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.
Based on our public float of $58.9 million at June 28, 2019, we are a smaller reporting company and are subject to reduced disclosure obligations in our periodic reports and proxy statements.
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts have been eliminated upon consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Regulation S-X and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring entries) necessary for the fair presentation of our results for the interim period presented. Results for the interim periods are not necessarily indicative of the results to be expected for the full year due to seasonal variations and other factors, such as the effects of the novel coronavirus ("COVID-19") and its impact on our future results.
Unless the context otherwise requires, the terms "we", "us", "our" and "the Company" refer to the Company and its wholly owned subsidiaries, on a consolidated basis.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying condensed consolidated financial statements and notes. Accordingly, actual results could differ materially from these estimates.
Reclassifications
No items in the prior year condensed consolidated financial statements have been reclassified.
Segment Reporting
Accounting Standards Codification ("ASC") 280, Segment Reporting ("ASC 280") established standards for the manner in which public enterprises report information about operating segments. The Company's reportable segments are Arizona homebuilding, California homebuilding, and fee building. In accordance with ASC 280, our California homebuilding reportable segment aggregates the Southern California and Northern California homebuilding operating segments based on the similarities in long-term economic characteristics.
Cash and Cash Equivalents
We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short term liquid investments with a maturity date of less than three months from the date of purchase.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash
Restricted cash of $0.4 million and $0.1 million as of September 30, 2020 and December 31, 2019, respectively, is held in accounts for payments of subcontractor costs incurred in connection with various fee building projects.
The table below shows the line items and amounts of cash and cash equivalents and restricted cash as reported within the Company's condensed consolidated balance sheets for each period shown that sum to the total of the same such amounts at the end of the periods shown in the accompanying condensed consolidated statements of cash flows.
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Nine Months Ended September 30,
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2020
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2019
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(Dollars in thousands)
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Cash and cash equivalents
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$
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126,375
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|
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$
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40,892
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Restricted cash
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|
|
408
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|
|
|
119
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|
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
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$
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126,783
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|
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$
|
41,011
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Real Estate Inventories and Cost of Sales
We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect construction costs. Pre-acquisition costs, including nonrefundable land deposits, are expensed to project abandonment costs if we determine continuation of the prospective project is not probable.
Land, development and other common costs are typically allocated to real estate inventories using a methodology that approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost of sales for homes closed includes the estimated total construction costs of each home at completion and an allocation of all applicable land acquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value of the home within each project. Changes in estimated development and common costs are allocated prospectively to remaining homes in the project.
In accordance with ASC 360, Property, Plant and Equipment ("ASC 360"), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset on a quarterly basis or whenever indicators of impairment exist. Real estate assets include projects actively selling and projects under development or held for future development. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases in gross margins or sales absorption rates, costs significantly in excess of budget, and actual or projected cash flow losses.
If there are indicators of impairment, we perform a detailed budget and cash flow review of the applicable real estate inventories to determine whether the estimated future undiscounted cash flows of the project are more or less than the asset’s carrying value. If the estimated future undiscounted cash flows exceed the asset’s carrying value, no impairment adjustment is required. However, if the estimated future undiscounted cash flows are less than the asset’s carrying value then the asset is impaired. If the asset is deemed impaired, it is written down to its fair value in accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820").
When estimating undiscounted future cash flows of a project, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other projects, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.
Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, and the level of time sensitive costs (such as indirect construction, overhead and carrying costs). Depending on the underlying objective of the project, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase the velocity of sales. These objectives may vary significantly from project to project and change over time.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
If a real estate asset is deemed impaired, the impairment is calculated by determining the amount the asset's carrying value exceeds its fair value in accordance with ASC 820. We calculate the fair value of real estate inventories considering a land residual value analysis and a discounted cash flow analysis. Under the discounted cash flow method, the fair value is determined by calculating the present value of future cash flows using a risk adjusted discount rate. Some of the critical assumptions involved with measuring the asset's fair value include estimating future revenues, sales absorption rates, development and construction costs, and other applicable project costs. This evaluation and the assumptions used by management to determine future estimated cash flows and fair value require a substantial degree of judgment, especially with respect to real estate projects that have a substantial amount of development to be completed, have not started selling or are in the early stages of sales, or are longer in duration. Actual revenues, costs and time to complete and sell a community could vary from these estimates which could impact the calculation of fair value of the asset and the corresponding amount of impairment that is recorded in our results of operations. For the three and nine months ended September 30, 2020, the Company recorded $0 and $19.0 million, respectively, in home sales impairment charges. For the three and nine months ended September 30, 2019, the Company recorded $1.7 million in home sales impairment charges and $1.9 million in land sales impairment charges. For additional information regarding these impairment charges, please see Note 4. In cases where we decide to abandon a project, we will fully expense all costs capitalized to such project and will expense and accrue any additional costs that we are contractually obligated to incur. For the three and nine months ended September 30, 2020 and 2019, $0, $14.1 million, $10,000 and $29,000 in project abandonment costs were incurred, respectively. For the three and nine months ended September 30, 2020 and 2019, we recovered $33,000, $0, $0 and $0 of previously expensed abandonment charges, respectively.
Capitalization of Interest
We follow the practice of capitalizing interest to real estate inventories during the period of development and to investments in unconsolidated joint ventures, when applicable, in accordance with ASC 835, Interest ("ASC 835"). Interest capitalized as a cost component of real estate inventories is included in cost of home sales as related homes or lots are sold. To the extent interest is capitalized to investment in unconsolidated joint ventures, it is included as a reduction of equity in net income (loss) of unconsolidated joint ventures when the related homes or lots are sold to third parties. In instances where the Company purchases land from an unconsolidated joint venture, the pro rata share of interest capitalized to investment in unconsolidated joint ventures is added to the basis of the land acquired and recognized as a cost of sale upon the delivery of the related homes or land to a third-party buyer. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively selling or under development as well as investments in unconsolidated joint ventures accounted for under the equity method until such equity investees begin their principal operations.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To do this, the Company performs the following five steps as outlined in ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
Home Sales and Profit Recognition
In accordance with ASC 606, home sales revenue is recognized when our performance obligations within the underlying sales contracts are fulfilled. We consider our obligations fulfilled when closing conditions are complete, title has transferred to the homebuyer, and collection of the purchase price is reasonably assured. Sales incentives are recorded as a reduction of revenues when the respective home is closed. The profit we record is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales." When it is determined that the earnings process is not complete, the related revenue and profit are deferred for recognition in future periods.
Land Sales and Profit Recognition
In accordance with ASC 606, land sales revenue is recognized when our performance obligations within the underlying sales contracts are fulfilled. The performance obligations in land sales contracts are typically satisfied at the point in time consideration and title is transferred through escrow at closing. Total revenue is typically recognized simultaneously with transfer of title to the customer. In instances where material performance obligations may exist after the closing date, a portion of the price is allocated to each performance obligation with revenue recognized as such obligations are completed. Variable consideration, such as profit participation, may be included within the land sales transaction price based on the terms of a contract. The Company includes the estimated amount of variable consideration to which it will be entitled only to the extent it is probable that a significant reversal in the amount of cumulative revenue will not occur when any uncertainty associated with the variable consideration is subsequently resolved.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fee Building
The Company enters into fee building agreements to provide services whereby it builds homes on behalf of third-party property owners. The third-party property owner funds all project costs incurred by the Company to build and sell the homes. The Company primarily enters into cost plus fee contracts where it charges third-party property owners for all direct and indirect costs plus a fee. The fee is typically a per-unit fixed fee or based on a percentage of the cost or home sales revenue of the project, depending on the terms of the agreement with the third-party property owner. For these types of contracts, the Company recognizes revenue based on the actual total costs it has incurred plus the applicable fee. In accordance with ASC 606, we apply the percentage-of-completion method, using the cost-to-cost approach, as it most accurately measures the progress of our efforts in satisfying our obligations within the fee building agreements. Under this approach, revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred. In the course of providing fee building services, the Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are passed through to the property owners and, in accordance with GAAP, are included in the Company’s revenues and cost of sales.
The Company also provides construction management and coordination services and sales and marketing services as part of agreements with third parties and its unconsolidated joint ventures. In certain contracts, the Company also provides project management and administrative services. For most services provided, the Company fulfills its related obligations as time-based measures, according to the input method guidance described in ASC 606. Accordingly, revenue is recognized on a straight-line basis as the Company's efforts are expended evenly throughout the performance period. The Company may also have an obligation to manage the home or lot sales process as part of providing sales and marketing services. This obligation is considered fulfilled when related homes or lots close escrow, as these events represent milestones reached according to the output method guidance described in ASC 606. Accordingly, revenue is recognized in the period that the corresponding lots or homes close escrow. Costs associated with these services are recognized as incurred.
The Company’s fee building revenues have historically been concentrated with a small number of customers. For the three and nine months ended September 30, 2020 and 2019, one customer comprised 84%, 94%, 96% and 94%, respectively, of fee building revenue. The balance of the fee building revenues primarily represented management fees earned from unconsolidated joint ventures and third-party customers. As of September 30, 2020 and December 31, 2019, one customer comprised 45% and 65% of contracts and accounts receivable, respectively, with the balance of contracts and accounts receivable primarily representing escrow receivables from home sales.
Variable Interest Entities
The Company accounts for variable interest entities in accordance with ASC 810, Consolidation ("ASC 810"). Under ASC 810, a variable interest entity ("VIE") is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights.
Once we consider the sufficiency of equity and voting rights of each legal entity, we then evaluate the characteristics of the equity holders' interests, as a group, to see if they qualify as controlling financial interests. Our real estate joint ventures consist of limited partnerships and limited liability companies. For entities structured as limited partnerships or limited liability companies, our evaluation of whether the equity holders (equity partners other than us in each our joint ventures) lack the characteristics of a controlling financial interest includes the evaluation of whether the limited partners or non-managing members (the non-controlling equity holders) lack both substantive participating rights and substantive kick-out rights, defined as follows:
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•
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Participating rights - provide the non-controlling equity holders the ability to direct significant financial and operational decision made in the ordinary course of business that most significantly influence the entity's economic performance.
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•
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Kick-out rights - allow the non-controlling equity holders to remove the general partner or managing member without cause.
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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.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Under ASC 810, a nonrefundable deposit paid to an entity may be deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are classified as real estate inventories, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a nonrefundable deposit, a VIE may have been created. At September 30, 2020, the Company had outstanding nonrefundable cash deposits of $11.7 million pertaining to land option contracts and purchase contracts.
As of September 30, 2020 and December 31, 2019, the Company was not required to consolidate any VIEs. In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.
Non-controlling Interest
During 2013, the Company entered into a joint venture agreement with a third-party property owner. In accordance with ASC 810, the Company analyzed this arrangement and determined that it was not a VIE; however, the Company determined it was required to consolidate the joint venture as the Company has a controlling financial interest with the powers to direct the major decisions of the entity. During the third quarter of 2020, the Company and its partner dissolved the joint venture, and as of September 30, 2020 and December 31, 2019, the third-party investor had an equity balance of $0 and $0.1 million, respectively.
Investments in and Advances to Unconsolidated Joint Ventures
We use the equity method to account for investments in homebuilding and land development joint ventures when any of the following situations exist: 1) the joint venture qualifies as a VIE and we are not the primary beneficiary, 2) we do not control the joint venture but have the ability to exercise significant influence over its operating and financial policies, or 3) we function as the managing member or general partner of the joint venture and our joint venture partner has substantive participating rights or can replace us as managing member or general partner without cause.
