THE NEW HOME COMPANY INC. CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements contained in this quarterly report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, our objectives for future operations, and potential adverse impacts of the COVID-19 pandemic are forward-looking statements. These forward-looking statements are frequently accompanied by words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "goal," "plan," "could," "can," "might," "should," and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, financial needs, and potential adverse impacts due to COVID-19. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year endedDecember 31, 2019 and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A, "Risk Factors" of this quarterly report on 10-Q. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. OnMarch 11 , theWorld Health Organization characterized the outbreak of COVID-19 a global pandemic. We continue to be uncertain of the full magnitude or duration of the business and economic impacts resulting from the measures enacted to contain this outbreak as the impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the situation on its financial condition, liquidity, operations, suppliers, customers, industry, and workforce; however, the Company is not able to estimate all the effects the COVID-19 outbreak will have on its results of operations, financial condition or liquidity for the year-endedDecember 31, 2020 given the rapid evolution of this outbreak and related containment responses. In addition to the following factors, reference is made to Part II, Item 1A of this this quarterly report on Form 10-Q for a discussion of material changes from the risk factors set forth in our annual report on Form 10-K for the year endedDecember 31, 2019 . • Risks related to our business, including among other things:
• our geographic concentration primarily in
land to acquire and our ability to acquire such land on favorable terms or at
all;
• the cyclical nature of the homebuilding industry which is affected by general
economic real estate and other business conditions;
the illiquid nature of real estate investments and the inventory risks related
• to declines in value of such investments which may result in significant
impairment charges;
• our ability to execute our business strategies is uncertain;
• a reduction in our sales absorption levels may force us to incur and absorb
additional community-level costs;
• shortages of or increased prices for labor, land or raw materials used in
housing construction;
• availability and skill of subcontractors at reasonable rates;• construction defect, product liability, warranty, and personal injury claims,
including the cost and availability of insurance;
• the degree and nature of our competition;
• inefficient or ineffective allocation of capital could adversely affect or
operations and/or stockholder value if expected benefits are not realized;
• delays in the development of communities; • increases in our cancellation rate;
• a large proportion of our fee building revenue being dependent upon one
customer;
• employment-related liabilities with respect to our contractors' employees;
• increased costs, delays in land development or home construction and reduced
consumer demand resulting from adverse weather conditions or other events
outside our control;
• increased cost and reduced consumer demand resulting from power, water and
other natural resource shortages or price increases;
• because of the seasonal nature of our business, our quarterly operating
results fluctuate;
• we may be unable to obtain suitable bonding for the development of our housing
projects;
• inflation could adversely affect our business and financial results;
• a major health and safety incident relating to our business could be costly in
terms of potential liabilities and reputational damage;
• negative publicity or poor relations with the residents of our communities
could negatively impact sales, which could cause our revenues or results of
operations to decline; and
• failure to comply with privacy laws or information systems interruption or
breach in security that releases personal identifying information or other
confidential information.
