0001574596 New Home Co Inc. false --12-31 FY 2020 0.01 0.01 50,000,000 50,000,000 0 0 0.01 0.01 500,000,000 500,000,000 18,122,345 18,122,345 20,096,969 20,096,969 1 1 1 95 1 1 1 2 0 0 3 5 0 0 18,000 1 0 0 0 2 2 10 10 26,663 0.5 21,000 0.1 30,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10 1 3 10 0 0 0 21 21 3 2 Some amounts do not add to our full year results presented on our consolidated statement of operations due to rounding differences in quarterly and annual weighted average share calculations. Represents the peak number of real estate projects that we had during each respective year. The number of projects outstanding at the end of each year may be less than the number of projects listed herein. 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 December 31, 2020 and 2019. The carrying value for the 2025 Notes, as presented at December 31, 2020, is net of the unamortized unamortized debt issuance costs of $5.1 million. The unamortized debt issuance costs are not factored into the estimated fair value. Capitalized selling and marketing costs includes costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and model furnishings, and also includes model landscaping costs, which were $2.2 million and $2.6 million as of December 31, 2020 and 2019, respectively. The Company depreciated $6.5 million and $8.7 million, of capitalized selling and marketing costs to selling and marketing expenses during the years ended December 31, 2020 and 2019, respectively. Balance represents the Company's interest, as reflected in the financial records of the respective joint ventures. At December 31, 2019, this balance differs from the investment in and advances to unconsolidated joint ventures balance reflected in the Company's consolidated balance sheets by $2.5 million due to interest capitalized to the Company's investment in joint ventures and certain other differences in outside basis. The Company adjusted its warranty insurance receivable upward by $1.2 million during 2020 to true-up the receivable to its estimate of qualifying reimbursable expenditures which resulted in pretax income of $0.3 million for the year ended December 31, 2020. The Company adjusted its warranty insurance receivable upward by $1.4 million during 2019 to true-up the receivable to its estimate of qualifying reimbursable expenditures which resulted in pretax income of the same amount for the year ended December 31, 2019. Included in the amount at December 31, 2020 and 2019 is approximately $2.5 million and $1.9 million, respectively, of warranty liabilities estimated to be recovered by our insurance policies. During 2019, we recorded litigation reserves totaling $5.9 million related to ordinary course litigation which developed and became probable and estimable within the 2019 fourth quarter. Further, as a result of the development of the construction defect related claims within the litigation reserve and their impact to the Company's litigation reserve estimates for IBNR future construction defect claims, we recorded an additional $5.0 million of IBNR construction defect claim reserves resulting in aggregate litigation reserves totaling $10.9 million as of December 31, 2019. Because the self-insured retention deductibles had been met for each claim covered by the $5.9 million reserve, and the self-insured retention deductibles are expected to be met for the $5.0 million IBNR construction defect claim reserves, the Company recorded estimated insurance receivables of $10.9 million offsetting the litigation reserves as of December 31, 2019. During the year ended December 31, 2020, $4.7 million was paid by our insurance carrier directly to claimants related to two claims, and the Company decreased its litigation reserve estimate by $0.2 million for one claim and decreased the IBNR litigation reserve by a net $0.4 million ($1.0 million corresponding decrease in insurance receivables, and a $0.6 million increase in cost of sales) resulting in a litigation reserve balance of $5.6 million at December 31, 2020. During 2020 the Company recorded an adjustment of $0.9 million to increase its warranty accrual for homebuilding projects based on the expected warranty experience rates which resulted in a corresponding increase of $1.2 million to warranty insurance recoveries included in other assets in the accompany consolidated balance sheets and a $0.3 million credit to cost of sales in the accompanying consolidated statement of operations. During 2019, the Company recorded a warranty accrual adjustment of $0.5 million due to higher expected warranty expenditures which resulted in an increase of the same amount to cost of home sales in the accompanying consolidated statement of operations. During 2018, the estimated amount to be covered by our insurance policies was reduced by $0.3 million. Netted against the amount recorded in 2018 is a warranty accrual adjustment of $43,000 related to higher expected warranty expenditures which resulted in an increase of $43,000 to cost of home sales in the accompanying consolidated statement of operations. Lease payments include options to extend lease terms that are reasonably certain of being exercised. The weighted average remaining lease term and weighted average incremental borrowing rate used in calculating our lease liabilities were 4.2 years and 3.7%, respectively, at December 31, 2020 and 1.9 years and 4.4%, respectively, at December 31, 2019. The amount at December 31, 2020 includes approximately $27.4 million of expected federal income tax refunds due to the recent enactment of the CARES Act signed into law on March 27, 2020 which allows net operating losses generated from 2018 – 2020 to be carried back five years. The Company recorded insurance receivables of $10.9 million in connection with $10.9 million of litigation reserves recorded as of December 31, 2019. During 2020, $4.7 million was paid by our insurance carrier directly to claimants related to two claims, and the Company reduced its insurance receivable estimate by $0.2 million for one claim and adjusted the incurred but not reported ("IBNR") litigation reserve by $1.2 million, resulting in an insurance receivable balance of $4.8 million at December 31, 2020 with a corresponding decrease recorded within litigation reserves and $0.2 million charged to cost of sales. For more information, please refer to Note 8. Balance represents equity in net loss of unconsolidated joint ventures included in the statements of operations related to the Company's investment in these two unconsolidated joint ventures. The balance may differ from the amount of profit or loss allocated to the Company as reflected in each joint venture's financial records primarily due to basis differences such as other-than-temporary impairment charges, interest capitalized to the Company's investment in joint ventures, and/or profit deferral from lot sales from the joint ventures to the Company. The carrying value of the 2022 Notes, as presented at December 31, 2019, is net of the unamortized discount of $1.1 million, unamortized premium of $0.9 million, and unamortized debt issuance costs of $3.0 million. The unamortized discount, unamortized premium and debt issuance costs are not factored into the estimated fair value. During 2020, the Company recorded an adjustment of $21,000 to decrease its warranty accrual for fee building projects based on the expected warranty experience rates which resulted in a corresponding decrease to fee building cost of sales in the accompanying consolidated statement of operations. In 2019, the Company recorded an adjustment of $0.1 million due to a lower experience rate of expected warranty expenditures for fee building projects which resulted in a reduction of the same amount to fee cost of sales in the accompanying consolidated statement of operations. During 2018, the warranty reserve and corresponding warranty insurance recoveries balances were increased by approximately $32,000, and the warranty reserve accrual was further adjusted by approximately $30,000 related to higher expected warranty expenditures which resulted in an increase to fee cost of sales of the same amount in the accompanying consolidated statement of operations. Amount does not include the cost of short-term leases with terms of less than one year which totaled approximately $0.2 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively, or the benefit from a sublease agreement of one of our office spaces which totaled approximately $0.2 million and $0.2 million for the years ended December 31, 2020 and 2019, respectively. 00015745962020-01-012020-12-31 0001574596us-gaap:CommonStockMember2020-01-012020-12-31 0001574596nwhm:SeriesAJuniorParticipatingPreferredShareRepurchaseRightsMember2020-01-012020-12-31 iso4217:USD 00015745962020-06-30 xbrli:shares 00015745962021-02-09 thunderdome:item 00015745962020-12-31 00015745962019-12-31 iso4217:USDxbrli:shares 0001574596us-gaap:HomeBuildingMember2020-01-012020-12-31 0001574596us-gaap:HomeBuildingMember2019-01-012019-12-31 0001574596us-gaap:HomeBuildingMember2018-01-012018-12-31 0001574596us-gaap:LandMember2020-01-012020-12-31 0001574596us-gaap:LandMember2019-01-012019-12-31 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2020 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.)

15231 Laguna Canyon Road, Suite 250

Irvine, California 92618

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code (949382-7800

 

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, par value $0.01 per share

NWHM

New York Stock Exchange

Series A Junior Participating Preferred Share Repurchase Rights--New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒ 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

1

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐ 

 

Indicate by check mark 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  ☒

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2020, based on the closing price of $3.36 as reported by the New York Stock Exchange was $46,031,980.

 

There were 18,071,979 shares of the registrant's common stock issued and outstanding as of February 9, 2021.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Stockholders to be held in 2021, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.

 

2

 
 

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED December 31, 2020 

 

 

 

Page

Number

Part I

 

 

 

Item 1

Business

5

Item 1A

Risk Factors

14

Item 1B

Unresolved Staff Comments

29

Item 2

Properties

30

Item 3

Legal Proceedings

30

Item 4

Mine Safety Disclosures

30

 

Part II

 

 

 

Item 5

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

31

Item 6

Selected Financial Data

32

Item 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

59

Item 8

Financial Statements and Supplementary Data

60

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

60

Item 9A

Controls and Procedures

60

Item 9B

Other Information

62

 

Part III

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

63

Item 11

Executive Compensation

63

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

63

Item 13

Certain Relationships and Related Transactions, and Director Independence

63

Item 14

Principal Accountant Fees and Services

63

 

Part IV

 

 

 

Item 15

Exhibits and Financial Statement Schedules

64

Item 16

Form 10-K Summary (Not Applicable)

 

Signatures

111

 

3

 

 

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K and other materials we have filed or will file with the Securities and Exchange Commission (the "SEC") (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act, as amended.  All statements contained in this annual report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. These forward-looking statements are frequently accompanied by words such as "believe," "anticipate," "intend," "estimate," "expect," "project," "plans," "could," "seeks" 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, financial needs and the potential impact of COVID-19. Such statements may include, but are not limited to information related to: anticipated operating results; home deliveries; the ability to acquire land and pursue real estate opportunities; our leverage; our plans to sell more affordably priced homes; inventory write-downs; the ability to gain approvals and open new communities; the ability to sell homes and properties; the ability to deliver homes from backlog; the ability to secure materials and subcontractors; joint ventures in which we are involved; anticipated results from our investments in unconsolidated entities; the ability to produce the liquidity and obtain capital necessary to expand and take advantage of opportunities; financial resources and condition; changes in revenues; changes in profitability; changes in margins; changes in accounting treatment; cost of sales; selling, general and administrative expenses; interest expense; community openings; seasonality; home warranty claims and reserves; legal proceedings; unrecognized tax benefits; anticipated effective tax rates; seasonality; dividends; sales paces and prices; trends and effects of home buyer cancellations; and growth and expansion.

 

From time to time, forward-looking statements also are included in other reports on Forms 10-Q and 8-K, in press releases, in presentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. This can occur as a result of incorrect assumptions or as a consequence of known or unknown risks and uncertainties. Many factors mentioned in this report or in other reports or public statements made by us, such as market conditions, government regulation and the competitive environment, will be important in determining our future performance. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.

 

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, including significant business, economic, competitive, regulatory and other risks and uncertainties. If any of those risks and uncertainties materialize, actual results could differ materially from those discussed in any such forward-looking statement.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

For a discussion of factors that we believe could cause our actual results to differ materially from expected and historical results, see "Item 1A - Risk Factors" in this annual report on Form 10-K. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.

 

4

 

PART I

 

Item 1.

Business

 

As used in this annual report on Form 10-K, unless the context otherwise requires or indicates, references to "the Company," "our company," "we," "our" and "us" refer to The New Home Company Inc. and its subsidiaries.  You should read the following in conjunction with the section titled "Risk Factors", which is included in Part I, Item 1A in this annual report on Form 10-K. 

 

Our Company

 

We are a new generation homebuilder focused on the design, construction and sale of innovative and consumer-driven homes in major metropolitan areas within select growth markets in California and Arizona, including Southern California, the San Francisco Bay area, metro Sacramento and the greater Phoenix area. We were founded in 2009, towards the end of an unprecedented downturn in the U.S. homebuilding industry, as The New Home Company LLC.  In January 2014, we renamed our company The New Home Company Inc. and completed our initial public offering of shares of our common stock. Since our initial public offering, we have transformed from a primarily high-end builder in California with a majority of revenues derived from joint venture projects to a more diversified builder with expanded product offerings to include more affordably priced homes and geographic diversification with the vast majority of revenues derived from wholly owned communities.  Despite a move down in price point, we continue to emphasize quality, design and customer service as integral to our brand. Among the numerous customer service, quality and design awards we have received, Eliant Homebuyer Survey Company has rated our company in the top two of overall homebuyer satisfaction for the past eight years, as well as America’s top builder in four of the past eight years. We’ve been recognized as having one of the top communities or master plans in the United States for five consecutive years.  Since we were founded, we've been awarded over 300 other architectural, design, sales and customer service awards including over 25 community of the year awards.

 

We are organized into three reportable segments: Arizona homebuilding, California homebuilding and fee building. Our California homebuilding operation is comprised of divisions in Northern California and Southern California.  Our primary business focus is building and selling homes for our own account and we also have a fee building business. For financial information about our segments, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 15 to the Consolidated Financial Statements.

 

Business Strategy

 

The New Home Company is a premium brand that emphasizes and has a reputation for customer service, quality and design, as well as strong relationships with key land sellers and developers within each of our local markets, that we believe differentiates us from our competitors.  We seek sites where we are rewarded for thoughtful land planning and architecture, quality construction, leading design, and excellent customer experience. Our core operating philosophy is to provide a positive, memorable experience for our home buyers by actively engaging with them in the building process, including through our design studios which allow buyers to personalize our home offerings. We believe that customer-focused community creation and product development, our reputation for high quality construction, as well as exemplary customer service, are key components of the lifestyle connection we seek to establish with each homebuyer. While we have strategically expanded our portfolio to include more affordable product offerings, we remain committed to our premium brand through The New Home Company credo, which we believe is critical to our success, comprised of the following pillars:

 

 

Among the most recognized builders in customer experience
 

Best-in-class quality
 

Leading design
 

Choice: Making our home yours
 

Giving Back

 

We seek to reduce upfront capital and exposure to land risk through the use of land options and other flexible land acquisition and development arrangements. The Company owned approximately 1,340 lots and had options to purchase an additional 678 lots as of December 31, 2020. We believe our lot option strategy allows us to leverage and establish a homebuilding platform focused on high-growth, land-constrained markets. In addition, we believe that our professional reputation and long-standing relationships with key land sellers, including masterplan community developers, brokers and other builders enable us to acquire well-positioned land parcels in our existing markets as well as new target markets. 

 

In addition, we also have a fee building business comprised primarily of building for third party landowners for a fee with such third party landowners paying or reimbursing the Company for all costs associated with construction. We believe our fee building business complements our business strategy as it leverages overhead and supplements income using nominal capital. 

 

 

5

 

Homebuilding Operations

 

We are currently focused on identifying unique sites and creating communities that allow us to design, construct and sell consumer-driven, single-family detached and attached homes in major metropolitan areas in Southern California, metro Sacramento, the San Francisco Bay area and the greater Phoenix area. Defining characteristics of our markets generally include barriers to entry, job growth, high employment to building permit ratios and increasing populations, which can create growing demand for new housing.  We have more recently expanded our portfolio to include more affordable offerings in strong locations, but remain committed to delivering a premium product and experience, which we believe differentiates us from our competitors.  As of December 31, 2020, the homes that we build range in price from approximately $300,000 to $1.3 million, with home sizes ranging from approximately 1,000 to 4,200 square feet. Our homebuilding operations are comprised of two reportable segments, Arizona homebuilding and California homebuilding.  Total homebuilding revenue contributed to 84%, 86%, and 76% of total revenue for the years ended December 31, 2020, 2019 and 2018, respectively. For the years ended December 31, 2020, 2019 and 2018, the average sales price of homes delivered from our wholly owned communities was approximately $768,000, $927,000, and $1.0 million, respectively.  

 

Additionally, we strive to enhance the home-buying experience and buyers’ personal investment in their homes by actively engaging them in the selection of design options and upgrades in many of our communities. We believe that our on-site design studios in such communities allow buyers to personalize our home offerings with dedicated designers who are knowledgeable about the attributes of the homes offered in the community. We believe that the active participation of buyers in selecting options and upgrades results in buyers becoming more personally invested in their homes. We also believe our emphasis on customer care provides us a competitive advantage. Our commitment to customer satisfaction is a key element of company culture, which fosters an environment where team members can innovate.