As of September 30, 2020, 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 ASC 230, Statement of Cash Flows ("ASC 230"). Under the cumulative earnings approach, distributions received are considered returns on investment and are classified as cash inflows from operating activities unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed cumulative equity in earnings. When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and 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 on a quarterly basis, consistent with how we review our real estate inventories as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales." We also review our investments in and advances to unconsolidated joint ventures for evidence of other-than-temporary declines in value. To the extent we deem any declines in value of our investment in and advances to unconsolidated joint ventures to be other-than-temporary, we impair our investment accordingly. For the three and nine months ended September 30, 2020 and 2019, the Company recorded other-than-temporary, noncash impairment charges of $0, $22.3 million, $0 and $0, respectively, related to our investment in and advances to unconsolidated joint ventures. Joint venture impairment charges are included in equity in net income (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations.
Selling and Marketing Expense
Costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and model landscaping and furnishings are capitalized to other assets in the accompanying condensed consolidated balance sheets under ASC 340, Other Assets and Deferred Costs ("ASC 340"). These costs are depreciated to selling and marketing expenses generally over the shorter of 30 months or the actual estimated life of the selling community. All other selling and marketing costs, such as commissions and advertising, are expensed as incurred.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Warranty and Litigation Accruals
We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural construction defects for one year. In addition, we provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered by the applicable statute of repose, that covers certain defined construction defects. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts are accrued based upon the Company’s historical claim and expense rates. In addition, the Company has received warranty payments from third-party property owners for certain of its fee building projects that have since closed-out where the Company has the contractual risk of construction. These payments are recorded as warranty accruals. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets and adjustments to our warranty accrual are recorded through cost of sales.
While our subcontractors who perform our homebuilding work generally provide us with an indemnity for claims relating to their workmanship and materials, we also purchase general liability insurance that covers development and construction activity at each of our communities. Our subcontractors are usually covered by these programs through an owner-controlled insurance program, or "OCIP." Consultants such as engineers and architects are generally not covered by the OCIP but are required to maintain their own insurance. In general, we maintain insurance, subject to deductibles and self-insured retentions, to protect us against various risks associated with our activities, including, among others, general liability, "all-risk" property, construction defects, workers’ compensation, automobile, and employee fidelity. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insured retention requirements. We establish a separate reserve for warranty and for known and incurred but not reported (“IBNR”) construction defect claims based on our historical claim and expense data. Our warranty accrual and litigation reserves for construction defect claims are presented on a gross basis within accrued expenses and other liabilities in our consolidated financial statements without consideration of insurance recoveries. Expected recoveries from insurance carriers are presented as warranty insurance receivables within other assets in our consolidated financial statements and are recorded based on actual insurance claims and amounts determined using our construction defect claim and warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates.
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 September 30, 2020 and December 31, 2019, no allowance was recorded related to contracts and accounts receivable.
Property, Equipment and Capitalized Selling and Marketing Costs
Property, equipment and capitalized selling and marketing costs are recorded at cost and included in other assets in the accompanying condensed consolidated balance sheets. Property and equipment are depreciated to general and administrative expenses using the straight-line method over their estimated useful lives ranging from three to five years. Leasehold improvements are stated at cost and are amortized to general and administrative expenses using the straight-line method generally over the shorter of either their estimated useful lives or the term of the lease. Capitalized selling and marketing costs are depreciated using the straight-line method to selling and marketing expenses over the shorter of either 30 months or the actual estimated life of the selling community.
Income Taxes
Income taxes are accounted for in accordance with ASC 740, Income Taxes ("ASC 740"). The consolidated provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not (defined as a likelihood of more than 50%) unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the tax asset we conclude is more likely than not unrealizable. Our assessment considers, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with net operating losses and tax credit carryforwards and the available tax planning alternatives, to the extent these items are applicable, and the availability of net operating loss carrybacks under certain circumstances. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible, as well as the ability to carryback net operating losses in the event that this option becomes available. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial statements. At September 30, 2020 a valuation allowance of $0.1 million was recorded against a capital loss and at December 31, 2019, no valuation allowance was recorded.
ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. In addition, these provisions provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. At September 30, 2020, the Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements.
The Company classifies any interest and penalties related to income taxes assessed as part of income tax expense. As of September 30, 2020, the Company has not been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.
Stock-Based Compensation
We account for share-based awards in accordance with ASC 718, Compensation – Stock Compensation ("ASC 718"). ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in a company's financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. In 2018, the scope of ASC 718 was expanded to include share-based payments for acquiring goods and services from nonemployees, with certain exceptions. The Company had one nonemployee equity award that was fully expensed during the 2019 first quarter and was accounted for in accordance with ASC 718.
Share Repurchase and Retirement
When shares are retired, the Company’s policy is to allocate the excess of the repurchase price over the par value of shares acquired to both retained earnings and additional paid-in capital. The portion allocated to additional paid-in capital is determined by applying a percentage, which is determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additional paid-in capital as of the retirement date. The residual, if any, is allocated to retained earnings as of the retirement date.
During the nine months ended September 30, 2020, the Company repurchased and retired 2,051,183 shares of its common stock at an aggregate purchase price of $3.7 million. During the nine months ended September 30, 2019, the Company repurchased and retired 153,916 shares of its common stock at an aggregate purchase price of $1.0 million. The purchases were made under a previously announced stock repurchase program that had a remaining purchase authorization of $1.7 million as of September 30, 2020. Repurchases from March 20, 2020 through May 11, 2020 were made pursuant to the Company's 10b5-1 plan. All repurchased shares were returned to the status of authorized but unissued.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tax Benefit Preservation Plan
On May 8, 2020, the Company entered into a Tax Benefit Preservation Plan between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (as amended from time to time, the “Tax Plan”) to help preserve the value of certain deferred tax benefits, including those generated by net operating losses and certain other tax attributes (collectively, the “Tax Benefits”). The Tax Plan is intended to act as a deterrent to any person or entity acquiring shares of the Company equal to or exceeding 4.95%. The Tax Plan reduces the likelihood that changes in our investor base have the unintended effect of limiting the use of our Tax Benefits. In connection with its adoption of the Tax Plan, the Board declared a dividend of one preferred stock purchase right (individually, a “Right” and collectively, the “Rights”) for each share of Common Stock, par value $0.01 (“Common Stock”) of the Company outstanding at the close of business on May 20, 2020. As long as the Rights are attached to the Common Stock, the Company will issue one Right (subject to adjustment) with each new share of the Common Stock so that all such shares will have attached Rights. Each Right has an exercise price of $11.50. Each Right, which is only exercisable if a person or group of affiliated or associated persons acquires beneficial ownership of 4.95% or more of the Common Stock, subject to certain limited exceptions (the “Acquiring Person”), when exercised will entitle the registered holder other than the Acquiring Person the right to acquire that number of shares of Common Stock having a market value of two times the $11.50 exercise price of the Right, or, at the election of the Board, to exchange each right for one share of Common Stock, in each case, subject to adjustment. Unless redeemed or exchanged earlier by the Company or terminated, the rights will expire upon the earliest to occur of (i) the close of business on May 7, 2021, (ii) the close of business on the effective date of the repeal of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”) if the Board determines that the Tax Plan is no longer necessary or desirable for the preservation of the Tax Benefits or (iii) the time at which the Board determines that the Tax Benefits are fully utilized or no longer available under Section 382 of the Code or that an ownership change under Section 382 of the Code would not adversely impact in any material respect the time period in which the Company could use the Tax Benefits, or materially impair the amount of the Tax Benefits that could be used by the Company in any particular time period, for applicable tax purposes.
Dividends
No dividends were paid on our common stock during the three and nine months ended September 30, 2020 and 2019. We currently intend to retain our future earnings to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, compliance with Delaware law, restrictions contained in any financing instruments, including but not limited to, our unsecured credit facility and senior notes indenture, and such other factors as our board of directors deem relevant.
Recently Issued Accounting Standards
The Company's status as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") ended on December 31, 2019. Section 102 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the "Securities Act"), for complying with new or revised accounting standards. As previously disclosed and prior to the expiration of its "emerging growth company" status, the Company had chosen, irrevocably, to "opt out" of such extended transition period, and as a result, complied with new or revised accounting standards on the relevant dates on which adoption of such standards was required for non-emerging growth companies.
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology. The FASB followed up with ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments in April 2019, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326), in May 2019, ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses in November 2019, and ASU 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) in February 2020 to provide further clarification on this topic. The standard is effective for annual and interim periods beginning January 1, 2020, and requires full retrospective application upon adoption. During November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates that provides for additional implementation time for smaller reporting companies with the standard being effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. As a smaller reporting company, we are not adopting the requirements of ASU 2016-13 for the year beginning January 1, 2020, however we do not anticipate a material impact to our consolidated financial statements as a result of adoption.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify certain disclosure requirements of fair value measurements. The Company adopted ASU 2018-13 in the 2020 first quarter with no impact to the condensed consolidated financial statements as a result.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)- Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently in the process of evaluating the effects on our financial statements of adopting ASU 2019-12.
In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815) ("ASU 2020-01"). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The standard is effective for fiscal years beginning after December 31, 2020, and interim periods within those fiscal years, with early adoption permitted. The Company expects no material impact to our consolidated financial statements as a result of adoption.
2. Computation of Earnings (Loss) Per Share
The following table sets forth the components used in the computation of basic and diluted loss per share for the three and nine months ended September 30, 2020 and 2019:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to The New Home Company Inc.
|
|
$
|
1,188
|
|
|
$
|
(4,624
|
)
|
|
$
|
(31,581
|
)
|
|
$
|
(5,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
18,231,954
|
|
|
|
20,096,969
|
|
|
|
18,839,551
|
|
|
|
20,051,751
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and unvested restricted stock units
|
|
|
100,647
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted-average shares outstanding
|
|
|
18,332,601
|
|
|
|
20,096,969
|
|
|
|
18,839,551
|
|
|
|
20,051,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share attributable to The New Home Company Inc.
|
|
$
|
0.07
|
|
|
$
|
(0.23
|
)
|
|
$
|
(1.68
|
)
|
|
$
|
(0.25
|
)
|
Diluted earnings (loss) per share attributable to The New Home Company Inc.
|
|
$
|
0.06
|
|
|
$
|
(0.23
|
)
|
|
$
|
(1.68
|
)
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive stock options and unvested restricted stock units not included in diluted earnings (loss) per share
|
|
|
1,596,644
|
|
|
|
1,491,479
|
|
|
|
1,872,640
|
|
|
|
1,311,389
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Contracts and Accounts Receivable
Contracts and accounts receivable consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Contracts receivable:
|
|
|
|
|
|
|
|
|
Costs incurred on fee building projects
|
|
$
|
69,632
|
|
|
$
|
93,281
|
|
Estimated earnings
|
|
|
1,206
|
|
|
|
2,052
|
|
|
|
|
70,838
|
|
|
|
95,333
|
|
Less: amounts collected during the period
|
|
|
(66,054
|
)
|
|
|
(84,979
|
)
|
Contracts receivable
|
|
$
|
4,784
|
|
|
$
|
10,354
|
|
|
|
|
|
|
|
|
|
|
Contracts receivable:
|
|
|
|
|
|
|
|
|
Billed
|
|
$
|
—
|
|
|
$
|
—
|
|
Unbilled
|
|
|
4,784
|
|
|
|
10,354
|
|
|
|
|
4,784
|
|
|
|
10,354
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Escrow receivables
|
|
|
3,992
|
|
|
|
5,392
|
|
Other receivables
|
|
|
512
|
|
|
|
236
|
|
Contracts and accounts receivable
|
|
$
|
9,288
|
|
|
$
|
15,982
|
|
Billed contracts receivable represent amounts billed to customers that have yet to be collected. Unbilled contracts receivable represents the contract revenue recognized but not yet invoiced. All unbilled receivables as of September 30, 2020 are expected to be billed and collected within 30 days. Accounts payable at September 30, 2020 and December 31, 2019 includes $4.0 million and $9.6 million, respectively, related to costs incurred under the Company’s fee building contracts.
