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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to ______

Commission File Number 001-36283
 
 
 

  NWHMLOGOA65.JPG
The New Home Company Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
 
Delaware
 
27-0560089
(State or other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
85 Enterprise , Suite 450
Aliso Viejo , California 92656
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code ( 949 382-7800
 
Not Applicable
 
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
NWHM
 
New York Stock Exchange
 
 
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes    ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes    ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
Non-accelerated filer
¨

Smaller reporting company
Emerging growth company




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No 
Registrant’s shares of common stock outstanding as of July 26, 2019: 20,096,969







THE NEW HOME COMPANY INC.
FORM 10-Q
INDEX

 
 
 
 
 
Page
Number
 
PART I  Financial Information
 
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Part II   Other Information
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 


2



PART I – FINANCIAL INFORMATION
Item 1 .
Financial Statements

THE NEW HOME COMPANY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value amounts)

 
June 30,
 
December 31,
 
2019
 
2018
 
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents
$
48,224

 
$
42,273

Restricted cash
124

 
269

Contracts and accounts receivable
16,113

 
18,265

Due from affiliates
218

 
1,218

Real estate inventories
541,954

 
566,290

Investment in and advances to unconsolidated joint ventures
33,637

 
34,330

Other assets
32,987

 
33,452

Total assets
$
673,257

 
$
696,097

 
 
 
 
Liabilities and equity
 
 
 
Accounts payable
$
26,629

 
$
39,391

Accrued expenses and other liabilities
32,375

 
29,028

Unsecured revolving credit facility
66,000

 
67,500

Senior notes, net
309,060

 
320,148

Total liabilities
434,064

 
456,067

Commitments and contingencies (Note 11)

 

Equity:
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding

 

Common stock, $0.01 par value, 500,000,000 shares authorized, 20,096,969 and 20,058,904, shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
201

 
201

Additional paid-in capital
192,691

 
193,132

Retained earnings
46,206

 
46,621

Total stockholders' equity
239,098

 
239,954

Non-controlling interest in subsidiary
95

 
76

Total equity
239,193

 
240,030

Total liabilities and equity
$
673,257

 
$
696,097

See accompanying notes to the unaudited condensed consolidated financial statements.


3



THE NEW HOME COMPANY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Home sales
$
140,464

 
$
117,460

 
$
239,650

 
$
196,897

Fee building, including management fees from unconsolidated joint ventures of $619, $672, $1,162 and $1,652, respectively
22,285

 
38,095

 
41,947

 
81,889

 
162,749

 
155,555

 
281,597

 
278,786

Cost of Sales:
 
 
 
 
 
 
 
Home sales
123,525

 
102,678

 
210,094

 
172,372

Fee building
21,770

 
37,038

 
41,038

 
79,737

 
145,295

 
139,716

 
251,132

 
252,109

Gross Margin:
 
 
 
 
 
 
 
Home sales
16,939

 
14,782

 
29,556

 
24,525

Fee building
515

 
1,057

 
909

 
2,152

 
17,454

 
15,839

 
30,465

 
26,677

 
 
 
 
 
 
 
 
Selling and marketing expenses
(9,683
)
 
(9,466
)
 
(18,362
)
 
(16,105
)
General and administrative expenses
(5,841
)
 
(5,979
)
 
(13,232
)
 
(11,998
)
Equity in net income (loss) of unconsolidated joint ventures
185

 
(120
)
 
369

 
215

Gain on early extinguishment of debt
552

 

 
969

 

Other income (expense), net
(102
)
 
(92
)
 
(295
)
 
(118
)
Pretax income (loss)
2,565

 
182

 
(86
)
 
(1,329
)
(Provision) benefit for income taxes
(974
)
 
(67
)
 
(310
)
 
793

Net income (loss)
1,591

 
115

 
(396
)
 
(536
)
Net (income) loss attributable to non-controlling interest
(19
)
 

 
(19
)
 
11

Net income (loss) attributable to The New Home Company Inc.
$
1,572

 
$
115

 
$
(415
)
 
$
(525
)
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to The New Home Company Inc.:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
0.01

 
$
(0.02
)
 
$
(0.03
)
Diluted
$
0.08

 
$
0.01

 
$
(0.02
)
 
$
(0.03
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
20,070,914

 
20,958,991

 
20,028,600

 
20,942,601

Diluted
20,095,533

 
21,024,769

 
20,028,600

 
20,942,601

See accompanying notes to the unaudited condensed consolidated financial statements.



4



THE NEW HOME COMPANY INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands)
(Unaudited)
 
Stockholders’ Equity Three Months Ended June 30
 
Non-controlling Interest in Subsidiary
 
Total Equity
 
Number of Shares of
Common
Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Total
Stockholders’
Equity
 
 
Balance at March 31, 2018
21,007,902

 
$
210

 
$
199,361

 
$
60,302

 
$
259,873

 
$
79

 
$
259,952

Adoption of ASU 2018-07 (see Note 1)

 

 
(18
)
 
18

 

 

 

Net income

 

 

 
115

 
115

 

 
115

Stock-based compensation expense

 

 
862

 

 
862

 

 
862

Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans
(2,366
)
 

 
(23
)
 

 
(23
)
 

 
(23
)
Shares issued through stock plans
55,482

 
1

 
(1
)
 

 

 

 

Repurchase of common stock
(205,240
)
 
(2
)
 
(1,947
)
 
(123
)
 
(2,072
)
 

 
(2,072
)
Balance at June 30, 2018
20,855,778

 
$
209

 
$
198,234

 
$
60,312

 
$
258,755

 
$
79

 
$
258,834

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
20,049,113

 
$
200

 
$
192,169

 
$
44,634

 
$
237,003

 
$
76

 
$
237,079

Net income

 

 

 
1,572

 
1,572

 
19

 
1,591

Stock-based compensation expense

 

 
523

 

 
523

 

 
523

Shares issued through stock plans
47,856

 
1

 
(1
)
 

 

 

 

Balance at June 30, 2019
20,096,969

 
$
201

 
$
192,691

 
$
46,206

 
$
239,098

 
$
95

 
$
239,193

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ Equity Six Months Ended June 30
 
Non-controlling Interest in Subsidiary
 
Total Equity
 
Number of Shares of
Common
Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Total
Stockholders’
Equity
 
 
Balance at December 31, 2017
20,876,837

 
$
209

 
$
199,474

 
$
64,307

 
$
263,990

 
$
90

 
$
264,080

Adoption of ASC 606 and ASU 2018-07 (see Note 1)

 

 
(18
)
 
(3,347
)
 
(3,365
)
 

 
(3,365
)
Net loss

 

 

 
(525
)
 
(525
)
 
(11
)
 
(536
)
Stock-based compensation expense

 

 
1,704

 

 
1,704

 

 
1,704

Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans
(86,182
)
 

 
(977
)
 

 
(977
)
 

 
(977
)
Repurchase of common stock
(205,240
)
 
(2
)
 
(1,947
)
 
(123
)
 
(2,072
)
 

 
(2,072
)
Shares issued through stock plans
270,363

 
2

 
(2
)
 

 

 

 

Balance at June 30, 2018
20,855,778

 
$
209

 
$
198,234

 
$
60,312

 
$
258,755

 
$
79

 
$
258,834

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
20,058,904

 
$
201

 
$
193,132

 
$
46,621

 
$
239,954

 
$
76

 
$
240,030

Net income (loss)

 

 

 
(415
)
 
(415
)
 
19

 
(396
)
Stock-based compensation expense

 

 
1,089

 

 
1,089

 

 
1,089

Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans
(85,420
)
 

 
(488
)
 

 
(488
)
 

 
(488
)
Shares issued through stock plans
277,401

 
2

 
(2
)
 

 

 

 

Repurchase of common stock
(153,916
)
 
(2
)
 
(1,040
)
 

 
(1,042
)
 

 
(1,042
)
Balance at June 30, 2019
20,096,969

 
$
201

 
$
192,691

 
$
46,206

 
$
239,098

 
$
95

 
$
239,193

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to the unaudited condensed consolidated financial statements.


5



THE NEW HOME COMPANY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(396
)
 
$
(536
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Deferred taxes

 
(1,481
)
Amortization of stock-based compensation
1,089

 
1,704

Distributions of earnings from unconsolidated joint ventures
279

 
715

Abandoned project costs
19

 
43

Equity in net income of unconsolidated joint ventures
(369
)
 
(215
)
Deferred profit from unconsolidated joint ventures

 
136

Depreciation and amortization
5,042

 
2,646

Gain on early extinguishment of debt
(969
)
 

Net changes in operating assets and liabilities:
 
 
 
Contracts and accounts receivable
2,152

 
2,854

Due from affiliates
975

 
788

Real estate inventories
24,970

 
(53,108
)
Other assets
(2,240
)
 
(6,095
)
Accounts payable
(12,762
)
 
5,256

Accrued expenses and other liabilities
1,102

 
(14,217
)
Net cash provided by (used in) operating activities
18,892

 
(61,510
)
Investing activities:
 
 
 
Purchases of property and equipment
(8
)
 
(184
)
Contributions and advances to unconsolidated joint ventures
(4,120
)
 
(8,954
)
Distributions of capital and repayment of advances from unconsolidated
joint ventures
4,928

 
5,874

Interest collected on advances to unconsolidated joint ventures

 
178

Net cash provided by (used in) investing activities
800

 
(3,086
)
Financing activities:
 
 
 
Borrowings from credit facility
40,000

 
35,000

Repayments of credit facility
(41,500
)
 

Repurchases of senior notes
(10,856
)
 

Repurchases of common stock
(1,042
)
 
(2,072
)
Tax withholding paid on behalf of employees for stock awards
(488
)
 
(977
)
Net cash (used in) provided by financing activities
(13,886
)
 
31,951

Net increase (decrease) in cash, cash equivalents and restricted cash
5,806

 
(32,645
)
Cash, cash equivalents and restricted cash – beginning of period
42,542

 
123,970

Cash, cash equivalents and restricted cash – end of period
$
48,348

 
$
91,325


See accompanying notes to the unaudited condensed consolidated financial statements.

6

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Organization and Summary of Significant Accounting Policies

Organization
 
The New Home Company Inc. (the "Company"), a Delaware corporation, and its subsidiaries are primarily engaged in all aspects of residential real estate development, including acquiring land and designing, constructing and selling homes in California and Arizona.

Based on our public float at June 29, 2018, we qualify as 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 Article 10 of Regulation S-X and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 . 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.
 
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.

Reclassification

The Company updated its reportable segments effective for the 2019 first quarter. Please refer to Note 15 for more information. Prior year comparative data has been reclassified to align with the composition of the current year reportable segments.

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 Northern California and Southern 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.
 
Restricted Cash
 
Restricted cash of $0.1 million and $0.3 million as of June 30, 2019 and December 31, 2018 , 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.

7

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




 
Six Months Ended June 30,
 
2019
 
2018
 
(Dollars in thousands)
Cash and cash equivalents
$
48,224

 
$
90,758

Restricted cash
124

 
567

Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
$
48,348

 
$
91,325




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 other income (expense), net if we determine continuation of the prospective project is not probable.
 
Land, development and other common costs are typically allocated to real estate inventories using a methodology that approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost of sales for homes closed includes the estimated total construction costs of each home at completion and an allocation of all applicable land acquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value of the home within each project. Changes in estimated development and common costs are allocated prospectively to remaining homes in the project.

In accordance with ASC 360, Property, Plant and Equipment ("ASC 360"), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset on a 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.

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,

8

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



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 six months ended June 30, 2019 and 2018, no real estate impairments were recorded.

Capitalization of Interest
 
We follow the practice of capitalizing interest to real estate inventories during the period of development and to investments in unconsolidated joint ventures, when applicable, in accordance with ASC 835, Interest ("ASC 835"). Interest capitalized as a cost component of real estate inventories is included in cost of home sales as related homes or lots are sold. To the extent interest is capitalized to investment in unconsolidated joint ventures, it is included as a reduction of income from unconsolidated joint ventures when the related homes or lots are sold to third parties. In instances where the Company purchases land from an unconsolidated joint venture, the pro rata share of interest capitalized to investment in unconsolidated joint ventures is added to the basis of the land acquired and recognized as a cost of sale upon the delivery of the related 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.

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

9

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



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 six months ended June 30, 2019 and 2018 , one customer comprised 95% , 93% , 95% and 96% , 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 June 30, 2019 and December 31, 2018 , one customer comprised 39% and 48% 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:

Participating rights - provide the non-controlling equity holders the ability to direct significant financial and operational decision made in the ordinary course of business that most significantly influence the entity's economic performance.

Kick-out rights - allow the non-controlling equity holders to remove the general partner or managing member without cause.

If we conclude that any of the three characteristics of a VIE are met, including if equity holders lack the characteristics of a controlling financial interest because they lack both substantive participating rights and substantive kick-out rights, we conclude that the entity is a VIE and evaluate it for consolidation under the variable interest model.

If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE.
 
Under ASC 810, a nonrefundable deposit paid to an entity may be deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are classified as real estate inventories, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a nonrefundable deposit, a VIE may have been created. At June 30, 2019, the Company had outstanding nonrefundable cash deposits of $15.3 million pertaining to land option contracts and purchase contracts.


10

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



As of June 30, 2019 and December 31, 2018 , the Company was not required to consolidate any VIEs. In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.

Non-controlling Interest
 
During 2013, the Company entered into a joint venture agreement with a third-party property owner. In accordance with ASC 810, the Company analyzed this arrangement and determined that it was not a VIE; however, the Company determined it was required to consolidate the joint venture as the Company has a controlling financial interest with the powers to direct the major decisions of the entity.  As of June 30, 2019 and December 31, 2018 , the third-party investor had an equity balance of $0.1 million and $0.1 million , respectively.

Investments in and Advances to Unconsolidated Joint Ventures
 
We use the equity method to account for investments in homebuilding and land development joint ventures when any of the 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 June 30, 2019 , 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 is classified as cash inflows from operating activities unless the cumulative distributions received exceed cumulative equity in earnings. When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and is 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 generally consistent with those of the Company.
 
We review real estate inventory held by our unconsolidated joint ventures for impairment on a quarterly basis, consistent with how 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 in accordance with ASC 820. To the extent we deem any portion of our investment in and advances to unconsolidated joint ventures as not recoverable, we impair our investment accordingly. For the three and six months ended June 30, 2019 and 2018 , no impairments related to investment in and advances to unconsolidated joint ventures were recorded.

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.

Warranty Accrual

We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural construction defects for one year. In addition, we provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered by the applicable statute of repose, that covers certain defined construction defects. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts are accrued based upon the Company’s historical rates. In addition, the Company has received warranty payments from third-party property owners for certain of its fee building projects that have since closed-out where the Company has the contractual risk of construction. These payments are recorded as warranty accruals. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets and adjustments to our warranty accrual are recorded through cost of sales.

11

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




Contracts and Accounts Receivable
 
Contracts and accounts receivable primarily represent the fees earned, but not collected, and reimbursable project costs incurred in connection with fee building agreements. The Company periodically evaluates the collectability of its contracts receivable, and, if it is determined that a receivable might not be fully collectible, an allowance is recorded for the amount deemed uncollectible. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts involved and the financial condition of its customers. Factors considered in such evaluations include, but are not limited to: (i) customer type; (ii) historical contract performance; (iii) historical collection and delinquency trends; (iv) customer credit worthiness; and (v) general economic conditions. In addition to contracts receivable, escrow receivables are included in contracts and accounts receivable in the accompanying condensed consolidated balance sheets. As of June 30, 2019 and December 31, 2018 , no allowance was recorded related to contracts and accounts receivable.
 
Property, Equipment and Capitalized Selling and Marketing Costs
 
Property, equipment and capitalized selling and marketing costs are recorded at cost and included in other assets in the 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.

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 available tax planning alternatives, to the extent these items are applicable. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial statements. At June 30, 2019 and December 31, 2018 , no valuation allowance was recorded.

ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding 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 June 30, 2019 , 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 June 30, 2019 , the Company has not been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.


12

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Stock-Based Compensation

We account for share-based awards in accordance with ASC 718,  Compensation – Stock Compensation  ("ASC 718") and ASC 505-50, Equity – Equity Based Payments to Non-Employees  ("ASC 505-50").

ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in a company's financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.
    