 

Fee Building Operations

 

Although our primary business focus is building and selling homes for our own account, we also selectively provide general contracting, construction management and coordination services, sales and marketing services and escrow coordination services as part of agreements with third-parties and the Company’s unconsolidated joint ventures. We refer to these projects as “fee building projects.”  Our fee business is comprised primarily of building for third party landowners for a fee with such third party landowners paying or reimbursing the Company for all costs associated with construction. Our fee building segment also includes our management fee revenues that we receive for serving as the managing member or other similar role in our joint ventures.  For the year ended December 31, 2020, 97% of our fee building revenue represents billings to third-party land owners for general contracting and construction management services and 3% represents management fees from unconsolidated joint ventures and third-party land owners for construction and sales management services. 

 

We believe our fee building business complements our homebuilding business as it leverages overhead and supplements income using nominal capital.  Our services with respect to fee building projects may include design, development, construction, escrow, and sales and marketing services. We earn revenue on our fee building projects either as a flat fee for the project or as a percentage of the cost or revenue of the project depending upon the terms of the agreement with our customer.  Under some fee arrangements we may also take title to lots immediately prior to the close of escrows with homebuyers in exchange for a warranty fee based on a percentage of the final sales price of the home. We usually act as the general contractor for our and our unconsolidated joint ventures’ projects and engage third party subcontractors for home construction and land development.

 

For the years ended December 31, 2020, 2019 and 2018, fee building revenue contributed to 16%, 14%, and 24%, respectively, of total revenue.  The Company’s fee building revenues have historically been concentrated with a small number of customers including Irvine Pacific, LP ("Irvine Pacific") who accounted for 15%, 14%, and 23% of our total consolidated revenues for the years ended December 31, 2020, 2019 and 2018, respectively.  However, in August 2020, Irvine Pacific made a decision to begin building homes using their own general contractor’s license, effectively terminating the Company’s fee building arrangement with Irvine Pacific moving forward. Although we do not expect to be engaged for new fee building contracts with them going forward, we are currently in the process of finishing certain existing homes under construction and generating revenues in connection therewith, which we expect will be completed in the first quarter of 2021.  The Company is actively seeking and entering into new fee building opportunities with other land developers with the objective of at least partially offsetting the expected reduction in Irvine Pacific business in future years, such as our new fee building relationship with FivePoint.  See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Fee Building", Note 1 "Revenue Recognition - Fee Building" to the Consolidated Financial Statements, and Item 1A, "Risk Factors - Risks Related to Our Business - A large proportion of our fee building revenue has been from one customer, and that customer relationship is ending" for further discussion of this revenue concentration.

 

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The following table shows the percentage of each segment’s revenue in relation to our consolidated total revenues for the years ended December 31, 2020, 2019 and 2018.  For additional information related to geographic location of our homebuilding revenues, see Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

 

   

Year Ended December 31,

 
   

(dollars in thousands)

 
   

2020

   

% of Total Revenues

   

2019

   

% of Total Revenues

   

2018

   

% of Total Revenues

 

Homebuilding revenues:

                                               

California home sales

  $ 383,536       76 %   $ 472,242       71 %   $ 504,029       76 %

California land sales

    157       0 %     41,664       6 %           %

Arizona home sales

    42,715       8 %     60,110       9 %           %

Total homebuilding revenues

    426,408       84 %     574,016       86 %     504,029       76 %

Fee building revenues, including management fees

    81,003       16 %     95,333       14 %     163,537       24 %

Total revenues

  $ 507,411       100 %   $ 669,349       100 %   $ 667,566       100 %

 

Summary of Owned and Controlled Lots

 

As of December 31, 2020, we owned or controlled an aggregate of 2,018 lots in our homebuilding segment and 54 lots through our fee building segment. The following table presents certain information with respect to our wholly owned and fee building lots as of December 31, 2020. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Lots Owned and Controlled” for further detail.

 

   

December 31,

 
           

Change

           

Change

         
   

2020

   

Amount

   

%

   

2019

   

Amount

   

%

   

2018

 
Lots Owned     1,340       (238 )     (15 )%     1,578       (89 )     (5 )%     1,667  

Lots Controlled(1)

    678       (445 )     (40 )%     1,123       (22 )     (2 )%     1,145  

Total Lots Owned and Controlled - Wholly Owned

    2,018       (683 )     (25 )%     2,701       (111 )     (4 )%     2,812  

Fee Building Lots(2)

    54       (1,081 )     (95 )%     1,135       329       41 %     806  

 


(1)

Includes lots that we control under purchase and sales agreements or option agreements with refundable and nonrefundable deposits that are subject to customary conditions and have not yet closed. There can be no assurance that such acquisitions will occur. 

(2)

Lots owned by third party property owners for which we perform general contracting or construction management services.

 

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Backlog

 

At December 31, 2020 and 2019, homes under contract, but not yet delivered (“backlog”) totaled 410 and 149, respectively, with an estimated sales value of $236.0 million and $125.8 million, respectively. We expect to deliver all of the homes in backlog at December 31, 2020 during 2021 under existing home order contracts or through the replacement of an existing contract with a new home order contract. The estimated backlog sales value at December 31, 2020 may be impacted by, among other things, subsequent home order cancellations, incentives provided, and/or options and upgrades selected. 

 

Acquisition Process

 

Our land acquisition strategy focuses on purchasing entitled finished, or partially improved land sufficient for construction of homes over a two- to three-year period from the initiation of homebuilding activity. We also selectively acquire parcels that require land development activities. Our acquisition process generally includes the following steps aimed at reducing development and market cycle risk:

 

 

review of the status of entitlements and other governmental processing, including title reviews;

 

identification of target buyer and appropriate housing product;

 

determination of land plan to accommodate desired housing product;

 

completion of environmental reviews and third-party market studies;

 

preparation of detailed budgets for all cost categories;

 

completion of due diligence on the land parcel prior to committing to the acquisition;

 

limitation on the size of an acquisition relative to the Company's pro forma capitalization; and

 

centralized acquisition procedure through a land committee and full Board approval process for larger acquisitions.

 

We also differentiate our acquisition strategy based on whether the land is in a masterplan community, or part of a larger development. For land which is not part of a larger development or masterplan, we generally enter into a purchase agreement with the land owner and deliver a deposit, which becomes nonrefundable upon the expiration of a specified due diligence period. The closing is generally tied to the date on which we have obtained development entitlements for the land. For land which is part of a larger development being developed by a master developer, we generally enter into a purchase agreement with the master developer and pay a deposit that becomes nonrefundable upon expiration of the due diligence period. The closing in master developments is generally tied to the issuance of final land development entitlements and completion of certain infrastructure and other improvements by the master developer. In master developments we may acquire all of the land at the closing or we may acquire the land in "phases". In master developments we may be required to (a) pay to the master developer a share of our net profit in excess of a specified margin (b) pay to the master developer marketing fees and/or (c) grant the master developer the right to repurchase the land if we fail to develop the land in accordance with applicable development requirements or wish to sell the land in bulk. Our acquisition and development financing is generally obtained using one or more of the following: (i) proceeds from the sale of debt securities, (ii) unsecured lines of credit; (iii) secured acquisition and development loans; and/or (iv) land bank arrangements with providers who take title to the land at closing subject to agreements which obligate us to perform all development activities with respect to the land and provide us with an option to purchase the land.

 

Construction, Marketing and Sales Process

 

We typically develop communities in phases based upon projected sales. We seek to control the timing of construction of subsequent phases in the same community based on sales demand in prior phases. Our construction process is driven by sales contracts that often precede the start of the construction of homes, however, depending on the price point, product, and buyer demand we also engage in some speculative building. The determination that a potential home buyer is qualified to obtain the financing necessary to complete the purchase is an integral part of our process. Once qualified, our designers, which are often at on-site design centers, work with the buyer to tailor the home to meet the buyer’s needs and budget. With the onset of COVID-19, we've focused on transforming our customer experience through digital options, including meeting virtually to review design center selections.  We use and our business relies upon general contractors' licenses and corporate real estate broker's licenses in order to build and sell homes.

 

Land Development and Construction

 

We customarily acquire improved or unimproved land zoned for residential use. To control larger land parcels or gain access to certain desirable parcels, we sometimes form land development joint ventures with third parties in order to provide us with a pipeline of land to acquire from the joint venture when the lots are developed. If we purchase raw land or partially developed land, we will perform development work that may include negotiating with governmental agencies and local communities to obtain any necessary zoning, environmental and other regulatory approvals and permits, and constructing, as necessary, roads, water, sewer and drainage systems and recreational facilities like parks, community centers, pools, and hiking and biking trails.

 

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The design of our homes must conform to zoning requirements, building codes and energy efficiency laws. As a result, we contract with a number of architects, engineers, and other consultants in connection with the design process. We act as a general contractor (and certain of our wholly owned subsidiaries hold the general contractor's licenses in California and Arizona) with our supervisory employees coordinating most of the land development and construction work on a project. Independent architectural design, engineering and other consulting firms are generally engaged on a project-by-project basis to assist in project planning and community and home design, and subcontractors and trade partners are engaged to perform all of the physical development and construction work. Although we generally do not have long-term contractual commitments with our subcontractors, trade partners, suppliers or laborers, we maintain strong and long-standing relationships with many of our subcontractors and trade partners. We believe that our relationships with subcontractors and trade partners have been enhanced through involving them prior to the start of a new community, maintaining our schedules and making timely payments. 

 

Sales and Marketing

 

In connection with the sale and marketing of our homes, we make extensive use of advertising and other promotional activities, including through our website, social-media, brochures, direct mail and other community-specific collateral materials.  We expend great effort and cost in designing and merchandising our model homes, which play an important role in our marketing. Interior merchandising varies among the models and is carefully selected to reflect the lifestyles of prospective buyers. With the onset of the COVID-19 pandemic and a general shift in consumer behaviors, we have focused on transforming our customer experience online through innovative digital options through our website www.NWHM.com, including (i) shifting to a remote selling environment through the use of our online sales concierges; and (ii) providing virtual options for online home tours, design center selections and new home demonstrations.  The information contained in, or that can be accessed through,  our website is not incorporated by reference and is not a part of this annual report on Form 10-K.

 

We sell our homes through our own sales representatives and through the use of outside brokers. It is also fairly common that a third party broker representing a homebuyer receives co-broker commissions in connection with a sale. One of our wholly owned subsidiaries holds the corporate broker's licenses in California and Arizona. Our in-house sales force works from sales offices located in model homes or sales centers close to, or within each community. Sales representatives assist potential buyers by providing them with floor plan, price and community amenity information, construction timetables, and tours of model homes. As a result of COVID-19, we also began providing for self-guided tour options to allow homebuyers to tour model homes safely, privately and at their leisure. In addition, our sales offices operated "by appointment only" and at limited capacity frequently throughout the 2020 year.

 

Generally, we build model homes at each project and have them professionally decorated and landscaped to display design features and options available for purchase in the design center. We believe that model homes play a significant role in helping homebuyers understand the efficiencies and value provided by each floor plan type. Structural changes in design from the model homes, other than those predetermined, are not generally permitted, but homebuyers may select various other optional construction and design amenities. The specific options selected for each community are based upon the price of the home and anticipated buyer preferences. Options include structural (room configurations or pre-determined additional square footage), electrical, plumbing and finish options (flooring, cabinets, fixtures). 

 

We typically sell homes using sales contracts that include cash deposits by the purchasers. Most homebuyers utilize long-term mortgage financing to purchase a home, and mortgage lenders will usually make loans only to qualified borrowers. Before entering into sales contracts, we pre-qualify many of our customers through a third party preferred mortgage provider, which provider varies depending on the market. However, purchasers can generally cancel sales contracts if they are unable to sell their existing homes, if they fail to qualify for financing, or under certain other circumstances. For our communities, the cancellation rate of buyers who contracted to buy a home but did not close escrow as a percentage of overall orders was 9%, 11%, and 10% for the years ended December 31, 2020, 2019 and 2018, respectively. Cancellation rates are subject to a variety of factors, including those beyond our control, such as adverse economic or housing market conditions and increases in mortgage interest rates. The cancellation rate for 2020 was impacted by increased cancellations in March and April 2020 as a result of the economic impact COVID-19 had on our buyers’ confidence. However, consumer confidence rebounded in the latter part of the 2020 second quarter with the 2020 cancellation rate declining compared to 2019.  

 

Quality Control and Customer Service

 

We pay particular attention to the product design process and carefully consider quality and choice of materials in order to attempt to eliminate building deficiencies. The quality and workmanship of the subcontractors and trade partners we employ are monitored using our personnel and third-party consultants. We make regular inspections and evaluations of our subcontractors and trade partners to seek to ensure that our standards are met.

 

We utilize a third party quality control provider and maintain customer service staff whose role includes providing a positive experience for each customer throughout the delivery and post-delivery periods. These employees are responsible for providing after-sales customer service, including the coordination of warranty requests. Our quality and service initiatives include taking homebuyers on a comprehensive tour of their home during construction and prior to delivery. In addition, we generally use a third party, Eliant, to conduct homebuyer surveys in order to improve our performance and evaluate our standards of quality and customer satisfaction.

 

9

 

Insurance and Warranty Program

 

We provide a limited one-year warranty to our homeowners covering workmanship and materials. In addition, we generally provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered by the applicable statute of repose, that covers certain defined construction defects. The limited warranty covering construction defects is transferable to subsequent buyers and provides for the resolution of unresolved construction-related disputes through binding arbitration. Additionally, we have dedicated customer service staff that work with our homebuyers and coordinate with subcontractors and trade partners, as necessary, during the warranty period. While our subcontractors who perform our homebuilding work generally provide us with an indemnity for claims relating to their workmanship and materials, we also purchase general liability insurance that covers development and construction activity at each of our communities. Our subcontractors are usually covered by these programs through an owner-controlled insurance program, or "OCIP." Consultants such as engineers and architects are generally not covered by the OCIP but are required to maintain their own insurance. In general, we maintain insurance, subject to deductibles and self-insured retentions, to protect us against various risks associated with our activities, including, among others, general liability, "all-risk" property, construction defects, workers’ compensation, automobile, and employee fidelity. Our warranty and litigation reserves are presented on a gross basis before coverage from insurance, and expected recoveries from insurance carriers are presented as a receivable, the net result of which is equivalent to our expected costs associated with the deductibles and self-insured amounts for warranty and construction defect claims.  For a further discussion of the risks associated with our warranty and insurance program, please see the risk factor under the heading "Risks Related to Laws and Regulations - We are subject to construction defect, warranty, and personal injury claims arising in the ordinary course of business that can be significant and could adversely affect our financial position and results of operations."

 

Seasonality and Cycles

 

We have experienced seasonal variations in our quarterly operating results and capital requirements in each of our California and Arizona homebuilding reportable segments as well as our fee building reportable segment. We typically take orders for more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy the deliveries in the second half of the year. Historically, our revenues and cash flows (exclusive of the amount and timing of land purchases and land sales, if applicable) from homebuilding operations are generally higher in the second half of the calendar year, particularly in the fourth quarter. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry and the opening, timing of closeout of communities, and other market factors.  For example, we experienced high demand during the fourth quarter of 2020, which we attribute to current market factors including low interest rates, a continued undersupply of homes, and consumers’ increased focus on the importance of home amid the COVID-19 pandemic.  Accordingly, as a result of the ongoing uncertainties and evolution of COVID-19, our traditional seasonal pattern was significantly impacted during 2020.  The homebuilding industry is cyclical. We continue to make investments in land, which is likely to utilize a significant portion of our cash resources, so long as we believe such investments will yield results that meet our investment criteria. 

 

Labor and Raw Materials

 

Typically, the raw materials and most of the components used in our business are available in the United States. Most are standard items carried by major suppliers. However, our industry experiences shortages in both raw materials and labor from time to time which is particularly acute in the markets in which we build in California and Arizona. In particular, in part due to the impacts of COVID-19 and also due to increasing demand, we have seen an increase in the costs and/or a decrease in the available supply of certain building materials, particularly with respect to lumber, and in certain cases supply chain disruptions causing delays. Increases in the cost of building materials and subcontracted labor may reduce gross margins from home sales to the extent that market conditions prevent the recovery of increased costs through higher home sales prices. These shortages and delays may result in delays in the delivery of homes under construction, reduced gross margins from home sales, or both. We continue to monitor the supply markets to achieve favorable prices. In addition, the imposition of tariffs on building materials frequently impacts the cost of construction and increases in costs may not be recovered by raising home prices due to affordability and market demand constraints.