4. Real Estate Inventories
Real estate inventories are summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Deposits and pre-acquisition costs
|
|
$
|
14,521
|
|
|
$
|
17,865
|
|
Land held and land under development
|
|
|
127,164
|
|
|
|
180,823
|
|
Homes completed or under construction
|
|
|
152,389
|
|
|
|
183,711
|
|
Model homes
|
|
|
47,133
|
|
|
|
51,539
|
|
|
|
$
|
341,207
|
|
|
$
|
433,938
|
|
All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0.1 million and $0.1 million as of September 30, 2020 and December 31, 2019, respectively.
Land held and land under development includes land costs and costs incurred during site development such as development, indirects, and permits. Homes completed or under construction and model homes include all costs associated with home construction, including allocated land, development, indirects, permits, materials and labor (except for capitalized selling and marketing costs, which are classified in other assets).
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with ASC 360, inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset at the community-level on a quarterly basis or whenever indicators of impairment exist. For the nine months ended September 30, 2020, the Company recognized inventory impairments of $19.0 million in cost of sales resulting in an increase of $17.8 million and $1.2 million in pretax loss for our California and Arizona homebuilding segments, respectively. The fair values for the homebuilding projects impaired were calculated under discounted cash flow models using discount rates ranging from 14%-26%. For the three and nine months ended September 30, 2019, the Company recognized real estate-related impairments of $3.6 million in cost of sales resulting in a decrease of the same amount to pretax income (loss) for our California homebuilding segment. Fair value for the homebuilding project impaired was calculated under discounted cash flow model using a discount rate of 17.3%. Fair value for the land sales project impaired was determined using the land purchase price included in the executed sales agreement, including commissions, less the Company's cost to sell. The following table summarizes inventory impairments recorded during the three and nine months ended September 30, 2020 and 2019:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Inventory impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
$
|
—
|
|
|
$
|
1,700
|
|
|
$
|
19,000
|
|
|
$
|
1,700
|
|
Land sales
|
|
|
—
|
|
|
|
1,900
|
|
|
|
—
|
|
|
|
1,900
|
|
Total inventory impairments
|
|
$
|
—
|
|
|
$
|
3,600
|
|
|
$
|
19,000
|
|
|
$
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining carrying value of inventory impaired at period end
|
|
$
|
—
|
|
|
$
|
68,615
|
|
|
$
|
60,027
|
|
|
$
|
68,615
|
|
Number of projects impaired during the period
|
|
|
—
|
|
|
|
2
|
|
|
|
5
|
|
|
|
2
|
|
Total number of projects subject to periodic impairment review during period (1)
|
|
|
31
|
|
|
|
24
|
|
|
|
31
|
|
|
|
27
|
|
(1)
|
Represents the peak number of real estate projects that we had during each respective period. The number of projects outstanding at the end of each period may be less than the number of projects listed herein.
|
The $17.8 million in California home sales impairments recorded in the 2020 period related to four homebuilding communities. Of this total, $6.5 million in charges related to a condominium community in the Sacramento Area, $6.2 million in charges related to a townhome community within Southern California's Inland Empire, $4.5 million in charges related to a townhome community in San Diego, and $0.6 million in charges related to a condominium community in Los Angeles. The $1.2 million in Arizona home sales impairments related to the Company's luxury condominium project in Scottsdale, Arizona. Each of these projects experienced slower absorptions which resulted in increased sales incentives and holding costs for these projects for which the aggregate sales prices for remaining units at each community would be lower than their previous carrying values. In addition, some of these communities experienced higher direct construction costs than originally underwritten and budgeted.
The $1.7 million home sales impairment recorded in the 2019 third quarter related to one higher-priced community in Southern California where the Company determined that additional incentives were required to sell the remaining homes and lots at estimated aggregate sales prices that would be lower than its previous carrying value. The $1.9 million land sales impairment recorded in the 2019 third quarter related to land the Company had under contract in Northern California that closed during the 2019 fourth quarter. The impairment charges represented the loss expected from the sale of the contracted land for less than its carrying value. For more information on fair value measurements, please refer to Note 10.
During the 2020 first quarter, the Company terminated its option agreement for a luxury condominium project in Scottsdale, Arizona. Due to the lower demand levels experienced at this community coupled with the substantial investment required to build out the remainder of the project, the Company decided to abandon the future acquisition, development, construction and sale of future phases of the project that were under option. In accordance with ASC 970-360-40-1, the capitalized costs related to the project are expensed and not allocated to other components of the project that the Company did develop. For the nine months ended September 30, 2020, the Company recorded an abandonment charge of $14.0 million representing the capitalized costs that have accumulated related to the portion of the project that is being abandoned. This charge is included within project abandonment (costs) recoveries, net in the accompanying condensed consolidated statement of operations.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Capitalized Interest
Interest is capitalized to inventory and investment in unconsolidated joint ventures during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales as related homes and land parcels are closed. Interest capitalized to investment in unconsolidated joint ventures is amortized to equity in net income (loss) of unconsolidated joint ventures as related joint venture homes or lots close, or in instances where lots are sold from the unconsolidated joint venture to the Company, the interest is added to the land basis and included in cost of sales when the related lots or homes are sold to third-party buyers. Interest expense is comprised of interest incurred but not capitalized and is reported as interest expense in our condensed consolidated statements of operations. For the three and nine months ended September 30, 2020 and 2019 interest incurred, capitalized and expensed was as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Interest incurred
|
|
$
|
5,831
|
|
|
$
|
6,978
|
|
|
$
|
18,361
|
|
|
$
|
22,345
|
|
Interest capitalized to inventory
|
|
|
(4,732
|
)
|
|
|
(6,978
|
)
|
|
|
(15,273
|
)
|
|
|
(22,345
|
)
|
Interest expensed
|
|
$
|
1,099
|
|
|
$
|
—
|
|
|
$
|
3,088
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest in beginning inventory
|
|
$
|
25,430
|
|
|
$
|
29,908
|
|
|
$
|
26,397
|
|
|
$
|
25,681
|
|
Interest capitalized as a cost of inventory
|
|
|
4,732
|
|
|
|
6,978
|
|
|
|
15,273
|
|
|
|
22,345
|
|
Capitalized interest transferred from investment in unconsolidated joint ventures to inventory upon lot acquisition
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
19
|
|
Previously capitalized interest included in cost of home and land sales
|
|
|
(6,875
|
)
|
|
|
(7,997
|
)
|
|
|
(17,622
|
)
|
|
|
(19,150
|
)
|
Previously capitalized interest included in project abandonment costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(761
|
)
|
|
|
—
|
|
Capitalized interest in ending inventory
|
|
$
|
23,287
|
|
|
$
|
28,895
|
|
|
$
|
23,287
|
|
|
$
|
28,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest in beginning investment in unconsolidated joint ventures
|
|
$
|
62
|
|
|
$
|
621
|
|
|
$
|
541
|
|
|
$
|
713
|
|
Capitalized interest transferred from investment in unconsolidated joint ventures to inventory upon lot acquisition
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
(19
|
)
|
Previously capitalized interest included in equity in net income (loss) of unconsolidated joint ventures
|
|
|
(62
|
)
|
|
|
(41
|
)
|
|
|
(541
|
)
|
|
|
(120
|
)
|
Capitalized interest in ending investment in unconsolidated joint ventures
|
|
|
—
|
|
|
|
574
|
|
|
|
—
|
|
|
|
574
|
|
Total capitalized interest in ending inventory and investments in unconsolidated joint ventures
|
|
$
|
23,287
|
|
|
$
|
29,469
|
|
|
$
|
23,287
|
|
|
$
|
29,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest as a percentage of inventory
|
|
|
6.8
|
%
|
|
|
5.7
|
%
|
|
|
6.8
|
%
|
|
|
5.7
|
%
|
Interest included in cost of home sales as a percentage of home sales revenue
|
|
|
5.8
|
%
|
|
|
5.2
|
%
|
|
|
6.0
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest as a percentage of investment in and advances to unconsolidated joint ventures
|
|
|
—
|
%
|
|
|
1.8
|
%
|
|
|
—
|
%
|
|
|
1.8
|
%
|
For the nine months ended September 30, 2020, the Company expensed $0.8 million in interest previously capitalized due to the abandonment of the future phases of one of its existing homebuilding communities. For the three and nine months ended September 30, 2019, the Company expensed $0.9 million in interest previously capitalized to inventory with the land impairment recorded during the 2019 third quarter. For more information, please refer to Note 4.
For the nine months ended September 30, 2020, the Company expensed $0.4 million in interest previously capitalized to investments in unconsolidated joint ventures as the result of an other-than-temporary impairment to its investment in one joint venture. For more information, please refer to Note 6.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Investments in and Advances to Unconsolidated Joint Ventures
As of September 30, 2020 and December 31, 2019, the Company had ownership interests in nine and ten, respectively, unconsolidated joint ventures with ownership percentages that generally ranged from 10% to 35%. The condensed combined balance sheets for our unconsolidated joint ventures accounted for under the equity method were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Cash and cash equivalents
|
|
$
|
22,135
|
|
|
$
|
31,484
|
|
Restricted cash
|
|
|
611
|
|
|
|
13,852
|
|
Real estate inventories
|
|
|
79,399
|
|
|
|
241,416
|
|
Other assets
|
|
|
9,916
|
|
|
|
3,843
|
|
Total assets
|
|
$
|
112,061
|
|
|
$
|
290,595
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
15,136
|
|
|
$
|
16,778
|
|
Notes payable
|
|
|
6,588
|
|
|
|
28,665
|
|
Total liabilities
|
|
|
21,724
|
|
|
|
45,443
|
|
The New Home Company's equity(1)
|
|
|
19,502
|
|
|
|
27,722
|
|
Other partners' equity
|
|
|
70,835
|
|
|
|
217,430
|
|
Total equity
|
|
|
90,337
|
|
|
|
245,152
|
|
Total liabilities and equity
|
|
$
|
112,061
|
|
|
$
|
290,595
|
|
Debt-to-capitalization ratio
|
|
|
6.8
|
%
|
|
|
10.5
|
%
|
Debt-to-equity ratio
|
|
|
7.3
|
%
|
|
|
11.7
|
%
|
(1)
|
Balance represents the Company's interest, as reflected in the financial records of the respective joint ventures. At September 30, 2020, this balance differs from the investment in and advances to unconsolidated joint ventures balance reflected in the Company's condensed consolidated balance sheets by $13.5 million due to other-than-temporary impairment charges to the Company's investment and certain other differences in outside basis. At December 31, 2019, this balance differs from investment in and advances to unconsolidated joint ventures balance reflected in the Company's consolidated balance sheets by $2.5 million due to interest capitalized to the Company's investment in joint ventures and certain other differences in outside basis.
|
The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity method were as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
17,585
|
|
|
$
|
35,809
|
|
|
$
|
79,522
|
|
|
$
|
137,174
|
|
Cost of sales and expenses
|
|
|
17,484
|
|
|
|
36,071
|
|
|
|
76,441
|
|
|
|
135,133
|
|
Net income (loss) of unconsolidated joint ventures
|
|
$
|
101
|
|
|
$
|
(262
|
)
|
|
$
|
3,081
|
|
|
$
|
2,041
|
|
Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations
|
|
$
|
(98
|
)
|
|
$
|
(63
|
)
|
|
$
|
(21,997
|
)
|
|
$
|
306
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company reviews its investments in and advances to unconsolidated joint ventures for other-than-temporary declines in value. To the extent we deem any declines in value of our investment in and advances to unconsolidated joint ventures to be other-than-temporary, we impair our investment accordingly. For the three and nine months ended September 30, 2020 and 2019, the Company recorded other-than-temporary, noncash impairment charges of $0, $22.3 million, $0 and $0, respectively. The Company plans to exit from its TNHC Russell Ranch LLC ("Russell Ranch") venture due to low expected financial returns relative to the required future capital contributions and related risks, including the potential impact of COVID-19 on the economy, as well as the Company's opportunity to pursue federal tax loss carryback refund opportunities from the passage of the CARES Act. As a result, the Company determined that its investment in the joint venture was not recoverable. The Company recorded a $20.0 million other-than-temporary impairment charge during the 2020 second quarter to write off its investment in Russell Ranch and to record a liability for its estimated costs to complete the Phase 1 backbone infrastructure costs. The Company believes that exiting the venture preserves capital, reduces its investment concentration within one geographical location, and allows it to pursue federal tax loss carryback refunds. This impairment charge reflects the Company's current estimates but actual losses associated with exiting the joint venture could differ materially based on the ultimate sales price of the underlying asset. The remaining 2020 impairment charge of $2.3 million occurred in the 2020 first quarter and related to our investment in the Arantine Hills Holdings LP ("Bedford") joint venture. The Company agreed to sell its interest in this joint venture to our partner for less than our current carrying value. This transaction closed during the 2020 third quarter. Pursuant to our agreement to sell our interest, the purchase price was $5.1 million for the sale of our partnership interest and we have an option to purchase at market up to 30% of the lots from the masterplan community. Joint venture impairment charges are included in equity in net income (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations.