On February 16, 2017, the Company entered into an agreement that transitioned Wayne Stelmar's role within the Company from Chief Investment Officer to a non-employee consultant and non-employee director. Per the agreement, Mr. Stelmar's outstanding equity awards continued to vest in accordance with their original terms. Under ASC 505-50, if an employee becomes a non-employee and continues to vest in an award pursuant to the award's original terms, that award will be treated as an award to a non-employee prospectively, provided the individual is required to continue providing services to the employer (such as consulting services). Based on the terms and conditions of Mr. Stelmar's consulting agreement noted above, we accounted for his share-based awards in accordance with ASC 505-50 through March 31, 2018. ASC 505-50 required that these awards be accounted for prospectively, such that the fair value of the awards was re-measured at each reporting date until the earlier of (a) the performance commitment date or (b) the date the services required under the transition agreement with Mr. Stelmar have been completed. ASC 505-50 required that compensation cost ultimately recognized in the Company's financial statements be the sum of (a) the compensation cost recognized during the period of time the individual was an employee (based on the grant-date fair value) plus (b) the fair value of the award determined on the measurement date determined in accordance with ASC 505-50 for the pro-rata portion of the vesting period in which the individual was a non-employee.

In June of 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") which expanded the scope of ASC 718 to include share-based payments for acquiring goods and services from nonemployees, with certain exceptions. Under ASC 718, the measurement date for equity-classified, share-based awards is generally the grant date of the award. The Company early adopted ASU 2018-07 on April 1, 2018, at which time Mr. Stelmar's award was the only nonemployee award outstanding. In accordance with the transition guidance, the Company assessed Mr. Stelmar's award for which a measurement date had not been established. The outstanding award was re-measured to fair value as of the April 1, 2018 adoption date. The adoption of ASU 2018-07 provided administrative relief by fixing the remaining unamortized expense of the award and eliminating the requirement to quarterly re-measure the Company's one remaining nonemployee award. The Company adopted this standard on a modified retrospective basis booking a cumulative-effect adjustment of an $18,000 increase to retained earnings and equal decrease to additional paid-in capital as of the beginning of the 2018 fiscal year. Mr. Stelmar's award was fully expensed as of March 31, 2019.

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 six months ended June 30, 2019 and 2018, the Company repurchased and retired 153,916 and 205,240 shares of its common stock at an aggregate purchase price of $1.0 million and $2.1 million , respectively. The shares were returned to the status of authorized but unissued.

Dividends
No dividends were paid on our common stock during the three and six months ended June 30, 2019 and 2018. 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.
 

13

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Recently Issued Accounting Standards
 
The Company currently qualifies as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Section 102 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the "Securities Act"), for complying with new or revised accounting standards. As previously disclosed, the Company has chosen, irrevocably, to "opt out" of such extended transition period, and as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASC 842"). ASC 842 requires organizations that lease assets (referred to as "lessees") to present lease assets and lease liabilities on the balance sheet at their gross value based on the rights and obligations created by those leases. Under ASC 842, a lessee is required to recognize assets and liabilities for leases with greater than 12 month terms. Lessor accounting remains substantially similar to prior GAAP. The Company's lease agreements impacted by ASC 842 primarily relate to our corporate headquarters, other office locations and office or construction equipment where we are the lessee and are all classified as operating leases.
The Company adopted ASC 842 on January 1, 2019 under the modified retrospective approach. Under the modified retrospective approach, the Company applied the requirements of ASC 842 to its leases as of the adoption date and recognized a $3.1 million right-of-use asset and a related $3.5 million liability. The comparative information has not been restated and continues to be reported as it was previously, under the appropriate accounting standards in effect for those periods. For additional information on our operating leases, please see Note 11.
For leases that commenced before the January 1, 2019 adoption date, the Company has elected the practical expedient package outlined in ASC 842-10-65-1(f) which prescribes the following:
1. An entity need not reassess whether any expired or existing contracts contain leases.
2.
An entity need not reassess the lease classification for any expired or existing leases (for example, all existing leases that were classified as operating leases in accordance with ASC 840, Leases , will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC 840 will be classified as finance leases).
3. An entity need not reassess initial direct costs for any existing lease.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), 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 and ASU 2019-05, Financial Instruments - Credit Losses (Topic 326) , in May 2019 to provide further clarification on this topic. The standard is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted, and requires full retrospective application upon adoption. The Company is currently evaluating the impact of ASU 2016-13 and does not anticipate a material impact to its consolidated financial statements as a result of adoption.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 and does not anticipate a material impact to the consolidated financial statements as a result of adoption.

14

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




2. Computation of Income (Loss) Per Share
The following table sets forth the components used in the computation of basic and diluted earnings per share for the three and six months ended June 30, 2019 and 2018 :
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to The New Home Company Inc.
$
1,572

 
$
115

 
$
(415
)
 
$
(525
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
20,070,914

 
20,958,991

 
20,028,600

 
20,942,601

Effect of dilutive shares:
 
 
 
 
 
 
 
Stock options and unvested restricted stock units
24,619

 
65,778

 

 

Diluted weighted-average shares outstanding
20,095,533

 
21,024,769

 
20,028,600

 
20,942,601

 
 
 
 
 
 
 
 
Basic income (loss) per share attributable to The New Home Company Inc.
$
0.08

 
$
0.01

 
$
(0.02
)
 
$
(0.03
)
Diluted income (loss) per share attributable to The New Home Company Inc.
$
0.08

 
$
0.01

 
$
(0.02
)
 
$
(0.03
)
 
 
 
 
 
 
 
 
Antidilutive stock options and unvested restricted stock units not included in diluted earnings per share
1,349,106

 
952,882

 
1,292,726

 
1,333,106



3. Contracts and Accounts Receivable
Contracts and accounts receivable consist of the following:
 
June 30,
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
Contracts receivable:
 
 
 
Costs incurred on fee building projects
$
41,038

 
$
159,136

Estimated earnings
909

 
4,401

 
41,947

 
163,537

Less: amounts collected during the period
(35,642
)
 
(154,743
)
Contracts receivable
$
6,305

 
$
8,794

 
 
 
 
Contracts receivable:
 
 
 
Billed
$

 
$

Unbilled
6,305

 
8,794

 
6,305

 
8,794

Accounts receivable:
 
 
 
Escrow receivables
9,530

 
8,787

Other receivables
278

 
684

Contracts and accounts receivable
$
16,113

 
$
18,265


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 June 30, 2019 and

15

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



December 31, 2018 are expected to be billed and collected within 30 days. Accounts payable at June 30, 2019 and December 31, 2018 includes $5.6 million and $8.5 million , respectively, related to costs incurred under the Company’s fee building contracts.

4. Real Estate Inventories
Real estate inventories are summarized as follows:
 
June 30,
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
Deposits and pre-acquisition costs
$
17,485

 
$
20,726

Land held and land under development
122,392

 
115,987

Homes completed or under construction
352,535

 
380,956

Model homes
49,542

 
48,621

 
$
541,954

 
$
566,290



All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0.7 million and $0.9 million as of June 30, 2019 and December 31, 2018 , respectively.
Land held and land under development includes land costs and costs incurred during site development such as development, indirects, and permits. Homes completed or under construction and model homes include all costs associated with home construction, including land, development, indirects, permits, materials and labor (except for capitalized selling and marketing costs, which are classified in other assets).
In accordance with ASC 360, inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset at the community-level on a quarterly basis or whenever indicators of impairment exist.


16

    
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 are closed. Interest capitalized to investment in unconsolidated joint ventures is amortized to equity in net income (loss) of unconsolidated joint ventures as related joint venture homes or lots close, or in instances where lots are sold from the unconsolidated joint venture to the Company, the interest is added to the land basis and included in cost of sales when the related lots or homes are sold to third-party buyers. For the three and six months ended June 30, 2019 and 2018 interest incurred, capitalized and expensed was as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Interest incurred
$
7,606

 
$
6,612

 
$
15,367

 
$
13,328

Interest capitalized to inventory
(7,606
)
 
(6,149
)
 
(15,367
)
 
(12,344
)
Interest capitalized to investment in unconsolidated joint ventures

 
(463
)
 

 
(984
)
Interest expensed
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Capitalized interest in beginning inventory
$
28,600

 
$
19,884

 
$
25,681

 
$
16,453

Interest capitalized as a cost of inventory
7,606

 
6,149

 
15,367

 
12,344

Capitalized interest transferred from investment in unconsolidated joint ventures to inventory upon lot acquisition
3

 
5

 
13

 
5

Previously capitalized interest included in cost of home sales
(6,301
)
 
(3,750
)
 
(11,153
)
 
(6,514
)
Capitalized interest in ending inventory
$
29,908

 
$
22,288

 
29,908

 
22,288

 
 
 
 
 
 
 
 
Capitalized interest in beginning investment in unconsolidated joint ventures
$
672

 
$
1,962

 
$
713

 
$
1,472

Interest capitalized to investment in unconsolidated joint ventures

 
463

 

 
984

Capitalized interest transferred from investment in unconsolidated joint ventures to inventory upon lot acquisition
(3
)
 
(5
)
 
(13
)
 
(5
)
Previously capitalized interest included in equity in net income (loss) of unconsolidated
joint ventures
(48
)
 
(18
)
 
(79
)
 
(49
)
Capitalized interest in ending investment in unconsolidated joint ventures
621

 
2,402

 
621

 
2,402

Total capitalized interest in ending inventory and investments in unconsolidated
joint ventures
$
30,529

 
$
24,690

 
$
30,529

 
$
24,690

 
 
 
 
 
 
 
 
Capitalized interest as a percentage of inventory
5.5
%
 
4.7
%
 
5.5
%
 
4.7
%
Interest included in cost of home sales as a percentage of home sales revenue
4.4
%
 
3.2
%
 
4.7
%
 
3.3
%
 
 
 
 
 
 
 
 
Capitalized interest as a percentage of investment in and advances to unconsolidated
joint ventures
1.8
%
 
4.1
%
 
1.8
%
 
4.1
%



17

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



6. Investments in and Advances to Unconsolidated Joint Ventures
 
As of June 30, 2019 and December 31, 2018 , the Company had ownership interests in 10 unconsolidated joint ventures with ownership percentages that generally ranged from 5% to 35% . The condensed combined balance sheets for our unconsolidated joint ventures accounted for under the equity method were as follows:
 
June 30,
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
Cash and cash equivalents
$
35,145

 
$
45,945

Restricted cash
14,740

 
19,205

Real estate inventories
338,176

 
374,607

Other assets
5,950

 
4,231

Total assets
$
394,011

 
$
443,988

 
 
 
 
Accounts payable and accrued liabilities
$
36,191

 
$
43,158

Notes payable
40,564

 
71,299

Total liabilities
76,755

 
114,457

The New Home Company's equity
33,016

 
33,617

Other partners' equity
284,240

 
295,914

Total equity
317,256

 
329,531

Total liabilities and equity
$
394,011

 
$
443,988

Debt-to-capitalization ratio
11.3
%
 
17.8
%
Debt-to-equity ratio
12.8
%
 
21.6
%

The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity method were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Revenues
$
59,078

 
$
33,879

 
$
101,365

 
$
65,892

Cost of sales and expenses
57,288

 
34,165

 
99,062

 
65,374

Net income (loss) of unconsolidated joint ventures
$
1,790

 
$
(286
)
 
$
2,303

 
$
518

Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations
$
185

 
$
(120
)
 
$
369

 
$
215


    
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% of more of the Company's consolidated net income (loss). For the six months ended June 30, 2019, income allocations from two of the Company's unconsolidated joint ventures accounted for under the equity method each exceeded 20% of the Company's consolidated net income (loss). The table below presents select combined financial information for these joint ventures:










18

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Revenues
$
44,358

 
$
23,798

 
$
76,395

 
$
53,439

Cost of home sales
40,548

 
21,910

 
69,624

 
47,544

Gross margin
$
3,810

 
$
1,888

 
$
6,771

 
$
5,895

Expenses
1,983

 
1,779

 
3,840

 
4,193

Net income
$
1,827

 
$
109

 
$
2,931

 
$
1,702

Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying consolidated statements of operations
$
261

 
$
11

 
$
488

 
$
452



For the three and six months ended June 30, 2019 and 2018 , the Company earned $0.6 million , $1.2 million , $0.7 million and $1.7 million respectively, in management fees from its unconsolidated joint ventures. For additional detail regarding management fees, please see Note 12.

7. Other Assets
Other assets consist of the following:
 
June 30,
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
 
 
 
 
Property, equipment and capitalized selling and marketing costs, net (1)
$
9,094

 
$
11,738

Deferred tax asset, net
13,937

 
13,937

Prepaid income taxes
443

 
514

Prepaid expenses
5,715

 
6,348

Warranty insurance receivable (2)
1,257

 
915

Right-of-use lease asset (3)
2,541

 

 
$
32,987

 
$
33,452


 
 

(1)
The Company depreciated $2.3 million , $4.9 million , $1.5 million and $2.4 million of capitalized selling and marketing costs to selling and marketing expenses during the three and six months ended June 30, 2019 and 2018, respectively. The Company depreciated $0.1 million , $0.2 million , $0.1 million and $0.2 million of property and equipment to general and administrative expenses during the three and six months ended June 30, 2019 and 2018, respectively.
(2)
The Company adjusted its warranty insurance receivable by $0.6 million during the 2019 second quarter to true-up the receivable to align with actual reimbursement experience rates which resulted in pretax income of the same amount. The impact to net income was $0.4 million or $0.02 per diluted share.
(3)
In conjunction with the adoption of ASC 842, the Company established a right-of-use asset of $3.1 million on January 1, 2019. For more information, please refer to Note 1 and Note 11.


19

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




8. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
 
June 30,
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
 Warranty accrual (1)
$
7,049

 
$
6,898

 Accrued compensation and benefits
3,157

 
5,749

 Accrued interest
6,236

 
6,497

 Completion reserve
3,351

 
4,192

 Lease liability (2)
2,902

 

 Customer deposits
7,188

 
2,192

 Other accrued expenses
2,492

 
3,500

 
$
32,375

 
$
29,028


 
 
 
 
 

(1)
Included in the amount at June 30, 2019 and December 31, 2018 is approximately $1.3 million and $0.9 million , respectively, of warranty liabilities estimated to be recovered by our insurance policies.
(2)
In conjunction with the adoption of ASC 842, the Company established a $3.5 million lease liability on January 1, 2019. For more information, please refer to Note 1 and Note 11.



Changes in our warranty accrual are detailed in the table set forth below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Beginning warranty accrual for homebuilding projects
$
6,767

 
$
6,775

 
$
6,681

 
$
6,634

Warranty provision for homebuilding projects
627

 
470

 
1,054

 
986

Warranty payments for homebuilding projects
(581
)
 
(469
)
 
(922
)
 
(844
)
Adjustment to warranty accrual (1)
94

 

 
94

 

Ending warranty accrual for homebuilding projects
6,907

 
6,776

 
6,907

 
6,776

 
 
 
 
 
 
 
 
Beginning warranty accrual for fee building projects
178

 
223

 
217

 
225

Warranty provision for fee building projects

 

 
9

 

Warranty efforts for fee building projects
(18
)
 
(1
)
 
(66
)
 
(3
)
Adjustment to warranty accrual for fee building projects (1)
(18
)
 

 
(18
)
 

Ending warranty accrual for fee building projects
142

 
222

 
142

 
222

Total ending warranty accrual
$
7,049

 
$
6,998

 
$
7,049

 
$
6,998


 
 

(1)
During the 2019 second quarter, we recorded an adjustment of  $0.1 million  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 2019 second quarter, the Company recorded an adjustment of $18,000 due to 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.


20

    
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 warranty accrual and related estimated insurance recoveries are based on historical claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.


9. Senior Notes and Unsecured Revolving Credit Facility
Indebtedness consisted of the following:
 
June 30,
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
7.25% Senior Notes due 2022, net
$
309,060

 
$
320,148

Unsecured revolving credit facility
66,000

 
67,500

Total Indebtedness
$
375,060

 
$
387,648



On March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Notes due 2022 (the "Existing Notes"), in a private placement. The Existing Notes were issued at an offering price of 98.961% of their face amount, which represents a yield to maturity of 7.50% . On May 4, 2017, the Company completed a tack-on private placement offering through the sale of an additional $75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438% . Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is paid semiannually in arrears on April 1 and October 1. The Notes were exchanged in an exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act, and are freely tradeable in accordance with applicable law.