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Table of Contents • Risks related to laws and regulations, including among other things: • mortgage financing, as well as our customer's ability to obtain such
financing, interest rate increases or changes in federal lending programs;
• changes in tax laws can increase the after-tax cost of owning a home, and
further tax law changes or government fees could adversely affect demand for
the homes we build, increase our costs, or negatively affect our operating
results;
• we may not be able to generate sufficient taxable income to fully realize our
net deferred tax asset;
• new and existing laws and regulations, including environmental laws and
regulations, or other governmental actions may increase our expenses, limit
the number of homes that we can build or delay the completion of our projects
or otherwise negatively impact our operations;
• changes in global or regional climate conditions and legislation relating to
energy and climate change could increase our costs to construct homes;
• Risks related to financing and indebtedness, including among other things:
• difficulty in obtaining sufficient capital could prevent us from acquiring
land for our developments or increase costs and delays in the completion of
our development projects;
• our level of indebtedness may adversely affect our financial position and
prevent us from fulfilling our debt obligations, and we may incur additional
debt in the future;
• the significant amount and illiquid nature of our joint venture partnerships,
in which we have less than a controlling interest;
• our current financing arrangements contain and our future financing
arrangements will likely contain restrictive covenants related to our
operations;
• a breach of the covenants under the Indenture or any of the other agreements
governing our indebtedness could result in an event of default under the
Indenture or other such agreements;
• potential future downgrades of our credit ratings could adversely affect our
access to capital and could otherwise have a material adverse effect on us;
• interest expense on debt we incur may limit our cash available to fund our
growth strategies;
• we may be unable to repurchase the Notes upon a change of control as required
by the Indenture;
• Risks related to our organization and structure, including among other things:
• our dependence on our key personnel;
• the potential costly impact termination of employment agreements with members
of our management that may prevent a change in control of the Company;
• our charter and bylaws could prevent a third party from acquiring us or limit
the price that investors might be willing to pay for shares of our common
stock;
• Risks related to ownership of our common stock, including among other things:
• that we are eligible to take advantage of reduced disclosure and governance
requirements because of our status as a smaller reporting company;
• the price of our common stock is subject to volatility and our trading volume
is relatively low;
• if securities or industry analysts do not publish, or cease publishing,
research or reports about us, our business or our market, or if they change
their recommendations regarding our common stock adversely, our stock price
and trading volume could decline;
• we do not intend to pay dividends on our common stock for the foreseeable
future;
• certain stockholders have rights to cause our Company to undertake securities
offerings;
• our senior notes rank senior to our common stock upon bankruptcy or
liquidation;
• certain large stockholders own a significant percentage of our shares and
exert significant influence over us;
• there is no assurance that the existence of a stock repurchase plan will
enhance shareholder value;
• non-
tax on gain realized on the sale of disposition of such shares.
Moreover, we operate in a very competitive and rapidly changing environment. New
risks emerge from time to time, such as COVID-19. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements we may make. In light of these risks, uncertainties
and assumptions, the future events and trends discussed in this quarterly report
on Form 10-Q may not occur and actual results could differ materially and
adversely from those anticipated or implied in the forward-looking statements.
The forward-looking statements in this quarterly report on Form 10-Q speak only
as of the date of this quarterly report on Form 10-Q, and we undertake no
obligation to revise or publicly release any revision to these forward-looking
statements, except as required by law. Given these risks and uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements.