As a smaller reporting company, the Company is subject to the provisions of Rule 8-03(b)(3) of Regulation S-X which requires the disclosure of certain financial information for equity investees that constitute 20% or more of the Company's consolidated net income (loss). For the nine months ended September 30, 2020, the loss allocation from one of the Company's unconsolidated joint ventures accounted for under the equity method exceeded 20% of the Company's consolidated net loss. For the three and nine months ended September 30, 2019, no profit or loss allocations from the Company's unconsolidated joint ventures accounted for under the equity method exceeded 20% of the Company's consolidated net loss. The table below presents select combined financial information for this joint venture for the three and nine months ended September 30, 2020 and 2019:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
935
|
|
|
$
|
—
|
|
|
$
|
2,002
|
|
Cost of home and land sales
|
|
|
—
|
|
|
|
930
|
|
|
|
—
|
|
|
|
1,993
|
|
Gross margin
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
9
|
|
Expenses
|
|
|
187
|
|
|
|
40
|
|
|
|
532
|
|
|
|
52
|
|
Net loss
|
|
$
|
(187
|
)
|
|
$
|
(35
|
)
|
|
$
|
(532
|
)
|
|
$
|
(43
|
)
|
Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
(20,000
|
)
|
|
$
|
18
|
|
In the above table, the Company's net losses for the nine months ended September 30, 2020 include a $20.0 million other-than-temporary impairment charge related to its interest in the one land development joint venture.
For the three and nine months ended September 30, 2020 and 2019, the Company earned $0.1 million, $0.7 million, $0.5 million and $1.7 million respectively, in management fees from its unconsolidated joint ventures. For additional detail regarding management fees, please see Note 12.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Other Assets
Other assets consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Capitalized selling and marketing costs, net(1)
|
|
$
|
6,152
|
|
|
$
|
7,148
|
|
Prepaid income taxes(2)
|
|
|
28,582
|
|
|
|
1,032
|
|
Insurance receivable(3)
|
|
|
6,000
|
|
|
|
10,900
|
|
Warranty insurance receivable(4)
|
|
|
1,772
|
|
|
|
1,852
|
|
Prepaid expenses
|
|
|
2,106
|
|
|
|
2,729
|
|
Right-of-use lease assets
|
|
|
1,822
|
|
|
|
1,988
|
|
Other
|
|
|
335
|
|
|
|
231
|
|
|
|
$
|
46,769
|
|
|
$
|
25,880
|
|
(1)
|
Capitalized selling and marketing costs includes costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and model furnishings, and also includes model landscaping costs, which were $2.1 million and $2.6 million as of September 30, 2020 and December 31, 2019, respectively. The Company depreciated $1.6 million, $5.1 million, $1.9 million and $6.8 million of capitalized selling and marketing costs to selling and marketing expenses during the three and nine months ended September 30, 2020 and 2019, respectively.
|
(2)
|
The amount at September 30, 2020 includes approximately $27.6 million of expected federal income tax refunds due to the recent enactment of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") signed into law on March 27, 2020 which allows net operating losses generated from 2018 – 2020 to be carried back five years.
|
(3)
|
At December 31, 2019, the Company recorded insurance receivables of $10.9 million in connection with $10.9 million of litigation reserves recorded. During the nine months ended September 30, 2020, $4.7 million was paid by insurance related to two claims and the Company also reduced its insurance receivable estimate by $0.2 million for one of these claims, resulting in an insurance receivable balance of $6.0 million at September 30, 2020, with a corresponding decrease recorded within litigation reserves. For more information, please refer to Note 8.
|
(4)
|
During the three and nine months ended September 30, 2020, the Company adjusted its warranty insurance receivable upward by $50,000 and $0.3 million, respectively, to true-up the receivable to its estimate of qualifying reimbursable expenditures, which resulted in pretax income of $0.3 million for the nine month period. During the three and nine months ended September 30, 2019, the Company adjusted its warranty insurance receivable upward by $0.8 million and $1.4 million, respectively, to true-up the receivable to its estimate of qualifying reimbursable expenditures, which resulted in pretax income of the same amount.
|
8. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Warranty accrual (1)
|
|
$
|
6,712
|
|
|
$
|
7,223
|
|
Litigation reserves (2)
|
|
|
6,000
|
|
|
|
10,900
|
|
Accrued interest
|
|
|
10,644
|
|
|
|
5,796
|
|
Accrued compensation and benefits
|
|
|
4,304
|
|
|
|
5,350
|
|
Completion reserve
|
|
|
3,147
|
|
|
|
3,167
|
|
Customer deposits
|
|
|
3,625
|
|
|
|
3,574
|
|
Lease liabilities
|
|
|
1,941
|
|
|
|
2,243
|
|
Other accrued expenses
|
|
|
3,404
|
|
|
|
2,301
|
|
|
|
$
|
39,777
|
|
|
$
|
40,554
|
|
(1)
|
Included in the amount at September 30, 2020 and December 31, 2019 is approximately $1.8 million and $1.9 million, respectively, of warranty liabilities estimated to be recovered by our insurance policies.
|
(2)
|
During 2019, we recorded litigation reserves totaling $5.9 million related to ordinary course litigation which developed and became probable and estimable within the 2019 fourth quarter. Further, as a result of the development of the construction defect related claims within the litigation reserve and their impact to the Company’s litigation reserve estimates for IBNR future construction defect claims, we recorded an additional $5.0 million of IBNR construction defect claim reserves resulting in aggregate litigation reserves totaling $10.9 million as of December 31, 2019. Because the self-insured retention deductibles had been met for each claim covered by the $5.9 million reserve, and the self-insured retention deductibles are expected to be met for the $5.0 million IBNR construction defect claim reserves, the Company recorded estimated insurance receivables of $10.9 million offsetting the litigation reserves as of December 31, 2019. During the nine months ended September 30, 2020, $4.7 million was paid by insurance related to two claims and the Company also reduced its litigation reserve estimate by $0.2 million for one of these claims, resulting in a litigation reserve balance of $6.0 million at September 30, 2020, with a corresponding decrease recorded within insurance receivables. Please refer to Note 7.
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related warranty and construction defect claims. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insured retention requirements. We establish and track separately our warranty accrual and litigation reserves for both known and IBNR construction defect claims. Our warranty accrual and litigation reserves for construction defect claims are presented on a gross basis within accrued expenses and other liabilities in the accompanying condensed consolidated financial statements without consideration of insurance recoveries. Expected recoveries from insurance carriers are tracked separately between warranty insurance receivables and insurance receivables related to litigated claims and are presented within other assets in the accompanying condensed consolidated financial statements. Our warranty accrual and related estimated insurance recoveries are based on historical warranty claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Our litigation reserves for both known and IBNR future construction defect claims based on historical claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our construction defect claim accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual costs and related insurance recoveries could differ significantly from amounts currently estimated.
Changes in our warranty accrual are detailed in the table set forth below:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Beginning warranty accrual for homebuilding projects
|
|
$
|
6,712
|
|
|
$
|
6,907
|
|
|
$
|
7,195
|
|
|
$
|
6,681
|
|
Warranty provision for homebuilding projects
|
|
|
539
|
|
|
|
530
|
|
|
|
1,317
|
|
|
|
1,584
|
|
Warranty payments for homebuilding projects
|
|
|
(617
|
)
|
|
|
(786
|
)
|
|
|
(1,878
|
)
|
|
|
(1,708
|
)
|
Adjustment to warranty accrual(1)
|
|
|
71
|
|
|
|
398
|
|
|
|
71
|
|
|
|
492
|
|
Ending warranty accrual for homebuilding projects
|
|
|
6,705
|
|
|
|
7,049
|
|
|
|
6,705
|
|
|
|
7,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning warranty accrual for fee building projects
|
|
|
28
|
|
|
|
142
|
|
|
|
28
|
|
|
|
217
|
|
Warranty provision for fee building projects
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
Warranty efforts for fee building projects
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(67
|
)
|
Adjustment to warranty accrual for fee building projects(1)
|
|
|
(21
|
)
|
|
|
(113
|
)
|
|
|
(21
|
)
|
|
|
(131
|
)
|
Ending warranty accrual for fee building projects
|
|
|
7
|
|
|
|
28
|
|
|
|
7
|
|
|
|
28
|
|
Total ending warranty accrual
|
|
$
|
6,712
|
|
|
$
|
7,077
|
|
|
$
|
6,712
|
|
|
$
|
7,077
|
|
(1)
|
During the three and nine months ended September 30, 2020, the Company recorded an adjustment of $71,000 to increase its warranty accrual for homebuilding projects and $21,000 to decrease its warranty accrual for fee building projects which is included in "Adjustment to warranty accrual" and "Adjustment to warranty accrual for fee building projects," respectively, above and resulted in a corresponding increase in warranty insurance recoveries in the accompanying condensed consolidated statement of operations. These adjustments were based on the expected warranty experience rates for each category. During the three and nine months ended September 30, 2019, the Company recorded an adjustment of $0.4 million and $0.5 million, respectively, to our warranty accrual for homebuilding projects due to higher expected warranty expenditures which is included in "Adjustment to warranty accrual" above and resulted in an increase of the same amount to cost of home sales in the accompanying condensed consolidated statement of operations. Also during the three and nine months ended September 30, 2019, the Company recorded an adjustment of $0.1 million and $0.1 million, respectively, due to a lower experience rate of expected warranty expenditures for fee building projects which is included in "Adjustment to warranty accrual for fee building projects" above and resulted in a reduction of the same amount to cost of fee building sales in the accompanying condensed consolidated statement of operations. The net impact of these adjustments to pretax loss was $(0.3) million for the 2019 third quarter and $(0.4) million for the nine months ended September 30, 2019.
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Senior Notes and Unsecured Revolving Credit Facility
Indebtedness consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
7.25% Senior Notes due 2022, net
|
|
$
|
290,272
|
|
|
$
|
304,832
|
|
Unsecured revolving credit facility
|
|
|
—
|
|
|
|
—
|
|
Total Indebtedness
|
|
$
|
290,272
|
|
|
$
|
304,832
|
|
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 to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and outside the United States in reliance on Regulation S under the Securities Act. The Existing Notes were issued at an offering price of 98.961% of their face amount, which represented a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on private placement offering through the sale of an additional $75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "2022 Notes") is paid semiannually in arrears on April 1 and October 1. The 2022 Notes were exchanged in an exchange offer for the 2022 Notes that are identical to the original 2022 Notes, except that they are registered under the Securities Act, and are freely tradeable in accordance with applicable law.