The carrying amount of our Senior Notes listed above at June 30, 2019 is net of the unamortized discount of $1.4 million , unamortized premium of $1.1 million , and unamortized debt issuance costs of $3.7 million , each of which are amortized and capitalized to interest costs on a straight-line basis over the respective terms of the notes which approximates the effective interest method. The carrying amount for the Senior Notes listed above at December 31, 2018, is net of the unamortized discount of $1.7 million , unamortized premium of $1.3 million , and unamortized debt issuance costs of $4.5 million . Debt issuance costs for the unsecured revolving credit facility are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement.
    
The Notes are general senior unsecured obligations that rank equally in right of payment to all existing and future senior indebtedness, including borrowings under the Company's senior unsecured revolving credit facility. The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are 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 Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries. See Note

21

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



17 for information about the guarantees and supplemental financial statement information about our guarantor subsidiaries group and non-guarantor subsidiaries group.

During the 2019 second quarter, the Company repurchased and retired approximately $7.0 million in face value of the Notes. The Notes were purchased at 90.82% of face value, for a cash payment of $6.3 million . The Company recognized a $0.6 million gain on the early extinguishment of debt, and the unamortized discount, premium and debt issuance costs associated with the retired notes totaling approximately $90,000 were written off. Total repurchases of the Notes for the six months ended June 30, 2019 equaled $12.0 million in face value at 90.58% of the face value, for a cash payment of $10.9 million . The Company recognized a total gain on early extinguishment of debt of $1.0 million and wrote off approximately $160,000 of unamortized discount, premium and debt issuance costs associated with the Notes retired during the six months ended June 30, 2019 .

The Company's unsecured revolving credit facility ("Credit Facility") is with a bank group and matures on September 1, 2020. Total commitments under the Credit Facility are $200 million with an accordion feature that allows the facility size thereunder to be increased up to an aggregate of $300 million , subject to certain financial conditions, including the availability of bank commitments. As of June 30, 2019 , we had $66.0 million of outstanding borrowings under the credit facility. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin ranging from 2.25% to 3.00% depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter. As of June 30, 2019 , the interest rate under the Credit Facility was 5.40% . Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as defined in the Credit Facility, including (i) a minimum tangible net worth; (ii) maximum leverage ratios; (iii) a minimum liquidity covenant; and (iv) a minimum fixed charge coverage ratio based on EBITDA (as detailed in the Credit Facility) to interest incurred or if this test is not met, the Company maintains unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred. As of June 30, 2019 , the Company was in compliance with all financial covenants.
The Credit Facility also provides a $25 million sublimit for letters of credit, subject to conditions set forth in the agreement. As of June 30, 2019 and December 31, 2018 , the Company had $2.3 million in outstanding letters of credit issued under the Credit Facility.

10. Fair Value Disclosures
ASC 820, Fair Value Measurements and Disclosures , defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:
Level 1 – Quoted prices for identical instruments in active markets
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date
Level 3 – Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date

Fair Value of Financial Instruments

The following table presents an estimated fair value of the Company's Notes and Credit Facility. The Notes are classified as Level 2 and primarily reflect estimated prices obtained from outside pricing sources. The Company's Credit Facility is classified as Level 3 within the fair value hierarchy. The Company had an outstanding balance of $66.0 million under its Credit Facility at June 30, 2019 , and the estimated fair value of the outstanding balance approximated the carrying value due to the short-term nature of LIBOR contracts.

22

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



 
June 30, 2019
 
December 31, 2018
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
(Dollars in thousands)
7.25% Senior Notes due 2022, net (1)
$
309,060

 
$
294,234

 
$
320,148

 
$
292,500

Unsecured revolving credit facility
$
66,000

 
$
66,000

 
$
67,500

 
$
67,500


 
 
(1) The carrying value for the Senior Notes, as presented at June 30, 2019 , is net of the unamortized discount of $1.4 million , unamortized premium of $1.1 million , and unamortized debt issuance costs of $3.7 million . The carrying value for the Senior Notes, as presented at December 31, 2018, is net of the unamortized discount of $1.7 million , unamortized premium of $1.3 million , and unamortized debt issuance costs of $4.5 million . The 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.

11. Commitments and Contingencies
From time-to-time, the Company is involved in various legal matters arising in the ordinary course of business. These claims and legal proceedings are of a nature that we believe are normal and incidental to a homebuilder. We make provisions for loss contingencies when they are probable and the amount of the loss can be reasonably estimated. Such provisions are assessed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. In view of the inherent unpredictability of litigation, we generally cannot predict their ultimate resolution, related timing or eventual loss. At this time, we do not believe that our loss contingencies, individually or in the aggregate, are material to our consolidated financial statements.
As an owner and developer of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of real estate in the vicinity of the Company’s real estate and other environmental conditions of which the Company is unaware with respect to the real estate could result in future environmental liabilities.
The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements comprise acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of June 30, 2019 and December 31, 2018 , $24.4 million and $41.3 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 $4.9 million and $7.3 million , respectively, as of June 30, 2019 and December 31, 2018 . In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion agreements. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion agreements to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from "bad boy acts" of

23

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy.
We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. As of June 30, 2019 and December 31, 2018 , the Company had outstanding surety bonds totaling $52.8 million and $50.5 million , respectively. The estimated remaining costs to complete of such improvements as of June 30, 2019 and December 31, 2018 were $25.1 million and $20.3 million , respectively. The beneficiaries of the bonds are various municipalities and other organizations. In the event that any such surety bond issued by a third party is called because the required improvements are not completed, the Company could be obligated to reimburse the issuer of the bond.
The Company accounts for contracts deemed to contain a lease under ASC 842. 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 assets and lease liabilities are recorded on the condensed consolidated balance sheets. The depreciable lives of right-of-use assets are limited to the expected term which would include any renewal options we expect to exercise. The exercise of lease 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 payments do not contain variable payments, any residual value guarantees, or material restrictive covenants. Right-of-use lease assets are included in other assets and lease liabilities are recorded in accrued expenses and other liabilities within our condensed consolidated balance sheets and total $2.5 million and $2.9 million , respectively, at June 30, 2019 .
For the three and six months ended June 30, 2019 , lease costs and cash flow information for leases with terms in excess of one year was as follows:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
(Dollars in thousands)
Lease cost:
 
 
 
Lease costs included in general and administrative expenses
$
265

 
$
620

Lease costs included in real estate inventories
207

 
369

Lease costs included in selling and marketing expenses
17

 
34

Net lease cost (1)
$
489

 
$
1,023

 
 
 
 
Other Information:
 
 
 
Lease cash flows (included in operating cash flows) (1)
$
563

 
$
1,053

(1) Does not include the cost of short-term leases with terms of less than one year which totaled approximately $0.2 million and $0.5 million for the three and six months ended June 30, 2019 , respectively, or the benefit from a sublease agreement of one of our office spaces which totaled approximately $49,000 and $98,000 for the three and six months ended June 30, 2019 , respectively.

Future minimum lease payments under our operating leases are as follows (dollars in thousands):
Remaining for 2019
$
971

2020
1,615

2021
444

2022
10

2023
2

Thereafter

Total lease payments (1)
$
3,042

Less: Interest (2)
140

Present value of lease liabilities (3)
$
2,902

 
 
 
 
 
(1)      Lease payments include options to extend lease terms that are reasonably certain of being exercised.

24

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



(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. There were no legally binding minimum lease payments for leases signed but not yet commenced at June 30, 2019 .
(3) The weighted average remaining lease term and weighted average incremental borrowing rate used in calculating our lease liabilities were 1.9 years and 5.2% , respectively at June 30, 2019 .

12. Related Party Transactions
During the three and six months ended June 30, 2019 and 2018 , the Company incurred construction-related costs on behalf of its unconsolidated joint ventures totaling $1.5 million , $3.2 million , $1.5 million and $3.6 million , respectively. As of June 30, 2019 and December 31, 2018 , $0.2 million and $0.4 million , respectively, are included in due from affiliates in the accompanying condensed consolidated balance sheets related to such costs.
The Company has entered into agreements with its unconsolidated joint ventures to provide management services related to the underlying projects (collectively referred to as the "Management Agreements"). Pursuant to the Management Agreements, the Company receives a management fee based on each project’s revenues. During the three and six months ended June 30, 2019 and 2018 , the Company earned $0.6 million , $1.2 million , $0.7 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 June 30, 2019 and December 31, 2018 , $0 and $0.2 million , respectively, of management fees are included in due from affiliates in the accompanying condensed consolidated balance sheets.
One member of the Company's board of directors beneficially owns more than 10% of the Company's outstanding common stock through an affiliated entity, 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 an owner of another entity, TNHC Newport LLC, which entity owned our "Meridian" project) and TNHC Russell Ranch LLC ("Russell Ranch"). The Company's investment in these two joint ventures was $9.8 million at June 30, 2019 and $6.5 million at December 31, 2018 . A former member of the Company's board of directors who served during 2018 is affiliated with entities that have investments in three of the Company's unconsolidated joint ventures, Arantine Hills Holdings LP ("Bedford"), Calabasas Village LP, and TNHC-TCN Santa Clarita, LP. As of June 30, 2019 and December 31, 2018 , the Company's investment in these three unconsolidated joint ventures totaled $10.9 million and $12.0 million , respectively.

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.
TL Fab LP, an affiliate of one of the Company's non-employee directors, was engaged by the Company and some of its unconsolidated joint ventures as a trade contractor to provide metal fabrication services. For the three and six months ended June 30, 2019 and 2018 , the Company incurred $22,000 , $55,000 , $0.1 million and $0.2 million , respectively, for these services. For the same periods, the Company's unconsolidated joint ventures incurred $0 , $0 , $0 and $0.4 million , respectively, for these services. Of these costs, $22,000 and $7,000 was due to TL Fab LP from the Company at June 30, 2019 and December 31, 2018 , respectively, and $0 and $8,000 was due to TL Fab LP from the Company's unconsolidated joint ventures at June 30, 2019 and December 31, 2018 , respectively.
In its ordinary course of business, the Company enters into agreements to purchase lots from unconsolidated land development joint ventures of which it is a member. In accordance with ASC 360-20, Property, Plant and Equipment - Real Estate Sales ("ASC 360-20"), the Company defers its portion of the underlying gain from the joint venture's sale of these lots 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 June 30, 2019 and December 31, 2018 , $0.2 million and

25

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



$0.2 million , respectively, of deferred gain from lot transactions with the TNHC-HW Cannery LLC ("Cannery"), Bedford and Russell Ranch 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 reimbursement of certain fee credits. The Company was reimbursed $0.1 million in fee credits from the Cannery during the six months ended June 30, 2018. As of June 30, 2019 and December 31, 2018 , $66,000 and $37,000 , 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.
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 for one year and reduce his scope of services and compensation to $1,000 per month. At June 30, 2019 , no fees were due to Mr. Davis for his consulting services. Additionally, the Company entered into a construction agreement effective September 7, 2017, with The Joseph and Terri Davis Family Trust Dated August 25, 1999 ("Davis Family Trust") of which Joseph Davis is a trustee. The agreement is a fee building contract pursuant to which the Company acts in the capacity of a general contractor to build a single family detached home on land owned by the Davis Family Trust. For its services, the Company will receive a contractor's fee and the Davis Family Trust will reimburse the Company's field overhead costs. During the three and six months ended June 30, 2019 and 2018 , the Company billed the Davis Family Trust $10,000 , $0.5 million , $0.6 million and $0.7 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 , $15,000 , $17,000 and $17,100 of the total billings for the three and six months ended June 30, 2019 and 2018 , respectively. The Company recorded $13,000 , $0.5 million , $0.6 million and $0.6 million for the three and six months ended June 30, 2019 and 2018 , 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 June 30, 2019 and December 31, 2018 , the Company was due $0 and $0.6 million , respectively, from the Davis Family Trust for construction draws, which are included in due from affiliates in the accompanying condensed consolidated balance sheets.

On February 17, 2017, the Company entered into a consulting agreement that transitioned Mr. Stelmar's role from that of Chief Investment Officer to a non-employee consultant to the Company. While an employee of the Company, Mr. Stelmar served as an employee director of the Company's Board of Directors. The agreement provides that effective upon Mr. Stelmar's termination of employment, he shall become a non-employee director and shall receive the compensation and be subject to the requirements of a non-employee director pursuant to the Company's policies. For his consulting services, Mr. Stelmar is compensated $6,000 per month. The current term is through August 17, 2019 and may be extended upon mutual consent of the parties. Additionally, Mr. Stelmar's outstanding restricted stock unit equity award granted in 2016 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. At June 30, 2019 and December 31, 2018 , no fees were due to Mr. Stelmar for his consulting services.

On February 14, 2019, the Company entered into a consulting agreement that transitioned Thomas Redwitz's role from that of Chief Investment Officer to a non-employee consultant to the Company effective March 1, 2019. For his consulting services, Mr. Redwitz is compensated $10,000 per month. The agreement terminates March 1, 2020 and may be extended upon mutual consent of the parties. At June 30, 2019 , no fees were due to Mr. Redwitz for his consulting services.
During 2018, the Company had advances outstanding to an unconsolidated joint venture, Encore McKinley Village LLC. The note bore interest at 10% per annum and was fully repaid during the 2018 second quarter. For the three and six months ended June 30, 2018 , the Company earned $49,000 and $0.1 million , respectively, in interest income on the unsecured promissory note which is included in equity in net income (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations.
The Company entered into two transactions in each of 2018 and 2017 to purchase land from affiliates of IHP, which owns more than 10% of the Company's outstanding common stock and is affiliated with one member of the Company's board of directors.
The first 2017 agreement allows the Company the option to purchase lots in Northern California in a phased takedown for a gross purchase price of $16.1 million with profit participation and master marketing fees due to the seller as outlined in the contract. As of June 30, 2019 , the Company has taken down approximately two-thirds of the lots, paid $0.4 million in master marketing fees, and has a $0.3 million nonrefundable deposit outstanding on the remaining lots. The second 2017 transaction

26

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



allowed the Company to purchase finished lots in Northern California which includes 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 $56.7 million , dependent on the timing of takedowns, as well as our obligation to pay certain fees and costs during the option maintenance period. 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 has in turn entered into an arrangement pursuant to which it shall purchase such lots on a rolling take down basis from such unrelated third party. The unrelated third party has agreed to purchase 67% of the lots originally under contract with the IHP affiliate and has already closed on 55% of the lots originally under contract with the IHP affiliate. Following the purchase of the lots by the unrelated third party, the purchase price of remaining lots from the IHP affiliate is expected to be approximately $8.4 million . As of June 30, 2019 , the Company (i) had a $2.3 million nonrefundable deposit up with the IHP affiliate, (ii) paid $0.1 million for fees and costs, (iii) paid $3.0 million in option payments, and (iv) paid $9.2 million for the purchase of lots directly from the IHP affiliate.
The first 2018 agreement allows the Company to purchase finished lots in Northern California for a gross purchase price of $8.0 million with additional profit participation, marketing fees and certain reimbursements due to the seller as outlined in the agreement. As of June 30, 2019 , the Company has taken down all of the lots, paid $0.3 million in master marketing fees and reimbursed the seller $0.2 million in costs related to this contract. The second 2018 agreement allows the Company to purchase land in a master-plan community in Arizona for an estimated purchase price of $3.8 million plus profit participation and marketing fees pursuant to contract terms. The Company has an outstanding, nonrefundable deposit of $0.3 million related to this contract and had not taken down any lots as of June 30, 2019 .
In the first quarter 2018, the Company entered into an agreement with its Bedford joint venture that is affiliated with one former member of the Company's board of directors for the option to purchase lots in phased takedowns. As of June 30, 2019 , the Company has made a $1.5 million nonrefundable deposit as consideration for this option, and a portion of the deposit will be applied to the purchase price across the phases. The gross purchase price of the land is $10.0 million with profit participation due to seller as outlined in the contract. Subsequent to June 30, 2019, the Company entered into an amendment to this agreement to reduce the gross purchase price of the land to $9.3 million . The Company has taken down approximately two-thirds of the contracted lots and $0.7 million of the nonrefundable deposit remains outstanding. During the fourth quarter 2018, the Company entered into a second option agreement with the Bedford joint venture to purchase lots in phased takedowns. The Company made a $1.4 million nonrefundable deposit as consideration for the option, and a portion of the deposit will be applied to the purchase price across the phases. The gross purchase price of the land is  $10.5 million  with profit participation due to the seller pursuant to the agreement. At June 30, 2019 , the Company had taken down approximately 42% of the optioned lots and $0.8 million of the deposit remained outstanding.