 

Joint Ventures

 

Joint ventures were initially a significant part of our operations by assisting in leveraging our entity-level capital. Over the last year, joint ventures have become a much less meaningful component of our business. We own a minority interest in our unconsolidated joint ventures, but serve as the managing member or general partner of each of our joint ventures and typically earn a management fee. We currently have investments in six homebuilding and three land development joint ventures.  We consider a joint venture to be "active" if active homebuilding or land development activities are ongoing and the entity continues to own homebuilding lots or homes remaining to be sold. Joint ventures that are not "active" are considered "inactive" and generally only have warranty or limited close-out management and development obligations ongoing. As of the date of this filing, of our nine joint ventures, none of our joint ventures are "active". During the 2020 fourth quarter, our land development joint venture in Folsom, CA sold its remaining homebuilding lots, consisting of phases 2 and 3 of its masterplan, to a third party purchaser. In addition, we delivered the remaining homes in our homebuilding joint venture in Arizona in January of 2021 and we sold and closed the three remaining lots in our Cannery land development joint venture.  Additional information related to our unconsolidated joint ventures is set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Off-Balance Sheet Arrangements and Contractual Obligations -- Joint Ventures."  For a further discussion of the risks associated with our joint ventures, please see the risk factor regarding our joint venture investments under the heading "Risks Related to Financing and Indebtedness."

10

 

Competition

 

The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential construction companies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor, and employees. A number of our primary competitors are significantly larger, have a longer operating history and may have greater resources or lower cost of capital than us. We compete for customers primarily on the basis of home design and location, price, customer satisfaction, construction quality, reputation, and the availability of mortgage financing. We also compete for sales with individual resales of existing homes and with available rental housing. In the past several years, we have expanded our product offerings to include more affordably-priced homes to reach a deeper pool of qualified buyers and in connection with growing our overall community count. We anticipate that we will continue to build more affordably-priced homes. We believe there is more competition among homebuilding companies in more affordable product offerings than in the luxury and move-up segments, however, we also believe this is a prudent strategy as there is a larger population of qualified buyers in more affordable price points.  Our homes are competitively priced, but are not designed to be the lowest priced option in the market as we seek to attract consumers drawn to premium product and experience. For risks associated with the competition we face, please see the risk factor under the heading "Risks Related to Our Business - We may not be able to compete effectively against competitors in the homebuilding industry".

 

Government Regulation and Environmental Matters

 

We are subject to numerous local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, development, building design, construction, and similar matters, including local regulations that impose restrictive zoning and density requirements. In a number of our markets, there has been an increase in state and local legislation authorizing the acquisition of land as dedicated open space, mainly by governmental, quasi-public, and nonprofit entities. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented. Local governments also have broad discretion regarding the imposition of development fees and exactions for communities in their jurisdiction. Communities for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process. In addition, we are subject to various licensing, registration, and filing requirements in connection with the construction, advertisement, and sale of homes in our communities, including requirements imposed by Federal Housing Administration (FHA)-insured or Veterans Affairs (VA) for homes that will be sold with FHA or VA loans. The impact of these laws, regulations, and requirements has been to increase our overall costs, and they have delayed, and in the future may delay, the opening of communities, or have caused, and in the future may cause, us to conclude that development of particular communities would not be economically feasible, even if any or all necessary governmental approvals were obtained. A building moratorium can have the effect of precluding us entirely from building on one or more areas in which we operate.

 

We can also be impacted by unforeseen health, safety and welfare issues, regulated by local and state agencies. For example, as a result of the COVID-19 pandemic, local and state regulators implemented many restrictions, including social distancing, to prevent the spread of the virus. While most "stay at home" orders in the markets in which we operate have deemed homebuilding an essential business, any change to this designation could materially and adversely impact our operations if we were unable to sell and/or construct homes for any period of time.

 

In order to secure certain approvals in some areas, we may be required to provide affordable housing at below market rental or sales prices. The impact of these requirements on us depends on how the various state and local governments in the areas in which we engage, or intend to engage, in development implement their programs for affordable housing. To date, these restrictions have not had a material impact on us.

 

We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the environment. The particular environmental laws which apply to any given homebuilding site vary according to multiple factors, including the site’s location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. In addition, in those cases where an endangered or threatened species is involved, environmental rules and regulations can result in the restriction or elimination of development in identified environmentally sensitive areas. In some instances, we may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for related damages, including for bodily injury, and for investigation and clean-up costs incurred by such parties in connection with the contamination. A mitigation system may be installed during the construction of a home if a cleanup does not remove all contaminants of concern or to address a naturally occurring condition such as methane. Some buyers may not want to purchase a home with a mitigation system. Legislation related to climate change and energy efficiency can impose stricter building standards, which may increase our cost to build. From time to time, the EPA and similar federal or state agencies review homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber. Environmental laws and regulations and their enforcement may result in delays, may cause us to incur substantial compliance and other costs, and could prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas. We manage compliance with environmental laws at the division level with assistance and oversight from our corporate office. As part of the land acquisition due diligence process, we utilize environmental assessments to identify environmental conditions that may exist on potential acquisition properties. Presently, environmental assessments or our compliance with environmental laws and regulations have not had a material adverse effect on our operations, although they may do so in the future.

 

11

 

 

We use and our business relies upon general contractors' licenses and corporate real estate broker's licenses in order to build and sell homes. Failure to comply with laws regulating these licenses could result in loss of licensing and a restriction of our business activities in the applicable jurisdiction.

 

For a further discussion of the impact of govern regulations on our business, including the impact of environmental regulations, please see the risk factors included under the heading "Risks Related to Laws and Regulations."

 

Environmental Impact and Sustainability
 

Homebuilding impacts the environment in a variety of ways, including through the use of water, gas and electricity, transportation of building materials, and the increase in density by constructing homes in areas that were previously undeveloped. However, our new homes utilize innovative technologies and systems to vastly improve the energy and water efficiency of our homes compared to resale homes. For example, beginning in 2020, all of our homes constructed in California are equipped with a solar electric system.  We believe that the standards for new home construction mitigate impacts to the environment by increasing home energy efficiency and reducing the impact of construction on the environment (such as limiting discharge of storm water and impacts to wetlands), all while addressing the serious need for housing in this country.

 

California is at the forefront when it comes to sustainability, including green energy, water conservation and efficient construction standards. As a builder with much of its operations in California, we have made a dedicated effort to implement a variety of sustainable best practices in many of our communities, including the masterplan communities which we and our joint venture partners have created. For example, our Cannery master planned community features a working urban farm which serves as a training ground for beginning farmers while supplying the community with fresh seasonal produce when available. Non-potable water from an onsite agricultural well was designed to irrigate landscaped areas along roadways and within open-space greenbelts, parks and the urban farm. In January 2020, we launched "EVO Home Tech", our advanced home automation technology packages which provide our homebuyers with advanced connectivity and features such as smart light controls and thermostats to allow for more convenient control of energy consumption and enhanced sustainability. We believe these eco-friendly, thoughtful community features not only enhance the living experiences for our homebuyers but also promote a lifestyle that's good for the environment. 

 

Human Capital Resources

 

As of December 31, 2020, we had 209 employees, 92 of whom were executive, management and administrative personnel located in our offices, 47 of whom were sales and marketing personnel and 70 were involved in field construction. We believe our employees are among our most important resources and are critical to our continued success. We focus significant attention on attracting and retaining talented and experienced individuals to manage and support our operations. Management also reviews employee engagement and satisfaction surveys to monitor employee morale and receive feedback on a variety of issues. Our most recent survey, from November 2020, had approximately 99% participation and reflected that approximately 96% of our employees are positively engaged, which was up from 91% in the 2019 survey. This score is based on affirmative responses to factors such as being proud to work for New Home, a willingness to recommend New Home, an intent to stay with New Home for at the least the next 12 months, and achieving a feeling of personal accomplishment associated with the employee's work. Annually, our CEO shares results with all team members at regional all-employee meetings and each regional leader is tasked with identifying improvement plans. The insights gained from our employee engagement surveys have helped us drive significant improvements in the way our employees work and engage with one another. We also pay our employees competitively and offer a broad range of company-paid benefits, which we believe are competitive with others in our industry. The Company engages in a variety of learning and development opportunities with its employees. Examples of such opportunities include construction best practices training, education for managers on delivering performance feedback, and sales coaching programs.

 

We strive to provide a safe and healthy work environment for all employees. We believe that corporate social responsibility is a significant factor for our overall success. This includes adopting ethical practices to direct how we do business while keeping the interests of our stakeholders and the environment in mind, including valuing and challenging the talented men and women who comprise our workforce. To that end, we have a comprehensive Code of Business Conduct and Ethics applicable to all employees and an actively-managed ethics hotline. The Company is committed to creating and maintaining a community in which its employees are free from all forms of harassment and discrimination. We require employee training and protocols for preventing, reporting and addressing behavior that is not in line with our business standards, our core values, including, but not limited to, discriminatory or harassing behavior and sexual misconduct. Further, we believe it is important to treat all employees with dignity and respect. Employee diversity and inclusion are embraced and opportunities for training, growth, and advancement are strongly encouraged.  We are also committed to maintaining high standards in health and safety at all of our sites. We have a health and safety audit system that includes comprehensive independent third-party inspections.  Our Risk Management team has a training system and a safety enforcement system in place in the field, which have led to an increase in safety awareness and effectiveness.  

 

 

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During fiscal 2020, in response to the COVID-19 pandemic, we implemented safety protocols and new procedures to protect our employees, our subcontractors and our customers. These protocols include complying with social distancing and other health and safety standards as required by federal, state and local government agencies, taking into consideration guidelines of the Centers for Disease Control and Prevention and other public health authorities. In addition, we modified the way we conduct many aspects of our business to reduce the number of in-person interactions. For example, we significantly expanded the use of virtual interactions in all aspects of our business, including customer facing activities. Many of our administrative and operational functions during this time have required modification as well, including much of our office-based workforce working remotely. For a detailed discussion of the impact of the COVID-19 pandemic on our human capital resources, see our Risk Factor discussing the impacts of COVID-19 to our business under "Risks Related to Our Business" in Item 1A of this Form 10-K.

 

Our Offices and Available Information

 

Our principal executive offices are located at 15231 Laguna Canyon Rd, Suite 250, Irvine, California 92618. Our main telephone number is (949) 382-7800. Our internet website is www.NWHM.com. Our common stock is listed on the New York Stock Exchange (NYSE: NWHM). We make available through the "Investors" section of our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after filing with, or furnishing to, the SEC. Copies of these reports, and any amendment to them, are available free of charge upon request. We provide information about our business and financial performance, including our corporate profile, on our Investor Relations website. Additionally, we webcast our earnings calls and certain events we participate in with members of the investment community on our Investor Relations website. Further corporate governance information, including our Code of Business Conduct and Ethics, corporate governance guidelines, and board committee charters, is also available on our Investor Relations website. The information contained in, or that can be accessed through our website is not incorporated by reference and is not part of this annual report on Form 10-K.

 

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Item 1A.

Risk Factors

 

You should carefully consider the following risk factors, which address the material risks concerning our business, together with the other information contained in this annual report on Form 10-K. If any of the risks discussed in this annual report on Form 10-K occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the trading price of our common stock could decline significantly and you could lose part or all of your investment. Some statements in this annual report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the initial section of this annual report entitled "Cautionary Note Concerning Forward-Looking Statements."

 

Risks Related to Our Business

 

Our business has experienced material disruption as a result of the COVID-19 outbreak and could be materially and adversely disrupted by another pandemic, epidemic or outbreak of infectious disease, or similar public health threat, or fear of such an event, in the United States or elsewhere, and the measures implemented to address such an event by government agencies and authorities.

 

A pandemic, epidemic or similar serious public health issue, such as the outbreak of COVID-19, and the measures taken by international, federal, state and local governments, and other authorities to address it, could significantly disrupt our business for an extended period.  Further, a significant outbreak of contagious diseases, such as COVID-19, could result in a widespread health crisis that could adversely affect the global economy and financial markets, resulting in an economic downturn.  As a result, consumer confidence may wane and demand for our homes may decline having a material adverse impact on our consolidated financial statements.

 

On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak, and most states and municipalities similarly declared public health emergencies including the states in which we operate, California and Arizona. Along with these declarations, California and Arizona have enacted, at various times, ”stay-at-home”, “shelter-in-place” and other restrictive orders to contain and combat the outbreak and spread of COVID-19 that substantially restricted daily activities for individuals and many businesses to curtail or cease normal operations.   

 

When under a “stay-at-home” or similar order, our model homes and design studios were closed to the public and operated on an appointment-only basis, as permitted, following recommended distancing and other health and safety protocols when meeting in person with a customer.  Associates at our corporate and divisional offices moved to a work-from-home model for nearly all employees.  Construction activities at our job sites within most of the jurisdictions in which we operate were permitted to continue, however, careful protocols were set in place to protect our employees and trade partners that impact operational efficiency.  The restrictions also reduce the availability, capacity and efficiency of municipal and private services necessary to our operations which has previously and may in the future delay the delivery of our homes at certain communities.   

 

While COVID-19 infection rates improved starting in early summer of 2020 and state and local governments began relaxing the public health restrictions, we took gradual steps to resume nearly all of our operations (with enhanced safety measures). However, throughout the second half of the year and continuing into 2021, the markets in which we operate experienced several spikes in COVID-19 cases which caused us to reintroduce more restrictive protocols from time to time throughout 2020 and continuing into 2021. The United States continues to struggle with rolling outbreaks of the virus. Accordingly, there is no assurance to what level of activity our operations may continue to operate and we cannot predict the magnitude of either the near-term or long-term effects that the pandemic will have on our business.

 

Our business can be negatively impacted as a result of a number of additional factors influenced by the COVID-19 pandemic, including as a result of an unwillingness of customers to visit model homes or employees to return to work due to fears about illness, school closures or other concerns; disruptions to the supply chain for building materials; disruptions in the mortgage financing markets; illness of key executives; inefficiencies due to safety protocols and social distancing, as well as due to the need to change protocols frequently due to the surges and reductions in COVID-19 cases; and costs incurred to disinfect contaminated employee work spaces, model homes or construction work sites. 

 

We are uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19, which could include, among other things, significant volatility in financial markets and a sharp decrease in the value of equity securities, including our common stock. In addition, we can provide no assurance as to whether the COVID-19 public health effort will be intensified to such an extent that we will no longer be designated an essential business or that we will not be able to conduct any business operations in certain of our served markets or at all for an indefinite period.

 

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Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home; cause civil or political unrest, similar to what arose during the Summer of 2020 related to efforts to institute law enforcement and other social and political reforms and which may also affect our business in the short and/or medium-to-longer term; negatively impact mortgage availability or the federal government’s mortgage loan-related programs; or precipitate a prolonged economic downturn and/or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our products as occurred during the latter part of the 2020 first quarter and earlier months of the 2020 second quarter; impair our ability to sell and build homes in a typical manner, or at all, generate revenues and cash flows, and/or access capital or lending markets (or significantly increase the costs of doing so), as may be necessary to sustain our business; increase our use of sales incentives and concessions which could adversely affect our margins; increase the costs or decrease the supply of building materials or the availability of subcontractors and other talent, including as a result of infections or medically necessary or recommended self-quarantining, or governmental mandates to direct production activities to support public health efforts; and/or result in our recognizing charges in current and future periods, which may be material, for inventory impairments or land option contract abandonments, or both, related to our current inventory assets. Specifically, if conditions in the overall housing market or in a specific market worsen in the future beyond our current expectations, if future changes in our business strategy significantly affect any key assumptions used in our projections of future cash flows, or if there are material changes in any of the other items we consider in assessing recoverability, we may recognize charges in future periods for inventory impairments related to our current inventory assets. For example, during the 2020 first quarter, we decided to terminate our option contract for a luxury condominium project in Scottsdale, Arizona in large part due to significant economic uncertainty related to COVID-19 and recorded an abandonment charge of $14.0 million related to the capitalized costs that had accumulated to the portion of the project that was abandoned.  Circumstances related to the COVID-19 pandemic and associated economic relief measures were considered in our 2020 second quarter decision to exit our joint venture in Folsom, California which resulted in a $20.0 million other-than-temporary impairment charge for the period.  Any sustained or prolonged reductions in future earnings periods may change our conclusions on whether we are more likely than not to realize portions of our deferred tax assets.