The carrying amount of the 2022 Notes listed above at September 30, 2020, is net of the unamortized discount of $0.7 million, unamortized premium of $0.6 million, and unamortized debt issuance costs of $1.9 million, each of which are amortized and capitalized to interest costs on a straight-line basis over the respective terms of the notes which approximates the effective interest method. The carrying amount for the 2022 Notes listed above at December 31, 2019, is net of the unamortized discount of $1.1 million, unamortized premium of $0.9 million, and unamortized debt issuance costs of $3.0 million.
The 2022 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 2022 Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. Exceptions to the limitation include, among other things, borrowings of up to $260 million under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2017 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of $15 million. The 2022 Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries. See Note 17 for information about the guarantees.
During the three months ended September 30, 2020, the Company repurchased and retired approximately $5.2 million in face value of the 2022 Notes for a cash payment of approximately $5.0 million. Total repurchases of the 2022 Notes for the nine months ended September 30, 2020 equaled approximately $15.7 million in face value of the 2022 Notes for a cash payment of approximately $14.8 million. For the three and nine months ended September 30, 2020, the Company recognized a gain on early extinguishment of debt of $0.2 million and $0.8 million, respectively, which included the write off of approximately $40,000 and $135,000, respectively, of unamortized discount, premium and debt issuance costs associated with the 2022 Notes retired. During the nine months ended September 30, 2019, the Company repurchased and retired approximately $12.0 million in face value of the 2022 Notes for a cash payment of approximately $10.9 million. For the nine months ended September 30, 2020, the Company recognized a gain on early extinguishment of debt of $1.0 million, which included the write off of approximately $160,000 of unamortized discount, premium and debt issuance costs associated with the 2022 Notes retired.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On October 28, 2020, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Notes due 2025 (the “2025 Notes”), in a private placement to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and outside the United States in reliance on Regulation S under the Securities Act. The 2025 Notes were issued at an offering price of 100% of their face amount, which represents a yield to maturity of 7.25%. Net proceeds from the offering of the 2025 Notes, together with cash on hand, will be used to redeem all of the outstanding 2022 Notes at a redemption price of 101.813% of the principal amount thereof, plus accrued and unpaid interest to November 12, 2020. On October 13, 2020, the Company issued a conditional notice of redemption to the holders of the 2022 Notes, which provides for the redemption by the Company of all of the outstanding 2022 Notes on November 12, 2020. On October 28, 2020, in connection with the consummation of the offering of the 2025 Notes, proceeds from the 2025 Notes and cash on hand were remitted to the trustee of the 2022 Notes in the full amount of the redemption price plus accrued and unpaid interest and its obligations under the indenture governing the 2022 Notes were satisfied and discharged. For more information on the 2025 Notes, please see Note 18.
As of September 30, 2020, the Company had an unsecured revolving credit facility with a bank group (the "existing credit facility") with (i) a maturity date of September 30, 2021, (ii) total commitments under the facility of $60 million and an accordion feature allowing up to $150 million of borrowings, subject to certain financial conditions, including the availability of bank commitments, (iii) a restriction on secured indebtedness to an aggregate maximum of $10 million, and (vi) limitations on the ability to repurchase the Company's common stock and senior notes, based on its net leverage ratio, as defined therein. As of September 30, 2020, we had no borrowings or letters of credit outstanding under the credit facility. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin ranging from 3.50% to 4.50% depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter; provided that LIBOR shall be subject to a LIBOR floor. As of September 30, 2020, the interest rate under the existing credit facility was 5.25%. Pursuant to the existing credit facility, the Company was required to maintain certain financial covenants as defined in the existing 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 existing credit facility) to interest incurred or if this test is not met, the Company maintains unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred. As of September 30, 2020, the Company was in compliance with all financial covenants.
The existing credit facility also provides a $10.0 million sublimit for letters of credit, subject to conditions set forth in the agreement. As of September 30, 2020 and December 31, 2019, the Company did not have any outstanding letters of credit issued under the existing credit facility. Debt issuance costs for the existing unsecured revolving credit facility, which totaled$0.4 million as of September 30, 2020, are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement.
On October 30, 2020, the Company entered into a Credit Agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto. The New Credit Agreement provides for a $60 million unsecured revolving credit facility, maturing April 30, 2023. The New Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate principal amount of revolving commitments up to an aggregate of $100 million. Concurrently with entering into the New Credit Agreement, the Company repaid in full and terminated the existing credit facility.
Amounts outstanding under the New Credit Agreement accrue interest at a rate equal to either, at the Company’s election, LIBOR plus a margin of 3.50% to 4.50% per annum, or base rate plus a margin of 2.50% to 3.50%, in each case depending on the Company’s leverage ratio. The covenants of the New Credit Agreement include customary negative covenants that, among other things, restrict the Company’s ability to incur secured indebtedness, grant liens, repurchase or retire its senior unsecured notes, and make certain acquisitions, investments, asset dispositions and restricted payments, including stock repurchases. In addition, the New Credit Agreement contains certain financial covenants, including requiring that the Company to maintain (i) a consolidated tangible net worth not less than $150 million plus 50% of the cumulative consolidated net income for each fiscal quarter commencing on or after June 30, 2020, (ii) a net leverage ratio not greater than 60%, (iii) minimum liquidity of at least $10 million, and (iv) an interest coverage ratio less than 1.75 to 1 or, if this test is not met, to maintain unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred. The New Credit Agreement includes customary events of default, and customary rights and remedies upon the occurrence of any event of default thereunder, including rights to accelerate the loans and terminate the commitments thereunder. The New Credit Agreement also provides for a $30.0 million sublimit for letters of credit, subject to conditions set forth in the New Credit Agreement.
On April 15, 2020, TNHC Realty and Construction, Inc., a wholly-owned operating subsidiary of the Company, received approval and funding pursuant to a promissory note evidencing an unsecured loan in the amount of approximately $7.0 million (the "Loan") under the Paycheck Protection Program (the "PPP"). The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration ("SBA"). The Company intended to use the Loan for qualifying expenses in accordance with the terms of the CARES Act. On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification requirements for a PPP loan. On April 24, 2020, out of an abundance of caution, the Company elected to repay the Loan and initiated a repayment of the full amount of the Loan to the lender.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Fair Value Disclosures
ASC 820 defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:
|
•
|
Level 1 – Quoted prices for identical instruments in active markets
|
|
•
|
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date
|
|
•
|
Level 3 – Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date
|
Fair Value of Financial Instruments
The following table presents an estimated fair value of the Company's 2022 Notes and the existing credit facility. The 2022 Notes are classified as Level 2 and primarily reflect estimated prices obtained from outside pricing sources. The Company's existing credit facility is classified as Level 3 within the fair value hierarchy.
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
7.25% Senior Notes due 2022, net (1)
|
|
$
|
290,272
|
|
|
$
|
289,362
|
|
|
$
|
304,832
|
|
|
$
|
298,775
|
|
Unsecured revolving credit facility
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
The carrying value for the 2022 Notes, as presented at September 30, 2020, is net of the unamortized discount of $0.7 million, unamortized premium of $0.6 million, and unamortized debt issuance costs of $1.9 million. The carrying value for the 2022 Notes, as presented at December 31, 2019, is net of the unamortized discount of $1.1 million, unamortized premium of $0.9 million, and unamortized debt issuance costs of $3.0 million. The unamortized discount, unamortized premium and debt issuance costs are not factored into the estimated fair value.
|
The Company considers the carrying value of cash and cash equivalents, restricted cash, contracts and accounts receivable, accounts payable, and accrued expenses and other liabilities to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due from affiliates is not determinable due to the related party nature of such amounts.
Non-Recurring Fair Value Adjustments
Nonfinancial assets and liabilities include items such as real estate inventory and long-lived assets that are measured at cost when acquired and adjusted for impairment to fair value, if deemed necessary. For the nine months ended September 30, 2020, the Company recognized real estate-related impairment adjustments of $19.0 million related to five homebuilding communities. The impairment adjustments were made using Level 3 inputs and assumptions, and the remaining carrying value of the real estate inventories subject to the impairment adjustments was $60.0 million. For the three and nine months ended September 30, 2019, the Company recognized real estate-related impairment adjustments of $3.6 million. Of this amount, $1.7 million related to one homebuilding community and $1.9 million related to land under contract to sell that closed during the 2019 fourth quarter. The impairment adjustments were made using Level 3 inputs and assumptions, and the remaining carrying value of the real estate inventories subject to the impairment adjustments was $68.6 million. For more information on real estate impairments, please refer to Note 4.
For the three and nine months ended September 30, 2020 and 2019, the Company recognized other-than-temporary impairments for its investment in unconsolidated joint ventures of $0, $22.3 million, $0 and $0, respectively. In the second quarter of 2020, impairment charges of $20.0 million were recorded related to the Company's intent to exit from its interest in its Russell Ranch joint venture whereby the investment balance was written off, and in the 2020 first quarter, the Company recorded an impairment charge of $2.3 million related to the Company's agreement to sell its interest in the Bedford joint venture to its partner for less than its current carrying value. The Bedford transaction closed during the 2020 third quarter. The 2020 impairment adjustments were made using Level 2 and Level 3 inputs and assumptions. For more information on the investment in unconsolidated joint ventures impairments, please refer to Note 6.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Commitments and Contingencies
From time-to-time, the Company is involved in various legal matters arising in the ordinary course of business. 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. During 2019, we recorded litigation reserves totaling $5.9 million related to ordinary course litigation which developed and became probable and estimable within the 2019 fourth quarter. Further, as a result of the development of the construction defect related claims within the litigation reserve and their impact to the Company’s litigation reserve estimates for IBNR future construction defect claims, we recorded an additional $5.0 million of IBNR construction defect claim reserves resulting in aggregate litigation reserves totaling $10.9 million as of December 31, 2019. Because the self-insured retention deductibles had been met for each claim covered by the $5.9 million reserve, and the self-insured retention deductibles are expected to be met for the $5.0 million IBNR construction defect claim reserves, the Company recorded estimated insurance receivables of $10.9 million offsetting the related litigation reserves as of December 31, 2019. During the nine months ended September 30, 2020, $4.7 million was paid by insurance related to two claims and the Company also reduced its litigation reserve estimate by $0.2 million for one of these claims, resulting in a litigation reserve and insurance receivable each with a balance of $6.0 million at September 30, 2020. Due to the inherent uncertainty and judgement used in these assumptions, our actual costs and related insurance recoveries could differ significantly from amounts currently estimated. Please refer to Note 1, Note 7 and Note 8 for more information on litigation reserves for construction defect claims and related insurance recoveries. In view of the inherent unpredictability of litigation, we generally cannot predict their ultimate resolution, related timing or eventual loss.
As an owner and developer of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of real estate in the vicinity of the Company’s real estate and other environmental conditions of which the Company is unaware with respect to the real estate could result in future environmental liabilities.
The Company has provided credit enhancements in connection with certain joint venture borrowings in the form of loan-to-value ("LTV") maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. For unconsolidated joint ventures where the Company provided LTV enhancements, the Company has also entered into agreements with some of its unconsolidated joint venture partners 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 LTV credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements include acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of September 30, 2020 and December 31, 2019, $6.6 million and $28.6 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was $1.6 million and $5.8 million, respectively, as of September 30, 2020 and December 31, 2019.
