earned
$0.1 million
and
$0.3 million
in interest income on the unsecured promissory note which is included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations. As of
June 30, 2017
and
December 31, 2016
,
$0.3 million
and
$44,000
of interest income was due to the Company and included in due from affiliates in the accompanying condensed consolidated balance sheets.
On February 17, 2017 (the "Transition Date"), the Company entered into a consulting agreement that transitioned Mr. Stelmar's role from that of Chief Investment Officer to a non-employee consultant to the Company. While an employee of the Company, Mr. Stelmar served as an employee director of the Company's Board of Directors. The agreement also provides that effective upon Mr. Stelmar's termination of employment, he shall become a non-employee director and shall receive the compensation and be subject to the requirements of a non-employee director pursuant to the Company's policies. For his consulting services, Mr. Stelmar will be compensated
$16,800
per month for a term of one year from the Transition Date with the option to extend the agreement one year on each anniversary of the Transition Date if mutually consented to by the parties. Either party may terminate the agreement at any time for any or no reason. Additionally, Mr. Stelmar's outstanding restricted stock unit equity award will continue to vest in accordance with its original terms based on his continued provision of consulting services rather than continued employment. At
June 30, 2017
,
no
fees were due to Mr. Stelmar for his consulting services.
During the 2017 second quarter, our Larkspur Land 8 Investors LLC unconsolidated joint venture (Larkspur) allocated
$0.1 million
of income to the Company from a reduction in cost to complete reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our outside equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
owned subsidiary and the Company assumed the cash, other assets, and accrued liabilities, including warranty and the remaining costs to complete reserves, of the joint venture. As part of this transaction, and in accordance with ASC 805, Business Combinations, the Company also recognized a gain of $
0.3 million
, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.
In April 2017, the Company entered into an agreement to purchase land from an affiliate of an entity that owns more than
10%
of the Company's outstanding common stock and is affiliated with one member of the Company's board of directors. The agreement allows the Company the option to purchase approximately
92
lots in Northern California in a phased takedown for a total purchase price of
$16.1 million
. The Company has completed the due diligence phase of this transaction, posted a
$0.5 million
non-refundable deposit, and expects to close on the first phase of lots in the third quarter of 2017.
During the 2017 second quarter, the Company, through a wholly owned subsidiary, entered into an amendment to one of its existing joint venture agreements of an unconsolidated joint venture, TNHC Arantine Hills Holdings LP. Our joint venture partner in this joint venture, Arantine Hills Equity LP, is affiliated with one of the members of our board of directors. The amendment to the joint venture agreement provides for a pro rata increase in the maximum capital commitments of both partners. The Company increased its funding obligation by
$4 million
over the existing contribution cap. At June 30, 2017, the Company’s investment in this joint venture totaled
$6.2 million
.
12. Stock-Based Compensation
The Company's 2014 Long-Term Incentive Plan (the “2014 Incentive Plan”), was adopted by our board of directors in January 2014. The 2014 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted stock awards, restricted stock units and performance awards. The 2014 Incentive Plan will automatically expire on the tenth anniversary of its effective date.
The number of shares of our common stock that are authorized to be issued under the 2014 Incentive Plan is
1,644,875
shares. To the extent that shares of the Company's common stock subject to an outstanding option, stock appreciation right, stock award or performance award granted under the 2014 Incentive Plan or any predecessor plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of common stock generally shall again be available under the 2014 Incentive Plan.
At our 2016 Annual Meeting of Shareholders on May 24, 2016, our shareholders approved the Company's 2016 Incentive Award Plan (the "2016 Incentive Plan"). The 2016 Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock- or cash-based awards. Non-employee directors of the Company and employees and consultants of the Company or any of its subsidiaries are eligible to receive awards under the 2016 Incentive Plan. The 2016 Incentive Plan authorizes the issuance of
800,000
shares of common stock, subject to certain limitations. The 2016 Incentive Plan will expire on February 23, 2026.
The Company has issued stock option and restricted stock unit awards under the 2014 Incentive Plan and restricted stock unit awards under the 2016 Incentive Plan. As of
June 30, 2017
,
32,830
shares remain available for grant under the 2014 Incentive Plan and
464,928
shares remain available for grant under the 2016 Incentive Plan. The exercise price of stock-based awards may not be less than the market value of the Company's common stock on the date of grant. The fair value for stock options is established at the date of grant using the Black-Scholes model for time-based vesting awards. The Company's stock option and restricted stock unit awards typically vest over a
one
to
three
year period and the stock options expire
ten years
from the date of grant.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s common stock option activity as of and for the
six
months ended
June 30, 2017
and
2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
Number of Shares
|
|
Weighted-Average Exercise Price per Share
|
|
Number of Shares
|
|
Weighted-Average Exercise Price per Share
|
Stock Option Activity
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
835,786
|
|
|
$
|
11.00
|
|
|
840,298
|
|
|
$
|
11.00
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
(9,288
|
)
|
|
$
|
11.00
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
—
|
|
|
$
|
—
|
|
|
(4,512
|
)
|
|
$
|
11.00
|
|
Outstanding, end of period
|
826,498
|
|
|
$
|
11.00
|
|
|
835,786
|
|
|
$
|
11.00
|
|
Exercisable, end of period
|
826,498
|
|
|
$
|
11.00
|
|
|
44,442
|
|
|
$
|
11.00
|
|
A summary of the Company’s restricted stock unit activity as of and for the
six
months ended
June 30, 2017
and
2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
Number of Shares
|
|
Weighted-Average Grant-Date Fair Value per Share
|
|
Number of Shares
|
|
Weighted-Average Grant-Date Fair Value per Share
|
Restricted Stock Unit Activity
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
474,989
|
|
|
$
|
10.66
|
|
|
308,386
|
|
|
$
|
14.20
|
|
Granted
|
343,933
|
|
|
$
|
10.84
|
|
|
409,509
|
|
|
$
|
10.05
|
|
Vested
|
(209,619
|
)
|
|
$
|
10.76
|
|
|
(231,289
|
)
|
|
$
|
14.22
|
|
Forfeited
|
(26,194
|
)
|
|
$
|
10.82
|
|
|
(3,980
|
)
|
|
$
|
13.68
|
|
Outstanding, end of period
|
583,109
|
|
|
$
|
10.72
|
|
|
482,626
|
|
|
$
|
10.67
|
|
The expense related to the Company's stock-based compensation programs, included in general and administrative expense in the accompanying condensed consolidated statements of operations, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Expense related to:
|
|
|
|
|
|
|
|
Stock options
|
$
|
—
|
|
|
$
|
185
|
|
|
$
|
11
|
|
|
$
|
447
|
|
Restricted stock units
|
695
|
|
|
572
|
|
|
1,295
|
|
|
1,295
|
|
|
$
|
695
|
|
|
$
|
757
|
|
|
$
|
1,306
|
|
|
$
|
1,742
|
|
We used the "simplified method" to establish the expected term of the common stock options granted by the Company. Our restricted stock unit awards are valued based on the closing price of our common stock on the date of grant. At
June 30, 2017
, the amount of unearned stock-based compensation currently estimated to be expensed through 2020 is
$5.4 million
. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is
2.0
years. If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.
13. Income Taxes
The Company accounts for income taxes in accordance with ASC 740, which requires an asset and liability approach for measuring deferred taxes based on temporary differences between the financial statements and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for the years in which taxes are expected to be paid or recovered.
For the three months ended
June 30, 2017
and
2016
, the Company recorded a provision for income taxes of
$1.0 million
and
$1.5 million
, respectively. For the six months ended
June 30, 2017
and
2016
, the Company recorded a provision for income taxes of
$1.5 million
and
$1.3 million
, respectively. Included in the three and six month periods for 2016 is an allocation of income from LR8 of
$0.5 million
due to a reduction in the warranty reserve and a
$1.1 million
gain from the closeout of LR8 due to the purchase of our JV partner's interest for less than its carrying value, which resulted in a provision for income taxes of
$0.6 million
for the three and six month periods ended June 30, 2016 and did not impact our effective tax rate. The effective tax rate for the three and six months ended
June 30, 2017
and
2016
differs from the
35%
federal statutory tax rate due to state income taxes partially offset by the tax benefit of production activities.
Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not unrealizable. Our assessment considers, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with operating loss and tax credit carryforwards and the planning alternatives, to the extent these items are applicable.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company classifies any interest and penalties related to income taxes assessed as part of income tax expense. The Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.
14. Segment Information
The Company’s operations are organized into
two
reportable segments: homebuilding and fee building. In determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross margins, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply in accordance with ASC Topic 280,
Segment Reporting
.
Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached
homes. Our fee building operations build homes and manage construction related activities on behalf of third-party property
owners and our joint ventures. In addition, our Corporate operations develop and implement strategic initiatives and support our operating segments by centralizing key administrative functions such as accounting, finance and treasury, information technology, insurance and risk management, litigation, marketing and human resources. A portion of the expenses incurred by Corporate are allocated to the fee building segment primarily based on its respective percentage of revenues. The assets of our fee building segment primarily consist of cash, restricted cash and accounts receivable. The majority of our Corporate personnel and resources are primarily dedicated to activities relating to our homebuilding segment, and, therefore, the balance of any unallocated Corporate expenses and assets are included in our homebuilding segment.