 

Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, decreases in our net orders, homes delivered, average selling prices, revenues and profitability, as we did in the 2020 second quarter, and such impacts could be material to our financial statements in 2021 and beyond. In addition, should the COVID-19 public health effort intensify to such an extent that we cannot operate in most or all of our served markets, we could generate few or no orders and deliver few, if any, homes during the applicable period, which could be prolonged. Along with a potential increase in cancellations of home purchase contracts, if there are prolonged government restrictions on our business and our customers, and/or an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business; meet the terms of our covenants and other requirements under our unsecured Credit Facility or our Senior Notes.  Such a circumstance could, among other things, exhaust our available liquidity (and ability to access liquidity sources) and/or trigger an acceleration to pay a significant portion or all of our then-outstanding debt obligations, which we may be unable to do.

 

In addition to the risks described above, the COVID-19 pandemic may also have the effect of heightening other risks disclosed in the “Risk Factors” sections of this Annual Report on Form 10-K, including, but not limited to, risks related to deterioration in homebuilding and general economic conditions, our geographic concentration, competition, availability of mortgage financing, inventory risks and impairments, supply and/or labor shortages, access to capital markets (including the debt and secondary mortgage markets), compliance with the terms of our indebtedness, potential downgrades of credit ratings, and our leverage.

 

Our geographic concentration may materially and adversely affect us if demand for housing or the availability of land parcels in our current markets declines.

 

Our current business involves the design, construction and sale of innovative single-family detached and attached homes in planned communities in major metropolitan areas in Southern California, metro Sacramento, the San Francisco Bay area and the greater Phoenix area. Because our operations are concentrated in these areas, a prolonged economic downturn affecting one or more of these areas, or affecting any sector of employment on which the residents of such area are dependent, or significant volatility in home prices and affordability could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations. During the downturn from 2007 to 2011, land values, the demand for new homes and home prices declined substantially in California. During the second half of fiscal 2018, demand for new homes, particularly in California, slowed which we believe stemmed from affordability concerns due to higher absolute home prices and higher interest rates. Buyer demand and order activity improved somewhat during 2019, which activity was unexpectedly halted in early 2020 in connection with the onset of COVID-19.  While demand has since resurged, there is no assurance that order activity will continue to improve. As a homebuilder, we are often subject to market forces beyond our control. In general, housing demand is impacted by the affordability of housing. Many homebuyers need to sell their existing homes in order to purchase a new home from us, and a weakness in the home resale market could adversely affect that ability. If land values decrease or demand for new homes and home prices decline in California or Arizona, our sales, results of operations, financial condition and business would be negatively impacted.

 

 

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In addition, our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning and other market conditions. Our future growth depends upon our ability to successfully identify and acquire attractive land parcels for development of our single-family homes at reasonable prices and with terms that meet our underwriting criteria. We currently depend primarily on the California markets and availability of land parcels in our California markets at reasonable prices is limited. When the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other reason, our ability to grow is significantly limited. To the extent that we are unable to purchase land parcels timely or enter into new contracts for the purchase of land parcels at reasonable prices, our home sales revenue and results of operations would be adversely impacted.

 

Mortgage financing, interest rate increases, changes in federal lending programs or other regulations, and tax law changes could lower demand for or impact homebuyers’ ability to purchase our homes, which could materially and adversely affect us.

 

A substantial percentage of purchasers of our homes finance their acquisitions with mortgage financing. Mortgage interest rates have remained low compared to most historical periods for the last several years, which has made the homes we sell more affordable. Mortgage rates have continuously fallen in fiscal years 2019 and 2020 due in part to Federal Reserve interest rate reductions, decelerating economic growth and other factors. However, we cannot predict whether interest rates will continue to fall or remain low or rise. Increases in interest rates increase the costs of owning a home and could adversely affect the purchasing power of consumers and lower demand for the homes we sell, which could result in a decrease in our revenues and earnings and adversely affect our financial condition.

 

The availability of mortgage financing is significantly influenced by governmental entities such as the FHA, VA, and Government National Mortgage Association and government-sponsored enterprises known as Fannie Mae and Freddie Mac. If these or other lenders’ borrowing standards are tightened and/or the federal government were to reduce or eliminate these mortgage loan programs (including due to any failure of lawmakers to agree on a budget or appropriation legislation to fund relevant programs or operations), it would likely make it more difficult for our customers to obtain acceptable financing, which would, in turn, adversely affect our business, financial condition and results of operations. In particular, FHA and VA may continue to impose stricter loan qualification standards, raise minimum down payment requirements, impose higher mortgage insurance premiums and other costs, or limit the number of mortgages it insures. FHA and VA also limit the number of FHA or VA loans within any one community and require completion of entire buildings in which our units are located prior to allowing project approval application to be submitted, which can delay our ability to deliver completed homes in a timely manner and negatively impacting our results.  Rising interest rates, decreased availability of mortgage financing or of certain mortgage programs, higher down payment requirements, increased monthly mortgage costs, and tightened credit requirements and underwriting standards, may lead to reduced demand for our homes.

 

Mortgage interest expense and real estate taxes represent significant costs of homeownership. Therefore, when there are changes in federal or state income tax laws that eliminate or substantially limit the income tax deductions relating to these expenses, or other increases in local real estate taxes or assessments, the after-tax costs of owning a new home can increase significantly. For example, the Tax Cuts and Jobs Act, which was enacted in December 2017, includes provisions that impose significant limitations with respect to these income tax deductions including limitations to the annual deduction for real estate property taxes and state and local income taxes as well as a limitation on the deduction for mortgage interest. We believe changes such as these adversely impact the demand for and sales prices of homes in certain markets, including parts of California, and therefore could adversely affect our business, financial condition and results of operations.

 

The homebuilding industry is cyclical and affected by changes in general economic, real estate and other business conditions that could reduce the demand for new homes and, as a result, adversely impact our results of operations, financial condition and cash flows.

 

The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic, political, real estate and other business conditions such as levels of employment, consumer confidence and income, availability of mortgage financing for homebuyers, interest rate levels, demographic trends, homebuyer preferences for specific designs or locations, real estate taxes, inflation, supply of and demand for new and existing homes, federal government actions, economic stimulus policies, tax policies and economic conditions outside the U.S. The foregoing conditions, among others, are complex and interrelated. Periods of prolonged economic downturn, high unemployment levels, increases in the rate of inflation and uncertainty in the U.S. economy, have historically contributed to decreased demand for housing, declining sales prices and increasing pricing pressure. In the event that one or more of such economic and business conditions occur, we could experience declines in the market value of our inventory and demand for our homes, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

   

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Inventory risks are substantial for the homebuilding business. If the value of the land we purchase declines, we have, and may continue, to incur impairments on the carrying values of the real estate inventories we own, some of which could be significant and could adversely affect our business or financial results.

 

Inventory risks are substantial for our homebuilding business. There are risks inherent in controlling, owning and developing land as housing inventories are illiquid assets and if housing demand declines, we may own land or homesites we acquired at costs we will not be able to recover fully, or on which we cannot build and sell homes profitably. This is particularly true when entitled land becomes scarce, as it has recently, especially in the markets in which we build, and the cost of purchasing such land is relatively high. Factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject the market value of our land to uncertainty. As a result, we may have to sell homes or land for lower than anticipated profit margins or we may have to record inventory impairment charges or sell land at a loss. During 2020, we recognized $19.0 million in homebuilding inventory impairments and $22.3 other than temporary impairments related to unconsolidated joint ventures For more information on impairments, please see Notes 4 and 6 to the accompanying Consolidated Financial Statements.  We utilize option structures to purchase land in our wholly owned business which reduces our exposure to such fluctuations, but we may still be required to take significant write-offs of deposits and pre-acquisition costs if we elect not to exercise our options to purchase land. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. We regularly review the value of our land holdings and continue to review our holdings on a periodic basis for indicators of impairment. Indicators of impairment include a decrease in demand for housing due to soft market conditions, competitive pricing pressures which reduce the average sales price of homes, which includes sales incentives for home buyers, sales absorption rates below management expectations, a decrease in the value of the underlying land and a decrease in projected cash flows for a particular project. Material impairment charges, abandonment charges or other write-downs of assets could adversely affect our financial condition and results of operations.

 

Our ability to execute on our business strategies and initiatives is uncertain, and we may be unable to achieve our goals.

 

We may undertake various strategic initiatives as part of our business, such as our pivot to offer more affordable-priced homes or our potential entry into new markets. We previously focused on second move up and luxury buyers. We have invested significant efforts to align our community offerings and designs to these buyers despite our experience in catering to a different buyer profile. We can provide no assurance (i) that our strategies, and any related initiatives or actions, will be successful or that they will generate growth, earnings or returns at any particular level or within any particular time frame; (ii) that in the future we will achieve positive operational or financial results or results in any particular metric or measure equal to or better than those attained in the past; or (iii) that we will perform in any period as well as other homebuilders. The failure of any one or more of our present strategies, or any related initiatives or actions, or the failure of any adjustments that we may pursue or implement, would likely have an adverse effect on our ability to increase the value and profitability of our business; on our ability to operate our business in the ordinary course; on our overall liquidity; and on our consolidated financial statements, and the effect, in each case, could be material. 

 

Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs, delay deliveries and could adversely affect our financial condition and results of operations.

 

The residential construction industry experiences labor and raw material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be more severe during periods of strong demand for housing or during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures. We and other homebuilders have encountered increases in costs of labor in materials, which is particularly acute in the markets in which we build in California and Arizona. In particular, in part due to the impacts of COVID-19 and also due to increasing demand, we have seen an increase in the costs and/or a decrease in the available supply of building materials, particularly with respect to lumber, and in certain cases supply chain disruptions causing delays. The cost of labor and raw materials may also increase during periods of shortage or high inflation. Pricing for labor and materials can also be affected by changes in energy prices, and various other national, regional and local economic and political factors. For example, government-imposed tariffs and trade regulations on imported building supplies have, and in the future could have, significant impacts on the cost to construct our homes. We do not have long-term contractual commitments with any subcontractors, and there can be no assurance that skilled subcontractors will continue to be available at reasonable rates and in the areas in which we conduct our operations. Certain of the subcontractors engaged by us are represented by labor unions or are subject to collective bargaining arrangements that require the payment of prevailing wages that are higher than normally expected on a residential construction site. A strike or other work stoppage involving any of our subcontractors could also make it difficult for us to retain subcontractors for our construction work. In addition, union activity could result in higher costs to retain our subcontractors. Access to qualified labor at reasonable rates may also be affected by other circumstances beyond changes in trends in labor force migration and changes in immigration laws, policies and trends. In particular, changes in federal and state immigration laws and policies, or in the enforcement of current laws and policies, may have the effect of increasing our labor costs. In addition, the enactment of federal, state or local statutes, ordinances, rules or regulations requiring the payment of prevailing wages on private residential developments would materially increase our costs of development and construction.  Shortages and price increases could cause delays in and increase our costs of home construction, which we may not be able to recover by raising home prices due to market demand which puts downward pressure on our gross margins. As a result, shortages or increased costs of labor and raw materials could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

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We may not be able to compete effectively against competitors in the homebuilding industry.

 

We operate in a very competitive environment which is characterized by competition from a number of other homebuilders in each market in which we operate. Additionally, there are relatively low barriers to entry into our business. We compete with numerous large national and regional homebuilding companies and with smaller local homebuilders and land developers for, among other things, home buyers, desirable land parcels, financing, raw materials and skilled management and labor resources. Our competitors may independently develop land and construct homes that are superior or substantially similar to our products. Over the past several years, we have expanded our product offerings to include more affordably-priced homes to reach a deeper pool of qualified buyers and grow our overall community count. We believe there is more competition among homebuilding companies in more affordable product offerings than in the luxury and move-up segments. Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion and cause us to increase our selling incentives or reduce our prices. We may be at a competitive disadvantage with regard to certain of our large national and regional homebuilding competitors whose operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturn in the housing market. These competitors also generally have longer operating histories and greater financial and operational resources than we do, including a lower cost of capital. Many of these competitors also have longstanding relationships with subcontractors, local governments and suppliers in the markets in which we operate or in which we may operate in the future. This may give our competitors an advantage in securing materials and labor at lower prices, marketing their products and allowing their homes to be delivered to customers more quickly and at more favorable prices. We also compete with the resale, or "previously owned," home market. If we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected.

 

Inefficient or ineffective allocation of capital, including from efforts to invest in future growth or expansion of our operations or acquisitions of businesses, could adversely affect our operations and/or stockholder value if expected benefits are not realized.

 

As competition for suitable land increases, the cost of acquiring both finished and undeveloped lots and the cost of developing owned land could rise, and the availability of suitable land at acceptable prices may decline, which could adversely impact our financial results. The availability of suitable land assets could also affect the success of our land acquisition strategy and ultimately our long-term strategic goals by impacting our ability to increase the number of actively selling communities, grow our revenues and margins and achieve or maintain profitability. As a part of our business strategy, we may consider growth or expansion of our operations in our current markets or in other areas of the country. Any such growth or expansion would be accompanied by risks such as difficulties in assimilating the operations and personnel of acquired companies or businesses, and potential loss of key employees of the acquired business, diversion of our management team, and risks associated with entering into markets in which we have limited or no direct experience. We cannot guarantee that any expansion into a new market will be successfully executed, and our failure to do so could harm our current business. Furthermore, we may engage in other capital actions such as repurchasing our common stock or Senior Notes from time to time to reduce our indebtedness. While our goal is to allocate capital to maximize our overall long-term returns, if we do not properly allocate our capital, we may fail to produce optimal financial results and we may experience a reduction in stockholder value, including increased volatility in our stock price.

 

Delays in opening communities or reductions in sales absorption levels may force us to incur additional community-level costs and our results of operations could be adversely affected.

 

Before a community generates any revenue, time and expenditures are required to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities, model homes and sales facilities. It can take several years from the time we acquire control of a property to the time we make our first home sale on the site. Our ability to process a significant number of transactions (which include, among other things, evaluating the site purchase, designing the layout of the development, sourcing materials and subcontractors and managing contractual commitments) efficiently and accurately is important to our success. Changes in law or regulation, including changes to FHA or other lending program guidelines for project approvals, local discretionary approvals, natural disasters, availability of subcontractors, errors by employees, failure to comply with regulatory requirements and conduct of business rules, failings or inadequacies in internal control processes, equipment failures or the failure of external systems, including those of our suppliers or counterparties, could result in delays and operational issues that could adversely affect our business, financial condition and operating results and our relationships with our customers. Delays in the development of communities also expose us to the risk of changes in market conditions for homes. We also incur certain overhead costs associated with our communities, such as indirect construction costs, property taxes, marketing expenses and costs associated with the upkeep and maintenance of our model and sales complexes, and interest costs. If communities are not opened within expected timeframes or our sales absorption pace decreases and the time required to close out our communities is extended, we incur additional overhead costs, interest and other carrying costs. A decline in our ability to develop and market our communities successfully within expected timeframes and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.

 

Increases in our cancellation rate could have a negative impact on our home sales revenue, homebuilding margins and cash flows.

 

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Our backlog reflects the number and value of homes for which we have entered into a sales contract with a customer but have not yet delivered the home. Although these sales contracts typically require a cash deposit and do not make the sale contingent on the sale of the customer's existing home, in some cases a customer may cancel the contract and receive a complete or partial refund of the deposit as a result of local laws or as a matter of our business practices.  Home order cancellations can result from a number of factors, including declines or slow appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, and changes in homebuyers' financial condition or personal circumstances. In addition, as part of our strategy, we have increased the number of homes we build at more affordable price points. Our cancellation rate may increase as we sell to a more diverse credit quality of buyers. Significant cancellations have had, and could have, a material adverse effect on our business as a result of lost sales revenue and the accumulation of unsold housing inventory.

 

A large proportion of our fee building revenue has been from one customer, and that customer relationship is ending.