FMR LLC beneficially owned over 10% of the Company's common stock during 2018, and an affiliate of FMR LLC ("Fidelity") provides investment management and record keeping services to the Company’s 401(k) Plan. For the three and six months ended June 30, 2018, the Company paid Fidelity approximately $5,000 and $9,000 , respectively, for 401(k) Plan record keeping and investment management services. The participants in the Company's 401(k) Plan paid Fidelity approximately $2,000 and $4,000 for the three and six months ended June 30, 2018, respectively, for record keeping and investment management services. As of June 30, 2019 , FMR LLC owns less than 10% of the Company's common stock.

The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV 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.

27

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



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 option, restricted stock unit, and performance share unit awards under the 2016 Incentive Plan. As of June 30, 2019 , 61,443 shares remain available for grant under the 2014 Incentive Plan and 1,053,811 shares remain available for grant under the 2016 Incentive Plan. The exercise price of stock-based awards may not be less than the market value of the Company's common stock on the date of grant. The fair value for stock options is established at the date of grant using the Black-Scholes model for time-based vesting awards. The Company's stock option, restricted stock unit awards, and performance share unit awards typically vest over a one year to three years period and the stock options expire ten years from the date of grant.
A summary of the Company’s common stock option activity as of and for the six months ended June 30, 2019 and 2018 is presented below:
 
Six Months Ended June 30,
 
2019
 
2018
 
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
821,470

 
$
11.00

 
826,498

 
$
11.00

Granted
249,283

 
$
5.76

 

 
$

Exercised

 
$

 

 
$

Forfeited
(2,736
)
 
$
11.00

 
(5,028
)
 
$
11.00

Outstanding, end of period
1,068,017

 
$
9.78

 
821,470

 
$
11.00

Exercisable, end of period
818,734

 
$
11.00

 
821,470

 
$
11.00


A summary of the Company’s restricted stock unit activity as of and for the six months ended June 30, 2019 and 2018 is presented below:
 
Six Months Ended June 30,
 
2019
 
2018
 
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
469,227

 
$
10.75

 
562,082

 
$
10.72

Granted
230,774

 
$
5.28

 
179,268

 
$
11.24

Vested
(277,401
)
 
$
10.50

 
(270,363
)
 
$
11.02

Forfeited
(48,178
)
 
$
10.91

 

 
$

Outstanding, end of period
374,422

 
$
7.54

 
470,987

 
$
10.74




28

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



A summary of the Company’s performance share unit activity as of and for the six months ended June 30, 2019 and 2018 is presented below:
 
Six Months Ended June 30,
 
2019
 
2018
 
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)

 
$

 
125,422

 
$
11.68

Vested

 
$

 

 
$

Forfeited
(26,882
)
 
$
11.68

 

 
$

Outstanding, end of period (at target)
98,540

 
$
11.68

 
125,422

 
$
11.68



The expense related to the Company's stock-based compensation programs, included in general and administrative expense in the accompanying condensed consolidated statements of operations, was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Expense related to:
 
 
 
 
 
 
 
Stock options
$
50

 
$

 
$
72

 
$

Restricted stock units and performance share units
473

 
862

 
1,017

 
1,704

 
$
523

 
$
862

 
$
1,089

 
$
1,704



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:
 
Six Months Ended June 30,
 
2019
 
2018
Expected term (in years)
6.0
 
0
Expected volatility
39.9%
 
Risk-free interest rate
2.5%
 
Expected dividends
 
Weighted-average grant date fair value
$2.43
 
$0

We used the "simplified method" to establish the expected term of the common stock options granted by the Company. Our restricted stock unit awards and performance share unit awards are valued based on the closing price of our common stock on the date of grant. The number of performance share units that will vest ranges from 50% - 150% of the target amount awarded based on actual cumulative earnings per share and return on equity growth from 2018-2019, subject to initial achievement of minimum thresholds. We evaluate the probability of achieving the performance targets established under each of the outstanding performance share unit awards quarterly and estimate the number of underlying units that are probable of being issued. Compensation expense for restricted stock unit and performance share unit awards is being recognized using the straight-line method over the requisite service period, subject to cumulative catch-up adjustments required as a result of changes in the number shares probable of being issued for performance share unit awards. At June 30, 2019 , the probability of achieving the performance targets associated with the outstanding performance share unit awards was estimated to be 0%. Forfeitures are recognized in compensation cost during the period that the award forfeiture occurs.

29

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



At June 30, 2019 , the amount of unearned stock-based compensation currently estimated to be expensed through 2022 is $2.8 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.

14. Income Taxes
For the three and six months ended June 30, 2019 , the Company recorded an income tax provision of $1.0 million and $0.3 million , respectively. Comparatively, the Company recorded an income tax provision of $0.1 million and an income tax benefit of $0.8 million for the three and six months ended June 30, 2018 , respectively. The Company's effective tax rate for all periods differs from the federal statutory tax rates due to state income taxes, estimated deduction limitations for executive compensation and discrete items. The Company recorded a $0.3 million discrete provision in the first six months of 2019 related to stock compensation and state tax rate changes while a $0.4 million discrete benefit was taken in the comparable 2018 period primarily related to energy credits.

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 Northern California and Southern California homebuilding operating segments.

Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached
homes. Our fee building operations build homes and manage construction related activities on behalf of third-party property owners and our joint ventures. In addition, our corporate operations develop and implement strategic initiatives and support our operating segments by centralizing key administrative functions such as accounting, finance and treasury, information technology, insurance and risk management, litigation, marketing and human resources. A portion of the expenses incurred by corporate are allocated to the fee building segment primarily based on its respective percentage of revenues and to each homebuilding segment based on its respective investment in and advances to unconsolidated joint ventures and real estate inventories balances. The assets of our fee building segment primarily consist of cash, restricted cash and accounts receivable. The majority of our corporate personnel and resources are primarily dedicated to activities relating to our homebuilding segment, and, therefore, the balance of any unallocated corporate expenses are allocated within our homebuilding reportable segments.

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.


30

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Financial information relating to reportable segments was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Homebuilding revenues:
 
 
 
 
 
 
 
California
$
132,830

 
$
117,460

 
$
216,162

 
$
196,897

Arizona
7,634

 

 
23,488

 

Total homebuilding revenues
140,464

 
117,460

 
239,650

 
196,897

Fee building revenues, including management fees
22,285

 
38,095

 
41,947

 
81,889

Total revenues
$
162,749

 
$
155,555

 
$
281,597

 
$
278,786

 
 
 
 
 
 
 
 
Homebuilding pretax income (loss):
 
 
 
 
 
 
 
California
$
2,846

 
$
83

 
$
279

 
$
(1,818
)
Arizona
(796
)
 
(958
)
 
(1,274
)
 
(1,663
)
Total homebuilding pretax income (loss)
2,050

 
(875
)
 
(995
)
 
(3,481
)
Fee building pretax income, including management fees
515

 
1,057

 
909

 
2,152

Total pretax income (loss)
$
2,565

 
$
182

 
$
(86
)
 
$
(1,329
)
 
June 30,
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
Homebuilding assets:
 
 
 
California
$
548,223

 
$
551,807

Arizona
95,370

 
86,205

Total homebuilding assets
643,593

 
638,012

Fee building assets
7,064

 
10,879

Corporate unallocated assets
22,600

 
47,206

Total assets
$
673,257

 
$
696,097



31

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




16. Supplemental Disclosure of Cash Flow Information

The following table presents certain supplemental cash flow information:

 
Six Months Ended June 30,
 
2019
 
2018
 
(Dollars in thousands)
Supplemental disclosures of cash flow information
 
 
 
Interest paid, net of amounts capitalized
$

 
$

Income taxes paid
$
240

 
$
7,000



17. Supplemental Guarantor Information

The Company's 7.25% Senior Notes due 2022 (the "Notes") are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries (collectively, the "Guarantors"). The guarantees are full and unconditional. The Indenture governing the Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a "Restricted Subsidiary" (as defined in the Indenture), which sale, transfer, exchange or other disposition is made in compliance with applicable provisions of the Indenture; (2) upon the proper designation of such Guarantor as an "Unrestricted Subsidiary" (as defined in the Indenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’ certificate provided to the trustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the indenture), so long as such Guarantor would not otherwise be required to provide a guarantee pursuant to the Indenture; provided that, if immediately after giving effect to such release the consolidated tangible assets of all Immaterial Subsidiaries that are not Guarantors would exceed 5.0% of consolidated tangible assets, no such release shall occur, (4) if the Company exercises its legal defeasance option or covenant defeasance option under the Indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the Indenture, upon such exercise or discharge; (5) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the Indenture; or (6) upon the full satisfaction of the Company’s obligations under the Indenture; provided that in each case if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the Indenture. The Company has determined that separate, full financial statements of the Guarantors would not be material to investors and, accordingly, supplemental financial information for the guarantors is presented.
    

32

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
 
June 30, 2019
 
NWHM
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated NWHM
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,005

 
$
44,040

 
$
179

 
$

 
$
48,224

Restricted cash

 
124

 

 

 
124

Contracts and accounts receivable
8

 
16,518

 

 
(413
)
 
16,113

Intercompany receivables
228,506

 

 

 
(228,506
)
 

Due from affiliates

 
218

 

 

 
218

Real estate inventories

 
541,954

 

 

 
541,954

Investment in and advances to unconsolidated joint ventures

 
33,637

 

 

 
33,637

Investment in subsidiaries
370,716

 

 

 
(370,716
)
 

Other assets
18,975

 
14,003

 
12

 
(3
)
 
32,987

Total assets
$
622,210

 
$
650,494

 
$
191

 
$
(599,638
)
 
$
673,257

 
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
329

 
$
26,300

 
$

 
$

 
$
26,629

Accrued expenses and other liabilities
7,723

 
25,001

 
59

 
(408
)
 
32,375

Intercompany payables

 
228,506

 

 
(228,506
)
 

Due to affiliates

 
8

 

 
(8
)
 

Unsecured revolving credit facility
66,000

 

 

 

 
66,000

Senior notes, net
309,060

 

 

 

 
309,060

Total liabilities
383,112

 
279,815

 
59

 
(228,922
)
 
434,064

Stockholders' equity
239,098

 
370,679

 
37

 
(370,716
)
 
239,098

Non-controlling interest in subsidiary

 

 
95

 

 
95

Total equity
239,098

 
370,679

 
132

 
(370,716
)
 
239,193

Total liabilities and equity
$
622,210

 
$
650,494

 
$
191

 
$
(599,638
)
 
$
673,257




33

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



 
December 31, 2018
 
NWHM
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated NWHM
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
28,877

 
$
13,249

 
$
147

 
$

 
$
42,273

Restricted cash

 
269

 

 

 
269

Contracts and accounts receivable
7

 
18,926

 

 
(668
)
 
18,265

Intercompany receivables
192,341

 

 

 
(192,341
)
 

Due from affiliates

 
1,218

 

 

 
1,218

Real estate inventories

 
566,290

 

 

 
566,290

Investment in and advances to unconsolidated joint ventures

 
34,330

 

 

 
34,330

Investment in subsidiaries
396,466

 

 

 
(396,466
)
 

Other assets
18,643

 
14,812

 

 
(3
)
 
33,452

Total assets
$
636,334

 
$
649,094

 
$
147

 
$
(589,478
)
 
$
696,097

 
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
240

 
$
39,151

 
$

 
$

 
$
39,391

Accrued expenses and other liabilities
8,492

 
21,129

 
71

 
(664
)
 
29,028

Intercompany payables

 
192,341

 

 
(192,341
)
 

Due to affiliates

 
7

 

 
(7
)
 

Unsecured revolving credit facility
67,500

 

 

 

 
67,500

Senior notes, net
320,148

 

 

 

 
320,148

Total liabilities
396,380

 
252,628

 
71

 
(193,012
)
 
456,067

Stockholders' equity
239,954

 
396,466

 

 
(396,466
)
 
239,954

Non-controlling interest in subsidiary

 

 
76

 

 
76

Total equity
239,954

 
396,466

 
$
76

 
(396,466
)
 
240,030

Total liabilities and equity
$
636,334

 
$
649,094

 
$
147

 
$
(589,478
)
 
$
696,097

































34

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
 
Three Months Ended June 30, 2019
 
NWHM
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated NWHM
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
Home sales
$

 
$
140,464

 
$

 
$

 
$
140,464

Fee building

 
22,285

 

 

 
22,285

 

 
162,749

 

 

 
162,749

Cost of Sales:
 
 
 
 
 
 
 
 
 
Home sales

 
123,582

 
(57
)
 

 
123,525

Fee building

 
21,770

 

 

 
21,770

 

 
145,352

 
(57
)
 

 
145,295

 
 
 
 
 
 
 
 
 
 
Gross Margin:
 
 
 
 
 
 
 
 
 
Home sales

 
16,882

 
57

 

 
16,939

Fee building

 
515

 

 

 
515

 

 
17,397

 
57

 

 
17,454

Selling and marketing expenses

 
(9,683
)
 

 

 
(9,683
)
General and administrative expenses
617

 
(6,458
)
 

 

 
(5,841
)
Equity in net income of unconsolidated joint ventures

 
185

 

 

 
185

Equity in net income of subsidiaries
1,087

 

 

 
(1,087
)
 

Gain on early extinguishment of debt
552

 

 

 

 
552

Other income (expense), net
(106
)
 
4

 

 

 
(102
)
Pretax income
2,150

 
1,445

 
57

 
(1,087
)
 
2,565

Provision for income taxes
(578
)
 
(396
)
 

 

 
(974
)
Net income
1,572

 
1,049

 
57

 
(1,087
)
 
1,591

Net income attributable to non-controlling interest in subsidiary

 

 
(19
)
 

 
(19
)
Net income attributable to The New Home Company Inc.
$
1,572

 
$
1,049

 
$
38

 
$
(1,087
)
 
$
1,572



35

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



 
Three Months Ended June 30, 2018
 
NWHM
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated NWHM
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
Home sales
$

 
$
117,460

 
$

 
$

 
$
117,460

Fee building

 
38,095

 

 

 
38,095

 

 
155,555

 

 

 
155,555

Cost of Sales:
 
 
 
 
 
 
 
 
 
Home sales

 
102,680

 
(2
)
 

 
102,678

Fee building

 
37,038

 

 

 
37,038

 

 
139,718

 
(2
)
 

 
139,716

 
 
 
 
 
 
 
 
 
 
Gross Margin:
 
 
 
 
 
 
 
 
 
Home sales

 
14,780

 
2

 

 
14,782

Fee building

 
1,057

 

 

 
1,057

 

 
15,837

 
2

 

 
15,839

Selling and marketing expenses

 
(9,466
)
 

 

 
(9,466
)
General and administrative expenses
305

 
(6,281
)
 
(3
)
 

 
(5,979
)
Equity in net loss of unconsolidated joint ventures

 
(120
)
 

 

 
(120
)
Equity in net loss of subsidiaries
(58
)
 

 

 
58

 

Other income (expense), net
(35
)
 
(57
)
 

 

 
(92
)
Pretax income (loss)
212

 
(87
)
 
(1
)
 
58

 
182

(Provision) benefit for income taxes
(97
)
 
30

 

 

 
(67
)
Net income (loss)
115

 
(57
)
 
(1
)
 
58

 
115

Net loss attributable to non-controlling interest in subsidiary

 

 

 

 

Net income (loss) attributable to The New Home Company Inc.
$
115

 
$
(57
)
 
$
(1
)
 
$
58

 
$
115



36

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



 
Six Months Ended June 30, 2019
 
NWHM
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated NWHM
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
Home sales
$

 
$
239,650

 
$

 
$

 
$
239,650

Fee building

 
41,947

 

 

 
41,947

 

 
281,597

 

 

 
281,597

Cost of Sales:
 
 
 
 
 
 
 
 
 
Home sales

 
210,151

 
(57
)
 

 
210,094

Fee building

 
41,038

 

 

 
41,038

 

 
251,189

 
(57
)
 

 
251,132

 
 
 
 
 
 
 
 
 
 
Gross Margin:
 
 
 
 
 
 
 
 
 
Home sales

 
29,499

 
57

 

 
29,556

Fee building

 
909

 