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 to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from "bad boy acts" of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. As of September 30, 2020 and December 31, 2019, the Company had outstanding surety bonds totaling $45.3 million and $47.6 million, respectively. The estimated remaining costs to complete of such improvements as of September 30, 2020 and December 31, 2019 were $14.1 million and $29.1 million, respectively. The beneficiaries of the bonds are various municipalities, homeowners' associations, and other organizations. In the event that any such surety bond issued by a third party is called because the required improvements are not completed, the Company could be obligated to reimburse the issuer of the bond.
The Company accounts for contracts deemed to contain a lease under ASC 842, Leases. At the inception of a lease, or if a lease is subsequently modified, we determine whether the lease is an operating or financing lease. Our lease population is fully comprised of operating leases and includes leases for certain office space and equipment for use in our operations. For all leases with an expected term that exceeds one year, right-of-use lease assets and lease liabilities are recorded within our consolidated balance sheets. The depreciable lives of right-of-use lease assets are limited to the expected term which would include any renewal options we expect to exercise. The exercise of lease renewal options is generally at our discretion and we expect that in the normal course of business, leases that expire will be renewed or replaced by other leases. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the right-of-use lease asset and lease liabilities and are expensed as incurred. Right-of-use lease assets are included in other assets and lease liabilities are recorded in accrued expenses and other liabilities within the accompanying condensed consolidated balance sheets and total $1.8 million and $1.9 million, respectively, at September 30, 2020.
For the three and nine months ended September 30, 2020 and 2019, lease costs and cash flow information for leases with terms in excess of one year was as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease costs included in general and administrative expenses
|
|
$
|
313
|
|
|
$
|
309
|
|
|
$
|
938
|
|
|
$
|
929
|
|
Lease costs included in real estate inventories
|
|
|
76
|
|
|
|
103
|
|
|
|
284
|
|
|
|
472
|
|
Lease costs included in selling and marketing expenses
|
|
|
58
|
|
|
|
53
|
|
|
|
156
|
|
|
|
87
|
|
Net lease cost (1)
|
|
$
|
447
|
|
|
$
|
465
|
|
|
$
|
1,378
|
|
|
$
|
1,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease cash flows (included in operating cash flows)(1)
|
|
$
|
482
|
|
|
$
|
486
|
|
|
$
|
1,498
|
|
|
$
|
1,539
|
|
(1)
|
Amount does not include the cost of short-term leases with terms of less than one year which totaled approximately $0.1 million, $0.2 million, $0.2 million and $0.7 million for the three and nine months ended September 30, 2020 and 2019, respectively, or the benefit from a sublease agreement of one of our office spaces which totaled approximately $0.1 million, $0.2 million, $0.1 million and $0.2 million for the three and nine months ended September 30, 2020 and 2019, respectively.
|
Future lease payments under our operating leases are as follows (dollars in thousands):
Remaining for 2020
|
|
$
|
377
|
|
2021
|
|
|
722
|
|
2022
|
|
|
327
|
|
2023
|
|
|
278
|
|
2024
|
|
|
218
|
|
Thereafter
|
|
|
124
|
|
Total lease payments(1)
|
|
$
|
2,046
|
|
Less: Interest(2)
|
|
|
105
|
|
Present value of lease liabilities(3)
|
|
$
|
1,941
|
|
(1)
|
Lease payments include options to extend lease terms that are reasonably certain of being exercised.
|
(2)
|
Our leases do not provide a readily determinable implicit rate. Therefore, we utilized our incremental borrowing rate for such leases to determine the present value of lease payments at the lease commencement date.
|
(3)
|
The weighted average remaining lease term and weighted average incremental borrowing rate used in calculating our lease liabilities were 3.4 years and 5.0%, respectively at September 30, 2020.
|
During the 2020 third quarter, the Company entered into a binding lease agreement for office space in Southern California that has not commenced. The fair value of lease payments is approximately $1.5 million, and the lease is expected to commence during December 2020.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Related Party Transactions
During the three and nine months ended September 30, 2020 and 2019, the Company incurred construction-related costs on behalf of its unconsolidated joint ventures totaling $0.4 million, $2.6 million, $1.2 million and $4.4 million, respectively. As of September 30, 2020 and December 31, 2019, $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 nine months ended September 30, 2020 and 2019, the Company earned $0.1 million, $0.7 million, $0.5 million and $1.7 million, respectively, in management fees, which have been recorded as fee building revenues in the accompanying condensed consolidated statements of operations. As of September 30, 2020 and December 31, 2019, $0 and $0, 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, IHP Capital Partners VI, LLC ("IHP"), and is also affiliated with entities that have investments in two of the Company's unconsolidated joint ventures, TNHC Meridian Investors LLC (which is owner of another entity, TNHC Newport LLC, which entity owned our "Meridian" project) and Russell Ranch. The Company's investment in these two joint ventures was $0.2 million at September 30, 2020 and $13.7 million at December 31, 2019.
During the 2019 second quarter, the Company entered into a second amendment to the limited liability company agreement of Russell Ranch between the Company and IHP. Prior to the execution of the second amendment, each of IHP and the Company had contributed its maximum capital commitments pursuant to the joint venture agreement. Pursuant to the second amendment, the parties agreed to fund additional required capital in the aggregate amount of approximately $26 million for certain remaining backbone improvements for the Project (the “Phase 1 Backbone Improvements”) as follows: 50% by IHP and 50% by the Company (“Amendment Additional Capital”). The Amendment Additional Capital will be returned to IHP and the Company ahead of any other contributed capital; provided that none of the Amendment Additional Capital accrues a preferred return that base capital contributions are generally afforded under the joint venture agreement. To the extent of overruns on the Phase 1 Backbone Improvements, the Company is required to fund such overrun capital (“TNHC Overrun Capital”); provided that such contributions shall receive capital account credit. Pursuant to the second amendment, the distribution of cash flow under the agreement was amended to provide that Amendment Additional Capital would be returned prior to TNHC Overrun Capital, which would, in turn, be returned ahead of the base capital preferred return and base capital. The Company previously purchased lots from the Russell Ranch joint venture as described below (the "Phase 1 Purchase"). The parties also amended the purchase and sale contract for the Phase 1 Purchase to provide relief from the profit participation provisions of this transaction under certain circumstances. As discussed in Note 6, in connection with its plan to exit the Russell Ranch joint venture due to the low expected financial returns relative to future capital requirements and related risks, the Company determined that the value of its investment in Russell Ranch declined beyond its current carrying value and recorded a $20.0 million other-than-temporary impairment charge to write off its investment balance and record its estimated remaining costs to complete during the nine months ended September 30, 2020.
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 nine months ended September 30, 2020 and 2019, the Company incurred $6,000, $13,000, $0.1 million and $0.2 million, respectively, for these services. Of these costs, none was due to TL Fab LP from the Company at September 30, 2020 and December 31, 2019.
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, the Company defers its portion of the underlying gain from the joint venture's sale of these lots to the Company. When the Company purchases lots directly from the joint venture, the deferred gain is recorded as a reduction to the Company's land basis on the purchased lots. In this instance, the gain is ultimately recognized when the Company delivers lots to third-party home buyers at the time of the home closing. At September 30, 2020, $0.1 million of deferred gain from lot transactions with the TNHC-HW Cannery LLC ("Cannery") unconsolidated joint venture remained unrecognized and included as a reduction to land basis in the accompanying condensed consolidated balance sheets, and at December 31, 2019, $0.2 million of deferred gain from lot transactions with the Cannery and Bedford unconsolidated joint ventures remained unrecognized and included as a reduction to land basis in the accompanying condensed consolidated balance sheets.
The Company’s land purchase agreement with the Cannery provides for reimbursements of certain fee credits. During the three and nine months ended September 30, 2020 and 2019, the Company was reimbursed $0, $15,000, $66,000, and $66,000, respectively, in fee credits from the Cannery. As of September 30, 2020 and December 31, 2019, $0 and $15,000, respectively, in fee credits was due to the Company from the Cannery, which is included in due from affiliates in the accompanying condensed consolidated balance sheets.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. For his services, Mr. Davis was compensated $5,000 per month through June 26, 2019 when his contract was amended to extend its term one year and reduce his scope of services and compensation to $1,000 per month. Mr. Davis' contract was amended on June 26, 2020 to extend the term one year with monthly compensation remaining $1,000 per month. At September 30, 2020, no fees were due to Mr. Davis for his consulting services. Additionally, the Company entered into a construction agreement effective September 7, 2017, with The Joseph and Terri Davis Family Trust Dated August 25, 1999 ("Davis Family Trust") of which Joseph Davis is a trustee. The agreement was a fee building contract pursuant to which the Company acted in the capacity of a general contractor to build a single family detached home on land owned by the Davis Family Trust. Construction of the home was completed during the 2019 first quarter. For its services, the Company received a contractor's fee and the Davis Family Trust reimbursed the Company's field overhead costs. During the three and nine months ended September 30, 2019, the Company billed the Davis Family Trust $0 and $0.5 million, respectively, including reimbursable construction costs and the Company's contractor's fees which are included in fee building revenues in the accompanying condensed consolidated statements of operations. Contractor's fees comprised $0 and $15,000 of the total billings for the three and nine months ended September 30, 2019, respectively. The Company recorded $5,000 and $0.5 million for the three and nine months ended September 30, 2019, respectively, for the costs of this fee building revenue which are included in fee building cost of sales in the accompanying condensed consolidated statements of operations. At September 30, 2020 and December 31, 2019, the Company was due $0 from the Davis Family Trust for construction draws.
On February 17, 2017, the Company entered into a consulting agreement that transitioned Wayne Stelmar's role from that of Chief Investment Officer to a non-employee consultant to the Company. While an employee of the Company, Mr. Stelmar served as an employee director of the Company's Board of Directors. The agreement provided that effective upon Mr. Stelmar's termination of employment, he became a non-employee director and received the compensation and was subject to the requirements of a non-employee director pursuant to the Company's policies. For his consulting services, Mr. Stelmar was compensated $0, $0, $12,000 and $48,000 for the three and nine months ended September 30, 2020 and 2019, respectively. Additionally, Mr. Stelmar's outstanding restricted stock unit equity award granted in 2016 continued to vest in accordance with its original terms based on his continued provision of consulting services rather than continued employment and fully vested during the 2019 first quarter. Mr. Stelmar's vested stock options remain outstanding based on Mr. Stelmar's continued service as a Board member. The consulting contract expired in August 2019 and was not extended.
On February 14, 2019, the Company entered into a consulting agreement that transitioned Thomas Redwitz's role from that of Chief Investment Officer to a non-employee consultant to the Company effective March 1, 2019. For his consulting services, Mr. Redwitz was compensated $10,000 per month. The agreement originally was set to expire on March 1, 2020 and was extended upon mutual consent of the parties on a month to month basis to a reduced consulting fee of $5,000 per month. At September 30, 2020, no fees were due to Mr. Redwitz for his consulting services.
The Company entered into agreements during 2018 and 2017 to purchase land from affiliates of IHP. Certain land takedowns pursuant to these agreements occurred during 2019 and 2020 or are scheduled to take place during the remainder 2020. Descriptions of these agreements and relevant takedown activity are described below.