 

The Company’s fee building revenues have historically been concentrated with a small number of customers.  We have several fee building agreements with Irvine Pacific, LP who accounted for 15%, 14%, and 23% of our total consolidated revenues for the years ended December 31, 2020, 2019, and 2018, respectively.  In August 2020, Irvine Pacific made a decision to begin building homes using their own general contractor’s license, effectively terminating the Company’s fee building arrangement with Irvine Pacific moving forward. Although we are transitioning construction management responsibilities to Irvine Pacific and are not expected to be engaged for new fee building contracts with them going forward, we are currently in the process of finishing certain existing homes under construction and generating revenues in connection therewith, which we expect to complete in the first quarter of 2021.  The Company is actively seeking and entering into new fee building opportunities with other land developers with the objective of at least partially offsetting the expected reduction in Irvine Pacific business in future years, such as our new fee building relationship with FivePoint. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Fee Building." However, there is no guarantee that we will be able to offset the loss of the Irvine Pacific business with new opportunities and the loss of these billings could negatively impact our business and our results of operations.

 

 Adverse weather, including wildfires, geological conditions, and natural resource shortages may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect us.

 

As a homebuilder and land developer, we are subject to the risks associated with numerous weather-related and geologic events, many of which are beyond our control. These weather-related and geologic events include but are not limited to droughts, floods, wildfires, landslides, soil subsidence and earthquakes. California, in particular, has experienced significant wildfire activity over the past several years. The markets in which we operate have also experienced power and resource shortages, including mandatory periods without electrical power, changes to water availability (including drought conditions) and significant increases in utility and resource costs. Shortages of natural resources, particularly water and power, may make it more difficult to obtain regulatory approval of new developments and can also increase the risk of wildfires, which may both reduce demand for housing and damage our inventory currently under construction. We can also experience significant delays due to utility company constraints which may be outside our control. For example, in January 2019, in response to potential liabilities arising from a series of catastrophic wildfires in Northern California, PG&E Corporation, a major gas and electric utility company servicing various geographic markets, including Northern California, initiated voluntary bankruptcy proceedings, which resulted in service disruptions and constraints or delays in providing such utilities in the markets in which PG&E Corporation currently operates. The occurrence of any of these events could damage our land parcels and projects, cause delays in the completion of our projects, cause us to incur additional costs, reduce consumer demand for housing and cause shortages and price increases in labor or raw materials, any of which could harm our sales and profitability. There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes and other geologic events may not be insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations

 

Because of the seasonal nature of our business, our quarterly operating results fluctuate.

 

Our quarterly operating results fluctuate with the seasons. We typically experience the highest new home order activity in late winter and spring, although this activity also highly depends on the number of active selling communities, timing of new community openings and other market factors.  For example, we experienced high demand during the fourth quarter of 2020, which we attribute to current market factors including low interest rates, a continued undersupply of homes, and consumers’ increased focus on the importance of home amid the COVID-19 pandemic. Construction of one of our traditional homes typically proceeds after signing the agreement of sale with our customer and can require five to ten months or more to complete. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year, particularly in the fourth quarter. Because of these factors, our quarterly operating results may be uneven and may be marked by lower revenues and earnings in some quarters than in others. Seasonality also requires us to finance construction activities in advance of the receipt of sales proceeds. Accordingly, there is a risk that we will invest significant amounts of capital in the acquisition and development of land and construction of homes that we do not sell at anticipated pricing levels or within anticipated time frames. If, due to market conditions, construction delays or other causes, we do not complete sales of our homes at anticipated pricing levels or within anticipated time frames, our financial performance and financial conditions could be materially and adversely affected.

 

19

 

We may be unable to obtain suitable bonding for the development of our housing projects.

 

We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. Our ability to obtain surety bonds primarily depends upon our credit rating, financial condition, past performance and other factors, including the capacity of the surety market and the underwriting practices of surety bond issuers. The ability to obtain surety bonds also can be impacted by the willingness of insurance companies to issue performance bonds for construction and development activities. If we are unable to obtain surety bonds when required, our results of operations and cash flows could be adversely affected.

 

Inflation could adversely affect our business and financial results.

 

Inflation could adversely affect us by increasing the costs of land, raw materials and labor needed to operate our business, which in turn leads us to increase our home selling price in an effort to maintain satisfactory housing gross margins. Inflation typically also accompanies higher interest rates, which could adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to at least partially offset the increasing costs of our operations, our margins could decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.

 

A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.

 

Building sites are inherently dangerous, and operating in the homebuilding industry poses certain inherent health and safety risks to those working at such sites. Any failure in health and safety performance may result in penalties for noncompliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with relevant regulatory agencies, governmental authorities and local communities, and our ability to win new business, which in turn could have a material adverse effect on our business.

 

Negative publicity or poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or results of operations to decline.

 

Unfavorable media related to our industry, company, brand, marketing, personnel, operations, business performance, or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The harm may be immediate without affording us an opportunity for redress or correction, and our success in maintaining and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. Adverse publicity or negative commentary on social media outlets, such as blogs, websites or newsletters, could hurt operating results, as consumers might avoid or protest brands that receive bad press or negative reviews. In addition, residents of communities we develop may look to us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents, and subsequent actions by these residents could adversely affect sales or our reputation.

 

Risks Related to Laws and Regulations

 

We are subject to construction defect, warranty, personal injury and other claims arising in the ordinary course of business that can be significant and could adversely affect our financial position and results of operations.

 

As a homebuilder, we are subject to construction defect, product liability home warranty, personal injury and other homebuilding-related claims, arising in the ordinary course of business or otherwise. We expend significant resources to repair items in homes we have sold to fulfill the warranties we issued to our homebuyers. We maintain reserves to cover the resolution of our potential liabilities associated with known and anticipated warranty and construction defect related claims and litigation, but the estimation process requires us to exercise significant judgment due to the complex nature of these exposures, with each exposure often exhibiting unique circumstances and there are no assurances that such reserves will be sufficient to cover liabilities associated with warranty, product liability, and construction defect liability.  We also typically act as the general contractor for the homes we build in our fee building business, including our unconsolidated joint ventures. In connection with these agreements, we indemnify the customer for liabilities arising from our work.  While we maintain general liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for some portion of the liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be collectible or adequate to cover any or all indemnity, construction defect and warranty claims for which we may be liable. Some claims may not be covered by insurance or may exceed applicable coverage limits. Furthermore, most insurance policies have some level of a self-insured retention that we are required to satisfy in order to access the underlying insurance which levels can be significant. Any such claims or self-insured retentions can be costly and could result in significant liability. We may not be able to renew our insurance coverage or renew it at reasonable rates and may incur significant costs or expenses (including repair costs and litigation expenses) surrounding possible construction defects, product liability claims, soil subsidence or building related claims. 

 

20

 

Any claim that becomes litigated is inherently unpredictable. Plaintiffs may seek to consolidate multiple parties in one lawsuit or seek class action status in some of these legal proceedings with potential class sizes that vary from case to case. Consolidated and class action lawsuits can be costly to defend and, if we were to lose any consolidated or certified class action suit, it could result in substantial liability. Litigated matters, including those related to construction defects, can also result in negative publicity in traditional and social media, which can damage our reputation and adversely affect our ability to sell homes.  In addition, we conduct most of our business in California, one of the most highly regulated and litigious jurisdictions in the United States, which imposes a ten-year, strict liability tail on many construction liability claims. As a result, our potential losses and expenses due to litigation, new laws and regulations may be greater than those of our competitors who have smaller California operations as a percentage of the total enterprise.

 

We could be responsible for employment-related liabilities with respect to our contractors’ employees.

 

Although contractors are independent of the homebuilders that contract with them under normal management practices and the terms of trade contracts and subcontracts within the homebuilding industry, if regulatory agencies reclassify the employees of contractors as employees of homebuilders, homebuilders using contractors could be responsible for wage and hour labor laws, workers’ compensation and other employment-related liabilities of their contractors. Even if we are not deemed joint employers with our contractors, we are, and may become in the future, subject to similar measures and legislation, such as California Labor Code Section 2810.3, that require us to share liability with our contractors for the payment of wages and the failure to secure valid workers’ compensation insurance coverage. In addition, California law makes direct contractors liable for wages, fringe benefits, or other benefit payments or contributions owed by a subcontractor that does not fulfill these obligations to its employees.  While the Company ordinarily negotiates with its subcontractors to obtain broad indemnification rights, there is no guarantee that it will be able to recover from its subcontractors for actions brought against the Company by its subcontractors’ employees or unions representing such employees and such liability could have a material and adverse effect on our financial position or results of operations.  

 

Changes in tax laws can negatively affect our operating results.

 

 Increases in real estate taxes and other local government fees, such as fees imposed on developers to fund schools, open space, and road improvements, and/or provide low- and moderate-income housing, could increase our costs and have an adverse effect on our operations. We also benefit from the availability of various deductions and tax credits.  For example, in December 2019, energy tax credits were extended through 2020 and retroactively applied to properties sold after December 31, 2017.  Elimination of such credits or deductions could negatively impact our financial results. 

 

We may not be able to generate sufficient taxable income to fully realize our net deferred tax asset and if we were to experience an “ownership change” as defined in Section 382 of the Internal Revenue Code our net operating loss carryforwards would be substantially limited

 

At December 31, 2020, we had a net deferred tax asset of $15.4 million, of which $8.2 million relates to tax-effected, net operating loss and tax credit carryforwards from prior periods, and the remaining $7.2 million related to the timing of the recognition of various expenses which were deducted from book income but are not deductible for income tax purposes until actually paid or realized.  Federal net operating losses may be carried forward indefinitely; however, the loss can only be utilized to offset 80% of taxable income generated in a tax year.  At December 31, 2020, the Company had no federal net operating losses as all were carried back to prior years as allowed by the Coronavirus Relief and Economic Security Act ("CARES Act").  The Company has sizable state net operating losses totaling $87.4 million which may be carried forward 20 years in California and Arizona and will begin to expire in 2039, unless previously utilized.  If we are unable to generate future sufficient taxable income, we will not be able to realize the full amount of the deferred tax asset. We regularly review our deferred tax asset for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. Our projections of future taxable income required to fully realize the recorded amount of the gross deferred tax asset reflect numerous assumptions about our operating businesses and investments and are subject to change as conditions change specific to our business units, investments or general economic conditions. Changes that are adverse to us could result in the need to increase the deferred tax asset valuation allowance resulting in a charge to income and a decrease to stockholders’ equity.

 

Federal and state tax laws impose restrictions on the utilization of net operating loss (“NOL”) and tax credit carryforwards in the event of an “ownership change” as defined by Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”). Generally, an “ownership change” occurs if the percentage of the value of the stock that is owned by one or more direct or indirect “five percent shareholders” increases by more than 50% over their lowest ownership percentage at any time during an applicable testing period (typically, three years). Under Section 382, if a corporation undergoes an “ownership change,” such corporation’s ability to use its pre-change NOL and tax credit carryforwards and other pre-change tax attributes to offset its post-change income may be limited. While no “ownership change” has resulted in annual limitations, future changes in our stock ownership, which may be outside of our control, may trigger an “ownership change.” In addition, future equity offerings or acquisitions that have equity as a component of the consideration could result in an “ownership change.” If an “ownership change” occurs in the future, utilization of our NOL and tax credit carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to us. We have adopted a tax benefit preservation plan, discussed below under “Risks Related to Ownership of Our Common Stock”, to protect our utilization of our NOL and tax credit carryforwards, but the plan only deters, and cannot ultimately block, all transfers of common stock that might result in an ownership change.

 

21

 

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, delay the completion of our projects, or otherwise negatively impact our operations.

 

We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction, accessibility, anti-discrimination, and similar matters which affect the housing industry such as by imposing restrictive zoning and density requirements, which can limit the number of homes that can be built within the boundaries of a particular area, among other things. Governmental regulation affects construction activities as well as sales activities, mortgage lending activities, and other dealings with home buyers, including anti-discrimination laws such as the Fair Housing Act and data privacy laws such as the California Consumer Privacy Act.  Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations as well as due to building moratoriums or "slow-growth" or "no-growth" initiatives that could be implemented in the future. Local governments also have broad discretion regarding the imposition of development fees, assessments and exactions for projects in their jurisdiction. Projects that are entitled still require a variety of other governmental approvals and permits during the development process.

 

We are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health, safety, and the environment, including those regulating the emission or discharge of materials into the environment, the management of storm water runoff at construction sites, the handling, use, storage and disposal of hazardous substances, impacts to wetlands and other sensitive environments, and the remediation of contamination at properties that we own or develop. The environmental regulations applicable to each community in which we operate vary greatly depending on the location of the community site, the site's environmental conditions and the present and former use of the site. Environmental regulations may cause delays, may cause us to incur substantial compliance, remediation or other costs, and can prohibit or severely restrict development and homebuilding activity. In addition, noncompliance with these regulations could result in fines and penalties, obligations to remediate, permit revocations or other sanctions; and contamination or other environmental conditions at or in the vicinity of our developments, whether or not we were responsible for such conditions, may result in claims against us for personal injury, property damage or other losses.

 

From time to time, the United States Environmental Protection Agency and other federal or state agencies review homebuilders' compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs or harm our reputation. Further, we expect that increasingly stringent requirements will be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber. Our communities in California are especially susceptible to restrictive government regulations and environmental laws, particularly surrounding water usage, as well as residential building codes and zoning regulations designed to counteract climate change or otherwise enhance the sustainability of the environment. Any or all of these changes could increase our costs to develop homes and adversely affect our financial condition and results of operations.

 

Changes in global or regional climate conditions and legislation relating to energy and climate change could increase our costs to construct homes.

 

Projected climate change may exacerbate the scarcity or presence of water and other natural resources in affected regions, which could limit, prevent or increase the costs of residential development in certain areas. There is a variety of new legislation being enacted, or considered for enactment at the federal, state and local level relating to energy, emissions and climate change. New building code requirements, including California's solar mandate that went into effect in 2020, that impose stricter energy efficiency standards have increased our cost to construct homes and legislation imposing additional efficiency standards may cause us to be unable to fully recover the costs associated with compliance.  California, our largest market, enacted the Global Warming Solutions Act of 2006 to achieve the goal of reducing greenhouse gas emissions. As a result, California has adopted and is expected to continue to adopt significant regulations to reduce greenhouse gas emissions. Similarly, energy-related initiatives throughout the United States may impact manufacturers of raw materials upon which we are dependent, such as lumber, steel, and concrete, which could have an indirect adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are burdened with expensive cap and trade and similar energy-related regulations. All of the foregoing could result in increased costs to build homes and cause a reduction in our homebuilding gross margin and materially and adversely affect our results of operations.

 

22

 

Failure to comply with privacy laws or an information systems interruption or breach in security that releases personal identifying information or other confidential information could adversely affect us.

 

Privacy, security, and compliance concerns have continued to increase as technology has evolved.  We use information technology and other computer resources to carry out important operational and marketing activities, to maintain our business records, and to collect and store personal identifying information, including information about employees, homebuyers, customers, vendors and suppliers as well as share information with vendors who assist us with certain aspects of our business. The regulatory environment in California and throughout the U.S. surrounding information security and privacy is increasingly demanding. The information technology systems we use are dependent upon global communications providers, web browsers, third-party software and data storage providers and other aspects of the Internet infrastructure that have experienced security breaches, cyber-attacks, ransomware attacks, significant systems failures and service outages in the past. A data security breach, a significant and extended disruption in the functioning of our information technology systems or a breach of any of our data security controls could include the theft or release of customer, employee, vendor or company data, and could disrupt our business operations, damage our reputation, cause us to lose customers, adversely impact our sales and revenue, and require us to incur significant expense to address and remediate or otherwise resolve these kinds of issues. The release of confidential information as a result of a security breach could also lead to litigation or other proceedings against us by affected individuals, vendors or regulators and the outcome of such proceedings, which could include penalties or fines, could have a significant negative impact on our business. We may also be required to incur significant costs to protect against damages caused by information technology failures or security breaches in the future. With the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, we have taken steps to allow our workforce to perform critical business functions remotely. Many of these measures were deployed for the first time and there is no guarantee the safeguards we have put in place will be completely effective or that we will not encounter some of the common risks associated with employees accessing Company data and systems remotely. We provide employee awareness training of cybersecurity threats, procure cyber insurance, and routinely utilize information technology consultants to assist us in our evaluations of the effectiveness of the security of our information technology systems. However, because methods used to obtain unauthorized access or disable systems evolve frequently, we may be unable to anticipate these attacks or to implement adequate preventative measures and we cannot eliminate the risk of such security breaches, cyber attacks, or other significant system or security failures, and such occurrences could have a material and adverse effect on our consolidated results of operations or financial position. In addition, the cost and operational consequences of implementing further data or system protection measure could be significant and our efforts to deter, identify, mitigate and/or eliminate any security breaches or incidents may not be successful.