 

 
909

 

 
30,408

 
57

 

 
30,465

Selling and marketing expenses

 
(18,362
)
 

 

 
(18,362
)
General and administrative expenses
51

 
(13,283
)
 

 

 
(13,232
)
Equity in net income of unconsolidated joint ventures

 
369

 

 

 
369

Equity in net loss of subsidiaries
(625
)
 

 

 
625

 

Gain on early extinguishment of debt
969

 

 

 

 
969

Other income (expense), net
(168
)
 
(127
)
 

 

 
(295
)
Pretax income (loss)
227

 
(995
)
 
57

 
625

 
(86
)
(Provision) benefit for income taxes
(642
)
 
332

 

 

 
(310
)
Net income (loss)
(415
)
 
(663
)
 
57

 
625

 
(396
)
Net income attributable to non-controlling interest in subsidiary

 

 
(19
)
 

 
(19
)
Net income (loss) attributable to The New Home Company Inc.
$
(415
)
 
$
(663
)
 
$
38

 
$
625

 
$
(415
)



37

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



 
Six Months Ended June 30, 2018
 
NWHM
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated NWHM
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
Home sales
$

 
$
196,897

 
$

 
$

 
$
196,897

Fee building

 
81,889

 

 

 
81,889

 

 
278,786

 

 

 
278,786

Cost of Sales:
 
 
 
 
 
 
 
 
 
Home sales

 
172,350

 
22

 

 
172,372

Fee building

 
79,737

 

 

 
79,737

 

 
252,087

 
22

 

 
252,109

 
 
 
 
 
 
 
 
 
 
Gross Margin:
 
 
 
 
 
 
 
 
 
Home sales

 
24,547

 
(22
)
 

 
24,525

Fee building

 
2,152

 

 

 
2,152

 

 
26,699

 
(22
)
 

 
26,677

Selling and marketing expenses

 
(16,105
)
 

 

 
(16,105
)
General and administrative expenses
(801
)
 
(11,194
)
 
(3
)
 

 
(11,998
)
Equity in net income of unconsolidated joint ventures

 
215

 

 

 
215

Equity in net loss of subsidiaries
(176
)
 

 

 
176

 

Other income (expense), net
76

 
(194
)
 

 

 
(118
)
Pretax loss
(901
)
 
(579
)
 
(25
)
 
176

 
(1,329
)
Benefit for income taxes
376

 
417

 

 

 
793

Net loss
(525
)
 
(162
)
 
(25
)
 
176

 
(536
)
Net loss attributable to non-controlling interest in subsidiary

 

 
11

 

 
11

Net loss attributable to The New Home Company Inc.
$
(525
)
 
$
(162
)
 
$
(14
)
 
$
176

 
$
(525
)


38

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended June 30, 2019
 
NWHM
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated NWHM
 
(Dollars in thousands)
Net cash (used in) provided by operating activities
$
(36,110
)
 
$
54,970

 
$
32

 
$

 
$
18,892

Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(1
)
 
(7
)
 

 

 
(8
)
Contributions and advances to unconsolidated joint ventures

 
(4,120
)
 

 

 
(4,120
)
Contributions to subsidiaries from corporate
(66,575
)
 

 

 
66,575

 

Distributions of capital from subsidiaries
91,700

 

 

 
(91,700
)
 

Distributions of capital and repayment of advances from unconsolidated
joint ventures

 
4,928

 

 

 
4,928

Net cash provided by investing activities
$
25,124

 
$
801

 
$

 
$
(25,125
)
 
$
800

Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings from credit facility
40,000

 

 

 

 
40,000

Repayments of credit facility
(41,500
)
 

 

 

 
(41,500
)
Repurchase of senior notes
(10,856
)
 

 

 

 
(10,856
)
Contributions to subsidiaries from corporate

 
66,575

 

 
(66,575
)
 

Distributions to corporate from subsidiaries

 
(91,700
)
 

 
91,700

 

Repurchases of common stock
(1,042
)
 

 

 

 
(1,042
)
Tax withholding paid on behalf of employees for stock awards
(488
)
 

 

 

 
(488
)
Net cash used in financing activities
$
(13,886
)
 
$
(25,125
)
 
$

 
$
25,125

 
$
(13,886
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(24,872
)
 
30,646

 
32

 

 
5,806

Cash, cash equivalents and restricted cash – beginning of period
28,877

 
13,518

 
147

 

 
42,542

Cash, cash equivalents and restricted cash – end of period
$
4,005

 
$
44,164

 
$
179

 
$

 
$
48,348



39

    
THE NEW HOME COMPANY INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



 
Six Months Ended June 30, 2018
 
NWHM
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated NWHM
 
(Dollars in thousands)
Net cash used in operating activities
$
(39,156
)
 
$
(22,349
)
 
$
(5
)
 
$

 
$
(61,510
)
Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
(22
)
 
(162
)
 

 

 
(184
)
Contributions and advances to unconsolidated joint ventures

 
(8,954
)
 

 

 
(8,954
)
Contributions to subsidiaries from corporate
(103,885
)
 

 

 
103,885

 

Distributions of capital from subsidiaries
49,975

 

 

 
(49,975
)
 

Distributions of capital and repayment of advances from unconsolidated
joint ventures

 
5,874

 

 

 
5,874

Interest collected on advances to unconsolidated joint ventures

 
178

 

 

 
178

Net cash used in investing activities
$
(53,932
)
 
$
(3,064
)
 
$

 
$
53,910

 
$
(3,086
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings from credit facility
35,000

 

 

 

 
35,000

Contributions to subsidiaries from corporate

 
103,885

 

 
(103,885
)
 

Distributions to corporate from subsidiaries

 
(49,975
)
 

 
49,975

 

Repurchases of common stock
(2,072
)
 

 

 

 
(2,072
)
Tax withholding paid on behalf of employees for stock awards
(977
)
 

 

 

 
(977
)
Net cash provided by financing activities
$
31,951

 
$
53,910

 
$

 
$
(53,910
)
 
$
31,951

Net (decrease) increase in cash, cash equivalents and restricted cash
(61,137
)
 
28,497

 
(5
)
 

 
(32,645
)
Cash, cash equivalents and restricted cash – beginning of period
99,586

 
24,196

 
188

 

 
123,970

Cash, cash equivalents and restricted cash – end of period
$
38,449

 
$
52,693

 
$
183

 
$

 
$
91,325




40



Item 2 .
Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements contained in this quarterly report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. These forward-looking statements are frequently accompanied by words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "goal," "plan," "could," "can," "might," "should," and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, 2018 and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A "Risk Factors" of this quarterly report on 10-Q. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements:
 
Risks related to our business, including among other things:
our geographic concentration primarily in California;
the cyclical nature of the homebuilding industry which is affected by general economic real estate and other business conditions;
availability of land to acquire and our ability to acquire such land on favorable terms or at all;
shortages of or increased prices for labor, land or raw materials used in housing construction;
availability and skill of subcontractors at reasonable rates;
employment-related liabilities with respect to our contractors' employees;
the illiquid nature of real estate investments;
the degree and nature of our competition;
delays in the development of communities;
increases in our cancellation rate;
a large proportion of our fee building revenue being dependent upon one customer;
construction defect product liability, warranty, and personal injury claims, including the cost and availability of insurance;
increased costs, delays in land development or home construction and reduced consumer demand resulting from adverse weather conditions or other events outside our control;
increased cost and reduced consumer demand resulting from power, water and other natural resource shortages or price increases;
because of the seasonal nature of our business, our quarterly operating results fluctuate;
we may be unable to obtain suitable bonding for the development of our housing projects;
inflation could adversely affect our business and financial results;
a major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage;
negative publicity or poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or results of operations to decline;
information systems interruption or breach in security;
inefficient or ineffective allocation of capital could adversely affect or operations and/or stockholder value if expected benefits are not realized;
our ability to execute our business strategies is uncertain;
a reduction in our sales absorption levels may force us to incur and absorb additional community-level costs;
future terrorist attacks against the United States or increased domestic or international instability could have an adverse effect on our operations;

41



Risks related to laws and regulations, including among other things:
mortgage financing, as well as our customer’s ability to obtain such financing, interest rate increases or changes in federal lending programs;
changes in tax laws can increase the after-tax cost of owning a home, and further tax law changes or government fees could adversely affect demand for the homes we build, increase our costs, or negatively affect our operating results;
new and existing laws and regulations, including environmental laws and regulations, or other governmental actions may increase our expenses, limit the number of homes that we can build or delay the completion of our projects;
legislation relating to energy and climate change could increase our costs to construct homes;
Risks related to financing and indebtedness, including among other things:
difficulty in obtaining sufficient capital could prevent us from acquiring land for our developments or increase costs and delays in the completion of our development projects;
our level of indebtedness may adversely affect our financial position and prevent us from fulfilling our debt obligations, and we may incur additional debt in the future;
the significant amount and illiquid nature of our joint venture partnerships, in which we have less than a controlling interest;
our current financing arrangements contain and our future financing arrangements will likely contain restrictive covenants related to our operations;
a breach of the covenants under the Indenture or any of the other agreements governing our indebtedness could result in an event of default under the Indenture or other such agreements;
potential future downgrades of our credit ratings could adversely affect our access to capital and could otherwise have a material adverse effect on us;
interest expense on debt we incur may limit our cash available to fund our growth strategies;
we may be unable to repurchase the Notes upon a change of control as required by the Indenture;
Risks related to our organization and structure, including among other things:
our dependence on our key personnel;
the potential costly impact termination of employment agreements with members of our management that may prevent a change in control of the Company;
our charter and bylaws could prevent a third party from acquiring us or limit the price that investors might be willing to pay for shares of our common stock;
the obligations associated with being a public company require significant resources and management attention;
that we are eligible to take advantage of reduced disclosure and governance requirements because of our status as an emerging growth company and smaller reporting company;
Risks related to ownership of our common stock, including among other things:
the price of our common stock is subject to volatility and our trading volume is relatively low;
if securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our common stock adversely, our stock price and trading volume could decline;
we do not intend to pay dividends on our common stock for the foreseeable future;
certain stockholders have rights to cause our Company to undertake securities offerings;
our senior notes rank senior to our common stock upon bankruptcy or liquidation;
certain large stockholders own a significant percentage of our shares and exert significant influence over us;
there is no assurance that the existence of a stock repurchase plan will enhance shareholder value;
non-U.S. holders of our common stock may be subject to United States income tax on gain realized on the sale of disposition of such shares.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this quarterly report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
The forward-looking statements in this quarterly report on Form 10-Q speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements,

42



except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Non-GAAP Measures

This quarterly report on Form 10-Q includes certain non-GAAP measures, including Adjusted EBITDA, Adjusted EBITDA margin percentage, ratio of Adjusted EBITDA to total interest incurred, net debt, ratio of net debt-to-capital, general and administrative costs excluding severance charges, general and administrative costs excluding severance charges as a percentage of home sales revenue, selling, marketing and general and administrative costs excluding severance charges, selling, marketing and general and administrative costs excluding severance charges as a percentage of home sales revenue, adjusted homebuilding gross margin (or homebuilding gross margin before interest in cost of home sales) and adjusted homebuilding gross margin percentage.  For a reconciliation of Adjusted EBITDA, Adjusted EBITDA margin percentage, and the ratio of Adjusted EBITDA to total interest incurred to the comparable GAAP measures please see "-- Selected Financial Information." For a reconciliation of net debt and ratio of net debt-to-capital to the comparable GAAP measures, please see "-- Liquidity and Capital Resources - Debt-to-Capital Ratios." For a reconciliation of general and administrative costs excluding severance charges, general and administrative expenses excluding severance charges as a percentage of homes sales revenue, selling, marketing and general and administrative expenses excluding severance charges and selling, marketing and general and administrative expenses excluding severance charges as a percentage of home sales revenue, please see "-- Results of Operations - Selling, General and Administrative Expenses." For a reconciliation of adjusted homebuilding gross margin (or homebuilding gross margin before interest in cost of home sales) and adjusted homebuilding gross margin percentage to the comparable GAAP measures please see "-- Results of Operations - Homebuilding Gross Margin."

43



Selected Financial Information

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
Home sales
$
140,464

 
$
117,460

 
$
239,650

 
$
196,897

Fee building, including management fees from unconsolidated joint ventures of $619, $672, $1,162 and $1,652, respectively
22,285

 
38,095

 
41,947

 
81,889

 
162,749

 
155,555

 
281,597

 
278,786

Cost of Sales:
 
 
 
 
 
 
 
Home sales
123,525

 
102,678

 
210,094

 
172,372

Fee building
21,770

 
37,038

 
41,038

 
79,737

 
145,295

 
139,716

 
251,132

 
252,109

Gross Margin:
 
 
 
 
 
 
 
Home sales
16,939

 
14,782

 
29,556

 
24,525

Fee building
515

 
1,057

 
909

 
2,152

 
17,454

 
15,839

 
30,465

 
26,677

 
 
 
 
 
 
 
 
Home sales gross margin
12.1
%
 
12.6
%
 
12.3
%
 
12.5
%
Fee building gross margin
2.3
%
 
2.8
%
 
2.2
%
 
2.6
%
 
 
 
 
 
 
 
 
Selling and marketing expenses
(9,683
)
 
(9,466
)
 
(18,362
)
 
(16,105
)
General and administrative expenses
(5,841
)
 
(5,979
)
 
(13,232
)
 
(11,998
)
Equity in net income (loss) of unconsolidated joint ventures
185

 
(120
)
 
369

 
215

Gain on early extinguishment of debt
552

 

 
969

 

Other income (expense), net
(102
)
 
(92
)
 
(295
)
 
(118
)
Pretax income (loss)
2,565

 
182

 
(86
)
 
(1,329
)
(Provision) benefit for income taxes
(974
)
 
(67
)
 
(310
)
 
793

Net income (loss)
1,591

 
115

 
(396
)
 
(536
)
Net (income) loss attributable to non-controlling interest
(19
)
 

 
(19
)
 
11

Net income (loss) attributable to The New Home Company Inc.
$
1,572

 
$
115

 
$
(415
)
 
$
(525
)
 
 
 
 
 
 
 
 
Interest incurred
$
7,606

 
$
6,612

 
$
15,367

 
$
13,328

Adjusted EBITDA (1)
$
11,119

 
$
6,564

 
$
18,025

 
$
10,127

Adjusted EBITDA margin percentage (1)
6.8
%
 
4.2
%
 
6.4
%
 
3.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
LTM (2)  Ended June 30,
 
 
 
 
 
2019
 
2018
Interest incurred
 
 
 
 
$
30,416

 
$
26,869

Adjusted EBITDA (1)
 
 
 
 
$
47,796

 
$
49,007

Adjusted EBITDA margin percentage  (1)
 
 
 
 
7.1
%
 
6.4
%
Ratio of Adjusted EBITDA to total interest incurred (1)
 
 
 
 
1.6x

 
1.8x

 

44



(1)
Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred are non-GAAP measures. Adjusted EBITDA margin percentage is calculated as a percentage of total revenue. Management believes that Adjusted EBITDA, which is a non-GAAP measure, assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, interest costs, tax position, inventory impairments and other non-recurring items. Due to the significance of the GAAP components excluded, Adjusted EBITDA should not be considered in isolation or as an alternative to net income (loss), cash flows from operations or any other performance measure prescribed by GAAP. The table below reconciles net income (loss), calculated and presented in accordance with GAAP, to Adjusted EBITDA.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
LTM (2)  Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Net income (loss)
$
1,591

 
$
115

 
$
(396
)
 
$
(536
)
 
$
(14,090
)
 
$
14,252

Add:
 
 
 
 
 
 
 
 
 
 
 
Interest amortized to cost of sales and equity in net income (loss) of unconsolidated joint ventures
6,349

 
3,768

 
11,232

 
6,563

 
24,577

 
14,349

Provision (benefit) for income taxes
974

 
67

 
310

 
(793
)
 
(4,972
)
 
13,085

Depreciation and amortization
2,386

 
1,624

 
5,042

 
2,646

 
9,027

 
2,859

Amortization of stock-based compensation
523

 
862

 
1,089

 
1,704

 
2,475

 
3,201

Cash distributions of income from unconsolidated joint ventures
19

 

 
279

 
715

 
279

 
715

Severance charges

 

 
1,788

 

 
1,788

 

Noncash inventory impairments and abandonments
14

 
8

 
19

 
43

 
10,182

 
1,120

Less:
 
 
 
 
 
 
 
 
 
 
 
Gain on early extinguishment of debt
(552
)
 

 
(969
)
 

 
(969
)
 

Equity in net (income) loss of unconsolidated joint ventures
(185
)
 
120

 
(369
)
 
(215
)
 
19,499

 
(574
)
Adjusted EBITDA
$
11,119

 
$
6,564

 
$
18,025

 
$
10,127

 
$
47,796

 
$
49,007

Total Revenue
$
162,749

 
$
155,555

 
$
281,597

 
$
278,786

 
$
670,377

 
$
760,819

Adjusted EBITDA margin percentage
6.8
%
 
4.2
%
 
6.4
%
 
3.6
%
 
7.1
%
 
6.4
%
Interest incurred
$
7,606

 
$
6,612

 
$
15,367

 
$
13,328

 
$
30,416

 
$
26,869

Ratio of Adjusted LTM (2)  EBITDA to total interest incurred
 
 
 
 
 
 


 
1.6
x
 
1.8
x

(2) "LTM" indicates amounts for the trailing 12 months.