The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 1. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented. Financial information relating to reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
Homebuilding
|
$
|
96,929
|
|
|
$
|
78,836
|
|
|
$
|
166,335
|
|
|
$
|
121,139
|
|
Fee building, including management fees
|
47,181
|
|
|
30,028
|
|
|
102,798
|
|
|
72,965
|
|
Total
|
$
|
144,110
|
|
|
$
|
108,864
|
|
|
$
|
269,133
|
|
|
$
|
194,104
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
Homebuilding
|
$
|
1,223
|
|
|
$
|
2,228
|
|
|
$
|
892
|
|
|
$
|
(906
|
)
|
Fee building, including management fees
|
1,282
|
|
|
1,711
|
|
|
2,973
|
|
|
3,734
|
|
Total
|
$
|
2,505
|
|
|
$
|
3,939
|
|
|
$
|
3,865
|
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Assets:
|
|
|
|
Homebuilding
|
$
|
605,358
|
|
|
$
|
393,095
|
|
Fee building
|
14,252
|
|
|
26,041
|
|
Total
|
$
|
619,610
|
|
|
$
|
419,136
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. Supplemental Disclosure of Cash Flow Information
The following table presents certain supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Supplemental disclosures of cash flow information
|
|
|
|
Interest paid, net of amounts capitalized
|
$
|
—
|
|
|
$
|
—
|
|
Income taxes paid
|
$
|
8,750
|
|
|
$
|
8,150
|
|
Supplemental disclosures of non-cash transactions
|
|
|
|
Assets assumed from unconsolidated joint ventures
|
$
|
100
|
|
|
$
|
46,811
|
|
Liabilities and equity assumed from unconsolidated joint ventures
|
$
|
1,095
|
|
|
$
|
47,197
|
|
Contribution of real estate to unconsolidated joint ventures
|
$
|
1,013
|
|
|
$
|
—
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
16. Supplemental Guarantor Information
The Company's
7.25%
Senior Notes due 2022 (the "Notes") are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries (collectively, the "Guarantors"). The guarantees are full and unconditional. The Indenture governing the Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the Indenture), which sale, transfer, exchange or other disposition is made in compliance with applicable provisions of the Indenture; (2) upon the proper designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the Indenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’ certificate provided to the trustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the indenture), so long as such Guarantor would not otherwise be required to provide a guarantee pursuant to the Indenture; provided that, if immediately after giving effect to such release the consolidated tangible assets of all Immaterial Subsidiaries that are not Guarantors would exceed 5.0% of consolidated tangible assets, no such release shall occur, (4) if the Company exercises its legal defeasance option or covenant defeasance option under the Indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the Indenture, upon such exercise or discharge; (5) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the Indenture; or (6) upon the full satisfaction of the Company’s obligations under the Indenture; provided that in each case if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the Indenture. The Company has determined that separate, full financial statements of the Guarantors would not be material to investors and, accordingly, supplemental financial information for the guarantors is presented.
As the guarantees were made in connection with the first and second quarter 2017 private offering of notes, the Guarantors’ condensed financial information is presented as if the guarantees existed during the period presented. If any subsidiaries are released from the guarantees in future periods, the changes are reflected prospectively.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
NWHM Inc.
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated NWHM
|
|
(Dollars in thousands)
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
120,557
|
|
|
$
|
33,180
|
|
|
$
|
222
|
|
|
$
|
—
|
|
|
$
|
153,959
|
|
Restricted cash
|
—
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
88
|
|
Contracts and accounts receivable
|
14
|
|
|
19,667
|
|
|
7
|
|
|
(1,367
|
)
|
|
18,321
|
|
Intercompany receivables
|
91,737
|
|
|
—
|
|
|
—
|
|
|
(91,737
|
)
|
|
—
|
|
Due from affiliates
|
—
|
|
|
2,062
|
|
|
—
|
|
|
—
|
|
|
2,062
|
|
Real estate inventories
|
—
|
|
|
365,400
|
|
|
—
|
|
|
—
|
|
|
365,400
|
|
Investment in and advances to unconsolidated joint ventures
|
—
|
|
|
55,864
|
|
|
—
|
|
|
—
|
|
|
55,864
|
|
Investment in subsidiaries
|
345,376
|
|
|
—
|
|
|
—
|
|
|
(345,376
|
)
|
|
—
|
|
Other assets
|
15,836
|
|
|
8,080
|
|
|
—
|
|
|
—
|
|
|
23,916
|
|
Total assets
|
$
|
573,520
|
|
|
$
|
484,341
|
|
|
$
|
229
|
|
|
$
|
(438,480
|
)
|
|
$
|
619,610
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
110
|
|
|
$
|
34,105
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,215
|
|
Accrued expenses and other liabilities
|
7,579
|
|
|
13,126
|
|
|
126
|
|
|
(1,358
|
)
|
|
19,473
|
|
Intercompany payables
|
—
|
|
|
91,737
|
|
|
—
|
|
|
(91,737
|
)
|
|
—
|
|
Due to affiliates
|
—
|
|
|
9
|
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
Senior notes, net
|
318,121
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
318,121
|
|
Total liabilities
|
325,810
|
|
|
138,977
|
|
|
126
|
|
|
(93,104
|
)
|
|
371,809
|
|
Stockholders' equity
|
247,710
|
|
|
345,364
|
|
|
12
|
|
|
(345,376
|
)
|
|
247,710
|
|
Noncontrolling interest
|
—
|
|
|
—
|
|
|
91
|
|
|
—
|
|
|
91
|
|
Total equity
|
247,710
|
|
|
345,364
|
|
|
103
|
|
|
(345,376
|
)
|
|
247,801
|
|
Total liabilities and equity
|
$
|
573,520
|
|
|
$
|
484,341
|
|
|
$
|
229
|
|
|
$
|
(438,480
|
)
|
|
$
|
619,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
NWHM Inc.
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated NWHM
|
|
(Dollars in thousands)
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
16,385
|
|
|
$
|
13,842
|
|
|
$
|
269
|
|
|
$
|
—
|
|
|
$
|
30,496
|
|
Restricted cash
|
—
|
|
|
585
|
|
|
—
|
|
|
—
|
|
|
585
|
|
Contracts and accounts receivable
|
30
|
|
|
29,774
|
|
|
—
|
|
|
(1,971
|
)
|
|
27,833
|
|
Intercompany receivables
|
73,972
|
|
|
—
|
|
|
—
|
|
|
(73,972
|
)
|
|
—
|
|
Due from affiliates
|
—
|
|
|
1,138
|
|
|
—
|
|
|
—
|
|
|
1,138
|
|
Real estate inventories
|
—
|
|
|
286,928
|
|
|
—
|
|
|
—
|
|
|
286,928
|
|
Investment in and advances to unconsolidated joint ventures
|
—
|
|
|
50,857
|
|
|
—
|
|
|
—
|
|
|
50,857
|
|
Investment in subsidiaries
|
268,411
|
|
|
—
|
|
|
—
|
|
|
(268,411
|
)
|
|
—
|
|
Other assets
|
9,381
|
|
|
11,918
|
|
|
—
|
|
|
—
|
|
|
21,299
|
|
Total assets
|
$
|
368,179
|
|
|
$
|
395,042
|
|
|
$
|
269
|
|
|
$
|
(344,354
|
)
|
|
$
|
419,136
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
167
|
|
|
$
|
32,900
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
33,094
|
|
Accrued expenses and other liabilities
|
5,489
|
|
|
19,763
|
|
|
108
|
|
|
(1,942
|
)
|
|
23,418
|
|
Intercompany payables
|
—
|
|
|
73,972
|
|
|
—
|
|
|
(73,972
|
)
|
|
—
|
|
Due to affiliates
|
—
|
|
|
29
|
|
|
—
|
|
|
(29
|
)
|
|
—
|
|
Unsecured revolving credit facility
|
118,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
118,000
|
|
Total liabilities
|
123,656
|
|
|
126,664
|
|
|
135
|
|
|
(75,943
|
)
|
|
174,512
|
|
Stockholders' equity
|
244,523
|
|
|
268,378
|
|
|
33
|
|
|
(268,411
|
)
|
|
244,523
|
|
Noncontrolling interest
|
—
|
|
|
—
|
|
|
101
|
|
|
—
|
|
|
101
|
|
Total equity
|
244,523
|
|
|
268,378
|
|
|
$
|
134
|
|
|
(268,411
|
)
|
|
244,624
|
|
Total liabilities and equity
|
$
|
368,179
|
|
|
$
|
395,042
|
|
|
$
|
269
|
|
|
$
|
(344,354
|
)
|
|
$
|
419,136
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
NWHM Inc.
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated NWHM
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Home sales
|
$
|
—
|
|
|
$
|
96,929
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
96,929
|
|
Fee Building
|
—
|
|
|
47,181
|
|
|
—
|
|
|
—
|
|
|
47,181
|
|
|
—
|
|
|
144,110
|
|
|
—
|
|
|
—
|
|
|
144,110
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
Home sales
|
—
|
|
|
82,488
|
|
|
—
|
|
|
—
|
|
|
82,488
|
|
Home sales impairment
|
—
|
|
|
1,300
|
|
|
—
|
|
|
—
|
|
|
1,300
|
|
Fee building
|
595
|
|
|
45,304
|
|
|
—
|
|
|
—
|
|
|
45,899
|
|
|
595
|
|
|
129,092
|
|
|
—
|
|
|
—
|
|
|
129,687
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin:
|
|
|
|
|
|
|
|
|
|
Home sales
|
—
|
|
|
13,141
|
|
|
—
|
|
|
—
|
|
|
13,141
|
|
Fee building
|
(595
|
)
|
|
1,877
|
|
|
—
|
|
|
—
|
|
|
1,282
|
|
|
(595
|
)
|
|
15,018
|
|
|
—
|
|
|
—
|
|
|
14,423
|
|
Selling and marketing expenses
|
—
|
|
|
(6,376
|
)
|
|
—
|
|
|
—
|
|
|
(6,376
|
)
|
General and administrative expenses
|
(375
|
)
|
|
(5,220
|
)
|
|
—
|
|
|
—
|
|
|
(5,595
|
)
|
Equity in net income of unconsolidated joint ventures
|
—
|
|
|
201
|
|
|
—
|
|
|
—
|
|
|
201
|
|
Equity in net income of subsidiaries
|
2,022
|
|
|
—
|
|
|
—
|
|
|
(2,022
|
)
|
|
—
|
|
Other income (expense), net
|
26
|
|
|
(174
|
)
|
|
—
|
|
|
—
|
|
|
(148
|
)
|
Income before income taxes
|
1,078
|
|
|
3,449
|
|
|
—
|
|
|
(2,022
|
)
|
|
2,505
|
|
Benefit (provision) for income taxes
|
439
|
|
|
(1,427
|
)
|
|
—
|
|
|
—
|
|
|
(988
|
)
|
Net income
|
1,517
|
|
|
2,022
|
|
|
—
|
|
|
(2,022
|
)
|
|
1,517
|
|
Net loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income attributable to The New Home Company Inc.
|
$
|
1,517
|
|
|
$
|
2,022
|
|
|
$
|
—
|
|
|
$
|
(2,022
|
)
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
NWHM Inc.