During 2017, the Company entered into an agreement with an IHP affiliate to purchase lots in Northern California in a phased takedown for a gross purchase price of $16.1 million with profit participation and master marketing fees due to the seller as outlined in the contract. The Company did not takedown any land pursuant to this contract during the three and nine months ended September 30, 2020 and 2019. At September 30, 2020, the Company has taken down all of the lots and paid $0.5 million in master marketing fees, and as of December 31, 2019, IHP was no longer affiliated with this development. During 2017, the Company also contracted to purchase finished lots in Northern California from an IHP affiliate, which agreement included customary profit participation and was structured as an optioned takedown. The total purchase price, including the cost for the finished lot development and the option, was expected to be approximately $56.3 million, dependent on the timing of takedowns, as well as our obligation to pay certain fees and costs during the option maintenance period. The Company took down 16% and 26% of lots pursuant to this agreement during the three and nine months ended September 30, 2019. During the 2019 second quarter, an unrelated third party entered into agreements to purchase from the IHP affiliate some of the lots under the Company's option. The Company in turn entered into an arrangement pursuant to which it agreed to purchase such lots on a rolling take down basis from such unrelated third party. The unrelated third party purchased 67% of the lots originally under contract with the IHP affiliate. Following the purchase of the lots by the unrelated third party in 2019, the Company had no remaining lots to purchase from the IHP affiliate. As of September 30, 2020, the Company (i) had no nonrefundable deposits with the IHP affiliate to be applied to the Company's takedown of lots from the unrelated third party and (ii) has paid (A) $0.2 million for fees and costs, (B) $3.0 million in option payments, and (C) $18.0 million for the purchase of lots directly from the IHP affiliate. During 2018, the Company agreed to purchase land in a master-plan community in Arizona for an estimated purchase price of $3.8 million plus profit participation and marketing fees pursuant to contract terms. During the three and nine months ended September 30, 2020, the Company took down approximately 8% and 19% of the option lots, respectively, and as of September 30, 2020, had an outstanding, nonrefundable deposit of $0.2 million related to this contract. As of December 31, 2019, IHP was no longer affiliated with this development.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the first quarter 2018, the Company entered into an option agreement to purchase lots in phased takedowns with its Bedford joint venture. At the time of the initial agreement in 2018, the Bedford joint venture was affiliated with a former member of the Company's board of directors, and subsequently during the 2020 third quarter, the Company sold its interest in this partnership to its joint venture partner. As of September 30, 2020, the Company has made a $1.5 million nonrefundable deposit as consideration for this option, with a portion of the deposit applied to the purchase price across the phases. The gross purchase price of the land was $10.0 million with profit participation and master marketing fees due to seller as outlined in the contract. During the 2019 third quarter, the Company entered into an amendment to this agreement to reduce the gross purchase price of the land to $9.3 million. During the three and nine months ended September 30, 2020, the Company did not take down any lots underlying this agreement. The Company took down 34% and 46% of the lots underlying this agreement during the three and nine months ended September 30, 2019, respectively. At September 30, 2020, the Company has taken down all of the contracted lots and the deposit was fully applied to the purchase and has paid $0.2 million in master marketing fees. During the fourth quarter 2018, the Company entered into a second option agreement with the Bedford joint venture to purchase lots in phased takedowns. The Company made a $1.4 million nonrefundable deposit as consideration for the option, with a portion of the deposit to be applied to the purchase price across the phases. The gross purchase price of the land is $10.5 million with profit participation and master marketing fees due to the seller pursuant to the agreement. The Company did not take down any optioned lots during the nine months ended September 30, 2020 and took down 42% of the lots underlying this agreement during the nine months ended September 30, 2019. At September 30, 2020, the Company had taken down approximately 92% of the optioned lots, paid $0.2 million in master marketing fees, and no deposit remained outstanding.
The Company sold its interest in the Bedford joint venture to its partner during the 2020 third quarter. Pursuant to the agreement, the purchase price was $5.1 million for the sale of the Company's partnership interest. During the nine months ended September 30, 2020, the Company recorded a $2.3 million other-than-temporary impairment charge to its investment in the Bedford joint venture reflecting the sale of its joint venture investment for less than its current carrying value. The sale agreement, among other things, allowed for a continuation of the Company's option to purchase at market up to 30% of the remaining lots from the joint venture.
The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. For more information regarding these agreements please refer to Note 11.
13. Stock-Based Compensation
The Company's 2014 Long-Term Incentive Plan (the "2014 Incentive Plan"), was adopted by our board of directors in January 2014. The 2014 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted stock awards, restricted stock units and performance awards. The 2014 Incentive Plan will automatically expire on the tenth anniversary of its effective date.
The number of shares of our common stock authorized to be issued under the 2014 Incentive Plan is 1,644,875 shares. To the extent that shares of the Company's common stock subject to an outstanding award granted under the 2014 Incentive Plan or any predecessor plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of common stock generally shall again be available under the 2014 Incentive Plan.
At our 2016 Annual Meeting of Shareholders on May 24, 2016, our shareholders approved the Company's 2016 Incentive Award Plan (the "2016 Incentive Plan"). The 2016 Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock- or cash-based awards. Non-employee directors of the Company and employees and consultants of the Company or any of its subsidiaries are eligible to receive awards under the 2016 Incentive Plan. On May 22, 2018, our shareholders approved the amended and restated 2016 Incentive Plan which increased the number of shares authorized for issuance under the plan from 800,000 to 2,100,000 shares. The amended and restated 2016 Incentive Plan will expire on April 4, 2028.
The Company has issued stock option and restricted stock unit awards under the 2014 Incentive Plan and stock options, restricted stock unit awards and performance share unit awards under the 2016 Incentive Plan. As of September 30, 2020, 66,968 shares remain available for grant under the 2014 Incentive Plan and 415,592 shares remain available for grant under the 2016 Incentive Plan. The exercise price of stock option awards may not be less than the market value of the Company's common stock on the date of grant. The fair value for stock options is established at the date of grant using the Black-Scholes model for time-based vesting awards. The Company's stock options, restricted stock unit awards, and performance share unit awards typically vest over a one year to three years period and the stock options expire ten years from the date of grant.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s common stock option activity as of and for the nine months ended September 30, 2020 and 2019 is presented below:
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise Price per Share
|
|
|
Number of Shares
|
|
|
Weighted-Average Exercise Price per Share
|
|
Outstanding Stock Option Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
1,068,017
|
|
|
$
|
9.78
|
|
|
|
821,470
|
|
|
$
|
11.00
|
|
Granted
|
|
|
161,479
|
|
|
$
|
5.36
|
|
|
|
249,283
|
|
|
$
|
5.76
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(5,525
|
)
|
|
$
|
11.00
|
|
|
|
(2,736
|
)
|
|
$
|
11.00
|
|
Outstanding, end of period
|
|
|
1,223,971
|
|
|
$
|
9.19
|
|
|
|
1,068,017
|
|
|
$
|
9.78
|
|
Exercisable, end of period
|
|
|
896,304
|
|
|
$
|
10.51
|
|
|
|
818,734
|
|
|
$
|
11.00
|
|
A summary of the Company’s restricted stock unit activity as of and for the nine months ended September 30, 2020 and 2019 is presented below:
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Number of Shares
|
|
|
Weighted-Average Grant-Date Fair Value per Share
|
|
|
Number of Shares
|
|
|
Weighted-Average Grant-Date Fair Value per Share
|
|
Restricted Stock Unit Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
592,116
|
|
|
$
|
6.36
|
|
|
|
469,227
|
|
|
$
|
10.75
|
|
Granted
|
|
|
358,869
|
|
|
$
|
4.78
|
|
|
|
448,468
|
|
|
$
|
4.82
|
|
Vested
|
|
|
(244,812
|
)
|
|
$
|
7.61
|
|
|
|
(277,401
|
)
|
|
$
|
10.50
|
|
Forfeited
|
|
|
(1,283
|
)
|
|
$
|
11.68
|
|
|
|
(48,178
|
)
|
|
$
|
10.91
|
|
Outstanding, end of period
|
|
|
704,890
|
|
|
$
|
5.11
|
|
|
|
592,116
|
|
|
$
|
6.36
|
|
A summary of the Company’s performance share unit activity as of and for the nine months ended September 30, 2020 and 2019 is presented below:
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Number of Shares
|
|
|
Weighted-Average Grant-Date Fair Value per Share
|
|
|
Number of Shares
|
|
|
Weighted-Average Grant-Date Fair Value per Share
|
|
Performance Share Unit Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
—
|
|
|
$
|
—
|
|
|
|
125,422
|
|
|
$
|
11.68
|
|
Granted (at target)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Vested
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
(26,882
|
)
|
|
$
|
11.68
|
|
Outstanding, end of period (at target)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
98,540
|
|
|
$
|
11.68
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Expense related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
81
|
|
|
$
|
51
|
|
|
$
|
226
|
|
|
$
|
123
|
|
Restricted stock units and performance share units
|
|
|
460
|
|
|
|
521
|
|
|
|
1,425
|
|
|
|
1,538
|
|
|
|
$
|
541
|
|
|
$
|
572
|
|
|
$
|
1,651
|
|
|
$
|
1,661
|
|
The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company in each year:
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Expected term (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected volatility
|
|
|
41.8
|
%
|
|
|
39.9
|
%
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
|
2.5
|
%
|
Expected dividends
|
|
|
—
|
|
|
|
—
|
|
Weighted-average grant date fair value per share
|
|
$
|
2.24
|
|
|
$
|
2.43
|
|
We used the "simplified method" to establish the expected term of the common stock options granted by the Company. Our restricted stock unit awards and performance share unit awards are valued based on the closing price of our common stock on the date of grant. The number of performance share units that would vest ranged from 50%-150% of the target amount awarded based on actual cumulative earnings per share and return on equity growth from 2018-2019, subject to initial achievement of minimum thresholds. We evaluated the probability of achieving the performance targets established under each of the outstanding performance share unit awards quarterly during 2018 and 2019 and estimated the number of underlying units that were probable of being issued. Compensation expense for restricted stock unit and performance share unit awards was being recognized using the straight-line method over the requisite service period, subject to cumulative catch-up adjustments required as a result of changes in the number shares probable of being issued for performance share unit awards. Forfeitures are recognized in compensation cost during the period that the award forfeiture occurs. For the nine months ended September 30, 2019, no expense was recognized for our performance share units. At December 31, 2019, the performance targets associated with the outstanding performance share unit awards were not met and all outstanding awards were forfeited.
At September 30, 2020, the amount of unearned stock-based compensation currently estimated to be expensed through 2023 is $3.0 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 1.8 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.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. Income Taxes
For the three and nine months ended September 30, 2020, the Company recorded an income tax provision of $0.4 million and a benefit of $26.5 million, respectively. The Company's effective tax rates for the three and nine months ended September 30, 2020 include the benefit associated with net operating loss carrybacks to years when the Company was subject to a 35% federal tax rate as permitted by the CARES Act. The CARES Act was signed into law on March 27, 2020 and allows companies to carry back net operating losses generated in 2018 through 2020 for five years. The effective tax rates for both 2020 periods differ from the federal statutory rate due the net operating loss carryback benefit, state income tax rates and tax credits for energy efficient homes. Additionally, the difference in the effective tax rate for the nine months ended September 30, 2020 compared to the statutory rate was largely due to a discrete benefit of $10.0 million of which $5.8 million related to the $14.0 million project abandonment costs recorded during the 2020 first quarter, and $3.9 million related to the remeasurement of deferred tax assets originally valued at a 21% federal statutory tax rate which are now available to be carried back to tax years with a 35% federal statutory rate.
For the three and nine months ended September 30, 2019, the Company recorded an income tax benefit of $0.2 million and a provision of $0.1 million, respectively. The Company's effective tax rates for 2019 periods differ from the federal statutory tax rates due to state income taxes, estimated deduction limitations for executive compensation and discrete items. The provision for discrete items totaled $0.4 million for the nine months ended September 30, 2019 and related to stock compensation and state income tax rate changes.