45



Overview

During the 2019 second quarter, the Company enjoyed both top and bottom-line growth and made significant progress towards reducing our leverage and strengthening our balance sheet. Home sales revenue increased 20% year-over-year from 56% more home deliveries, and our pretax income was up meaningfully over the prior year at $2.6 million versus $0.2 million. In addition, we repurchased $7.0 million of senior notes during the quarter, which when combined with a net $18.0 million pay down of our revolving credit facility, contributed to a 240 basis point sequential decrease in our net debt-to-capital ratio to 57.7%*.

W e experienced solid sequential improvement in our sales absorption pace across all markets, with the 2019 second quarter monthly absorption rate up 41% over the 2019 first quarter at 2.4 sales per community, resulting in a 38% sequential increase in net new orders. We also continued to recognize benefits from our strategic repositioning to more affordable product as sales from these communities represented a higher proportion of our 2019 second quarter net new orders and an absorption pace higher than the companywide average.

Net income attributable to the Company for the 2019 second quarter was $1.6 million , or $0.08 per diluted share, compared to $0.1 million , or $0.01 per diluted share, in the prior year period. The year-over-year increase in net income was primarily attributable to a 20% increase in homebuilding revenue, a 200 basis point improvement in our SG&A rate, a $0.3 million increase in joint venture income, and a $0.6 million gain on early extinguishment of debt. These items were partially offset by a 50 basis point decline in home sales gross margins and a lower fee building gross margin due to lower fee construction activity.

We continue to take steps to lower our cost structure, strengthen our balance sheet, pursue opportunities to reduce our leverage and thoughtfully allocate resources to best position the Company for long-term success. The Company ended the quarter with $48.2 million in cash and cash equivalents and $375.1 million in debt, of which $66.0 million was outstanding under its revolving credit facility. As of June 30, 2019 the Company's debt-to-capital ratio was 61.1% and its net debt-to-capital ratio was 57.7% *, a 240 basis point sequential improvement from the 2019 first quarter.

*Net debt-to-capital ratio is a non-GAAP measure. For a reconciliation of net debt-to-capital to the appropriate GAAP measure, please see "-- Liquidity and Capital Resources - Debt-to-Capital Ratios."


 
 
 
 
 
 
 
 



46



Results of Operations
Net New Home Orders
 
Three Months Ended 
 June 30,
 
Increase/(Decrease)
 
Six Months Ended 
 June 30,
 
Increase/(Decrease)
 
2019
 
2018
 
Amount
 
%
 
2019
 
2018
 
Amount
 
%
 
 
Net new home orders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Southern California
90

 
104

 
(14
)
 
(13
)%
 
148

 
173

 
(25
)
 
(14
)%
Northern California
53

 
77

 
(24
)
 
(31
)%
 
98

 
147

 
(49
)
 
(33
)%
Arizona
11

 
13

 
(2
)
 
(15
)%
 
20

 
15

 
5

 
33
 %
Total net new home orders
154

 
194

 
(40
)
 
(21
)%

266


335

 
(69
)
 
(21
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling communities at end of period:
 
 
 
 
 
 
 
 
 
 
 
 
Southern California
 
 
 
 


 


 
11

 
11

 

 
 %
Northern California
 
 
 
 


 


 
7

 
7

 

 
 %
Arizona
 
 
 
 
 
 
 
 
2

 
2

 

 
 %
Total selling communities
 


 
 
 
20

 
20

 

 
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly sales absorption rate per community: (1)
 
 
 
 
 
 
 
 
 
 
 
 
Southern California
2.5

 
3.1

 
(0.6
)
 
(19
)%
 
2.0

 
2.7

 
(0.7
)
 
(26
)%
Northern California
2.3

 
3.7

 
(1.4
)
 
(38
)%
 
2.2

 
3.6

 
(1.4
)
 
(39
)%
Arizona
1.8

 
2.2

 
(0.4
)
 
(18
)%
 
1.7

 
2.1

 
(0.4
)
 
(19
)%
Total monthly sales absorption rate per community (1)
2.4

 
3.2

 
(0.8
)
 
(25
)%
 
2.0

 
3.0

 
(1.0
)
 
(33
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average selling communities:
 
 
 
 
 
 
 
 
 
 
 
 
Southern California
12

 
11

 
1

 
9
 %
 
12

 
11

 
1

 
9
 %
Northern California
8

 
7

 
1

 
14
 %
 
8

 
7

 
1

 
14
 %
Arizona
2

 
2

 

 
 %
 
2

 
1

 
1

 
100
 %
Total average selling communities
22

 
20

 
2

 
10
 %
 
22

 
19

 
3

 
16
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cancellation rate
11
%
 
6
%
 
5
%
 
NA

 
12
%
 
6
%
 
6
%
 
NA

 

(1) Monthly sales absorption represents the number of net new home orders divided by the number of average selling communities for the period.

Net new home orders for the 2019 second quarter decreased 21% primarily as the result of a 25% decline in the monthly sales absorption rate. The decrease in monthly absorption rates was due to weaker buyer demand compared to the prior year, however, the 2019 second quarter monthly sales absorption pace improved 41% sequentially over the 2019 first quarter. A  10%  year-over-year increase in average selling communities partially offset the slower sales pace in the 2019 second quarter, however, community closeouts late in the 2019 second quarter resulted in an ending community count of 20 , flat with the prior year.

Demand for the 2019 second quarter was strongest in Southern California with a monthly absorption rate of 2.5 driven by stronger order activity at more affordably priced communities, including a high number of initial sales at a new community of attached court homes located within the Inland Empire. Overall, the Southern California market has experienced a slowdown compared to the prior year due to a run up in home prices and a decrease in demand from foreign national buyers, which contributed to our 19% year-over-year decrease in monthly sales pace in this market. Additionally, the Company's Southern California monthly absorption rate benefited during the 2018 second quarter from two newly-opened communities that experienced solid initial order activity. Northern California experienced a 38% decline in its monthly sales absorption rate for the 2019 second quarter primarily related to slower demand at our Bay Area communities due to buyer affordability constraints and because sale pace was strongest in this region in the 2018 second quarter.

47




Net new home orders for the six months ended June 30, 2019 decreased 21% as compared to the same period in 2018 primarily as a result of a 33% decline in the monthly sales absorption rate due to weaker buyer demand. A 16% increase in average selling communities partially offset the slower sales pace for the for the six months ended June 30, 2019 .

During the six months ended June 30, 2019, monthly sales absorption was strongest in Northern California at 2.2 monthly sales per community, driven by strong order activity at three affordably-priced communities located within masterplan developments. However, the 39% decrease in Northern California's monthly absorption rate for the six months ended June 30, 2019 from the same period in 2018 was the largest of the divisions due to lack of affordability and strong sales experienced in the first half of 2018 from two Bay Area townhome communities, one of which sold out during the prior year period. The decrease in Southern California year-to-date absorption rates during the first half of 2019 compared to 2018 was attributable to the overall run up in home prices and a slowdown in demand from foreign national buyers in the market, and the high initial orders in the prior year from two communities that opened during the first half of 2018, as noted above.

Also impacting the decline in net new orders was the increase in the Company's cancellation rate for the 2019 second quarter to 11% from 6% for the 2018 second quarter. The cancellation rate for the six months ended June 30, 2019 was also up to 12% from 6% in the comparable prior year period. Our cancellation rate has increased moderately with our transition to more affordably-priced product where buyers are often times more credit challenged than a luxury or move-up buyer. Of the communities that opened during the last twelve months ended June 30, 2019, five offer base pricing of $600,000 or less.
   
Backlog
 
As of June 30,
 
2019
 
2018
 
% Change
 
Homes
 
Dollar Value
 
Average Price
 
Homes
 
Dollar Value
 
Average Price
 
Homes
 
Dollar Value
 
Average Price
 
(Dollars in thousands)
Southern California
86

 
$
92,438

 
$
1,075

 
139

 
$
141,718

 
$
1,020

 
(38
)%
 
(35
)%
 
5
 %
Northern California
85

 
71,648

 
843

 
153

 
131,859

 
862

 
(44
)%
 
(46
)%
 
(2
)%
Arizona
36

 
37,503

 
1,042

 
15

 
17,354

 
1,157

 
140
 %
 
116
 %
 
(10
)%
Total
207

 
$
201,589

 
$
974

 
307

 
$
290,931

 
$
948

 
(33
)%
 
(31
)%
 
3
 %

Backlog reflects the number of homes, net of cancellations, for which we have entered into sales contracts with customers, but for which we have not yet delivered the homes. The number of homes in backlog as of June 30, 2019 was down 33% as compared to the prior year period due to a higher backlog conversion rate of 74% for the 2019 second quarter compared to 46% for the 2018 second quarter and a 21% decrease in net orders resulting from a slower sales pace due to weaker year-over-year demand. The increase in conversion rate resulted from the Company's move to more affordably priced product which generally has quicker build cycles, as well as the Company's success in selling and delivering a higher level of spec homes that accompany these communities. The dollar value of backlog at the end of the 2019 second quarter was down 31% year-over-year to $201.6 million due to the lower number of backlog units, slightly offset by a 3% higher average selling price of the homes in backlog.

The year-over-year decrease in backlog units and value was greatest in Northern California where the decrease in net new orders from the 2019 and 2018 second quarters was also the largest of the divisions. The number of backlog units declined due to a lower number of homes in beginning backlog and a reduction in net new orders. Backlog value in Northern California decreased due to the lower number of homes in backlog, coupled with fewer homes in backlog with average selling prices over $1.0 million. Southern California ending backlog units at June 30, 2019 decreased primarily due to the 2019 second quarter backlog conversation rate of 105% compared to 64% in the 2018 second quarter due to the number of spec homes sold and delivered during the quarter, and to a lesser extent, a decrease in net new orders. The mix of homes in backlog in Southern California at June 30, 2019 shifted from the prior year and resulted in a 5% increase in the backlog average selling price driven largely by homes at a luxury community in south Orange County that opened in the third quarter of 2018 where the average price of homes in backlog exceeds $2.0 million. Our Arizona operations became a larger component of the Company's ending backlog for the 2019 second quarter with increased orders primarily from our successful Belmont community in Gilbert, Arizona that opened in the 2018 second quarter and commenced deliveries in the 2019 first quarter.


48



Lots Owned and Controlled
 
As of June 30,
 
Increase/(Decrease)
 
2019
 
2018
 
Amount
 
%
Lots Owned:
 
 
 
 
 
 
 
Southern California
581

 
505

 
76

 
15
 %
Northern California
729

 
314

 
415

 
132
 %
Arizona
294

 
299

 
(5
)
 
(2
)%
Total
1,604

 
1,118

 
486

 
43
 %
Lots Controlled: (1)
 
 
 
 
 
 
 
Southern California
200

 
807

 
(607
)
 
(75
)%
Northern California
503

 
959

 
(456
)
 
(48
)%
Arizona
477

 
343

 
134

 
39
 %
Total
1,180

 
2,109

 
(929
)
 
(44
)%
Total Lots Owned and Controlled - Wholly Owned
2,784

 
3,227

 
(443
)
 
(14
)%
Fee Building (2)
1,231

 
1,078

 
153

 
14
 %
Total Lots Owned and Controlled
4,015

 
4,305

 
(290
)
 
(7
)%
 

(1)
Includes lots that we control under purchase and sale agreements or option agreements subject to customary conditions and have not yet closed. There can be no assurance that such acquisitions will occur.
(2)
Lots owned by third party property owners for which we perform general contracting or construction management services.

The Company's wholly owned lots owned and controlled decreased 14% year-over-year to 2,784 lots, of which 42% of which were controlled through option contracts. The decrease in wholly owned lots owned and controlled was primarily due to an increase in deliveries during the last twelve months ended June 30, 2019 compared to the same period ending June 30, 2018 and a decrease of 400 lots controlled at June 30, 2018 that the Company did not pursue, partially offset by executed contracts for new developments across all markets in the same period.

The increase in fee building lots at June 30, 2019 as compared to the prior year period was primarily attributable to new contracts entered into during the last twelve months ended June 30, 2019 , for 600 lots with our largest customer. These fee lot additions were partially offset by the delivery of 447 homes to customers in the same period.


49



Home Sales Revenue and New Homes Delivered
 
Three Months Ended June 30,
 
2019

2018
 
% Change
 
Homes
 
Dollar Value
 
Average Price
 
Homes
 
Dollar Value
 
Average Price
 
Homes
 
Dollar Value
 
Average Price
 
(Dollars in thousands)
Southern California
91

 
$
95,534

 
$
1,050

 
61

 
$
87,278

 
$
1,431

 
49
%
 
9
 %
 
(27
)%
Northern California
53

 
37,296

 
704

 
36

 
30,182

 
838

 
47
%
 
24
 %
 
(16
)%
Arizona
7

 
7,634

 
1,091

 

 

 
NA

 
NA

 
NA

 
NA

Total
151

 
$
140,464

 
$
930

 
97

 
$
117,460

 
$
1,211

 
56
%
 
20
 %
 
(23
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2019
 
2018
 
% Change
 
Homes
 
Dollar Value
 
Average Price
 
Homes
 
Dollar Value
 
Average Price
 
Homes
 
Dollar Value
 
Average Price
 
(Dollars in thousands)
Southern California
152


$
160,127

 
$
1,053

 
105


$
131,858

 
$
1,256

 
45
%
 
21
 %
 
(16
)%
Northern California
81


56,035

 
692

 
76


65,039

 
856

 
7
%
 
(14
)%
 
(19
)%
Arizona
17

 
23,488

 
1,382

 

 

 
NA

 
NA

 
NA

 
NA

Total
250

 
$
239,650

 
$
959

 
181

 
$
196,897

 
$
1,088

 
38
%
 
22
 %
 
(12
)%
New home deliveries increased 56% for the 2019 second quarter compared to the prior year period. The increase in deliveries was the result of a higher backlog conversion rate for the 2019 second quarter compared to the 2018 second quarter and was driven by our success at selling and delivering more speculative homes during the quarter. Home sales revenue for the three months ended June 30, 2019 increased 20% compared to the same period in 2018, primarily due to the increase in new home deliveries, partially offset by a 23% decrease in average sales price per delivery for the period.
The increase in homes sales revenue was led by Southern California with 49% more deliveries in the 2019 second quarter due to a higher backlog conversion rate compared to the 2018 second quarter, partially offset by a decrease in average selling price due to a mix shift. The 2018 second quarter included deliveries from several higher-priced, close-out communities in Orange County. In Northern California, 2019 second quarter homes sales revenue was up 24% from a 47% increase in homes delivered, which was partially offset by a 16% decline in average selling price. The increase in home deliveries was attributable to an increase in backlog conversion rate for the 2019 second quarter, while the decrease in average selling price was a result of product mix where more affordable product with base pricing below $600,000 comprised approximately 70% of 2019 second quarter deliveries compared to approximately 36% for the 2018 second quarter.
New home deliveries increased 38% for the six months ended June 30, 2019 compared to the prior year period due to a higher backlog conversion rate. Home sales revenue for the six months ended June 30, 2019 increased 22% compared to the same period in 2018, primarily due to the increase in new home deliveries, partially offset by a 12% decrease in average sales price per delivery for the period. Average selling price was down in Southern California due to the 2018 period including deliveries from several higher-priced, closed-out Orange County communities. Average selling price in Northern California declined due to the significant increase in deliveries from more affordable communities during the first half of 2019 as compared to the prior year period and fewer Bay Area deliveries, which generally are high-priced.
Homebuilding Gross Margin
Homebuilding gross margin for the 2019 second quarter was 12.1% versus 12.6% in the prior period. The 50 basis point decrease was primarily due higher interest costs resulting from slower sales absorption rate and higher incentives due to weaker buyer demand, all of which was partially offset by a product mix shift. Adjusted homebuilding gross margin, which excludes interest in cost of home sales, was 16.5% and 15.8% for the 2019 and 2018 second quarters, respectively. Adjusted homebuilding gross margin is a non-GAAP measure. See the table below reconciling this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent. Excluding the impact of interest in cost of sales, the 70 basis point improvement was due to product mix shift, partially offset by higher incentives, largely in Southern California.
Homebuilding gross margin for the six months ended June 30, 2019 quarter was 12.3% versus 12.5% in the prior period. The 20 basis point decrease was primarily due to higher interest costs and incentives, which were partially offset by product