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Table of Contents Non-GAAP Measures This quarterly report on Form 10-Q includes certain non-GAAP measures, including home sales gross margin before impairments (or homebuilding gross margin before impairments), home sales gross margin before impairments percentage, Adjusted EBITDA, Adjusted EBITDA margin percentage, ratio of Adjusted EBITDA to total interest incurred, net debt, ratio of net debt-to-capital, adjusted net income (loss), adjusted net income (loss) per diluted share, general and administrative costs excluding severance charges, general and administrative costs excluding severance charges as a percentage of home sales revenue, selling, marketing and general and administrative costs excluding severance charges, selling, marketing and general and administrative costs excluding severance charges as a percentage of home sales revenue, adjusted homebuilding gross margin (or homebuilding gross margin before impairments and interest in cost of home sales) and adjusted homebuilding gross margin percentage. 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 home 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 "-- Selected Financial Information." For a reconciliation of net debt and ratio of net debt-to-capital to the comparable GAAP measures, please see "-- Liquidity and Capital Resources -Debt-to-Capital Ratios." For a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP measure, please see "-- Overview." 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." 46
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Table of Contents
Selected Financial Information
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(Dollars in thousands)
Revenues:
Home sales $ 77,757 $ 140,464 $ 173,416 $ 239,650
Land sales 10 - 157 -
Fee building, including management fees 21,193 22,285 57,420 41,947
98,960 162,749 230,993 281,597
Cost of Sales:
Home sales 66,216 123,525 150,938 210,094
Home sales impairments 19,000 - 19,000 -
Land sales 10 - 157 -
Fee building 20,985 21,770 56,482 41,038
106,211 145,295 226,577 251,132
Gross Margin:
Home sales (7,459 ) 16,939 3,478 29,556
Land sales - - - -
Fee building 208 515 938 909
(7,251 ) 17,454 4,416 30,465
Home sales gross margin (9.6 )% 12.1 % 2.0 % 12.3 %
Home sales gross margin before
impairments(1) 14.8 % 12.1 % 13.0 % 12.3 %
Land sales gross margin - % N/A - % N/A
Fee building gross margin 1.0 % 2.3 % 1.6 % 2.2 %
Selling and marketing expenses (6,386 ) (9,683 ) (13,852 ) (18,362 )
General and administrative expenses (6,892 ) (5,841 ) (12,915 ) (13,232 )
Equity in net income (loss) of
unconsolidated joint ventures (19,962 ) 185 (21,899 ) 369
Interest expense (1,271 ) - (1,989 ) -
Project abandonment costs (94 ) (14 ) (14,130 ) (19 )
Gain on early extinguishment of debt 702 552 579 969
Other income (expense), net (68 ) (88 ) 155 (276 )
Pretax income (loss) (41,222 ) 2,565 (59,635 ) (86 )
(Provision) benefit for income taxes 16,929 (974 ) 26,866 (310 )
Net income (loss) (24,293 ) 1,591 (32,769 ) (396 )
Net income attributable to
non-controlling interest - (19 ) - (19 )
Net income (loss) attributable to The
New Home Company Inc. $ (24,293 ) $ 1,572 $ (32,769 ) $ (415 )
Interest incurred $ 6,150 $ 7,606 $ 12,530 $ 15,367
Adjusted EBITDA(2) $ 6,394 $ 11,071 $ 13,375 $ 17,946
Adjusted EBITDA margin percentage(2) 6.5 % 6.8 % 5.8 % 6.4 %
LTM(3) Ended June 30,
2020 2019
Interest incurred $ 25,982 $ 30,416
Adjusted EBITDA(2) $ 36,859 $ 46,536
Adjusted EBITDA margin percentage (2) 6.0 % 6.9 %
Ratio of Adjusted EBITDA to total interest incurred (2) 1.4x 1.5x
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Table of Contents
(1) Home sales gross margin before impairments (also referred to as
homebuilding gross margin before impairments) is a non-GAAP measure. The
table below reconciles this non-GAAP financial measure to homebuilding
gross margin, the nearest GAAP equivalent.
Three Months Ended June 30, Six Months Ended June 30,
2020 % 2019 % 2020 % 2019 %
(Dollars in thousands)
Home sales
revenue $ 77,757 100.0 % $ 140,464 100.0 % $ 173,416 100.0 % $ 239,650 100.0 %
Cost of home
sales 85,216 109.6 % 123,525 87.9 % 169,938 98.0 % 210,094 87.7 %
Homebuilding
gross margin (7,459 ) (9.6 )% 16,939 12.1 % 3,478 2.0 % 29,556 12.3 %Add: Home sales impairments 19,000 24.4 % - - % 19,000 11.0 % - - % Homebuilding gross margin before impairments$ 11,541 14.8 %$ 16,939 12.1 % $
22,478 13.0 %$ 29,556 12.3 %
(2) Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted
EBITDA to total interest incurred are non-GAAP measures. Adjusted EBITDA
margin percentage is calculated as a percentage of total revenue.
Management believes that Adjusted EBITDA, which is a non-GAAP measure,
assists investors in understanding and comparing the operating
characteristics of homebuilding activities by eliminating many of thedifferences in companies' respective capitalization, interest costs, tax
position, inventory impairments and other non-recurring items. Due to the
significance of the GAAP components excluded, Adjusted EBITDA should not be
considered in isolation or as an alternative to net income (loss), cash
flows from operations or any other performance measure prescribed by GAAP.
The table below reconciles net income (loss), calculated and presented in
accordance with GAAP, to Adjusted EBITDA.