 

Risks Related to Financing and Indebtedness

 

Difficulty in obtaining sufficient capital could prevent us from acquiring land for our developments or increase costs and delays in the completion of our development projects.

 

Our business and results of operations depend substantially on our ability to obtain financing, whether from bank borrowings or from financing in the public debt markets. Our unsecured revolving Credit Facility, which provides for $60 million in committed borrowing capacity, matures on April 30, 2023 and our $250 million in aggregate principal amount of Senior Notes (the "2025 Notes") becomes due in October 2025. We cannot be certain that we will be able to continue to replace existing financing or find additional sources of financing in the future on favorable terms or at all. If we are not able to obtain suitable financing at reasonable terms or replace existing debt and credit facilities when they become due or expire, our costs for borrowings will likely increase and our revenues may decrease or we could be precluded from continuing our operations at current levels. In such event, we could be required to become more reliant on other forms of financing, including joint venture relationships or securities offerings.  These types of financings may restrict our flexibility, be more costly, and reduce our profitability and adversely impact our financial position. Additionally, if we cannot obtain additional financing to fund the purchase of land under our option contracts or purchase contracts, we may be forced to forfeit nonrefundable deposits or incur other contractual penalties and fees.

 

Our level of indebtedness is significant and may adversely affect our financial position and prevent us from fulfilling our debt obligations; we may incur additional debt in the future.

 

The homebuilding and land development industry is capital-intensive and requires significant up-front expenditures to acquire land parcels and complete development and our cash flow from operations may not be sufficient to enable us to service our debt or fund other liquidity needs. Accordingly, we incur substantial indebtedness to finance our homebuilding activities. As discussed elsewhere in this filing, including "Management's Discussion and Analysis of Financial Condition and Result of Operations - Liquidity and Capital Resources," the Company has outstanding $250 million in aggregate principal amount of the 2025 Notes. As of December 31, 2020, the 2025 Notes had a carrying value of $244.9 million, net of $5.1 million of unamortized debt issuance costs. In addition, we have $60 million in debt commitments under our Credit Facility, none of which was outstanding or utilized to provide letters of credit at December 31, 2020 leaving $60 million available for borrowing, subject to satisfaction of the financial covenants and borrowing base requirements in the Credit Facility agreement.

 

23

 

Our level of indebtedness and incurring additional debt could subject us to many risks that, if realized, would adversely affect us, including the risk that:

 

 

our ability to obtain additional financing as needed for working capital, land acquisition costs, building costs, other capital expenditures, or general corporate purposes, or to refinance existing indebtedness before its scheduled maturity, may be limited;

 

our debt may increase our vulnerability to adverse economic and industry conditions;

 

we may be required to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing funds available for other purposes such as land and lot acquisition, development and construction activities;

 

our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt, which would likely result in acceleration of the maturity of such debt;

 

we may be put at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in our industry, including increased competition; and

 

Our ability to meet our expenses depends, to a large extent, on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors and we cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes. If we do not have sufficient funds, we may be required to refinance all or part of our existing debt, sell assets or borrow additional funds. We cannot guarantee that we will be able to do so on terms acceptable to us, if at all. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we may lose some or all of our assets or property that may be pledged to secure our obligations to foreclosure. Also, debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

We currently have investments in unconsolidated joint ventures with third parties - some of which are affiliated with certain of our board members - in which we have less than a controlling interest. These investments are highly illiquid and have significant risks due to, in part, a lack of sole decision-making authority and reliance on the financial condition and liquidity of our joint venture partners.

 

We own interests in various joint ventures and as of December 31, 2020, our investments in and advances to our unconsolidated joint ventures was $2.1 million. In the past, we have entered into joint ventures in order to acquire land positions, to manage our risk profile and to leverage our capital base. Although we consider all of our current joint ventures to have entered the winddown stage, we may enter into additional joint ventures in the future. These investments are generally highly illiquid and absent partner agreement, we may not be able to liquidate our joint venture investments to generate cash. We do not have exclusive control over the joint ventures which may prevent us from taking actions in our best interest but opposed by our partners which could create risk of impasses on decisions, including related to development and financing. Disputes between ourselves and our partners may result in litigation that would increase our expenses and take valuable time from our officers and directors in handling any such litigation.  In addition, our Credit Facility and indenture for our Senior Notes limit our ability to make investments in joint ventures. 

 

We have historically served as the managing member or general partner of our joint ventures and one of our subsidiaries acts as the general contractor while our joint venture partner serves as the capital provider. Due to our respective role in these joint ventures, we may become liable for obligations beyond our proportionate equity and/or contribution interest.

 

Our unconsolidated joint ventures will frequently finance development utilizing secured financing. Secured indebtedness increases the risk of the joint venture’s loss of ownership of the property (which would, in turn, impair the value of our ownership interests in the joint venture). Under credit enhancements that we may provide with respect to joint venture borrowings, we and our partners could be required to make additional unanticipated investments in and advances to these joint ventures, either in the form of capital contributions or loan repayments, to reduce such outstanding borrowings. We also often sign a completion agreement in connection with obtaining financing for our joint ventures. Under such agreements, we may be compelled to complete a project, usually with costs within the budget related to the project being funded by the lender with any budget shortfalls being borne by us, even if we no longer have an economic interest in the joint venture or the joint venture no longer has an interest in the property. A partner may fail to fund its share of required capital contributions or may become bankrupt, which may cause us and any other remaining partners to need to fulfill the obligations of the venture in order to preserve our interests and retain any benefits from the joint venture. As a result, we could be contractually required, or elect, to contribute our corporate funds to the joint venture to finance acquisition and development and/or construction costs and such ability to contribute may be limited by our corporate debt covenants.

 

 

 

24

 

Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive covenants relating to our operations.

 

Our current financing arrangements, including the Credit Facility and the Indenture governing the 2025 Notes (the "Indenture"), contain covenants (financial and otherwise) affecting our ability to incur additional debt, make certain investments, allow liquidity to fall below certain levels, make distributions to our stockholders, and otherwise affect our operating policies. These restrictions limit our ability to, among other things:

 

 

incur or guarantee additional indebtedness or issue certain equity interests;

 

pay dividends or distributions, repurchase equity, repurchase our Senior Notes, or prepay subordinated debt;

 

make certain investments, including investments in joint ventures;

 

sell assets;

 

incur liens;

 

create restrictions on the ability of restricted subsidiaries to transfer assets;

 

enter into transactions with affiliates;

 

create unrestricted subsidiaries; and

 

consolidate, merge or sell all or substantially all of our assets.

 

In addition, our Credit Facility provides that our maximum net leverage ratio must be less than 60%, which, as defined in our Credit Facility agreement, is calculated on a net debt basis after a minimum liquidity threshold. Our net leverage ratio as of December 31, 2020, as calculated under our Credit Facility, was approximately 42.8%. Our Credit Facility also contains financial covenants related to our tangible net worth, liquidity, and interest coverage or a minimum unrestricted cash balance. Tables presenting our compliance with the financial conditions and covenants under the Notes and Credit Facility are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in this Report on Form 10-K. As of December 31, 2020, we did not meet the minimum interest coverage ratio test under our Credit Facility which requires us to maintain an interest coverage ratio of at least 1.75 to 1.00 (the “Interest Coverage Test”). The Credit Facility provides that if the Interest Coverage Test  is not satisfied on the last day of any fiscal quarter, we are required to maintain during any period in which the Interest Coverage Test is not satisfied unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred (as defined in the Credit Facility agreement) which was $23.9 million as of December 31, 2020. As of December 31, 2020, we were in compliance with such requirement. This cash balance maintenance requirement may reduce our ability to use our cash flow for other purposes, including land investments.  Failure to have sufficient borrowing base availability in the future or to be in compliance with our financial covenants under our Credit Facility could have a material adverse effect on our operations and financial condition.

 

Potential future downgrades of our credit ratings could adversely affect our access to capital and could otherwise have a material adverse effect on us.

 

Rating agencies may elect in the future to downgrade our corporate credit rating or any rating of the Notes due to deterioration in our homebuilding operations, credit metrics or other earnings-based metrics, as well as our leverage or a significant decrease in our tangible net worth. These ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, as well as our stock price, and negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. In particular, a weakening of our financial condition, including a significant increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.

 

Interest expense on debt we incur may limit our cash available to fund our growth strategies.

 

As of December 31, 2020, we had outstanding $250 million in aggregate principal amount of our 7.25% 2025 Senior Notes.  In addition, we have $60 million in debt commitments under our Credit Facility, of which none was outstanding or utilized to provide letters of credit at December 31, 2020 with $60 million is available for borrowing, subject to the satisfaction of the financial covenants and the state of the borrowing base and the conditions precedent to borrowing under our Credit Facility.  A significant portion of our cash flows from operations is dedicated to the payment of principal and interest on our indebtedness and therefore such cash flows are not available to make investments in our business. Our Credit Facility has, and any additional debt we subsequently incur may have, a floating rate of interest. Our Notes have a fixed rate of interest. As part of our financing strategy, we may incur a significant amount of additional debt. Higher interest rates could increase debt service requirements on our current floating rate debt and on any floating or fixed rate debt we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay existing debt during periods of rising interest rates, we could be required to refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times that may not permit realization of a favorable return on such assets and could result in a loss or lower profitability. The occurrence such events could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

 

 

 

25

 

We may be unable to repurchase the Notes upon a change of control triggering event as required by the Indenture.

 

Upon the occurrence of a change of control triggering event, we must offer to repurchase the 2025 Notes at 101% of their principal amount, plus accrued and unpaid interest thereon to the purchase date. In such circumstances, we cannot assure you that we would have sufficient funds available to repay all of our indebtedness that would become payable upon a change of control triggering event and to repurchase all of the 2025 Notes. Our failure to purchase the 2025 Notes tendered in such an offer would be a default under the Indenture and would trigger a cross default of the Credit Facility.

 

Risks Related to Our Organization and Structure

 

We are and will continue to be dependent on key personnel and certain members of our management team.

 

Our success depends to a significant degree upon the contributions of certain key personnel including, but not limited to, our executive officers, each of whom would be difficult to replace. Although we have entered into employment agreements with our executive officers, there is no guarantee that these executives will remain employed with us. We have not obtained key person life insurance that would provide us with proceeds in the event of death or disability of any of our key personnel. The loss of services from key personnel could materially and adversely impact our business, prospects, liquidity, financial condition and results of operations and/or be negatively perceived in the capital markets and with our bank group.

 

Termination of the employment agreements with the members of our management team could be costly and prevent a change in control of our company.

 

Our employment agreements with Messrs. Webb, Miller and Stephens each provide that if their employment with us terminates under certain circumstances, we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could materially and adversely affect the market price of our common stock.

 

Our charter and bylaws could prevent a third party from acquiring us or limit the price that investors might be willing to pay for shares of our common stock.    

 

Provisions of the Delaware General Corporation Law, our certificate of incorporation and our bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions could delay or prevent a change in control of and could limit the price that investors might be willing to pay in the future for shares of our common stock.

 

Our Board of Directors is divided into three classes, with the term of one class expiring each year, which could delay a change in our control. Our certificate of incorporation also authorizes our Board of Directors to issue new series of common stock and preferred stock without stockholder approval. Depending on the rights and terms of any new series created, and the reaction of the market to the series, rights of existing stockholders could be negatively affected. For example, subject to applicable law, our Board of Directors could create a series of common stock or preferred stock with preferential rights to dividends or assets upon liquidation, or with superior voting rights to our existing common stock. The ability of our Board of Directors to issue these new series of common stock and preferred stock could also prevent or delay a third party from acquiring us, even if doing so would be beneficial to our stockholders. Our certificate of incorporation contains a provision similar to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in certain business combinations with an interested stockholder (as defined in the certificate of incorporation) unless the business combination is approved in advance by a majority of the independent directors or by the holders of at least two-thirds of the outstanding disinterested shares. The application of this provision could also have the effect of delaying or preventing a change of control of us. See also "The Company has entered into a Section 382 Rights Agreement, and if the share purchase rights issued pursuant to such agreement is exercised, it could materially and adversely affect the market price of our common stock" under "Risks Relating to Ownership of Our Common Stock."

 

Risks Related to Ownership of Our Common Stock

 

We are a "smaller reporting company" and, as a result of the reduced disclosure and governance requirements applicable to smaller reporting companies, our common stock may be less attractive to investors.

 

We are a "smaller reporting company" because we had public float of less than $250 million on the applicable measurement date. As a smaller reporting company, we are subject to reduced disclosure obligations in our periodic reports and proxy statements. We cannot predict whether investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

26

 

The price of our Common Stock is subject to volatility and our trading volume is relatively low.

 

The market price of our common stock may be highly volatile and subject to wide fluctuations. Compared to other public homebuilders, we believe we have relatively low trading volume. Because of this limited trading volume, purchases and sales of large numbers of our shares may cause rapid price swings in our stock.

 

If securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our common stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock is influenced by whether industry or securities analysts publish research and reports about us, our business, our market or our competitors and, if any analysts do publish such reports, what they publish in those reports. Any analysts who do cover us may make adverse recommendations regarding our common stock, adversely change their recommendations from time to time or provide more favorable relative recommendations about our competitors. We are covered by a limited number of analysts.  If any analyst who covers us now or may cover us in the future were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn may cause our stock price or trading volume to decline.

 

We do not intend to pay dividends on our common stock for the foreseeable future.

 

We currently intend to retain our future earnings to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments, applicable legal requirements and such other factors as our board of directors deems relevant. Accordingly, stockholders may need to sell their shares of our common stock to realize a return on investment, and may not be able to sell shares at or above the price paid for them.

 

The Company has entered into a Section 382 Rights Agreement, and if the share purchase rights issued pursuant to such agreement are exercised, it could materially and adversely affect the market price of our common stock.

 

We entered into a Section 382 tax benefit preservation plan on May 8, 2020 with American Stock Transfer & Trust Company, LLC, as Rights Agent (the “Rights Agreement”). The Rights Agreement is intended to discourage acquisitions of our common stock which could result in a cumulative “ownership change” as defined under Section 382, thereby preserving our current ability to utilize net operating loss carryforwards to offset future income tax obligations, which would become subject to limitations if we were to experience an “ownership change,” as defined under Section 382. While this Rights Agreement is intended to preserve our current ability to utilize net operating loss carryforwards, it effectively deters current and future purchasers from accumulating more than 4.95% of our common stock, which could delay or discourage takeover attempts that our stockholders may consider favorable. This limitation may impact our trading volume and limit the price that investors might be willing to pay for our common stock. In addition, if the share purchase rights issued pursuant to the Rights Agreement are exercised, additional shares of our common stock will be issued, which could materially and adversely affect the market price of our common stock. Moreover, sales in the public market of any shares of our common stock issued upon such exercise, or the perception that such sales may occur, could also adversely affect the market price of our common stock. These issuances would also cause our per share net income, if any, to decrease in future periods.

 

Certain stockholders have rights to cause our Company to undertake securities offerings. Future sales of our common stock or other securities convertible into our common stock could cause the market value of our common stock to decline and could result in dilution of your shares.

 

We entered into a registration rights agreement with the individual founders and certain of our institutional shareholders, IHP Capital Partners VI, LLC, TCN/TNHC LLC and Watt/TNHC LLC at the time our Company consummated its initial public offering which gives such holders registration rights to cause our Company to undertake securities offerings. Sales by these holders, or any shareholders, in substantial amounts, could cause the price of our common stock to decline significantly. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional equity securities.

 

Our Notes and future offerings of debt securities, which rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

 

We have outstanding $250 million in aggregate principal amount of Notes. In the future, we may attempt to increase our capital resources by conducting offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities, including the Notes, and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. 

 

27

 

Certain large stockholders own a significant percentage of our shares and exert significant influence over us. Their interests may not coincide with ours and may have conflicts of interests with us in the future.