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated NWHM
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Home sales
|
$
|
—
|
|
|
$
|
77,486
|
|
|
$
|
1,350
|
|
|
$
|
—
|
|
|
$
|
78,836
|
|
Fee Building
|
—
|
|
|
30,068
|
|
|
—
|
|
|
(40
|
)
|
|
30,028
|
|
|
—
|
|
|
107,554
|
|
|
1,350
|
|
|
(40
|
)
|
|
108,864
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
Home sales
|
—
|
|
|
68,152
|
|
|
1,238
|
|
|
—
|
|
|
69,390
|
|
Fee building
|
496
|
|
|
27,821
|
|
|
—
|
|
|
—
|
|
|
28,317
|
|
|
496
|
|
|
95,973
|
|
|
1,238
|
|
|
—
|
|
|
97,707
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin:
|
|
|
|
|
|
|
|
|
|
Home sales
|
—
|
|
|
9,334
|
|
|
112
|
|
|
—
|
|
|
9,446
|
|
Fee building
|
(496
|
)
|
|
2,247
|
|
|
—
|
|
|
(40
|
)
|
|
1,711
|
|
|
(496
|
)
|
|
11,581
|
|
|
112
|
|
|
(40
|
)
|
|
11,157
|
|
Selling and marketing expenses
|
—
|
|
|
(4,820
|
)
|
|
(226
|
)
|
|
—
|
|
|
(5,046
|
)
|
General and administrative expenses
|
(3,283
|
)
|
|
(2,550
|
)
|
|
—
|
|
|
—
|
|
|
(5,833
|
)
|
Equity in net income of unconsolidated joint ventures
|
—
|
|
|
3,947
|
|
|
—
|
|
|
—
|
|
|
3,947
|
|
Equity in net income of subsidiaries
|
4,843
|
|
|
—
|
|
|
—
|
|
|
(4,843
|
)
|
|
—
|
|
Other income (expense), net
|
(57
|
)
|
|
(229
|
)
|
|
(40
|
)
|
|
40
|
|
|
(286
|
)
|
Income (loss) before income taxes
|
1,007
|
|
|
7,929
|
|
|
(154
|
)
|
|
(4,843
|
)
|
|
3,939
|
|
Benefit (provision) for income taxes
|
1,502
|
|
|
(2,997
|
)
|
|
—
|
|
|
—
|
|
|
(1,495
|
)
|
Net income (loss)
|
2,509
|
|
|
4,932
|
|
|
(154
|
)
|
|
(4,843
|
)
|
|
2,444
|
|
Net loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
65
|
|
|
—
|
|
|
65
|
|
Net income (loss) attributable to The New Home Company Inc.
|
$
|
2,509
|
|
|
$
|
4,932
|
|
|
$
|
(89
|
)
|
|
$
|
(4,843
|
)
|
|
$
|
2,509
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
NWHM Inc.
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated NWHM
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Home sales
|
$
|
—
|
|
|
$
|
166,335
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
166,335
|
|
Fee Building
|
—
|
|
|
102,798
|
|
|
—
|
|
|
—
|
|
|
102,798
|
|
|
—
|
|
|
269,133
|
|
|
—
|
|
|
—
|
|
|
269,133
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
Home sales
|
—
|
|
|
142,522
|
|
|
31
|
|
|
—
|
|
|
142,553
|
|
Home sales impairment
|
—
|
|
|
1,300
|
|
|
—
|
|
|
—
|
|
|
1,300
|
|
Fee building
|
1,085
|
|
|
98,740
|
|
|
—
|
|
|
—
|
|
|
99,825
|
|
|
1,085
|
|
|
242,562
|
|
|
31
|
|
|
—
|
|
|
243,678
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin:
|
|
|
|
|
|
|
|
|
|
Home sales
|
—
|
|
|
22,513
|
|
|
(31
|
)
|
|
—
|
|
|
22,482
|
|
Fee building
|
(1,085
|
)
|
|
4,058
|
|
|
—
|
|
|
—
|
|
|
2,973
|
|
|
(1,085
|
)
|
|
26,571
|
|
|
(31
|
)
|
|
—
|
|
|
25,455
|
|
Selling and marketing expenses
|
—
|
|
|
(11,377
|
)
|
|
—
|
|
|
—
|
|
|
(11,377
|
)
|
General and administrative expenses
|
(1,154
|
)
|
|
(9,531
|
)
|
|
—
|
|
|
—
|
|
|
(10,685
|
)
|
Equity in net income of unconsolidated joint ventures
|
—
|
|
|
507
|
|
|
—
|
|
|
—
|
|
|
507
|
|
Equity in net income of subsidiaries
|
3,694
|
|
|
—
|
|
|
—
|
|
|
(3,694
|
)
|
|
—
|
|
Other income (expense), net
|
44
|
|
|
(79
|
)
|
|
—
|
|
|
—
|
|
|
(35
|
)
|
Income (loss) before income taxes
|
1,499
|
|
|
6,091
|
|
|
(31
|
)
|
|
(3,694
|
)
|
|
3,865
|
|
Benefit (provision) for income taxes
|
864
|
|
|
(2,376
|
)
|
|
—
|
|
|
—
|
|
|
(1,512
|
)
|
Net income (loss)
|
2,363
|
|
|
3,715
|
|
|
(31
|
)
|
|
(3,694
|
)
|
|
2,353
|
|
Net loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Net income (loss) attributable to The New Home Company Inc.
|
$
|
2,363
|
|
|
$
|
3,715
|
|
|
$
|
(21
|
)
|
|
$
|
(3,694
|
)
|
|
$
|
2,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
NWHM Inc.
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated NWHM
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Home sales
|
$
|
—
|
|
|
$
|
115,982
|
|
|
$
|
5,157
|
|
|
$
|
—
|
|
|
$
|
121,139
|
|
Fee Building
|
—
|
|
|
73,120
|
|
|
—
|
|
|
(155
|
)
|
|
72,965
|
|
|
—
|
|
|
189,102
|
|
|
5,157
|
|
|
(155
|
)
|
|
194,104
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
Home sales
|
—
|
|
|
101,422
|
|
|
4,638
|
|
|
—
|
|
|
106,060
|
|
Fee building
|
966
|
|
|
68,265
|
|
|
—
|
|
|
—
|
|
|
69,231
|
|
|
966
|
|
|
169,687
|
|
|
4,638
|
|
|
—
|
|
|
175,291
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin:
|
|
|
|
|
|
|
|
|
|
Home sales
|
—
|
|
|
14,560
|
|
|
519
|
|
|
—
|
|
|
15,079
|
|
Fee building
|
(966
|
)
|
|
4,855
|
|
|
—
|
|
|
(155
|
)
|
|
3,734
|
|
|
(966
|
)
|
|
19,415
|
|
|
519
|
|
|
(155
|
)
|
|
18,813
|
|
Selling and marketing expenses
|
—
|
|
|
(7,838
|
)
|
|
(684
|
)
|
|
—
|
|
|
(8,522
|
)
|
General and administrative expenses
|
(6,466
|
)
|
|
(4,542
|
)
|
|
—
|
|
|
—
|
|
|
(11,008
|
)
|
Equity in net income of unconsolidated joint ventures
|
—
|
|
|
3,940
|
|
|
—
|
|
|
—
|
|
|
3,940
|
|
Equity in net income of subsidiaries
|
6,448
|
|
|
—
|
|
|
—
|
|
|
(6,448
|
)
|
|
—
|
|
Other income (expense), net
|
(39
|
)
|
|
(369
|
)
|
|
(142
|
)
|
|
155
|
|
|
(395
|
)
|
Income (loss) before income taxes
|
(1,023
|
)
|
|
10,606
|
|
|
(307
|
)
|
|
(6,448
|
)
|
|
2,828
|
|
Benefit (provision) for income taxes
|
2,718
|
|
|
(3,971
|
)
|
|
—
|
|
|
—
|
|
|
(1,253
|
)
|
Net income (loss)
|
1,695
|
|
|
6,635
|
|
|
(307
|
)
|
|
(6,448
|
)
|
|
1,575
|
|
Net loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
120
|
|
|
—
|
|
|
120
|
|
Net income (loss) attributable to The New Home Company Inc.
|
$
|
1,695
|
|
|
$
|
6,635
|
|
|
$
|
(187
|
)
|
|
$
|
(6,448
|
)
|
|
$
|
1,695
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
NWHM Inc.