LTM(3) Ended
Three Months Ended June 30, Six Months Ended June 30, June 30,
2020 2019 2020 2019 2020 2019
(Dollars in thousands)
Net income (loss) $ (24,293 ) $ 1,591 $ (32,769 ) $ (396 ) $ (40,374 ) $ (14,090 )
Add:
Interest amortized to cost of
sales excluding impairment
charges, and interest expensed
(4) 5,872 6,301 12,736 11,153 28,817 23,317
Provision (benefit) for income
taxes (16,929 ) 974 (26,866 ) 310 (30,991 ) (4,972 )
Depreciation and amortization 1,778 2,386 3,623 5,042 7,538 9,027
Amortization of stock-based
compensation 521 523 1,110 1,089 2,281 2,475
Cash distributions of income
from unconsolidated joint
ventures - 19 - 279 95 279
Severance charges 1,091 - 1,091 1,788 1,091 1,788
Noncash inventory impairments
and abandonments 19,094 14 33,130 19 43,405 10,182
Less:
Gain on early extinguishment of debt (702 ) (552 ) (579 ) (969 ) (774 ) (969 ) Equity in net (income) loss of unconsolidated joint ventures 19,962 (185 ) 21,899 (369 ) 25,771 19,499 Adjusted EBITDA$ 6,394 $ 11,071 $ 13,375 $ 17,946 $ 36,859 $ 46,536 Total Revenue$ 98,960 $ 162,749
6.5 % 6.8 % 5.8 % 6.4 % 6.0 % 6.9 %
Interest incurred $ 6,150 $ 7,606 $ 12,530 $ 15,367 $ 25,982 $ 30,416
Ratio of Adjusted LTM(3) EBITDA
to total interest incurred 1.4x 1.5x
(3) "LTM" indicates amounts for the trailing 12 months.
(4) Due to an inadvertent oversight in prior periods, interest amortized tocertain inventory impairment charges and to equity in net income (loss) of
unconsolidated joint ventures was duplicated in the Adjusted EBITDA
calculation. The prior periods have been restated to correct this
duplication.
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Table of Contents Overview The Company made solid progress on a number of fronts in the 2020 second quarter as it generated positive order momentum as the quarter progressed, made additional improvements to its cost structure and improved its balance sheet leverage as compared to the prior year period and continued its pivot to more affordable price points. The Company also addressed certain underperforming assets, which resulted in significant impairments and a loss for the quarter, but should provide a better path forward both from a financial and strategic standpoint. After experiencing unprecedented uncertainty during the month of April, our monthly absorption pace improved sequentially each month with June ending at 3.6 net orders per community for the month, a 33% increase compared toJune 2019 . We believe these results were driven by record-low interest rates and pent-up demand for new housing. Year-over-year orders for April and May decreased 56% and 5%, respectively, before increasing 68% in June, marking the highest monthly net order total in our Company's history. Our more-affordable communities led the way with an absorption pace 4.3 net orders per community for the month of June. Consistent with our strategic shift to more-affordable product, we opened three new entry-level communities inGilbert, Arizona in May and ended the 2020 second quarter with 25 active selling communities, up 25% compared to the prior year. The stronger demand later in the quarter contributed to a 14% increase in homes in backlog compared to the 2019 second quarter and positioned us for a better second half of 2020. Total revenues for the 2020 second quarter were$99.0 million compared to$162.7 million in the prior year period. The year-over-year drop in revenues was driven largely by a lower beginning backlog and slower sales during April resulting from a temporary drop in demand from the pandemic, which impacted our ability to sell and deliver homes during the quarter. During the 2020 second quarter, the Company realized a$41.2 million pretax loss as compared to pretax income of$2.6 million in the prior year period. The 2020 second quarter included$19.0 million in inventory impairment charges, a$20.0 million joint venture impairment charge