 

IHP Capital Partners VI, LLC ("IHP"), H. Lawrence Webb, Wayne Stelmar and Joseph Davis (collectively, the "Founders") beneficially own (as such term is defined in Section 13(d)(3) of the Exchange Act), directly or indirectly through their affiliates, approximately 14% of our common stock and are party to an investor rights agreement, pursuant to which each such holder agreed to vote, in respect of IHP, in favor of one individual for nomination and election to the Board chosen by IHP for so long as IHP owns 4% or more of our then-outstanding stock. IHP has also agreed to vote its shares of common stock in favor of Messrs. Webb, Stelmar or Berchtold (or, if at that time nominated as a director, Mr. Davis) in any election in which any such individual is a nominee. In addition to the influence such holders have due to their voting arrangement, to the extent they and their affiliates vote their shares together on any matter, their combined stock ownership may effectively give them the power to influence matters reserved for our shareholders, including the election of members of our board of directors and significant corporate or change of control transactions.

 

Circumstances may occur in which the interest of these shareholders could be in conflict with your interests or our interests. In addition, such persons may have an interest in pursuing transactions that, in their judgment, enhance the value of their equity investment in us, even though such transactions may involve risks to you. For example, IHP is also in the real estate and land development business and may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their other equity investments, even though such transactions might involve risks to us. We have entered into various business relationships with IHP, or entities affiliated with or controlled by them, including real estate development or homebuilding joint ventures. While our audit committee, our related party review committee, or in some cases all of our independent or disinterested board members, have reviewed and approved all such transactions, investment in joint ventures have considerable risks. See the Risk Factor entitled "We currently have investments in unconsolidated joint ventures with independent third parties--some which are affiliated with certain of our board members--in which we have less than a controlling interest. These investments are highly illiquid and have significant risks due to, in part, a lack of sole decision-making authority and reliance on the financial condition and liquidity of our joint venture partners" for a description of additional risks arising from our investments in joint ventures. IHP and their affiliates are involved in business that provides equity capital for residential housing, land and development, including for businesses that directly or indirectly compete with our business. In their capacities as principals or executives of those businesses, they may also pursue opportunities that may be complementary to our business, and, as a result, those opportunities may not be available to us.

 

There is no assurance that the existence of a stock repurchase program will result in additional repurchases of our common stock or enhance long term stockholder value, and repurchases, if any, could affect our stock price and increase its volatility and will diminish our cash reserves.

 

On November 18, 2020, the Company’s Board of Directors authorized a stock repurchase program (“Repurchase Program”) pursuant to which the Company may purchase up to $10.0 million of shares of its common stock (the “New Repurchase Program”) to replace its existing $15.0 million share repurchase program which had previously been authorized in May 2018 (the “existing program”).  The existing program was cancelled upon the authorization of the New Repurchase Program.  Repurchases pursuant to the Repurchase Program or any other stock repurchase program we adopt in the future could affect our stock price and increase its volatility and will reduce the market liquidity for our stock. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program. Additionally, these repurchases will diminish our cash reserves and increase our leverage, which could impact our ability to pursue possible future strategic opportunities and acquisitions, result in lower overall returns on our cash balances and impact our debt covenants and our ability to incur more indebtedness. There can be no assurance that any stock repurchases will, in fact, occur, or, if they occur, that they will enhance stockholder value. Although stock repurchase programs are intended to enhance long term stockholder value, short-term stock price fluctuations could reduce the effectiveness of these repurchases.

 

 

28

 

 

Item 1B.

Unresolved Staff Comments

 

Not Applicable.

 

29

 

Item 2.

Properties

 

We lease our corporate headquarters in Irvine, California. The lease on this facility consists of approximately 13,000 square feet and expires in December 2025. In addition, we lease divisional offices in Northern California, Southern California and Arizona, including approximately 7,300 square feet through July 2025 in Roseville, CA approximately 7,700 square feet through October 2021 in Walnut Creek, CA (all of which is sublet), approximately 1,400 square feet through July 2021 in Agoura Hills, CA and approximately 3,100 square feet through February 2021 in Scottsdale, AZ. For information on land owned and controlled by us and our joint ventures for use in our homebuilding activities, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Lots Owned and Controlled", "- Equity in Net Loss of Unconsolidated Joint Ventures" and "- Off-Balance Sheet Arrangements and Contractual Obligations - Joint Ventures".

 

Item 3.

Legal Proceedings

 

We are involved in various claims, legal and regulatory proceedings, and litigation arising in the ordinary course of business, including, without limitation warranty claims and litigation and arbitration proceedings alleging construction defects. We do not believe that any such claims and litigation will materially affect our results of operations or financial position. For a discussion of our legal matters and associated reserves, please see Note 11, Commitments and Contingencies to the accompanying notes to our consolidated financial statements included in this annual report on Form 10-K which is incorporated herein by reference.

 

Item 4.

Mine Safety Disclosures

 

Not Applicable.

 

30

 

PART II

 

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is listed on the New York Stock Exchange under the ticker symbol "NWHM" and began trading on January 31, 2014.

 

As of February 9, 2021, we had nine holders of record of our common stock. The number of holders of record is based upon the actual numbers of holders registered at such date and does not include holders of shares in "street name" or persons, partnerships, associates, corporations or other entities in security position listings maintained by depositories.

 

Dividends

 

We currently intend to retain our future earnings to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, compliance with Delaware law, restrictions contained in any financing instruments, including but not limited to, our Credit Facility and 2025 Notes indenture, and such other factors as our board of directors deem relevant.

 

Purchases of Equity Securities by the Issuer

 

During the year ended December 31, 2020, the Company repurchased and retired 2,160,792 shares of its common stock at an aggregate purchase price of $4.3 million.  Of this amount 109,609 shares of common stock were repurchased during the three month period ending December 31, 2020 at an aggregate purchase price of $0.6 million.  During the year ended December 31, 2019, the Company repurchased and retired 153,916 shares of its common stock at an aggregate purchase price of $1.0 million.  

 

 

The following table provides information about repurchases of our common stock during the fourth quarter of the year ended December 31, 2020:

 

Period  

Total number of shares purchased

   

Average price paid per share

   

Total number of shares purchased as part of publicly announced plans or programs(1)

   

Approximate dollar value of shares that may be purchased under the plans or programs (in thousands)(1)

 

October 1, 2020 to October 31, 2020

        $           $  

November 1, 2020 to November 30, 2020

    15,109     $ 5.54       15,109     $ 9,916  

December 1, 2020 to December 31, 2020(2)

    94,500     $ 5.02       94,500     $ 9,442  

Total

    109,609     $ 5.09       109,609     $ 9,442  

 


(1)

On November 18, 2020, the Company’s Board of Directors (the “Board”) authorized a stock repurchase program pursuant to which the Company may purchase up to $10.0 million of shares of its common stock (the “New Repurchase Program”) to replace its existing $15.0 million share repurchase program which had previously been authorized in May 2018 (the “Existing Program”). As of November 19, 2020, there was $1.7 million of remaining availability under the Existing Program which was cancelled upon the authorization of the New Repurchase Program. 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, as amended.  The Board did not fix any expiration date for the New Repurchase Program.

(2) Starting December 16, 2020, our repurchases were done pursuant to a 10b5-1 plan entered into by the Company which covers the period December 16, 2020 to February 16, 2021.

 

Sales of Unregistered Securities

 

We did not sell any unregistered equity securities during the year ended December 31, 2020.

 

31

 

Item 6.

Selected Financial Data

 

The following sets forth our selected financial data and other operating data on a historical basis. You should read the following selected financial data in conjunction with our consolidated financial statements and the related notes, "Risk Factors" and with "Management’s Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this annual report on Form 10-K. The historical results presented below are not necessarily indicative of the results to be expected for any future period. 

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

   

2017

   

2016

 
   

(Dollars in thousands, except per share amounts)

 

Income Statement Data

                                       

Home sales revenue

  $ 426,251     $ 532,352     $ 504,029     $ 560,842     $ 507,949  

Land sales revenue

    157       41,664                    

Fee building revenue, including management fees

    81,003       95,333       163,537       190,324       186,507  

Total revenues

  $ 507,411     $ 669,349     $ 667,566     $ 751,166     $ 694,456  
                                         

Pretax income (loss):

                                       

Homebuilding

  $ (60,876 )   $ (10,463 )   $ (24,706 )   $ 27,034     $ 25,546  
Land           (3,405 )                  

Fee building

    1,420       2,052       4,401       5,497       8,404  

Pretax income (loss)

  $ (59,456 )   $ (11,816 )   $ (20,305 )   $ 32,531     $ 33,950  
                                         

Net income (loss) attributable to the Company

  $ (32,819 )   $ (8,037 )   $ (14,216 )   $ 17,152     $ 21,022  
Basic earnings (loss) per share   $ (1.76 )   $ (0.40 )   $ (0.69 )   $ 0.82     $ 1.02  
Diluted earnings (loss) per share   $ (1.76 )   $ (0.40 )   $ (0.69 )   $ 0.82     $ 1.01  

Weighted Average Common Shares Outstanding:

                                       

Basic

    18,680,993       20,063,148       20,703,967       20,849,736       20,685,386  

Diluted

    18,680,993       20,063,148       20,703,967       20,995,498       20,791,445  
                                         

Balance Sheet Data

                                       

Cash and cash equivalents

  $ 107,279     $ 79,314     $ 42,273     $ 123,546     $ 30,496  

Real estate inventories

  $ 314,957     $ 433,938     $ 566,290     $ 416,143     $ 286,928  

Investment in and advances to unconsolidated joint ventures

  $ 2,107     $ 30,217     $ 34,330     $ 55,824     $ 50,857  

Total assets

  $ 495,699     $ 603,189     $ 696,097     $ 644,512     $ 419,136  

Total debt

  $ 244,865     $ 304,832     $ 387,648     $ 318,656     $ 118,000  

Stockholders’ equity

  $ 197,442     $ 232,647     $ 239,954     $ 263,990     $ 244,523  
Stockholders' equity per common share outstanding   $ 10.89     $ 11.58     $ 11.96     $ 12.64     $ 11.81  

Cash dividends declared per share

  $     $     $     $     $  
                                         

Operating Data (excluding unconsolidated JVs)

                                       
Net new home orders     816       532       536       412       253  
New homes delivered     555       574       498       341       250  
Average sales price of homes delivered   $ 768     $ 927     $ 1,012     $ 1,645     $ 2,032  
Selling communities at end of year     23       21       20       17       15  
Backlog at end of year, number of homes     410       149       191       153       79  
Backlog at end of year, dollar value   $ 235,991     $ 125,803     $ 207,071     $ 162,250     $ 187,296  
Average sales price of homes in backlog   $ 576     $ 844     $ 1,084     $ 1,060     $ 2,371  
                                         

Operating Data – Fee Building Projects (excluding unconsolidated JVs)

                                       
Homes started     65       284       545       533       784  
Homes delivered     336       309       600       820       644  

 

 

32

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following in conjunction with the sections of this annual report on Form 10-K entitled "Risk Factors," "Cautionary Note Concerning Forward-Looking Statements," "Selected Financial Data" and "Business" and our historical financial statements and related notes thereto included elsewhere in this annual report on Form 10-K. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled "Risk Factors" and elsewhere in this annual report on Form 10-K.

 

Non-GAAP Measures

 

This annual report on Form 10-K includes certain non-GAAP measures, including home sales gross margin before impairments (or homebuilding gross margin before impairments), home sales gross margin percentage before impairments, Adjusted EBITDA, Adjusted EBITDA margin percentage, the ratio of Adjusted EBITDA to total interest incurred, adjusted net income attributable to The New Home Company Inc., adjusted earnings per share attributable to The New Home Company Inc., net debt, the ratio of net debt-to-capital, adjusted homebuilding gross margin (or homebuilding gross margin before impairments and interest in cost of sales), adjusted homebuilding gross margin percentage, 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, and selling, marketing and general and administrative costs excluding severance charges as a percentage of home sales revenue.  For a reconciliation of home sales gross margin before impairments (or homebuilding gross margin before impairments), adjusted homebuilding gross margin (or homebuilding gross margin before impairments and interest in cost of sales), home sales gross margin before impairments percentage and adjusted homebuilding gross margin percentage to the comparable GAAP measures, please see  "-- Results of Operations - Homebuilding Gross Margin."  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 "-- Consolidated Financial Data." For a reconciliation of adjusted net income attributable to The New Home Company Inc. and adjusted earnings per share attributable to The New Home Company Inc. to the comparable GAAP measures, please see "-- Overview."  For a reconciliation of net debt and 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."   

 

33

 

Consolidated Financial Data

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 
   

(Dollars in thousands)

 

Revenues:

                       

Home sales

  $ 426,251     $ 532,352     $ 504,029  

Land sales

    157       41,664        
       Fee building, including management fees     81,003       95,333       163,537  
      507,411       669,349       667,566  

Cost of Sales:

                       

Home sales

    367,026       469,557       436,530  

Home sales impairments

    19,000       8,300       10,000  

Land sales

    157       43,169        

Land sales impairments

          1,900        

Fee building

    79,583       93,281       159,136  
      465,766       616,207       605,666  

Gross Margin:

                       

Home sales

    40,225       54,495       57,499  

Land sales

          (3,405 )      

Fee building

    1,420       2,052       4,401  
      41,645       53,142       61,900  
                         
Home sales gross margin     9.4 %     10.2 %     11.4 %
Home sales gross margin before impairments(1)     13.9 %     11.8 %     13.4 %
Land sales gross margin     %     (8.2 )%     %
Fee building gross margin     1.8 %     2.2 %     2.7 %
                         

Selling and marketing expenses

    (30,777 )     (36,357 )     (36,065 )

General and administrative expenses

    (26,699 )     (25,723 )     (25,966 )

Equity in net loss of unconsolidated joint ventures

    (18,791 )     (3,503 )     (19,653 )
Interest expense     (3,655 )            
Project abandonment costs     (14,098 )     (94 )     (206 )

Gain (loss) on early extinguishment of debt

    (7,254 )     1,164        

Other income (expense), net

    173       (445 )     (315 )

Pretax loss

    (59,456 )     (11,816 )     (20,305 )

Benefit for income taxes

    26,587       3,815       6,075  

Net loss

    (32,869 )     (8,001 )     (14,230 )

Net (income) loss attributable to non-controlling interest

    50       (36 )     14  

Net loss attributable to The New Home Company Inc.

  $ (32,819 )   $ (8,037 )   $ (14,216 )
                         
Loss per share attributable to The New Home Company Inc.:                        
Basic   $ (1.76 )   $ (0.40 )   $ (0.69 )
Diluted   $ (1.76 )   $ (0.40 )   $ (0.69 )
                         

Interest incurred

  $ 23,936     $ 28,819     $ 28,377  

Adjusted EBITDA(2)

  $ 37,325     $ 41,430     $ 38,668  
Adjusted EBITDA margin percentage (2)     7.4 %     6.2 %     5.8 %

 


 

34

 

(1)

Home sales gross margin before impairments (also referred to as homebuilding gross margin before impairments) is a non-GAAP measure. The table below reconciles this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.

 

   

Year Ended December 31,

 
   

2020

   

%

   

2019

   

%

   

2018

   

%

 
   

(Dollars in thousands)

 

Home sales revenue

  $ 426,251       100.0 %   $ 532,352       100.0 %   $ 504,029       100.0 %

Cost of home sales

    386,026       90.6 %     477,857       89.8 %     446,530       88.6 %

Homebuilding gross margin

    40,225       9.4 %     54,495       10.2 %     57,499       11.4 %

Add: Home sales impairments

    19,000       4.5 %     8,300       1.6 %     10,000       2.0 %

Homebuilding gross margin before impairments(1)

  $ 59,225       13.9 %   $ 62,795       11.8 %   $ 67,499       13.4 %

 

(2)

Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred are non-GAAP measures. Adjusted EBITDA margin percentage is calculated as a percentage of total revenue. Management believes that Adjusted EBITDA, 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 events.  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.