The components of our deferred tax asset, net are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Net operating loss
|
|
$
|
8,599
|
|
|
$
|
3,848
|
|
Reserves and accruals
|
|
|
2,482
|
|
|
|
2,563
|
|
Share based compensation
|
|
|
1,485
|
|
|
|
1,392
|
|
Inventory
|
|
|
4,272
|
|
|
|
3,536
|
|
Investments in joint ventures
|
|
|
397
|
|
|
|
7,080
|
|
Other
|
|
|
27
|
|
|
|
27
|
|
Capital loss
|
|
|
135
|
|
|
|
—
|
|
Valuation allowance
|
|
|
(135
|
)
|
|
|
—
|
|
Depreciation and amortization
|
|
|
(493
|
)
|
|
|
(393
|
)
|
Right-of-use lease asset
|
|
|
(547
|
)
|
|
|
(550
|
)
|
Deferred tax asset, net
|
|
$
|
16,222
|
|
|
$
|
17,503
|
|
15. Segment Information
The Company’s operations are organized into three reportable segments: two homebuilding segments (Arizona and California) and fee building. In determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross margins, production processes, suppliers, subcontractors, regulatory environments, land position, and underlying demand and supply in accordance with ASC 280. Our California homebuilding reportable segment aggregates the Southern California and Northern California homebuilding operating segments.
Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached homes and may sell land. Our fee building operations build homes and manage construction and sales related activities on behalf of third-party property owners and our joint ventures. While our corporate operations conduct no independent construction, development, sales or land acquisition activities, our corporate operations develop and implement strategic initiatives and support our operating segments by centralizing key administrative functions such as accounting, finance and treasury, information technology, insurance and risk management, litigation, marketing and human resources. A portion of the expenses incurred by corporate are allocated to the fee building segment primarily based on its respective percentage of revenues and to each homebuilding segment based on its respective investment in and advances to unconsolidated joint ventures and real estate inventories balances. The 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 are allocated within our homebuilding reportable segments.
Corporate unallocated assets consists primarily of cash, prepaid taxes and our deferred tax asset. For cash management efficiency and yield maximization reasons, cash is held at the corporate level. All cash is held for the benefit of the subsidiaries that comprise the homebuilding and fee building segments, and all operating cash flow is generated by these subsidiaries. The majority of our prepaid taxes and deferred tax asset are recorded at the corporate level as The New Home Company Inc. is the tax-filing entity for the subsidiaries structured as pass-through entities. Taxable income or loss and the resulting payment of income taxes is driven by the activities of the Company's subsidiaries. All other corporate assets comprise less than 3% of the Company's consolidated total assets. The assets of our fee building segment primarily consist of cash, restricted cash and contracts and accounts receivable.
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 1. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.
Financial information relating to reportable segments was as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Homebuilding revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California home sales
|
|
$
|
109,189
|
|
|
$
|
103,679
|
|
|
$
|
264,066
|
|
|
$
|
319,841
|
|
California land sales
|
|
|
—
|
|
|
|
24,573
|
|
|
|
157
|
|
|
|
24,573
|
|
Arizona home sales
|
|
|
8,237
|
|
|
|
15,102
|
|
|
|
26,776
|
|
|
|
38,590
|
|
Total homebuilding revenues
|
|
|
117,426
|
|
|
|
143,354
|
|
|
|
290,999
|
|
|
|
383,004
|
|
Fee building revenues, including management fees
|
|
|
13,418
|
|
|
|
22,262
|
|
|
|
70,838
|
|
|
|
64,209
|
|
Total revenues
|
|
$
|
130,844
|
|
|
$
|
165,616
|
|
|
$
|
361,837
|
|
|
$
|
447,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$
|
3,485
|
|
|
$
|
(5,200
|
)
|
|
$
|
(39,204
|
)
|
|
$
|
(4,921
|
)
|
Arizona
|
|
|
(2,225
|
)
|
|
|
(225
|
)
|
|
|
(20,109
|
)
|
|
|
(1,499
|
)
|
Total homebuilding pretax income (loss)
|
|
|
1,260
|
|
|
|
(5,425
|
)
|
|
|
(59,313
|
)
|
|
|
(6,420
|
)
|
Fee building pretax income, including management fees
|
|
|
268
|
|
|
|
647
|
|
|
|
1,206
|
|
|
|
1,556
|
|
Total pretax income (loss)
|
|
$
|
1,528
|
|
|
$
|
(4,778
|
)
|
|
$
|
(58,107
|
)
|
|
$
|
(4,864
|
)
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Homebuilding assets:
|
|
|
|
|
|
|
|
|
California
|
|
$
|
332,357
|
|
|
$
|
416,179
|
|
Arizona
|
|
|
69,109
|
|
|
|
82,234
|
|
Total homebuilding assets
|
|
|
401,466
|
|
|
|
498,413
|
|
Fee building assets
|
|
|
5,809
|
|
|
|
11,193
|
|
Corporate unallocated assets
|
|
|
139,065
|
|
|
|
93,583
|
|
Total assets
|
|
$
|
546,340
|
|
|
$
|
603,189
|
|
16. Supplemental Disclosure of Cash Flow Information
The following table presents certain supplemental cash flow information:
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in thousands)
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
|
$
|
—
|
|
|
$
|
—
|
|
Income taxes paid
|
|
$
|
—
|
|
|
$
|
270
|
|
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
17. Supplemental Guarantor Information
The Company's 2022 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 2022 Notes (the "2022 Indenture") 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 2022 Indenture), which sale, transfer, exchange or other disposition is made in compliance with applicable provisions of the 2022 Indenture; (2) upon the proper designation of such Guarantor as an "Unrestricted Subsidiary" (as defined in the 2022 Indenture), in accordance with the 2022 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 2022 Indenture), so long as such Guarantor would not otherwise be required to provide a guarantee pursuant to the 2022 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 2022 Indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the 2022 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 2022 Indenture; or (6) upon the full satisfaction of the Company’s obligations under the 2022 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 2022 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 2022 Indenture. See Note 18 for information regarding the guarantors of the 2025 Notes.
The New Home Company Inc. operates as a holding company and all of its homebuilding construction, fee building, development and sales activities are conducted through its subsidiaries. Since the issuance of the 2022 Notes in 2017, the Company has had only one subsidiary, a consolidated joint venture, that was not a Guarantor. During the 2020 third quarter, this entity was dissolved and at September 30, 2020, all of the Company's subsidiaries were 100% owned subsidiaries and Guarantors. The Company has not provided condensed consolidated financial information of the Guarantors because the parent company, The New Home Company Inc. has no independent assets or operations as defined by Article 3-10(h)(5) of Regulation S-X) and the guarantees of its subsidiaries are full unconditional and joint and several and, accordingly, the presentation of such information is not material. For more information regarding the Company's assets and operations, please see Note 15.
18. Subsequent Events
Senior Notes Due 2025
On October 28, 2020 (the “Closing Date”), the Company completed the sale (the “Offering”) of $250 million in aggregate principal amount of its 7.25% Senior Notes due 2025 (the “2025 Notes”), in a private placement to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and outside the United States in reliance on Regulation S under the Securities Act. The 2025 Notes were issued at an offering price of 100% of their face amount, which represents a yield to maturity of 7.25%, pursuant to an indenture, dated as of October 28, 2020 (the “Indenture”), by and among the Company, the subsidiary guarantors party thereto (the “Guarantors”) and U.S. Bank National Association, as trustee.
The Company intends to use the net proceeds from the Offering, together with cash on hand, to redeem all of the outstanding 2022 Notes at a redemption price of 101.813% of the principal amount thereof, plus accrued and unpaid interest to the Redemption Date (defined below). On October 13, 2020, the Company issued a conditional notice of redemption to the holders of the 2022 Notes, which provides for the redemption by the Company of all of the outstanding 2022 Notes on November 12, 2020. On October 28, 2020, in connection with the consummation of the Offering, the Company’s obligations under the indenture governing the 2022 Notes were satisfied and discharged.
The 2025 Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and any applicable state securities laws. Pursuant to the Indenture, interest on the 2025 Notes will be paid semiannually in arrears on April 15 and October 15 of each year, commencing on April 15, 2021. The 2025 Notes will mature on October 15, 2025.
The 2025 Notes 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, (1) borrowings of up to the greater of (i) $100 million and (ii) 20% of our consolidated tangible net assets under existing or future bank credit facilities, (2) non-recourse indebtedness, and (3) indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either the leverage condition or interest coverage condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2021 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of up to the greater of $15 million and 3% of our consolidated tangible net assets.
The 2025 Notes and the guarantees are the Company’s and the Guarantor’s senior unsecured obligations. The 2025 Notes and the guarantees rank equally in right of payment with all of the Company’s and the Guarantors’ existing and future unsecured senior debt, including borrowings under the Company's senior unsecured revolving credit facility, and senior in right of payment to all of the Company’s and the Guarantors’ existing and future subordinated debt. The 2025 Notes and the guarantees will be effectively subordinated to any of the Company’s and the Guarantors’ existing and future secured debt. The 2025 Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's wholly owned subsidiaries (collectively, the "Guarantors"). The guarantees are full and unconditional. The Indenture governing the 2025 Notes provides that the guarantee of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a "Restricted Subsidiary" (as defined in the Indenture), which sale, transfer, exchange or other disposition is made in compliance with applicable provisions of the Indenture; (2) upon the proper designation of such Guarantor as an "Unrestricted Subsidiary" (as defined in the Indenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’ certificate provided to the trustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the Indenture), so long as such Guarantor would not otherwise be required to provide a guarantee pursuant to the Indenture; provided that, if immediately after giving effect to such release the consolidated tangible assets of all Immaterial Subsidiaries that are not Guarantors would exceed 5% of consolidated tangible assets, no such release shall occur, (4) if the Company exercises its legal defeasance option or covenant defeasance option under the Indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the Indenture; (5) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company or any other Guarantor so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the Indenture; or (6) upon the full satisfaction of the Company’s obligations under the Indenture; provided that in each case if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the Indenture.
On or after October 15, 2022, the Company may redeem all or a portion of the 2025 Notes upon not less than 15 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of the principal amount on the redemption date) set forth below plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the 12-month period, as applicable, commencing on October 15 of the years as set forth below:
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Year
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Redemption Price
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2022
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103.625%
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2023
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101.813%
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2024
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100.000%
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THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, any time prior to October 15, 2022, the Company may, at its option on one or more occasions, redeem the 2025 Notes (including any additional notes that may be issued in the future under the Indenture) in an aggregate principal amount not to exceed 40% of the aggregate principal amount of the 2025 Notes (including any additional notes that may be issued in the future under the Indenture) issued prior to such date at a redemption price (expressed as a percentage of principal amount) of 107.25%, plus accrued and unpaid interest, if any, to the redemption date, with an amount equal to the net cash proceeds from one or more equity offerings by the Company or any direct or indirect parent entity of the Company.
If the Company experiences a change of control triggering event (as described in the Indenture), holders of the 2025 Notes will have the right to require the Company to repurchase all or a portion of the 2025 Notes at 101% of their principal amount thereof on the date of repurchase, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).
The Indenture contains certain covenants limiting, among other things, the ability of the Company and its restricted subsidiaries to:
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incur or guarantee additional indebtedness or issue certain equity interests;
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pay dividends or distributions, repurchase equity or make payments in respect of subordinated indebtedness;
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make certain investments;
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sell assets;
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incur liens;
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create certain restrictions on the ability of restricted subsidiaries to pay dividends or to transfer assets;
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enter into transactions with affiliates;
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create unrestricted subsidiaries; and
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consolidate, merge or sell all or substantially all of its assets.
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These covenants are subject to a number of exceptions and qualifications as set forth in the Indenture. The Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal of and accrued interest on such 2025 Notes to be declared due and payable. In addition, if the 2025 Notes are assigned an investment grade rating by certain rating agencies and no default or event of default has occurred or is continuing, certain covenants related to the 2025 Notes would be suspended. If the rating on the 2025 Notes should subsequently decline to below investment grade, the suspended covenants would be reinstated.
Credit Agreement
On October 30, 2020, the Company entered into a Credit Agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto. The New Credit Agreement provides for a $60 million unsecured revolving credit facility, maturing April 30, 2023. For additional information about the New Credit Agreement, see Note 9.