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated NWHM
|
|
(Dollars in thousands)
|
Net cash used in operating activities
|
$
|
(21,176
|
)
|
|
$
|
(49,302
|
)
|
|
$
|
(47
|
)
|
|
$
|
(886
|
)
|
|
$
|
(71,411
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(40
|
)
|
|
(55
|
)
|
|
—
|
|
|
—
|
|
|
(95
|
)
|
Cash assumed from joint venture at consolidation
|
—
|
|
|
995
|
|
|
—
|
|
|
—
|
|
|
995
|
|
Contributions and advances to unconsolidated joint venture
|
—
|
|
|
(8,517
|
)
|
|
—
|
|
|
—
|
|
|
(8,517
|
)
|
Contributions to subsidiaries from corporate
|
(94,035
|
)
|
|
—
|
|
|
—
|
|
|
94,035
|
|
|
—
|
|
Distributions of capital from subsidiaries
|
19,880
|
|
|
—
|
|
|
—
|
|
|
(19,880
|
)
|
|
—
|
|
Distributions of capital from unconsolidated joint ventures
|
—
|
|
|
2,948
|
|
|
—
|
|
|
—
|
|
|
2,948
|
|
Net cash (used in) provided by investing activities
|
$
|
(74,195
|
)
|
|
$
|
(4,629
|
)
|
|
$
|
—
|
|
|
$
|
74,155
|
|
|
$
|
(4,669
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from senior notes
|
324,465
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
324,465
|
|
Borrowings from credit facility
|
72,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72,000
|
|
Repayments of credit facility
|
(190,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(190,000
|
)
|
Payment of debt issuance costs
|
(6,440
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,440
|
)
|
Contributions to subsidiaries from corporate
|
—
|
|
|
94,035
|
|
|
—
|
|
|
(94,035
|
)
|
|
—
|
|
Distributions to corporate from subsidiaries
|
—
|
|
|
(20,766
|
)
|
|
—
|
|
|
20,766
|
|
|
—
|
|
Minimum tax withholding paid on behalf of employees for stock awards
|
(584
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(584
|
)
|
Proceeds from exercise of stock options
|
102
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
102
|
|
Net cash provided by financing activities
|
$
|
199,543
|
|
|
$
|
73,269
|
|
|
$
|
—
|
|
|
$
|
(73,269
|
)
|
|
$
|
199,543
|
|
Net increase (decrease) in cash and cash equivalents
|
104,172
|
|
|
19,338
|
|
|
(47
|
)
|
|
—
|
|
|
123,463
|
|
Cash and cash equivalents – beginning of period
|
16,385
|
|
|
13,842
|
|
|
269
|
|
|
—
|
|
|
30,496
|
|
Cash and cash equivalents – end of period
|
$
|
120,557
|
|
|
$
|
33,180
|
|
|
$
|
222
|
|
|
$
|
—
|
|
|
$
|
153,959
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
NWHM Inc.
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated NWHM
|
|
(Dollars in thousands)
|
Net cash used in operating activities
|
$
|
(22,026
|
)
|
|
$
|
(144,949
|
)
|
|
$
|
3,347
|
|
|
$
|
(2,071
|
)
|
|
$
|
(165,699
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
(156
|
)
|
|
(140
|
)
|
|
—
|
|
|
—
|
|
|
(296
|
)
|
Cash assumed from joint venture at consolidation
|
—
|
|
|
2,009
|
|
|
—
|
|
|
—
|
|
|
2,009
|
|
Contributions and advances to unconsolidated joint venture
|
—
|
|
|
(5,656
|
)
|
|
—
|
|
|
—
|
|
|
(5,656
|
)
|
Contributions to subsidiaries from corporate
|
(160,406
|
)
|
|
—
|
|
|
—
|
|
|
160,406
|
|
|
—
|
|
Distributions of capital from subsidiaries
|
18,929
|
|
|
725
|
|
|
—
|
|
|
(19,654
|
)
|
|
—
|
|
Distributions of capital from unconsolidated joint ventures
|
—
|
|
|
7,405
|
|
|
—
|
|
|
—
|
|
|
7,405
|
|
Net cash (used in) provided by investing activities
|
$
|
(141,633
|
)
|
|
$
|
4,343
|
|
|
$
|
—
|
|
|
$
|
140,752
|
|
|
$
|
3,462
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Borrowings from senior notes and credit facility
|
175,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
175,000
|
|
Repayments of credit facility
|
(11,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,000
|
)
|
Borrowings from other notes payable
|
—
|
|
|
—
|
|
|
343
|
|
|
—
|
|
|
343
|
|
Repayments of other notes payable
|
—
|
|
|
(13,135
|
)
|
|
(2,501
|
)
|
|
—
|
|
|
(15,636
|
)
|
Payment of debt issuance costs
|
(1,064
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,064
|
)
|
Cash distributions to noncontrolling interest in subsidiary
|
—
|
|
|
—
|
|
|
(725
|
)
|
|
—
|
|
|
(725
|
)
|
Contributions to subsidiaries from corporate
|
—
|
|
|
160,406
|
|
|
—
|
|
|
(160,406
|
)
|
|
—
|
|
Distributions to corporate from subsidiaries
|
—
|
|
|
(21,000
|
)
|
|
(725
|
)
|
|
21,725
|
|
|
—
|
|
Minimum tax withholding paid on behalf of employees for stock awards
|
(647
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(647
|
)
|
Excess income tax provision from stock-based compensation
|
(97
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(97
|
)
|
Net cash provided by (used in) financing activities
|
$
|
162,192
|
|
|
$
|
126,271
|
|
|
$
|
(3,608
|
)
|
|
$
|
(138,681
|
)
|
|
$
|
146,174
|
|
Net decrease in cash and cash equivalents
|
(1,467
|
)
|
|
(14,335
|
)
|
|
(261
|
)
|
|
—
|
|
|
(16,063
|
)
|
Cash and cash equivalents – beginning of period
|
18,129
|
|
|
27,140
|
|
|
605
|
|
|
—
|
|
|
45,874
|
|
Cash and cash equivalents – end of period
|
$
|
16,662
|
|
|
$
|
12,805
|
|
|
$
|
344
|
|
|
$
|
—
|
|
|
$
|
29,811
|
|
|
|
|
Item 2
.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act, as amended. All statements contained in this quarterly report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. These forward-looking statements are frequently accompanied by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “goal,” “plan” and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs.
These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, “Risk Factors” and Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended
December 31, 2016
and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A "Risk Factors" of this quarterly report on 10-Q. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements:
|
|
•
|
Risks related to our business, including among other things:
|
|
|
◦
|
our geographic concentration primarily in California;
|
|
|
◦
|
the cyclical nature of the homebuilding industry which is affected by general economic real estate and other business conditions;
|
|
|
◦
|
availability of land to acquire and our ability to acquire such land on favorable terms or at all;
|
|
|
◦
|
shortages of or increased prices for labor, land or raw materials used in housing construction;
|
|
|
◦
|
the illiquid nature of real estate investments;
|
|
|
◦
|
economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;
|
|
|
◦
|
the degree and nature of our competition;
|
|
|
◦
|
a large proportion of our fee building revenue being dependent upon one customer;
|
|
|
◦
|
delays in land development or home construction resulting from adverse weather conditions, regulatory approval delays, or other events outside our control;
|
|
|
◦
|
product liability and warranty claims, including the cost and availability of insurance;
|
|
|
◦
|
information systems interruption or breach in security;
|
|
|
•
|
Risks related to laws and regulations, including among other things:
|
|
|
◦
|
changes in, or the failure or inability to comply with, governmental laws and regulations; including environmental laws and regulations;
|
|
|
◦
|
mortgage financing, as well as our customer’s ability to obtain such financing, interest rate increases or changes in federal lending programs;
|
|
|
◦
|
the timing of receipt of regulatory approvals and the opening of projects;
|
|
|
◦
|
the impact of recent accounting standards;
|
|
|
•
|
Risks related to financing and indebtedness, including among other things:
|
|
|
◦
|
Volatility and uncertainty in the credit markets and broader financial markets;
|
|
|
◦
|
our liquidity and availability, terms and deployment of capital;
|
|
|
◦
|
issues concerning our joint venture partnerships, in which we have less than a controlling interest;
|
|
|
◦
|
our leverage, interest expense, debt service obligations and restrictive covenants related to our operations in our current or future financing arrangements, including under our unsecured credit facility and our senior notes;
|
|
|
•
|
Risks related to our structure and ownership of our common stock, including among other things:
|
|
|
◦
|
availability of qualified personnel and our ability to retain our key personnel;
|
|
|
◦
|
Our status as an emerging growth company with a limited operating history;
|
|
|
◦
|
the price of our common stock is subject to volatility and our trading volume is relatively low;
|
|
|
◦
|
our senior notes rank senior to our common stock upon bankruptcy or liquidation.
|
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this quarterly report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
The forward-looking statements in this quarterly report on Form 10-Q speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Non-GAAP Measures
This quarterly report on Form 10-Q includes certain non-GAAP measures, including homebuilding gross margin before impairments, homebuilding gross margin before impairments percentage, adjusted homebuilding gross margin, adjusted homebuilding gross margin percentage, net debt, the ratio of net debt-to-capital, Adjusted EBITDA, Adjusted EBITDA margin percentage and the ratio of Adjusted EBITDA to total interest incurred. For a reconciliation of Adjusted EBITDA, Adjusted EBITDA margin percentage, the ratio of Adjusted EBITDA to total interest incurred, homebuilding gross margin before impairments, and homebuilding gross margin before impairments percentage to the comparable GAAP measures please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Selected Financial Information." For a reconciliation of adjusted homebuilding gross margin and adjusted homebuilding gross margin percentage to homebuilding gross margin under GAAP please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Homebuilding Gross Margin." For a reconciliation of net debt-to-capital to the comparable GAAP measure, please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt-to-Capital Ratios."