related to a land development joint venture inNorthern California , and$1.1 million in severance charges. Net loss attributable to the Company for the 2020 second quarter was$24.3 million , or ($1.32 ) per diluted share, compared to net income of$1.6 million , or$0.08 per diluted share, for the prior year period. Excluding the impairment and severance charges and a$1.8 million net deferred tax asset remeasurement benefit, adjusted net loss for the 2020 second quarter was($0.7) million *, or ($0.04 )* per diluted share. Other factors contributing to the year-over-year increase in net loss for the 2020 second quarter included a 45% decrease in home sale revenues and a$1.3 million increase in interest expense. The Company generated operating cash flow of$4.7 million for the 2020 second quarter and ended the quarter with$85.6 million in cash and cash equivalents and no borrowings outstanding under its revolving credit facility. The Company also strengthened its balance sheet by extending the maturity date of its bank credit facility toSeptember 30, 2021 and repurchased and retired$5.8 million in principal of its 7.25% Senior Notes due 2022 at a discount. The Company repurchased 817,300 shares of our common stock during the 2020 second quarter for$1.5 million , or an average price of$1.80 per share. AtJune 30, 2020 , the Company had a debt-to-capital ratio of 60.0% and a net debt-to-capital ratio of 51.5*%, which represented a 620-basis point improvement compared to the 2019 second quarter. As the COVID-19 pandemic is still impacting lives around the world and in our markets, we continue to prioritize the health and safety of our employees, trade partners and home buyers. Despite the uncertainty related to this pandemic, we believe pent up demand for housing continues to be strong and thatThe New Home Company is on more solid footing moving forward. -------------------------------------------------------------------------------- *Net debt-to-capital ratio, adjusted net loss and adjusted net loss per diluted share are non-GAAP measures. For a reconciliation of net debt-to-capital to the appropriate GAAP measure, please see "-- Liquidity and Capital Resources - Debt-to-Capital Ratios." For a reconciliation of adjusted net loss and adjusted net loss per diluted share to the appropriate GAAP measures, please see below. 49
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Table of Contents
Non-GAAP Footnote (continued)
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(Dollars in thousands,except per share amounts)
Net income (loss) attributable to The New Home Company Inc.$ (24,293 ) $ 1,572 $ (32,769 ) $ (415 ) Inventory impairments, abandoned project costs, joint venture impairments and severance charges, net of tax 25,414 - 34,847 1,113 Noncash deferred tax asset remeasurement (1,827 ) - (3,941 ) - Adjusted net income (loss) attributable to The New Home Company Inc. $ (706 )$ 1,572
Earnings (loss) per share attributable toThe New Home Company Inc. : Basic $ (1.32 )$ 0.08 $ (1.71 ) $ (0.02 ) Diluted $ (1.32 )$ 0.08 $ (1.71 ) $ (0.02 ) Adjusted earnings (loss) per share attributable toThe New Home Company Inc. : Basic $ (0.04 )$ 0.08 $ (0.10 ) $ 0.03 Diluted $ (0.04 )$ 0.08 $ (0.10 ) $ 0.03 Weighted average shares outstanding: Basic 18,341,549 20,070,914 19,146,687 20,028,600 Diluted 18,341,549 20,095,533 19,146,687 20,082,018 (1) Inventory impairments$ 19,000 $ -$ 19,000 $ - Abandoned project costs related to Arizona luxury condominium community - - 14,000 - Joint venture impairments related to joint venture exits 20,038 - 22,325 - Severance charges 1,091 - 1,091 1,788 Less: Related tax benefit (14,715 ) - (21,569 ) (675 ) Inventory impairments, abandoned project costs, joint venture impairments and severance charges, net of tax$ 25,414 $ -$ 34,847 $ 1,113
(1) Applicable only for diluted earnings per share for adjusted earning per
share calculation.