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 
   

(Dollars in thousands)

 

Net loss

  $ (32,869 )   $ (8,001 )   $ (14,230 )

Add:

                       
Interest amortized to cost of sales excluding impairment charges and interest expensed(3)     27,519       27,234       18,678  

Benefit for income taxes

    (26,587 )     (3,815 )     (6,075 )

Depreciation and amortization

    6,721       8,957       6,631  

Amortization of stock-based compensation

    2,197       2,260       3,090  

Cash distributions of income from unconsolidated joint ventures

    110       374       715  
Severance charges     1,091       1,788        

Noncash inventory impairments and abandonments

    33,098       10,294       10,206  

Less:

                       

Loss (gain) on early extinguishment of debt

    7,254       (1,164)        

Equity in net loss of unconsolidated joint ventures

    18,791       3,503       19,653  

Adjusted EBITDA

  $ 37,325     $ 41,430     $ 38,668  

Total Revenue

  $ 507,411     $ 669,349     $ 667,566  
Adjusted EBITDA margin percentage     7.4 %     6.2 %     5.8 %

Interest incurred

    23,936       28,819       28,377  

Ratio of Adjusted EBITDA to total interest incurred

    1.6x       1.4x       1.4x  

 


(3)

Due to an inadvertent oversight in prior periods, interest amortized to certain inventory impairment charges and to equity in net loss of unconsolidated joint ventures was duplicated in the Adjusted EBITDA calculation.  The prior periods have been restated to correct this duplication. 

 

35

 

Overview

 

The New Home Company finished the year on a strong note with solid progress made across many key operating metrics during the fourth quarter. Robust demand for new housing resulted in an 89% increase in net new orders in the fourth quarter. The Company’s quarterly sales absorption rates improved sequentially throughout 2020 and ended the year strong, with December’s monthly sales absorption pace of 4.4 representing the highest monthly net order total in the Company's history. While the Company’s affordable product offerings continue to grow as a percentage of its total community offerings, new home demand was evident across all product segments and contributed to ending 2020 with a strong level of the number of homes in backlog, up 175% as compared to the end of 2019.

 

The increase in sales pace and improved pricing power experienced in the latter half of 2020 provided opportunities for meaningful price increases at nearly all of the Company’s communities and contributed to an increase in gross margin.  Homebuilding gross margin for 2020 was 9.4% and included $19.0 million in inventory impairment charges. Homebuilding gross margin for 2019 was 10.2% and included $8.3 million in inventory impairment charges. Excluding impairment charges, homebuilding gross margin for 2020 was 13.9%* as compared to 11.8%* in 2019, and excluding impairment charges and interest in cost of home sales, homebuilding gross margin for 2020 was 19.5%* as compared to 16.7%* in 2019, a 280 basis point improvement*.

 

Total revenues for the year ended December 31, 2020 were $507.4 million compared to $669.3 million for the prior year. The year-over-year decrease in revenues was driven largely by a 20% decrease in home sales revenue, a $41.5 million decrease in land sales revenue and, to a lesser extent, a 15% decrease in fee building revenue as a result of a decrease in construction activity at fee building communities in Irvine, California. For the full year 2020, the net loss attributable to the Company was $32.8 million, or $(1.76) per diluted share. Adjusted net income for 2020 was $3.6 million*, or $0.19 per diluted share*, and excluded pretax charges of $19.0 million in inventory impairment charges, $22.3 million in joint venture impairment charges, a $14.0 million project abandonment charge, an $8.0 million debt refinance charge and $1.1 million in severance charges. The Company's net loss for 2019 was $8.0 million, or $(0.40) per diluted share. Adjusted net income for 2019 was $4.6 million*, or $0.23 per diluted share*, after excluding pretax charges of $10.2 million in inventory impairment charges, including $1.9 million related to a land sale, a $3.5 million joint venture impairment charge, $1.8 million in severance charges and $1.5 million in land sales losses. The year-over-year increase in net loss was primarily attributable to the $41.6 million pretax increase in impairment and project abandonment charges, an $8.4 million increase in debt extinguishment charges, a $3.7 million increase in interest expense and a 20% decrease in home sale revenues. These decreases were partially offset by an improvement in gross margins excluding impairments and an increase in income tax benefit as a result of the CARES Act.  

 

The Company generated operating cash flow of $93.1 million during 2020 and ended the year with $107.3 million in cash and cash equivalents and had no borrowings outstanding under its revolving credit facility. The Company also strengthened its balance sheet by refinancing its Senior Notes to October 2025, reduced its debt outstanding by $60 million during 2020, and extended the maturity date of its bank credit facility to April 2023. At December 31, 2020, the Company had a debt-to-capital ratio of 55.4% and a net debt-to-capital ratio of 41.0%*, which represented an 820-basis point improvement compared to 2019.  The Company also repurchased 2,160,792 shares of our common stock during 2020 for $4.3 million. In connection with the net operating loss carryback tax benefit recognized during 2020 as a result of the CARES Act, the Company had approximately $27.4 million of expected federal income tax refunds receivable recorded as of December 31, 2020. 

 

In addition, the Company made significant progress during 2020 to wind down its joint venture activities in order to reduce its related capital commitments, and is actively looking to reinvest its capital in areas where it believes such investments will yield results that meet its investment criteria.  The Company had reduced the level of land acquisition over the last year as a result of its focus to generate cash flows and reduce its leverage, however, the Company has been actively evaluating new land opportunities to rebuild its pipeline as economic conditions have improved over the past few months, especially for the homebuilding industry. The Company plans to execute a balanced approach of acquiring new land positions and improving our operating metrics to generate positive shareholder returns.

 

Although economic conditions have improved since mid-March and April, in particular for the housing industry, we remain cautious as to the impact of the COVID-19 pandemic on the economy, among other things. Despite the uncertainty related to this pandemic, we believe pent up demand for housing continues to be strong and that The New Home Company is on more solid footing moving forward.

 


 

* Net-debt-to capital ratio, adjusted net income, adjusted earnings per diluted share, home sales gross margin excluding impairment charges (homebuilding gross margin before impairments) and adjusted homebuilding gross margin (or homebuilding gross margin excluding impairments and interest in cost of home sales) are non-GAAP measures. For a reconciliation of the net debt-to-capital ratio to the appropriate GAAP measure, please see "Liquidity and Capital Resources - Debt-to-Capital Ratios."  We believe that the ratio of net debt-to-capital is a relevant financial measure for management and investors to understand the leverage employed in our operations and as an indicator of the Company’s ability to obtain financing.  We believe adjusted net income and adjusted earnings per diluted share are meaningful as the impact of impairments, loss on land sales, debt refinance charges and severance charges are removed to provide investors with an understanding of the impact these items had on earnings. We believe home sales gross margin before impairments and homebuilding gross margin excluding impairments and interest in cost of home sales is meaningful, as it isolates the impact home sales impairments and interest costs have on homebuilding gross margin and provides investors better comparisons with our competitors, who may adjust gross margins in a similar fashion.

 

36

 

Non-GAAP Footnote (continued)

 

   

Year Ended December 31,

 
   

2020

   

2019

   

2018

 
    (Dollars in thousands)  
                         
Net loss attributable to The New Home Company Inc.   $ (32,819 )   $ (8,037 )   $ (14,216 )
Total impairments and other charges, net of tax     36,422       12,643       21,810  
Adjusted net income attributable to The New Home Company Inc.   $ 3,603     $ 4,606     $ 7,594  
                         

Loss per share attributable to The New Home Company Inc.:

                       
Basic   $ (1.76 )   $ (0.40 )   $ (0.69 )
Diluted   $ (1.76 )   $ (0.40 )   $ (0.69 )
                         

Adjusted earnings per share attributable to The New Home Company Inc.:

                       
Basic   $ 0.19     $ 0.23     $ 0.37  
Diluted   $ 0.19     $ 0.23     $ 0.37  
                         

Weighted average shares outstanding for adjusted earnings per share:

                       
Basic     18,680,993       20,063,148       20,703,967  
Diluted     18,799,780       20,120,450       20,804,859  
                         
Inventory impairments   $ 19,000     $ 10,200     $ 10,000  
Abandoned project costs related to Arizona luxury condominium community     14,000              
Joint venture impairments     22,325       3,500       20,000  
Loss related to retirement of 2022 Notes     8,024              
Severance charges     1,091       1,788        
Loss on land sales           1,505        
Less: Related tax benefit     (28,018 )     (4,350 )     (8,190 )
Total impairments and other charges, net of tax   $ 36,422     $ 12,643     $ 21,810  
                         

 

 

37

 

 

Market Conditions and COVID-19 Impact and Strategy 

 

While the broader economic recovery following the nationwide COVID-19 related shutdown is ongoing, our business generally was only impacted from mid-March of 2020 through mid-second quarter 2020 when economic conditions in our markets started to improve. The Company has recently experienced very strong demand for its homes. This resurgence in demand began in the back half of the 2020 second quarter, following the significant drop in sales experienced at the end of the 2020 first quarter through mid-second quarter 2020 as a result of the initial impact of the COVID-19 pandemic.   The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates and overall housing affordability.  We attribute the recent higher levels of demand to a number of factors, including low interest rates, a continued undersupply of homes, consumers’ increased focus on the importance of home, and a general desire for more indoor and outdoor space. As a result, many of the Company's operating metrics improved significantly as compared to 2019, as described below. We believe these factors will continue to support demand in the near term but recognize our year-over-year order improvement is not necessarily indicative of future results due to various factors including seasonality, anticipated community openings and closeouts, and continued uncertainty surrounding the economic and housing market environments due to the impacts of the ongoing COVID-19 pandemic and the related COVID-19 control responses. Overall economic conditions in the United States have been, and continue to be, impacted negatively by the COVID-19 pandemic and uncertainty exists with respect to unemployment levels, consumer confidence, political uncertainty, civil unrest, financial and mortgage markets, as well as the impacts of COVID-19-related government directives, actions and economic relief efforts, all of which could impact the demand for our homes.

 

  The COVID-19 pandemic has resulted in, among other things, quarantines, "stay-at-home" or "shelter-in-place" orders, and similar mandates from national, state and local governments that have substantially restricted daily activities and caused many businesses to curtail or cease normal operations. Notwithstanding these developments, the state and local governments in the markets in which we operate have deemed housing to be an essential business, which has allowed us to continue with construction and sales of homes. We have also implemented several health and safety protocols to protect our employees, trade partners and customers as required by state and local government agencies and taking into consideration the CDC and other public health authorities’ guidelines. While these actions are and have been necessary, they do impact our ability to operate our business in its ordinary and traditional course due to, among other things, a reduction in efficiency and capacity of municipal and private services necessary to progress our operations, delays as a result of some supply chain disruptions, and, showing homes by "appointment only" at various times throughout the year. Our sales operations continue to leverage our virtual sales tools to connect with our customers online, including through the use of our online sales concierges, providing virtual options for online home tours and design center selections, and providing for self-guided tour options to allow homebuyers to tour models privately. 

 

Much uncertainty existed at the onset of the COVID-19 pandemic and we experienced adverse business conditions, including a slowdown in customer traffic and sales pace and an increase in cancellations during this time.  To mitigate the adverse impacts and uncertainty, we implemented initiatives to preserve capital, including implementing additional cost cutting measures, curtailing the acquisition and development of land, renegotiating lot takedown arrangements and limiting the number of speculative homes under construction.  As a result, we made strategic decisions to (i) liquidate the remaining developable lots in a land development joint venture in Northern California which resulted in a $20.0 million other-than-temporary impairment charge in the 2020 second quarter, (ii) cease further development at a wholly owned community in Scottsdale, Arizona resulting in a $14.0 million project abandonment charge during the 2020 first quarter, and (iii) exit a land development joint venture in Southern California which resulted in a $2.3 million other-than-temporary impairment charge in the 2020 first quarter. By not continuing with these projects, we avoided capital outlays to help preserve capital for the future, and will be able to seek federal tax refunds.

 

  

38

 

Results of Operations  

 

Net New Home Orders

 

   

Year Ended December 31,

 
         

Change

           

Change

       
   

2020

   

Amount

   

%

   

2019

   

Amount

   

%

   

2018

 

Net new home orders

                                                 
Southern California   266       (22 )     (8 )%     288     (13 )     (4 )%   301  
Northern California   353       138       64 %     215     13       6 %   202  
   Arizona   197       168       579 %     29     (4 )     (12 )%   33  

Total net new home orders

  816       284       53 %     532     (4 )     (1 )%   536  
                                                   

Monthly sales absorption rate per community (1)

                                             
Southern California   2.4       0.3       14 %     2.1     (0.1 )     (5 )%   2.2  
Northern California   2.9       0.6       26 %     2.3     (0.4 )     (15 )%   2.7  
   Arizona   3.7       2.5       208 %     1.2     (0.5 )     (29 )%   1.7  
Total monthly sales absorption rate per community (1)   2.9       0.8       38 %     2.1     (0.2 )     (9 )%   2.3  
                                                   
Cancellation rate   9 %     (2 )%     NA       11 %   1 %     NA     10 %
                                                   

Selling communities at end of year:

                                                 
Southern California   6       (4 )     (40 )%     10     (3 )     (23 )%   13  
Northern California   10       1       11 %     9     4       80 %   5  
   Arizona   7       5       250 %     2           %   2  

Total selling communities

  23       2       10 %     21     1       5 %   20  
                                                   

Average selling communities

                                                 
Southern California   9       (2 )     (18 )%     11     (1 )     (8 )%   12  
Northern California   10       2       25 %     8     2       33 %   6  
   Arizona   4       2       100 %     2           %   2  

Total average selling communities

  24       3       14 %     21     1       5 %   20  

 


(1)

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

 

Net new home orders for the year ended December 31, 2020 increased 53% as compared to prior year, driven by a 38% increase in the monthly sales absorption rate of 2.9 per community and, to a lesser extent, a 14% year-over-year increase in average selling communities, which resulted in an ending community count of 23 compared to 21 for the prior year. Quarterly sales absorption rates improved sequentially throughout 2020 and ended the year strong, with December’s monthly sales absorption pace of 4.4 representing the highest monthly net order total in the Company's history.  We attribute the recently higher level of demand to a number of factors, including low interest rates, a continued undersupply of homes, consumers’ increased focus on the importance of the home, and the opening of more affordable communities in the strong Phoenix, Arizona market. The Company also benefited from the success of its enhanced virtual selling platform from which a large portion of our net new orders were generated from during the year. Home buyers are demonstrating an increased level of comfort with shopping for homes online allowing our sales team to identify qualified, motivated buyers and converting those leads into sales.

 

Demand was strongest during 2020 for our more-affordable, entry-level product, which averaged a monthly sales pace of 3.5 per community compared to a total of 2.9 per community for the companywide average. Approximately half of all net new orders during the year ended December 31, 2020 were from entry-level communities compared to approximately 35% during the prior year. We opened 12 new communities during 2020, the majority of which are classified as entry-level product. The sales pace for our entry-level product was strong across substantially all entry-level communities, where all but one community was at or above the 2.9 companywide average. In addition to the success with our entry-level product, the sales pace for our first time move up product increased 82% year-over-year, primarily due to strong order volume from two of our recently opened first time move up communities in Arizona and our single family detached community in Rancho Mission Viejo which opened early in 2020.  Additionally, Arizona’s 208% increase in sales pace compared to the prior year was driven by the opening of seven new communities during 2020, five of which were classified as entry-level product and two of which were classified as first time move up product, and all were above the 2.9 companywide average.

 

The Company’s cancellation rate for 2020 was 9% as compared to 11% in the prior year.  Since peaking in the first quarter of 2020 as a result of the economic impact COVID-19 had on our buyers, we have seen year-over-year decreases in our quarterly cancellation rates for each quarter subsequent to the 2020 second quarter.

 

 

39

 

Backlog

 

   

Year Ended December 31,

 
   

2020

   

2019

   

% Change

 
   

Homes

    Dollar Value    

Average Price

   

Homes

   

Dollar Value

   

Average Price

   

Homes

   

Dollar Value

   

Average Price

 
   

(Dollars in thousands)

 

Southern California

    76     $ 55,322     $ 728       72     $ 69,263     $ 962       6 %     (20 )%     (24 )%

Northern California

    172       116,594       678       66       41,973       636       161 %     178 %     7 %

Arizona

    162       64,075       396       11       14,567       1,324       1373 %     340 %     (70 )%

Total

    410     $ 235,991     $ 576       149     $ 125,803     $ 844       175 %     88 %     (32 )%

 

   

Year Ended December 31,

 
   

2019

   

2018

   

% Change

 
   

Homes

    Dollar Value    

Average Price

   

Homes

   

Dollar Value

   

Average Price

   

Homes

   

Dollar Value

   

Average Price

 
   

(Dollars in thousands)

 

Southern California

    72     $ 69,263     $ 962       90     $ 111,024     $ 1,234       (20 )%     (38 )%     (22 )%

Northern California

    66       41,973       636