50



mix shift. Adjusted homebuilding gross margin, which excludes interest in cost of home sales, was 17.0% and 15.8% for the six months ended June 30, 2019 and 2018, respectively. The 120 basis point improvement in adjusted homebuilding gross margin was primarily a result of higher interest costs from slower sales absorption rates and to a lesser extent, a product mix shift. Offsetting these items were higher incentives for the 2019 period.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
%
 
2018
 
%
 
2019
 
%
 
2018
 
%
 
(Dollars in thousands)
Home sales revenue
$
140,464

 
100.0
%
 
$
117,460

 
100.0
%
 
$
239,650

 
100.0
%
 
$
196,897

 
100.0
%
Cost of home sales
123,525

 
87.9
%
 
102,678

 
87.4
%
 
210,094

 
87.7
%
 
172,372

 
87.5
%
Homebuilding gross margin
16,939

 
12.1
%
 
14,782

 
12.6
%
 
29,556

 
12.3
%
 
24,525

 
12.5
%
Add: Interest in cost of home sales
6,301

 
4.4
%
 
3,750

 
3.2
%
 
11,153

 
4.7
%
 
6,514

 
3.3
%
Adjusted homebuilding gross margin (1)
$
23,240

 
16.5
%
 
$
18,532

 
15.8
%
 
$
40,709

 
17.0
%
 
$
31,039

 
15.8
%
 

(1)
Adjusted homebuilding gross margin (or homebuilding gross margin before interest in cost of home sales) is non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that leverage and our cost of debt capital has on homebuilding gross margin and permits investors to make better comparisons with our competitors who also break out and adjust gross margins in a similar fashion.
Fee Building
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
%
 
2018
 
%
 
2019
 
%
 
2018
 
%
 
(Dollars in thousands)
Fee building revenues
$
22,285

 
100.0
%
 
$
38,095

 
100.0
%
 
$
41,947

 
100.0
%
 
$
81,889

 
100.0
%
Cost of fee building
21,770

 
97.7
%
 
37,038

 
97.2
%
 
41,038

 
97.8
%
 
79,737

 
97.4
%
Fee building gross margin
$
515

 
2.3
%
 
$
1,057

 
2.8
%
 
$
909

 
2.2
%
 
$
2,152

 
2.6
%
Our fee building revenues include (i) billings to third-party land owners for general contracting services and (ii) management fees from our unconsolidated joint ventures and third-party land owners for construction and sales management services. Cost of fee building includes (i) labor, subcontractor, and other indirect construction and development costs that are reimbursable by the land owner and (ii) general and administrative, or G&A, expenses that are attributable to fee building activities and joint venture management overhead. Besides allocable G&A expenses, there are no other material costs associated with management fees from our unconsolidated joint ventures.
Billings to land owners for general contracting services are a function of construction activity and reimbursable costs are incurred generally once home construction begins. The total billings and reimbursable costs are driven by the pace at which the land owner executes its development plan. Management fees from our unconsolidated joint ventures are collected over the underlying project's life and as homes and lots are delivered. Construction management fees from third-party customers are collected over the life of the contract and sales management fees from third-party customers are collected as homes close escrow.
In the 2019 second quarter, fee building revenues decreased 42% from the prior year period, driven by a decrease in construction activity at fee building communities in Irvine, California due to lower demand levels in that market. Additionally, management fees from joint ventures and construction management fees from third parties, which are included in fee building revenue, decreased year-over-year by $0.3 million for the 2019 second quarter. Included in fee building revenues for the three months ended June 30, 2019 and 2018 were (i) $21.2 million and $36.7 million of billings to land owners, respectively, and (ii) $1.1 million and $1.4 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively. Our fee building revenues have historically been concentrated with a small number of customers. For the three months ended June 30, 2019 and 2018, one customer comprised 95% and 95% , respectively, of fee building revenue.
The cost of fee building decreased in the 2019 second quarter compared to the prior year period due to the decrease in fee building activity mentioned above. The amount of G&A expenses included in the cost of fee building was $1.5 million and $1.8 million for the 2019 and 2018 second quarters, respectively. Fee building gross margin percentage decreased to 2.3% for

51



the three months ended June 30, 2019 from 2.8% in the prior year period primarily due to the decrease in construction management fees from third parties, partially offset by lower allocated G&A costs.
For the six months ended June 30, 2019 , fee building revenues decreased 49% from the prior year period, driven by the previously noted decrease in construction activity at fee building communities in Irvine, California. Included in fee building revenues for the six months ended June 30, 2019 and 2018 were (i) $39.6 million and $79.5 million of billings to land owners, respectively, and (ii) $2.3 million and $2.4 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively. Our fee building revenues have historically been concentrated with a small number of customers. For the six months ended June 30, 2019 and 2018, one customer comprised 93% and 96% , respectively, of fee building revenue.
The cost of fee building decreased in the first half of 2019 compared to the same period in 2018 due to the decrease in fee building activity mentioned above. The amount of G&A expenses included in the cost of fee building was $3.0 million and $3.4 million for the six months ended June 30, 2019 and 2018, respectively. Fee building gross margin percentage decreased to 2.2% for the six months ended June 30, 2019 from 2.6% in the prior year period due to the decrease in fee billings to land owners and lower management fees from joint ventures, partially offset by an increase in construction management fees from third parties and lower allocated G&A costs.
Selling, General and Administrative Expenses
 
Three Months Ended 
 June 30,
 
As a Percentage of Home Sales Revenue
 
Six Months Ended 
 June 30,
 
As a Percentage of Home Sales Revenue
 
 
 
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Selling and marketing expenses
$
9,683

 
$
9,466

 
6.9
%
 
8.0
%
 
$
18,362

 
$
16,105

 
7.7
 %
 
8.2
%
General and administrative expenses ("G&A")
5,841

 
5,979

 
4.2
%
 
5.1
%
 
13,232

 
11,998

 
5.5
 %
 
6.1
%
Total selling, marketing and G&A ("SG&A")
$
15,524

 
$
15,445

 
11.1
%
 
13.1
%
 
$
31,594

 
$
28,103

 
13.2
 %
 
14.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
G&A
$
5,841

 
$
5,979

 
4.2
%
 
5.1
%
 
$
13,232

 
$
11,998

 
5.5
 %
 
6.1
%
Less: Severance charges

 

 
%
 
%
 
(1,788
)
 

 
(0.8
)%
 
%
G&A, excluding severance charges
$
5,841

 
$
5,979

 
4.2
%
 
5.1
%
 
$
11,444

 
$
11,998

 
4.7
 %
 
6.1
%
 

 

 

 

 
 
 
 
 
 
 
 
Selling and marketing expenses
$
9,683

 
$
9,466

 
6.9
%
 
8.0
%
 
$
18,362

 
$
16,105

 
7.7
 %
 
8.2
%
G&A, excluding severance charges
5,841

 
5,979

 
4.2
%
 
5.1
%
 
11,444

 
11,998

 
4.7
 %
 
6.1
%
SG&A, excluding severance charges
$
15,524

 
$
15,445

 
11.1
%
 
13.1
%
 
$
29,806

 
$
28,103

 
12.4
 %
 
14.3
%
During the 2019 second quarter, our SG&A rate as a percentage of home sales revenue was 11.1% vs. 13.1% for the same period in 2018. The 200 basis point decrease was primarily due to improved leverage from higher home sales revenue, reduced marketing and advertising spend as compared to the 2018 second quarter and to a lesser extent, lower personnel expenses. These items were partially offset by higher amortization of capitalized selling and marketing costs related to the opening of certain higher-end model homes in late 2018.
During the six months ended June 30, 2019, our SG&A rate as a percentage of home sales revenue was 13.2% , down 110 basis points from the comparable prior year period. The 2019 period included $1.8 million in pretax severance charges taken in the 2019 first quarter related to right-sizing our operations by reducing headcount, including the departure of one of our executive officers. Excluding these charges, the Company's SG&A rate for the six months ended June 30, 2019 was 12.4% compared to 14.3% in the prior year period. The 190 basis point decrease was due to improved leverage from higher home sales revenue, a year-over-year reduction in marketing and advertising spend, and to a lesser extent, lower personnel expenses. Offsetting these items were higher amortization of capitalized selling and marketing costs discussed above. SG&A excluding severance charges as a percentage of home sales revenue is a non-GAAP measure. See the table above reconciling this non-GAAP financial measure to SG&A as a percentage of home sales revenue, the nearest GAAP equivalent.

52



Equity in Net Income (Loss) of Unconsolidated Joint Ventures
As of June 30, 2019 and 2018 , we had ownership interests in 10 unconsolidated joint ventures, of which six have active homebuilding or land development operations. We own interests in our unconsolidated joint ventures that generally range from 5% to 35% and these interests vary by entity.
The Company’s share of joint venture income for the 2019 second quarter was $0.2 million as compared to a $0.1 million loss for the 2018 period. For the six months ended June 30, 2019 and 2018, the Company's share of joint venture income was $0.4 million and $0.2 million , respectively. The year-over-year increase in joint venture income for the three and six months ended June 30, 2019 was primarily related to an increase in home deliveries and home sales revenue at our Mountain Shadows luxury community in Paradise Valley, AZ.
The following sets forth supplemental operational and financial information about our unconsolidated joint ventures. Such information is not included in our financial data for GAAP purposes, but is recognized in our results as a component of equity in net income (loss) of unconsolidated joint ventures. This data is included for informational purposes only.
 
Three Months Ended 
 June 30,
 
 
 
Six Months Ended 
 June 30,
 
 
  
 
Increase/(Decrease)
 
 
Increase/(Decrease)
  
2019
 
2018
 
Amount
 
%
 
2019
 
2018
 
Amount
 
%
 
(Dollars in thousands)
Unconsolidated Joint Ventures - Operational Data
 
 
 
 
 
 
 
 
 
 
Net new home orders
28

 
42

 
(14
)
 
(33
)%
 
64

 
78

 
(14
)
 
(18
)%
New homes delivered
53

 
36

 
17

 
47
 %
 
90

 
68

 
22

 
32
 %
Average sales price of homes delivered
$
954

 
$
832

 
$
122

 
15
 %
 
$
985

 
$
900

 
$
85

 
9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home sales revenue
$
50,567

 
$
29,938

 
$
20,629

 
69
 %
 
$
88,694

 
$
61,178

 
$
27,516

 
45
 %
Land sales revenue
8,511

 
3,941

 
4,570

 
116
 %
 
12,671

 
4,714

 
7,957

 
169
 %
Total revenues
$
59,078

 
$
33,879

 
$
25,199

 
74
 %
 
$
101,365

 
$
65,892

 
$
35,473

 
54
 %
Net income
$
1,790

 
$
(286
)
 
$
2,076

 
726
 %
 
$
2,303

 
$
518

 
$
1,785

 
345
 %
 
 
 
 
 
 
 
 
 
Selling communities at end of period
 
6

 
7

 
(1
)
 
(14
)%
Backlog (dollar value)
 
$
44,775

 
$
70,851

 
$
(26,076
)
 
(37
)%
Backlog (homes)
 
50

 
90

 
(40
)
 
(44
)%
Average sales price of backlog
 
$
896

 
$
787

 
$
109

 
14
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Homebuilding lots owned and controlled
 
121

 
273

 
(152
)
 
(56
)%
Land development lots owned and controlled
 
1,924

 
2,305

 
(381
)
 
(17
)%
Total lots owned and controlled
 
2,045

 
2,578

 
(533
)
 
(21
)%

Gain on Early Extinguishment of Debt
    
During the 2019 second quarter, the Company repurchased and retired approximately $7.0 million in face value of its 7.25% Senior Notes due 2022. The Notes were purchased at 90.82% of face value, for a cash payment of $6.3 million . The Company recognized a $0.6 million gain on the early extinguishment of debt, and the unamortized discount, premium and debt issuance costs associated with the retired notes totaling approximately $90,000 were written off. Total repurchases of the Notes for the six months ended June 30, 2019 equaled approximately $12.0 million in face value at 90.58% of face value, for a cash payment of $10.9 million . The Company recognized a total gain on early extinguishment of debt of $1.0 million and wrote off approximately $160,000 of unamortized discount, premium and debt issuance costs associated with the Notes retired during the six months ended June 30, 2019.

53




Provision/Benefit for Income Taxes

For the 2019 second quarter, the Company recorded a $1.0 million provision for income taxes compared to $0.1 million provision for the 2018 second quarter. For the six months ended June 30, 2019 , the Company recorded an income tax provision of $0.3 million compared to an $0.8 million benefit for the prior year period. For the three months ended June 30, 2019 and 2018, the Company's effective tax rate was 38.0% and 36.8%, respectively, with the rate increase attributable to the impact of expected deduction limitations had on each period. The tax rates for the six month periods were impacted by discrete items. The Company recorded a $0.3 million discrete provision in the first six months of 2019 related to stock compensation and state tax rate changes while a $0.4 million discrete benefit was taken in the comparable 2018 period primarily related to energy credits.

Liquidity and Capital Resources
Overview
Our principal sources of capital for the six months ended June 30, 2019 were cash generated from home sales activities, borrowing from our credit facility, distributions from our unconsolidated joint ventures, and management fees from our fee building agreements. Our principal uses of capital for the six months ended June 30, 2019 were land purchases, land development, home construction, contributions and advances to our unconsolidated joint ventures, repurchases of the Company's common stock and bonds, paydowns on our credit facility, and payment of operating expenses, interest and routine liabilities.
Cash flows for each of our communities depend on their stage in the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our real estate inventories and not recognized in our consolidated statement of operations until a home is delivered, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with home and land construction were previously incurred. From a liquidity standpoint, we are actively acquiring and developing lots to maintain or grow our lot supply and community count. As we expand our business, we expect cash outlays for land purchases, land development and home construction at times to exceed cash generated by operations. We are currently focused on reducing our debt levels and leverage and therefore expect to spend less on land purchases than we have over the last few years.
We ended the second quarter of 2019 with $48.2 million of cash and cash equivalents, a $6.0 million increase from December 31, 2018 . Over the next few quarters we expect to generate cash from the sale of our inventory, including unsold and presold homes under construction as well as land sales. After reducing our debt and leverage levels within our target range, we intend to deploy a portion of cash generated from the sale of inventory to acquire and develop strategic, well-positioned lots that represent opportunities to generate future income and cash flows by allocating capital to best position the Company for long-term success.
As of June 30, 2019 and December 31, 2018 , we had $5.6 million and $8.5 million , respectively, in accounts payable that related to costs incurred under our fee building agreements. Funding to pay these amounts is the obligation of the third-party land owner, which is generally funded on a monthly basis. Similarly, contracts and accounts receivable and due from affiliates as of the same dates included $6.3 million and $8.8 million , respectively, related to the payment of the above payables.
We intend to utilize both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from continuing operations, to operate our business. As of June 30, 2019 , we had outstanding borrowings of $313.0 million in aggregate principal related to our Senior Notes due 2022 and $66.0 million related to our revolving credit facility. We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the ability of particular assets, and our Company as a whole, to generate cash flow to cover the expected debt service. In addition, our debt contains certain financial covenants that limit the amount of leverage we can maintain.
We intend to finance future acquisitions and developments with what we believe to be the most advantageous source of capital available to us at the time of the transaction, which may include unsecured corporate level debt, property-level debt, and other public, private or bank debt, seller land banking arrangements, or common and preferred equity.