Selected Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
Home sales
|
$
|
96,929
|
|
|
$
|
78,836
|
|
|
$
|
166,335
|
|
|
$
|
121,139
|
|
Fee building, including management fees from unconsolidated joint ventures of $1,217, $2,537, $2,431 and $4,712, respectively
|
47,181
|
|
|
30,028
|
|
|
102,798
|
|
|
72,965
|
|
|
144,110
|
|
|
108,864
|
|
|
269,133
|
|
|
194,104
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
Home sales
|
82,488
|
|
|
69,390
|
|
|
142,553
|
|
|
106,060
|
|
Home sales impairments
|
1,300
|
|
|
—
|
|
|
1,300
|
|
|
—
|
|
Fee building
|
45,899
|
|
|
28,317
|
|
|
99,825
|
|
|
69,231
|
|
|
129,687
|
|
|
97,707
|
|
|
243,678
|
|
|
175,291
|
|
Gross Margin:
|
|
|
|
|
|
|
|
Home sales
|
13,141
|
|
|
9,446
|
|
|
22,482
|
|
|
15,079
|
|
Fee building
|
1,282
|
|
|
1,711
|
|
|
2,973
|
|
|
3,734
|
|
|
14,423
|
|
|
11,157
|
|
|
25,455
|
|
|
18,813
|
|
|
|
|
|
|
|
|
|
Home sales gross margin
|
13.6
|
%
|
|
12.0
|
%
|
|
13.5
|
%
|
|
12.4
|
%
|
Home sales gross margin before impairments
(1)
|
14.9
|
%
|
|
12.0
|
%
|
|
14.3
|
%
|
|
12.4
|
%
|
Fee building gross margin
|
2.7
|
%
|
|
5.7
|
%
|
|
2.9
|
%
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
(6,376
|
)
|
|
(5,046
|
)
|
|
(11,377
|
)
|
|
(8,522
|
)
|
General and administrative expenses
|
(5,595
|
)
|
|
(5,833
|
)
|
|
(10,685
|
)
|
|
(11,008
|
)
|
Equity in net income of unconsolidated joint ventures
|
201
|
|
|
3,947
|
|
|
507
|
|
|
3,940
|
|
Other income (expense), net
|
(148
|
)
|
|
(286
|
)
|
|
(35
|
)
|
|
(395
|
)
|
Income before income taxes
|
2,505
|
|
|
3,939
|
|
|
3,865
|
|
|
2,828
|
|
Provision for income taxes
|
(988
|
)
|
|
(1,495
|
)
|
|
(1,512
|
)
|
|
(1,253
|
)
|
Net income
|
1,517
|
|
|
2,444
|
|
|
2,353
|
|
|
1,575
|
|
Net loss attributable to noncontrolling interest
|
—
|
|
|
65
|
|
|
10
|
|
|
120
|
|
Net income attributable to The New Home Company Inc.
|
$
|
1,517
|
|
|
$
|
2,509
|
|
|
$
|
2,363
|
|
|
$
|
1,695
|
|
|
|
|
|
|
|
|
|
Interest incurred
|
$
|
6,401
|
|
|
$
|
1,689
|
|
|
$
|
8,437
|
|
|
$
|
2,970
|
|
Adjusted EBITDA
(2)
|
$
|
6,304
|
|
|
$
|
3,213
|
|
|
$
|
11,265
|
|
|
$
|
4,016
|
|
Adjusted EBITDA margin percentage
|
4.4
|
%
|
|
3.0
|
%
|
|
4.2
|
%
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LTM
(3)
Ended June 30,
|
|
|
|
|
|
2017
|
|
2016
|
Interest incurred
|
|
|
|
|
$
|
12,951
|
|
|
$
|
5,766
|
|
Adjusted EBITDA
(2)
|
|
|
|
|
$
|
50,393
|
|
|
$
|
37,662
|
|
Adjusted EBITDA margin percentage
(2)
|
|
|
|
|
6.5
|
%
|
|
7.9
|
%
|
Ratio of Adjusted EBITDA to total interest incurred
(2)
|
|
|
|
|
3.9x
|
|
|
6.5x
|
|
|
|
(1)
|
Home sales gross margin before impairments (also referred to as homebuilding gross margin before impairments) is a non-GAAP measure. The table below reconciles this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
(Dollars in thousands)
|
Home sales revenue
|
$
|
96,929
|
|
|
100.0
|
%
|
|
$
|
78,836
|
|
|
100.0
|
%
|
|
$
|
166,335
|
|
|
100.0
|
%
|
|
$
|
121,139
|
|
|
100.0
|
%
|
Cost of home sales
|
83,788
|
|
|
86.4
|
%
|
|
69,390
|
|
|
88.0
|
%
|
|
143,853
|
|
|
86.5
|
%
|
|
106,060
|
|
|
87.6
|
%
|
Homebuilding gross margin
|
13,141
|
|
|
13.6
|
%
|
|
9,446
|
|
|
12.0
|
%
|
|
22,482
|
|
|
13.5
|
%
|
|
15,079
|
|
|
12.4
|
%
|
Add: Home sales impairments
|
1,300
|
|
|
1.3
|
%
|
|
—
|
|
|
—
|
%
|
|
1,300
|
|
|
0.8
|
%
|
|
—
|
|
|
—
|
%
|
Homebuilding gross margin before impairments
(1)
|
$
|
14,441
|
|
|
14.9
|
%
|
|
$
|
9,446
|
|
|
12.0
|
%
|
|
$
|
23,782
|
|
|
14.3
|
%
|
|
$
|
15,079
|
|
|
12.4
|
%
|
|
|
(2)
|
Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred are non-GAAP measures. Adjusted EBITDA margin percentage is calculated as a percentage of total revenue. Management believes that Adjusted EBITDA, which is a non-GAAP measure, assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, interest costs, tax position and inventory impairments. Due to the significance of the GAAP components excluded, Adjusted EBITDA should not be considered in isolation or as an alternative to net income, cash flows from operations or any other performance measure prescribed by GAAP. The table below reconciles net income (loss), calculated and presented in accordance with GAAP, to Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
LTM
(3)
Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
|
|
|
|
Net income (loss)
|
$
|
1,517
|
|
|
$
|
2,444
|
|
|
$
|
2,353
|
|
|
$
|
1,575
|
|
|
$
|
21,704
|
|
|
$
|
18,133
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
Interest amortized to cost of sales and other expense
|
1,720
|
|
|
1,063
|
|
|
3,271
|
|
|
1,711
|
|
|
6,891
|
|
|
3,827
|
|
Provision (benefit) for income taxes
|
988
|
|
|
1,495
|
|
|
1,512
|
|
|
1,253
|
|
|
13,283
|
|
|
10,761
|
|
Depreciation and amortization
|
113
|
|
|
126
|
|
|
236
|
|
|
251
|
|
|
496
|
|
|
492
|
|
Amortization of equity-based compensation
|
695
|
|
|
757
|
|
|
1,306
|
|
|
1,742
|
|
|
3,035
|
|
|
4,391
|
|
Cash distributions of income from unconsolidated joint ventures
|
—
|
|
|
1,095
|
|
|
1,588
|
|
|
1,095
|
|
|
4,235
|
|
|
12,120
|
|
Non-cash impairments and abandonments
|
1,472
|
|
|
180
|
|
|
1,506
|
|
|
329
|
|
|
5,257
|
|
|
521
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Gain from notes payable principal reduction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(250
|
)
|
|
—
|
|
Equity in income of unconsolidated joint ventures
|
(201
|
)
|
|
(3,947
|
)
|
|
(507
|
)
|
|
(3,940
|
)
|
|
(4,258
|
)
|
|
(12,583
|
)
|
Adjusted EBITDA
|
$
|
6,304
|
|
|
$
|
3,213
|
|
|
$
|
11,265
|
|
|
$
|
4,016
|
|
|
$
|
50,393
|
|
|
$
|
37,662
|
|
Total Revenue
|
$
|
144,110
|
|
|
$
|
108,864
|
|
|
$
|
269,133
|
|
|
$
|
194,104
|
|
|
$
|
769,485
|
|
|
$
|
475,707
|
|
Adjusted EBITDA margin percentage
|
4.4
|
%
|
|
3.0
|
%
|
|
4.2
|
%
|
|
2.1
|
%
|
|
6.5
|
%
|
|
7.9
|
%
|
Interest incurred
|
$
|
6,401
|
|
|
$
|
1,689
|
|
|
$
|
8,437
|
|
|
$
|
2,970
|
|
|
$
|
12,951
|
|
|
$
|
5,766
|
|
Ratio of Adjusted EBITDA to total interest incurred
|
|
|
|
|
|
|
|
|
3.9x
|
|
|
6.5x
|
|
|
|
(3)
|
"LTM" indicates amounts for the trailing 12 months.
|
Overview
Solid buyer demand for new homes continued into the 2017 second quarter, building on a strong first quarter. Consolidated revenues increased 32% year-over-year to $144.1 million, while home sales and fee building revenue increased 23% and 57%, respectively. In addition, our wholly owned operating margins improved both sequentially and year-over-year. Homebuilding gross margin for the 2017 second quarter increased 160 basis points to
13.6%
, which included a
$1.3 million
non-cash inventory impairment charge, from
12.0%
in the prior year period. Excluding inventory impairments, our homebuilding gross margin increased 290 basis points to 14.9%*, while our selling, general and administrative ("SG&A") expenses as a percentage of home sales revenue improved 140 basis points year-over-year. Our net income was $1.5 million, or $0.07 per diluted share, for the 2017 second quarter versus $2.5 million, or $0.12 per diluted share, in the prior year period. The decrease in net income was primarily due to a $3.7 million reduction in income from joint ventures, a $1.3 million decrease in joint venture management fee revenue and a $1.3 million pretax impairment at one homebuilding community. These decreases were largely offset by the increase in our consolidated revenues and the improvements in our homebuilding gross margin before impairments* and the reduction in our SG&A expense rate as noted above.
We continued to execute on our strategy to further diversify our home offerings to include more affordable price points. As expected, our average selling price for homes delivered was $1.5 million, a reduction of 17% from the prior year period. Additionally, solid order demand boosted the dollar value of our backlog to $339.4 million, a 22% increase over the prior year second quarter, and was the highest quarter end backlog value in our history. This growth in backlog resulted from a 53% year-over-year increase in net new orders and was driven largely by a 74% improvement in our monthly sales absorption rate of 3.3 sales per community versus 1.9 in the prior year period. As a result of the strong absorption pace coupled with the timing of new community openings and project close-outs, our wholly-owned community count decreased to nine at the end of the 2017 second quarter, which was consistent with our expectations. We anticipate that our community count will expand meaningfully over the next two quarters as we anticipate opening nine new communities in the second half of 2017, six of which are expected to be priced at or below $750,000.
At the same time, the Company improved its liquidity by issuing $75 million of 7.25% senior unsecured notes due 2022 in a tack-on private offering during the 2017 second quarter. The notes were issued at a premium to yield 6.44%. The Company ended the quarter with $154 million in cash and cash equivalents, no debt outstanding under its $260 million unsecured revolving credit facility, a debt-to-capital ratio of 56.2%, and a net debt-to-capital ratio of 39.8%*. In addition, the Company improved its lot portfolio by growing its wholly-owned lot count by
23%
to
1,821
lots, of which 62% were controlled through option contracts.
*Homebuilding gross margin before impairments and net debt-to-capital ratio are non-GAAP measures. For a reconciliation to the appropriate GAAP measures, please see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Homebuilding Gross Margin." and
"Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt-to-Capital Ratios."
Results of Operations
Net New Home Orders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Increase/(Decrease)
|
|
Six Months Ended
June 30,
|
|
Increase/(Decrease)
|
|
2017
|
|
2016
|
|
Amount
|
|
%
|
|
2017
|
|
2016
|
|
Amount
|
|
%
|
|
|
Net new home orders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern California
|
44
|
|
|
39
|
|
|
5
|
|
|
13
|
%
|
|
100
|
|
|
66
|
|
|
34
|
|
|
52
|
%
|
Northern California
|
54
|
|
|
25
|
|
|
29
|
|
|
116
|
%
|
|
124
|
|
|
54
|
|
|
70
|
|
|
130
|
%
|
Total
|
98
|
|
|
64
|
|
|
34
|
|
|
53
|
%
|
|
224
|
|
|
120
|
|
|
104
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling communities at end of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Southern California
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
7
|
|
|
(1
|
)
|
|
(14
|
)%
|
Northern California
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
5
|
|
|
(2
|
)
|
|
(40
|
)%
|
Total
|
|
|
|
|
|
|
|
|
|
9
|
|
|
12
|
|
|
(3
|
)
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly sales absorption rate per community
(1)
|
3.3
|
|
|
1.9
|
|
|
1.4
|
|
|
74
|
%
|
|
3.0
|
|
|
1.9
|
|
|
1.1
|
|
|
58
|
%
|
Cancellation rate
|
10
|
%
|
|
6
|
%
|
|
4
|
%
|
|
N/A
|
|
|
8
|
%
|
|
13
|
%
|
|
(5
|
)%
|
|
N/A
|
|
(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 2017 second quarter increased
53%
as compared to the same period in
2016
primarily due to an increase in the monthly sales absorption rate. The improvement in absorption rate was driven by solid order activity in both Southern and Northern California. Southern California experienced monthly absorption of 2.8 sales per community, which represented a year-over-year increase of 33%. Northern California experienced broad based demand over multiple communities during the 2017 second quarter which resulted in a monthly sales absorption rate of 3.9 compared to 1.8 in the prior year period. The Company continued to experience modest cancellation rates during 2017 with a
10%
cancellation rate for the three months ended
June 30, 2017
. We believe our cancellation rate is one of the lower rates in the industry due to many factors, including the high level of personalized options that our homebuyers select, which we believe creates emotional attachment, and a higher proportion of affluent buyers with strong credit profiles.
Net new home orders for the six months ended
June 30, 2017
were up
87%
over the prior year period primarily due to a an increase in monthly absorption rates in both Southern California and Northern California. Monthly absorption for Southern California increased to 2.5 sales per community for the six months ended
June 30, 2017
from 1.9 sales per community for the six months ended June 30, 2016. In Northern California, the monthly absorption rate was 3.5 for the first half of 2017 compared to 1.7 for the same period in 2016.
Backlog
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
2017
|
|
2016
|
|
% Change
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
(Dollars in thousands)
|
Southern California
|
99
|
|
|
$
|
278,513
|
|
|
$
|
2,813
|
|
|
89
|
|
|
$
|
249,433
|
|
|
$
|
2,803
|
|
|
11
|
%
|
|
12
|
%
|
|
—
|
%
|
Northern California
|
86
|
|
|
60,899
|
|
|
708
|
|
|
36
|
|
|
28,567
|
|
|
794
|
|
|
139
|
%
|
|
113
|
%
|
|
(11
|
)%
|
Total
|
185
|
|
|
$
|
339,412
|
|
|
$
|
1,835
|
|
|
125
|
|
|
$
|
278,000
|
|
|
$
|
2,224
|
|
|
48
|
%
|
|
22
|
%
|
|
(17
|
)%
|
Backlog reflects the number of homes, net of cancellations, for which we have entered into a sales contract with a customer, but for which we have not yet delivered the home. The dollar value of backlog was up
22%
year-over-year to
$339.4 million
primarily due to a
48%
increase in the number of homes in backlog, which was partially offset by a
17%
decrease in average selling price in backlog due to a product mix shift. The increase in the number of homes in backlog as of
June 30, 2017
compared to the prior year period was largely the result of a higher monthly sales absorption rate. The higher dollar value and average selling price in Southern California backlog as compared to Northern California was due to higher-priced communities in the Newport Coast area of Southern California where we have two coastal luxury communities where average home prices in backlog range from $4.7 million to $7.8 million.
Lots Owned and Controlled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Increase/(Decrease)
|
|
2017
|
|
2016
|
|
Amount
|
|
%
|
Lots Owned:
|
|
|
|
|
|
|
|
Southern California
|
402
|
|
|
226
|
|
|
176
|
|
|
78
|
%
|
Northern California
|
285
|
|
|
249
|
|
|
36
|
|
|
14
|
%
|
Total
|
687
|
|
|
475
|
|
|
212
|
|
|
45
|
%
|
Lots Controlled:
(1)
|
|
|
|
|
|
|
|
Southern California
|
564
|
|
|
631
|
|
|
(67
|
)
|
|
(11
|
)%
|
Northern California
|
303
|
|
|
379
|
|
|
(76
|
)
|
|
(20
|
)%
|
Arizona
|
267
|
|
|
—
|
|
|
267
|
|
|
NA
|
|
Total
|
1,134
|
|
|
1,010
|
|
|
124
|
|
|
12
|
%
|
Total Lots Owned and Controlled - Wholly Owned
|
1,821
|
|
|
1,485
|
|
|
336
|
|
|
23
|
%
|
Fee Building
(2)
|
1,043
|
|
|
1,001
|
|
|
42
|
|
|
4
|
%
|
Total Lots Owned and Controlled
|
2,864
|
|
|
2,486
|
|
|
378
|
|
|
15
|
%
|
|
|
(1)
|
Includes lots that we control under purchase and sale agreements or option agreements 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 services.
|
Consistent with our focus on growing our wholly owned business, the Company increased the number of wholly owned lots owned and controlled by
23%
year-over-year to
1,821
lots, 62% of which were controlled through option contracts. The increase in wholly owned lots owned and controlled was primarily due to our planned expansion in Arizona where we entered into contracts on three land parcels which totaled
267
aggregate lots.
The increase in fee building lots at June 30, 2017 compared to the prior year period was attributable to the Company being awarded contracts for five new fee building communities totaling 587 lots from its largest customer during the 2017 second quarter. This lot increase was largely offset by the record level of fee building homes delivered during the twelve months ended June 30, 2017.
Home Sales Revenue and New Homes Delivered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
|
% Change
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
(Dollars in thousands)
|
Southern California
|
27
|
|
|
$
|
67,279
|
|
|
$
|
2,492
|
|
|
20
|
|
|
$
|
54,900
|
|
|
$
|
2,745
|
|
|
35
|
%
|
|
23
|
%
|
|
(9
|
)%
|
Northern California
|
37
|
|
|
29,650
|
|
|
801
|
|
|
23
|
|
|
23,936
|
|
|
1,041
|
|
|
61
|
%
|
|
24
|
%
|
|
(23
|
)%
|
Total
|
64
|
|
|
$
|
96,929
|
|
|
$
|
1,515
|
|
|
43
|
|
|
$
|
78,836
|
|
|
$
|
1,833
|
|
|
49
|
%
|
|
23
|
%
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
% Change
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
Homes
|
|
Dollar Value
|
|
Average Price
|
|
(Dollars in thousands)
|
Southern California
|
49
|
|
|
$
|
111,202
|
|
|
$
|
2,269
|
|
|
31
|
|
|
$
|
84,208
|
|
|
$
|
2,716
|
|
|
58
|
%
|
|
32
|
%
|
|
(16
|
)%
|
Northern California
|
69
|
|
|
55,133
|
|
|
799
|
|
|
40
|
|
|
36,931
|
|
|
923
|
|
|
73
|
%
|
|
49
|
%
|
|
(13
|
)%
|
Total
|
118
|
|
|
$
|
166,335
|
|
|
$
|
1,410
|
|
|
71
|
|
|
$
|
121,139
|
|
|
$
|
1,706
|
|
|
66
|
%
|
|
37
|
%
|
|
(17
|
)%
|
New home deliveries increased
49%
during the 2017 second quarter as compared to the same period in 2016. The increase in deliveries was the result of a higher number of homes in backlog at
December 31, 2016
and an increase in net new home orders during the period. Additionally, home sales revenue increased
23%
during the 2017 second quarter as compared to the prior year period primarily due to the increase in new home deliveries, and was partially offset by a
17%
decline in average sales price per delivery for the period. The year-over-year decrease in average sales price was driven by a product mix shift for both Southern California and Northern California, which is consistent with the Company's strategy to expand its product portfolio to include more affordable-priced homes. The average selling price for Southern California during the 2017 second quarter was influenced by deliveries from our higher-priced luxury product in Newport Coast, but was partially offset by two lower-priced communities in Irvine, CA. The decrease in average selling price for Northern California during the 2017 second quarter was largely due to an increase in deliveries from our lower-priced townhome community in Davis, CA.