54



Senior Notes Due 2022
On March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Unsecured Notes due 2022 (the "Existing Notes"), in a private placement. The Notes were issued at an offering price of 98.961% of their face amount, which 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 revolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is payable semiannually in arrears on April 1 and October 1. The maturity date of the Notes is April 1, 2022. The Notes were exchanged in an exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act of 1933 and are freely tradeable in accordance with applicable law. During the first half of 2019, the Company repurchased approximately $12.0 million of the Notes at 90.58% of face value reducing the outstanding aggregate principal amount to $313.0 million.
The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. The leverage and interest coverage conditions are summarized in the table below, as described and defined further in the indenture for the Notes. Exceptions to the additional indebtedness limitation include, among other things, borrowings of up to $260 million under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2017 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of $15 million. The Notes are guaranteed by all of the Company's 100% owned subsidiaries, for more information about these guarantees, please see Note 17 of the notes to our condensed consolidated financial statements.
 
June 30, 2019
Financial Conditions
Actual
 
Requirement
 
 
Fixed Charge Coverage Ratio: EBITDA to Consolidated Interest Incurred; or
1.6

 
> 2.0 : 1.0
Leverage Ratio: Indebtedness to Tangible Net Worth
1.57

 
< 2.25 : 1.0
As of June 30, 2019 , we were able to satisfy the leverage condition.

Senior Unsecured Revolving Credit Facility
The Company's senior unsecured revolving credit facility ("Credit Facility") is with a bank group and matures on September 1, 2020. Total commitments under the Credit Facility are $200 million with an accordion feature that allows the facility size thereunder to be increased up to an aggregate of $300 million , subject to certain conditions, including the availability of bank commitments.
As of June 30, 2019 , we had $66.0 million of outstanding borrowings under the Credit Facility. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin ranging from 2.25% to 3.00% depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter. As of June 30, 2019 , the interest rate under the Credit Facility was 5.40% . Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as defined in the Credit Facility, including, but not limited to, those listed in the following table.

55



 
June 30, 2019
 
Financial Covenants
Actual
 
Covenant
Requirement
 
 
(Dollars in thousands)
 
Unencumbered Liquid Assets (Minimum Liquidity Covenant)
$
48,224

 
$
10,000

(1)  
EBITDA to Interest Incurred (2)
1.55

 
> 1.75 : 1.0

 
Tangible Net Worth (3)
$
239,098

 
$
188,362

 
Leverage Ratio
58.5%

 
< 65%

 
 
(1)
So long as the Company is in compliance with the interest coverage test (see Note 2), the minimum unencumbered liquid assets that the Company must maintain as of the quarter end measurement date is $10 million.
(2)
If the EBITDA to Interest Incurred test is not met, it will not be considered an event of default so long as the Company maintains unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred (as defined in the Credit Facility agreement) which was $30.5 million as of June 30, 2019 . The Company was in compliance with this requirement with an unrestricted cash balance of $48.2 million at June 30, 2019 .
(3)
The Credit Facility previously applied an "adjusted leverage ratio" test computed as total joint venture debt divided by total joint venture equity. This covenant ceased to apply as of September 30, 2017 because our consolidated tangible net worth exceeded $250 million in that quarter. Once the adjusted leverage ratio ceased to apply, consolidated tangible net worth is reduced by an adjustment equal to the aggregate amount of investments in and advance to unconsolidated joint ventures that exceed 35% of consolidated tangible net worth as calculated without giving effect to this adjustment (the "Adjustment Amount"). The Adjustment Amount was considered in the calculation of consolidated tangible net worth.
As of June 30, 2019 , we were in compliance with all financial covenants under our Credit Facility.
Stock Repurchase Program
On May 10, 2018, our board of directors approved a stock repurchase program (the "Repurchase Program") authorizing the repurchase of the Company's common stock with an aggregate value of up to $15 million. Repurchases of the Company's common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in block trades or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The Repurchase Program does not obligate the Company to repurchase any particular amount or number of shares of common stock, and it may be modified, suspended or discontinued at any time. The timing and amount of repurchases are determined by the Company’s management at its discretion and be based on a variety of factors, such as the market price of the Company’s common stock, corporate and contractual requirements, general market and economic conditions and legal requirements. For the six months ended June 30, 2019, the Company repurchased and retired 153,916 shares totaling $1.0 million. As of June 30, 2019 , the Company had repurchased and retired in aggregate 1,157,032 shares totaling $9.6 million and had remaining authorization to purchase $5.4 million of common shares.
  


56



Debt-to-Capital Ratios
We believe that debt-to-capital ratios provide useful information to the users of our financial statements regarding our financial position and leverage. Net debt-to-capital ratio is a non-GAAP financial measure. See the table below reconciling this non-GAAP measure to debt-to-capital ratio, the nearest GAAP equivalent.
 
June 30,
 
December 31,
 
2019
 
2018
 
(Dollars in thousands)
Total debt, net of unamortized discount, premium and debt issuance costs
$
375,060

 
$
387,648

Equity, exclusive of non-controlling interest
239,098

 
239,954

Total capital
$
614,158

 
$
627,602

Ratio of debt-to-capital (1)
61.1
%
 
61.8
%
 
 
 
 
Total debt, net of unamortized discount, premium and debt issuance costs
$
375,060

 
$
387,648

Less: Cash, cash equivalents and restricted cash
48,348

 
42,542

Net debt
326,712

 
345,106

Equity, exclusive of non-controlling interest
239,098

 
239,954

Total capital
$
565,810

 
$
585,060

Ratio of net debt-to-capital (2)
57.7
%
 
59.0
%
 

(1)
The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt, net of unamortized discount, premium and debt issuance costs by total capital (the sum of total debt, net of unamortized discount, premium and debt issuance costs plus equity), exclusive of non-controlling interest.  
(2)
The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is total debt, net of unamortized discount, premium and debt issuance costs less cash, cash equivalents and restricted cash to the extent necessary to reduce the debt balance to zero) by total capital, exclusive of non-controlling interest. The most directly comparable GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We believe that by deducting our cash from our debt, we provide a measure of our indebtedness that takes into account our cash liquidity. We believe this provides useful information as the ratio of debt-to-capital does not take into account our liquidity and we believe that the ratio net of cash provides supplemental information by which our financial position may be considered. Investors may also find this to be helpful when comparing our leverage to the leverage of our competitors that present similar information.

Cash Flows — Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
For the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 , the comparison of cash flows is as follows:
Net cash provided by operating activities was $18.9 million for the six months ended June 30, 2019 versus net cash used in operating activities of $61.5 million for the six months ended June 30, 2018 . The year-over-year change was primarily a result of a net increase in cash inflow related to the reduction in real estate inventories to $25.0 million for the 2019 period as compared to an outflow of $53.1 million for the 2018 period. The change in real estate inventories cash flow was driven by the year-over-year increase in proceeds from home sales in the first half of 2019, and a decrease in land acquisition and development spend.
Net cash provided by investing activities was $0.8 million for the six months ended June 30, 2019 compared to net cash used in investing activities of $3.1 million for the six months ended June 30, 2018 . For the six months ended June 30, 2019 , net distributions from unconsolidated joint ventures were $0.8 million compared to net contributions and advances to unconsolidated joint ventures of $3.1 million for the six months ended June 30, 2018 . The increase in net distributions for the 2019 period was primarily due to a $3.1 million year-over-year reduction in joint venture contributions to one land development joint venture in Northern California.
Net cash used in financing activities was $13.9 million for the six months ended June 30, 2019 versus $32.0 million of net cash provided by financing activities for the six months ended June 30, 2018 . The outflow in 2019 reflects $10.9 million of cash paid to repurchase and retire our 7.25% Senior Notes due 2022 as well as a net pay down on our credit facility of $1.5 million compared to net borrowings of $35 million in the prior year.

57



Off-Balance Sheet Arrangements and Contractual Obligations

Option Contracts
In the ordinary course of business, we enter into land option contracts in order to procure lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchase contracts typically require a cash deposit and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and financial intermediaries as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, to reduce the use of funds from our corporate financing sources, and to enhance our return on capital. Option contracts generally require a nonrefundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. We generally have the right at our discretion to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash deposit with no further financial responsibility to the land seller or financial intermediary. In some instances, we may also expend funds for due diligence and development activities with respect to our option contracts prior to purchase which we would have to write off should we not purchase the land. As of June 30, 2019 , we had $15.3 million of nonrefundable and $0.7 million of refundable cash deposits pertaining to land option contracts and purchase contracts with an estimated aggregate remaining purchase price of $118.1 million , net of deposits. These cash deposits are included as a component of our real estate inventories in our condensed consolidated balance sheets.
Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.

Joint Ventures
We enter into land development and homebuilding joint ventures from time to time as means of:
leveraging our capital base
accessing larger lot positions
expanding our market opportunities
managing financial and market risk associated with land holdings
These joint ventures have historically obtained secured acquisition, development and/or construction financing which reduces the use of funds from our corporate financing sources.
We are subject to certain contingent obligations in connection with our unconsolidated joint ventures. The Company has provided credit enhancements in connection with joint venture borrowings in the form of loan-to-value ("LTV") maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements comprise acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of June 30, 2019 and December 31, 2018 , $24.4 million and $41.3 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 $4.9 million and $7.3 million as of June 30, 2019 and December 31, 2018 , respectively. In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion guaranties. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion guaranties to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to

58



the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from customary "bad boy acts" of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy. Additionally, in some cases, under our joint venture agreements, our shares of profits and losses may be greater than our contribution percentage.
For more information about our off-balance sheet arrangements, please see Note 11 to our condensed consolidated financial statements.
As of June 30, 2019 , we held membership interests in 10 unconsolidated joint ventures, six of which related to homebuilding activities and four related to land development as noted below. Of the 10 joint ventures, six have active homebuilding or land development activities ongoing and the balance are effectively inactive with only limited warranty activities. We were a party to two loan-to-value maintenance agreements related to unconsolidated joint ventures as of June 30, 2019 . The following table reflects certain financial and other information related to our unconsolidated joint ventures as of June 30, 2019 :
 
 
 
June 30, 2019
 
Year
Formed
Location
 
Total Joint Venture
 
NWHM Equity (3)
Debt-to-Total
Capital-ization
Loan-to-
Value
Maintenance
Agreement
Estimated Future
Capital
Commitment (4)
Lots Owned and Controlled
Joint Venture (Project Name)
Contribu-tion % (1)
Assets
Debt (2)
Equity
 
 
 
 
 
(Dollars in 000's)
 
TNHC-HW San Jose LLC (Orchard Park)
2012
San Jose, CA
15%
$
2,149

$

$
382

 
$
115

%
N/A
$


TNHC-TCN Santa Clarita LP (Villa Metro) (5)
2012
Santa
Clarita, CA
10%
903


211

 
53

%
N/A


TNHC Newport LLC (Meridian) (5)
2013
Newport
Beach, CA
12%
1,750


1,603

 
287

%
N/A


Encore McKinley Village LLC (McKinley Village)
2013
Sacramento, CA
10%
46,410

7,769

35,107

 
3,512

18
%
Yes

91

TNHC Russell Ranch LLC (Russell Ranch) (5)(6)(7)
2013
Folsom, CA
35%
59,553


49,654

 
9,553

%
N/A
10,651

631

TNHC-HW Foster City LLC (Foster Square) (6)
2013
Foster City, CA
35%
890


891

 
414

%
N/A


Calabasas Village LP (Avanti) (5)
2013
Calabasas,
CA
10%
12,398


11,483

 
1,147

%
N/A


TNHC-HW Cannery LLC (Cannery Park) (6)
2013
Davis, CA
35%
6,124


5,235

 
1,833

%
N/A

13

Arantine Hills Holdings LP (Bedford) (5)(6)
2014
Corona, CA
5%
215,299

16,230

185,425

 
9,272

8
%
No
1,467

1,280

TNHC Mountain Shadows LLC (Mountain Shadows)
2015
Paradise Valley, AZ
25%
48,535

16,565

27,265

 
6,830

38
%
Yes

30

Total Unconsolidated Joint Ventures
 
$
394,011

$
40,564

$
317,256

 
$
33,016

11
%
 
$
12,118

2,045

 

(1)
Actual equity interests may differ due to current phase of underlying project's life cycle. The contribution percentage reflects the percentage of capital we are generally obligated to contribute (subject to adjustment under the joint venture agreement) and generally (subject to waterfall provisions) aligns with our percentage of distributions. In some cases our share of profit and losses may be greater than our contribution percentage.
(2)
The carrying value of the debt is presented net of $0.2 million in unamortized debt issuance costs. Scheduled maturities of the unconsolidated joint venture debt as of June 30, 2019 are as follows: $16.7 million matures in 2019, $16.3 million matures in 2020, and $7.8 million matures in 2021. The $16.7 million of Mountain Shadows debt is due December 14, 2019; however, pursuant to the agreement, advances made related to the

59



construction of a presold home shall be due and payable 12 months after the initial advance of such loan with the option to extend an additional three months (provided no event of default has occurred).
(3)
Represents the Company's equity in unconsolidated joint ventures. Equity does not include $0.6 million of interest capitalized to certain investments in unconsolidated joint ventures which along with equity, are included in investments in and advances to unconsolidated joint ventures in the accompanying condensed consolidated balance sheets.
(4)
Estimated future capital commitment represents our proportionate share of estimated future contributions to the respective unconsolidated joint ventures as of June 30, 2019 . Actual contributions may differ materially.
(5)
Certain current and former members of the Company's board of directors are affiliated with entities that have an investment in these joint ventures. See Note 12 to the condensed consolidated financial statements.
(6)
Land development joint venture.
(7)
The Company's share of capital contributions for certain improvements in the aggregate amount of approximately $26 million is 50%.

As of June 30, 2019 , the unconsolidated joint ventures were in compliance with their respective loan covenants, where applicable, and we were not required to make any loan-to-value maintenance related payments during the three and six months ended June 30, 2019 .
Inflation
Our homebuilding and fee building segments can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we may be unable to offset cost increases with higher selling prices.
Seasonality
Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes five to nine months to construct a new home, depending on whether it is single-family detached or multi-family attached, we typically deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and a higher level of cash receipts from home deliveries occurs during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry and the opening and closeout of communities.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future.
Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018 .
Recently Issued Accounting Standards
The portion of Note 1 to the accompanying notes to unaudited condensed consolidated financial statements under the heading "Recently Issued Accounting Standards" included in this quarterly report on Form 10-Q is incorporated herein by reference.

JOBS Act
We qualify as an "emerging growth company" pursuant to the provisions of the JOBS Act. For as long as we are an "emerging growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory "say-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation.

60




In addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An "emerging growth company" can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to "opt out" of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

There has been no material change to the information about our market risk as disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 .

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving our desired disclosure control objectives. In designing controls and procedures specified in the SEC's rules and forms, and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.
At the end of the period being reported upon, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2019 .

Changes in Internal Controls
There was no change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


61



PART II - OTHER INFORMATION

Item 1.      Legal Proceedings
We are involved in various claims and litigation arising in the ordinary course of business. We do not believe that any such claims and litigation will materially affect our results of operations or financial position.
Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds
None.
Purchases of Equity Securities by the Issuer

The Company did not make any purchases of its common stock during the three months ended June 30, 2019.


62



Item 3.      Defaults Upon Senior Securities
 
None.

Item 4.      Mine Safety Disclosures

Not applicable.

Item 5.      Other Information
    
None.


63



Item 6.      Exhibits
Exhibit
Number
 
Exhibit Description
 
 
3.1
 
 
 
3.2
 
 
 
3.3
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
4.3
 
 
 
 
10.1*
 
 
 
 
31.1*
 
 
 
31.2*
 
 
 
32.1**
 
 
 
32.2**
 
 
 
 
101*
 
The following materials from The New Home Company Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.
 
 
 
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
*
Filed herewith
**
Furnished herewith. The information in Exhibits 32.1 and 32.2 shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act, or the Exchange Act (including this Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.



64



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
 
 
 
 
 
 
 
 
The New Home Company Inc.
 
 
 
 
 
 
 
 
By:
 
/s/ H. Lawrence Webb
 
 
 
 
 
 
H. Lawrence Webb
 
 
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ John M. Stephens
 
 
 
 
 
 
John M. Stephens
 
 
 
 
 
 
Chief Financial Officer
Date: July 30, 2019


65
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