New home deliveries increased
66%
for the six months ended
June 30, 2017
compared to the six months ended June 30, 2016. The increase in deliveries was the result of a higher number of homes in backlog at
December 31, 2016
and an increase in net new home orders during the period. Home sales revenue for the first half of 2017 increased
37%
compared to the same period in 2016 primarily due to an increase in new home deliveries, offset partially by a
17%
decline in average sales price per delivery for the period. The year-over-year decrease in average sales price related to a product mix shift for both Southern California and Northern California as deliveries from lower-priced communities increased in proportion to total new home deliveries.
Homebuilding Gross Margin
Homebuilding gross margin for the 2017 second quarter was
13.6%
, which included a
$1.3 million
non-cash inventory impairment charge isolated to one homebuilding community in Southern California due to slow monthly sales absorption and our determination that additional incentives would be required, compared to
12.0%
for the same period in
2016
. Homebuilding gross margin before impairments for the 2017 second quarter was
14.9%
versus
12.0%
in the prior year period. The 290 basis point improvement in homebuilding gross margin before impairments for the 2017 second quarter was primarily due to a
change in product mix, including the favorable impact of higher margins from our Crystal Cove communities located in Newport Coast, CA. Excluding home sales impairments and interest in cost of home sales, the adjusted homebuilding gross margin percentages for the three months ended
June 30, 2017
and June 30, 2016 were
16.7%
and
13.3%
, 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 GAAP equivalent.
Homebuilding gross margin for the six months ended
June 30, 2017
was
13.5%
, which included a
$1.3 million
non-cash inventory impairment related to one homebuilding community in Southern California, compared to
12.4%
for the prior year period. Excluding the inventory impairment charge, homebuilding gross margin before impairments for the first half of 2017 was
14.3%
versus
12.4%
for the same period in 2016. The 190 basis point improvement in homebuilding gross margin before impairments was primarily due to a change in product mix. Excluding home sales impairments and interest in cost of home sales, the adjusted homebuilding gross margin percentages for the six months ended
June 30, 2017
and June 30, 2016 were
16.3%
, and
13.9%
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
(Dollars in thousands)
|
Home sales revenue
|
$
|
96,929
|
|
|
100.0
|
%
|
|
$
|
78,836
|
|
|
100.0
|
%
|
|
$
|
166,335
|
|
|
100.0
|
%
|
|
$
|
121,139
|
|
|
100.0
|
%
|
Cost of home sales
|
83,788
|
|
|
86.4
|
%
|
|
69,390
|
|
|
88.0
|
%
|
|
143,853
|
|
|
86.5
|
%
|
|
106,060
|
|
|
87.6
|
%
|
Homebuilding gross margin
|
13,141
|
|
|
13.6
|
%
|
|
9,446
|
|
|
12.0
|
%
|
|
22,482
|
|
|
13.5
|
%
|
|
15,079
|
|
|
12.4
|
%
|
Add: Home sales impairments
|
1,300
|
|
|
1.3
|
%
|
|
—
|
|
|
—
|
%
|
|
1,300
|
|
|
0.8
|
%
|
|
—
|
|
|
—
|
%
|
Homebuilding gross margin before impairments
(1)
|
14,441
|
|
|
14.9
|
%
|
|
9,446
|
|
|
12.0
|
%
|
|
23,782
|
|
|
14.3
|
%
|
|
15,079
|
|
|
12.4
|
%
|
Add: Interest in cost of home sales
|
1,720
|
|
|
1.8
|
%
|
|
1,063
|
|
|
1.3
|
%
|
|
3,271
|
|
|
2.0
|
%
|
|
1,711
|
|
|
1.5
|
%
|
Adjusted homebuilding gross margin
(1)
|
$
|
16,161
|
|
|
16.7
|
%
|
|
$
|
10,509
|
|
|
13.3
|
%
|
|
$
|
27,053
|
|
|
16.3
|
%
|
|
$
|
16,790
|
|
|
13.9
|
%
|
|
|
(1)
|
Homebuilding gross margin before impairments and adjusted homebuilding gross margin are non-GAAP financial measures. We believe this information is meaningful as it isolates the impact that home sales impairments and leverage have on homebuilding gross margin and permits investors to make better comparisons with our competitors who also break out and adjust gross margins in a similar fashion.
|
Fee Building
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
(Dollars in thousands)
|
Fee building revenues
|
$
|
47,181
|
|
|
100.0
|
%
|
|
$
|
30,028
|
|
|
100.0
|
%
|
|
$
|
102,798
|
|
|
100.0
|
%
|
|
$
|
72,965
|
|
|
100.0
|
%
|
Cost of fee building
|
45,899
|
|
|
97.3
|
%
|
|
28,317
|
|
|
94.3
|
%
|
|
99,825
|
|
|
97.1
|
%
|
|
69,231
|
|
|
94.9
|
%
|
Fee building gross margin
|
$
|
1,282
|
|
|
2.7
|
%
|
|
$
|
1,711
|
|
|
5.7
|
%
|
|
$
|
2,973
|
|
|
2.9
|
%
|
|
$
|
3,734
|
|
|
5.1
|
%
|
Our fee building revenues include (i) billings to independent third-party land owners for general contracting services and (ii) management fees from our unconsolidated joint ventures for construction and sales management services. Cost of fee building includes (i) labor, subcontractor, and other indirect construction and development costs that are reimbursable by the land owner and (ii) general and administrative, or G&A, expenses that are attributable to fee building activities and joint venture management overhead. Besides allocable G&A expenses, there are no other material costs associated with management fees from our unconsolidated joint ventures.
Billings to land owners are a function of construction activity and reimbursable costs are incurred as homes are started. The total billings and reimbursable costs are driven by the pace at which the land owner executes its development plan. Management fees from our unconsolidated joint ventures are collected over the project's life and increase as homes and lots are delivered.
For the three months ended
June 30, 2017
, fee building revenues increased
57%
from the prior year period primarily due to an increase in fee building activity resulting from a higher number of homes under construction during the period. Included in fee building revenues for the three months ended June 30, 2017 and 2016 were (i)
$46.0 million
and
$27.5 million
of billings to land owners, respectively, and (ii)
$1.2 million
and
$2.5 million
of management fees from our unconsolidated joint ventures, respectively. The decrease in management fees from JVs was primarily the result of fewer deliveries and lower revenues from
JV communities, which is consistent with the Company’s strategic shift to emphasize wholly owned operations. Our fee building revenues have historically been concentrated with a small number of customers. For the three months ended
June 30, 2017
and 2016,
one
customer comprised
97%
and
92%
of fee building revenue, respectively.
For the three months ended
June 30, 2017
, cost of fee building increased due to the increase in fee building activity, compared to the same periods during
2016
. The amount of G&A expenses included in cost of fee building was
$2.3 million
and
$2.2 million
for the three months ended
June 30, 2017
and
2016
, respectively. Fee building gross margin percentage decreased to
2.7%
for the three months ended
June 30, 2017
from
5.7%
in the prior year period. The overall decrease in fee building gross margins was largely due to a decrease in management fees received from joint ventures.
For the six months ended
June 30, 2017
, fee building revenues increased
41%
from the prior year period primarily due to an increase in fee building activity resulting from a higher number of homes under construction during the period. Included in fee building revenues for the
six
months ended periods were (i)
$100.4 million
and
$68.3 million
of billings to land owners, respectively, and (ii)
$2.4 million
and
$4.7 million
of management fees from our unconsolidated joint ventures, respectively. The decrease in management fees from JVs was primarily the result of fewer deliveries and lower revenues from JV communities. For the six months ended
June 30, 2017
and 2016,
one
customer comprised
98%
and
94%
of fee building revenue, respectively.
For the six months ended
June 30, 2017
, cost of fee building increased due to the increase in fee building activity, compared to the same periods during
2016
. The amount of G&A expenses included in cost of fee building was
$4.6 million
and
$4.4 million
for the six months ended
June 30, 2017
and
2016
, respectively. Fee building gross margin percentage decreased to
2.9%
for the six months ended June 30, 2017 from
5.1%
in the prior year period. The overall decrease in fee building gross margins was largely due to a decrease in management fees received from joint ventures.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
As a Percentage of Home Sales Revenue
|
|
Six Months Ended
June 30,
|
|
As a Percentage of Home Sales Revenue
|
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(Dollars in thousands)
|
Selling and marketing expenses
|
$
|
6,376
|
|
|
$
|
5,046
|
|
|
6.6
|
%
|
|
6.4
|
%
|
|
$
|
11,377
|
|
|
$
|
8,522
|
|
|
6.8
|
%
|
|
7.0
|
%
|
General and administrative expenses (“G&A”)
|
5,595
|
|
|
5,833
|
|
|
5.8
|
%
|
|
7.4
|
%
|
|
10,685
|
|
|
11,008
|
|
|
6.4
|
%
|
|
9.1
|
%
|
Total selling, marketing and G&A (“SG&A”)
|
$
|
11,971
|
|
|
$
|
10,879
|
|
|
12.4
|
%
|
|
13.8
|
%
|
|
$
|
22,062
|
|
|
$
|
19,530
|
|
|
13.3
|
%
|
|
16.1
|
%
|
During the 2017 second quarter, our SG&A operating leverage improved significantly, resulting in a 140 basis point reduction in our SG&A expense ratio compared to the 2016 second quarter. The improvement was largely attributable to the increase in home sales revenue, which was driven by an increase in new home deliveries and lower G&A expenses.
For the six months ended
June 30, 2017
, our SG&A expense ratio was
13.3%
, a 280 basis point improvement from
16.1%
for the same period in 2016. The improvement was largely attributable to the increase in home sales revenue, which was driven by an increase in new home deliveries and lower G&A expenses.
Equity in Net Income (Loss) of Unconsolidated Joint Ventures
As of
June 30, 2017
and
2016
, we had ownership interests in
12
unconsolidated joint ventures. We own interests in our unconsolidated joint ventures that generally range from 5% to 35% and these interests vary by entity.
The Company's share of joint venture income for the three months ended
June 30, 2017
was
$0.2 million
as compared to
$3.9 million
for the same period in
2016
. The decrease in the Company's share of income was largely due to the close out of an unconsolidated joint venture known as "LR8" in the 2016 second quarter, which produced an income allocation of $0.5 million prior to close out and a gain of $1.1 million due to the purchase of our joint venture partner's interest for less than its carrying value. Additionally, a reduction in joint venture revenues from decreased home deliveries and lot sales, lower gross margins from joint venture home sales and timing of recognition of income due to joint venture distribution waterfalls also contributed to the year-over-year decrease in the Company's share of joint venture income. The decrease in joint venture homes sales gross margin was primarily due to increased deliveries in the 2017 second quarter from five Sacramento communities with lower margins than the communities that were delivering in the 2016 second quarter, which included our higher-margin Orchard Park project in the Bay Area, which delivered its last home in the 2017 first quarter. The decrease in the Company's share of joint venture income was partially offset by the close out of an unconsolidated joint venture known as "Larkspur" in the 2017 second
quarter, which produced an income allocation of $0.1 million prior to close out and a gain of
$0.3 million
due to the purchase of our JV partner's interest for less than its carrying value as part of a negotiated transaction. The joint venture close outs mentioned are discussed in further detail within Note 11, "Related Party Transactions," in our accompanying Condensed Consolidated Financial Statements.
The Company's share of joint venture income for the six months ended
June 30, 2017
was
$0.5 million
as compared to
$3.9 million
for the same period in
2016
. The decrease in the Company's share of income was largely due to the close out of the LR8 unconsolidated joint venture in the 2016 second quarter noted above. Additionally, a reduction in joint venture revenues from decreased home deliveries and lot sales, lower gross margins from joint venture home sales and timing of recognition of income due to joint venture distribution waterfalls also contributed to the year-over-year decrease in the Company's share of joint venture income. The decrease in joint venture homes sales gross margin was primarily due to a mix shift in deliveries, including deliveries in the 2017 period from five Sacramento communities with lower margins that did not have deliveries in 2016 as well as the close out of our higher-margin Orchard Park project in the Bay Area, which delivered its last home in the 2017 first quarter. The decrease in the Company's share of joint venture income was partially offset by the close out of the Larkspur unconsolidated joint venture in the 2017 second quarter, which produced an income allocation of $0.1 million prior to close out and a gain of
$0.3 million
due to the purchase of our JV partner's interest for less than its carrying value as part of a negotiated transaction. The joint venture close outs mentioned are discussed in further detail within Note 11, "Related Party Transactions," in our accompanying Condensed Consolidated Financial Statements.
The following sets forth supplemental operational and financial information about our unconsolidated joint ventures. Such information is not included in our financial data for GAAP purposes, but is recognized in our results as a component of equity in net income (loss) of unconsolidated joint ventures. This data is included for informational purposes only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
Increase/(Decrease)
|
|
|
Increase/(Decrease)
|
|
2017
|
|
2016
|
|
Amount
|
|
%
|
|
2017
|
|
2016
|
|
Amount
|
|
%
|
|
(Dollars in thousands)
|
Unconsolidated Joint Ventures
|
|
|
|
|
|
|
|
|
|
|
Net new home orders
|
54
|
|
|
30
|
|
|
24
|
|
|
80
|
%
|
|
93
|
|
|
76
|
|
|
17
|
|
|
22
|
%
|
New homes delivered
|
33
|
|
|
55
|
|
|
(22
|
)
|
|
(40
|
)%
|
|
65
|
|
|
100
|
|
|
(35
|
)
|
|
(35
|
)%
|
Average sales price of homes delivered
|
|
$
|
914
|
|
|
$
|
859
|
|
|
$
|
55
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales revenue
|
$
|
34,240
|
|
|
$
|
47,698
|
|
|
$
|
(13,458
|
)
|
|
(28
|
)%
|
|
$
|
59,386
|
|
|
$
|
85,899
|
|
|
$
|
(26,513
|
)
|
|
(31
|
)%
|
Land sales revenue
|
931
|
|
|
22,406
|
|
|
(21,475
|
)
|
|
(96
|
)%
|
|
2,405
|
|
|
26,162
|
|
|
(23,757
|
)
|
|
(91
|
)%
|
Total revenue
|
$
|
35,171
|
|
|
$
|
70,104
|
|
|
$
|
(34,933
|
)
|
|
(50
|
)%
|
|
$
|
61,791
|
|
|
$
|
112,061
|
|
|
$
|
(50,270
|
)
|
|
(45
|
)%
|
Net income (loss)
|
$
|
(654
|
)
|
|
$
|
10,195
|
|
|
$
|
(10,849
|
)
|
|
(106
|
)%
|
|
$
|
(1,518
|
)
|
|
$
|
12,336
|
|
|
$
|
(13,854
|
)
|
|
(112
|
)%
|
|
|
|
|
|
|
|
|
|
Selling communities at end of period
|
|
8
|
|
|
3
|
|
|
5
|
|
|
167
|
%
|
Backlog (dollar value)
|
|
$
|
70,941
|
|
|
$
|
71,970
|
|
|
$
|
(1,029
|
)
|
|
(1
|
)%
|
Backlog (homes)
|
|
90
|
|
|
76
|
|
|
14
|
|
|
18
|
%
|
Average sales price of backlog
|
|
$
|
788
|
|
|
$
|
947
|
|
|
$
|
(159
|
)
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding lots owned and controlled
|
|
520
|
|
|
610
|
|
|
(90
|
)
|
|
(15
|
)%
|
Land development lots owned and controlled
|
|
2,415
|
|
|
2,512
|
|
|
(97
|
)
|
|
(4
|
)%
|
Total lots owned and controlled
|
|
2,935
|
|
|
3,122
|
|
|
(187
|
)
|
|
(6
|
)%
|
Provision (Benefit) for Income Taxes
For the three months ended
June 30, 2017
and
2016
, the Company recorded a provision for income taxes of
$1.0 million
and
$1.5 million
, respectively. For the six months ended
June 30, 2017
and
2016
, the Company recorded a provision for income taxes of
$1.5 million
and
$1.3 million
, respectively. Included in the three and six month periods for 2016 is an allocation of income from LR8 of
$0.5 million
due to a reduction in the warranty reserve and a
$1.1 million
gain from the closeout of LR8 due to the purchase of our JV partner's interest for less than its carrying value, which resulted in a provision for income taxes of
$0.6 million
for the three and six month periods ended June 30, 2016 and did not impact our effective tax rate. The effective tax rate for the three and six months ended
June 30, 2017
and
2016
differs from the
35%
federal statutory tax rate due to state income taxes partially offset by the tax benefit of production activities.
Liquidity and Capital Resources
Overview
Our principal sources of capital for the
six
months ended
June 30, 2017
were proceeds from the sale of our senior notes due 2022, cash generated from home sales activities, advances from our unsecured revolving credit facility, distributions from our unconsolidated joint ventures, and management fees from our fee building agreements. Our principal uses of capital for the
six
months ended
June 30, 2017
were land purchases, land development, home construction, repayments on our revolving credit facility, contributions and advances to our unconsolidated joint ventures, operating expenses and the payment of routine liabilities.
Cash flows for each of our communities depend on their stage in the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our real estate inventories and not recognized in our consolidated statement of operations until a home is delivered, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are actively acquiring and developing lots to increase our lot supply and community count. As we continue to expand our business, we expect cash outlays for land purchases, land development and home construction to exceed our cash generated by operations.
We ended the
second
quarter of
2017
with
$154.0 million
of cash and cash equivalents, a
$123.5 million
increase from
December 31, 2016
, primarily as a result of the issuance of our senior notes due 2022. We expect to generate cash from the sale of our inventory, but intend to redeploy the net cash generated from the sale of inventory to acquire and develop strategic, well-positioned lots that represent opportunities to generate future income and cash flows.
As of
June 30, 2017
and
December 31, 2016
, we had
$12.1 million
and
$22.8 million
, respectively, in accounts payable that related to costs incurred under our fee building agreements. Funding to pay these amounts is the obligation of the independent third-party land owner, which is generally funded on a monthly basis. Similarly, contracts and accounts receivable as of the same dates included
$13.5 million
and
$24.3 million
, respectively, related to the payment of the above payables.
We intend to utilize both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from continuing operations, to provide us with the financial flexibility to operate our business. In that regard, we expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. As of
June 30, 2017
, we had outstanding borrowings of $325 million in aggregate principal related to our senior notes. We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. In addition, our debt contains certain financial covenants that limits the amount of leverage we can maintain.
We intend to finance future acquisitions and developments with what we believe to be the most advantageous source of capital available to us at the time of the transaction, which may include unsecured corporate level debt, property-level debt, and other public, private or bank debt, or common and preferred equity. Additionally, we have an existing effective shelf registration statement that allows us to issue equity, debt or hybrid securities up to
$349.7 million
as of
June 30, 2017
.
Senior Notes Due 2022
On March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Unsecured Notes due 2022 (the "Existing Notes"), in a private placement. The Notes were issued at an offering price of 98.961% of their face amount, which represents a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on private placement offering through the sale of an additional
$75 million
in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of
102.75%
of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the remainder to be used for general corporate purposes. Net proceeds from the Additional Notes will be used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (collectively, the “Notes”) will be paid semiannually in arrears on April 1 and October 1, commencing October 1, 2017. The Notes will mature on April 1, 2022.
The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. The leverage and interest coverage conditions are summarized in the table below, as described and defined further in the indenture for the Notes. Exceptions to the additional indebtedness limitation include, among other things, borrowings of up to $260 million under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2017 and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of $15,000,000. The Notes are guaranteed by all of the Company's 100% owned subsidiaries, for more information about these guarantees, please see Note 16.