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Table of Contents Results of OperationsNet New Home Orders Three Months Ended Six Months Ended June 30, Increase/(Decrease) June 30, Increase/(Decrease) 2020 2019 Amount % 2020 2019 Amount % Net new home orders: Southern California 75 90 (15 ) (17 )% 137 148 (11 ) (7 )% Northern California 60 53 7 13 % 128 98 30 31 % Arizona 29 11 18 164 % 31 20 11 55 % Total net new home orders 164 154 10 6 % 296 266 30 11 % Monthly sales absorption rate per community: (1) Southern California 2.3 2.5 (0.2 ) (8 )% 2.1 2.0 0.1 5 % Northern California 1.9 2.3 (0.4 ) (17 )% 2.1 2.2 (0.1 ) (5 )% Arizona 3.2 1.8 1.4 78 % 2.2 1.7 0.5 29 % Total monthly sales absorption rate per community (1) 2.2 2.4 (0.2 ) (8 )% 2.1 2.0 0.1 5 % Cancellation rate 11 % 11 % - % NA 14 % 12 % 2 % NA Selling communities at end of period: Southern California 11 11 - - % Northern California 10 7 3 43 % Arizona 4 2 2 100 % Total selling communities 25 20 5 25 % Average selling communities: Southern California 11 12 (1 ) (8 )% 11 12 (1 ) (8 )% Northern California 11 8 3 38 % 10 8 2 25 % Arizona 3 2 1 50 % 2 2 - - % Total average selling communities 25 22 3 14 % 23 22 1 5 %
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(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 2020 second quarter increased 6% as compared to the
same period in 2019 primarily due to a 14% increase in total average selling
communities, partially offset by a decline in the monthly sales absorption rate
due to slow sales activity in the early part of the quarter as a result of the
stay-at-home orders implemented in the latter part of the 2020 first quarter
related to COVID-19. However, sales increased substantially in June 2020 as
COVID-19 restrictions eased and the 2020 second quarter monthly absorption pace
increased 10% sequentially over the 2020 first quarter. Historically low
interest rates and a shortage of resale inventory due to restricted
accessibility from the pandemic contributed to increased buyer demand and the
Company recorded the highest sales month in its history during June 2020 with
net new orders up 68% compared to June 2019 . The Company has also benefited
from the success of its enhanced virtual selling platform from which a large
portion of our net new orders generated during the 2020 second quarter. Home
buyers are demonstrating an increased level of comfort with shopping for homes
online allowing our sales team to identify qualified, motivated buyers and
convert those leads into sales in a much more cost-effective way versus the
traditional sales model.
Partially offsetting the decline in the monthly sales absorption pace for our
California communities was a 78% increase in the monthly sales pace for Arizona ,
attributable to the successful opening of its entry-level masterplan community
in Gilbert, Arizona during the 2020 second quarter, which had a combined monthly
sales pace of 4.0 for its three selling communities. The decline in monthly
sales absorption pace for Southern California was primarily due to the 2019
second quarter benefiting from strong order volume from our community of
attached court homes located in the Inland Empire, which experienced its highest
sales pace since its opening during that prior period. Northern California sales
pace also decreased in the 2020 second quarter compared to the prior year
period, due to weakened demand for some of our Sacramento communities,
especially early in the quarter. Notwithstanding the decrease in sales pace for
Northern California , the increase in average selling communities contributed to
an increase in net new home orders for the 2020 second quarter.
51
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Net new home orders for the six months ended June 30, 2020 increased 11% as
compared to the same period in 2019, as a pick up in demand during the latter
part of the 2020 second quarter resulted in a 5% increase in the monthly sales
absorption rate. A 5% year-over-year increase in average selling communities
also contributed to the increase in orders for the 2020 year-to-date period and
resulted in an ending community count of 25 compared to 20 for the prior year
period.
Demand was strongest during the six months ended June 30, 2020 for our
more-affordable, entry-level product, which averaged a monthly sales pace of 2.6
per community compared to a total of 2.1 per community for the company wide
average. We opened six new communities during 2020, the majority of which fall
under our entry-level product category. The sales pace for our entry-level
product benefited the most from an existing Northern California masterplan
community in Vacaville as well as a popular community of paired homes in Rancho
Mission Viejo in Southern California . In addition to the success with our
entry-level product, the sales pace for our first time move up product increased
38% year-over-year, primarily due to strong order volume from our recently
opened single family detached community in Rancho Mission Viejo , as each phase
release continues to sell well.
The Company's cancellation rate for the 2020 second quarter was flat with the
prior year at 11%. The cancellation rate for the six months ended June 30, 2020
was 14%, a modest increase from 12% for the comparable prior year period. The
increase in the cancellation rate was due to increased cancellations occurring
in March and April as a result of the economic impact COVID-19 had on our
buyers' confidence.
Backlog
As of June 30,
2020 2019 % Change
Average
Homes Dollar Value Average Price Homes Dollar Value Price Homes Dollar Value Average Price
(Dollars in thousands)
Southern California 91 $ 74,547 $ 819 86 $ 92,438 $ 1,075 6 % (19 )% (24 )%
Northern California 117 81,909 700 85 71,648 843 38 % 14 % (17 )%
Arizona 27 12,337 457 36 37,503 1,042 (25 )% (67 )% (56 )%
Total 235 $ 168,793 $ 718 207 $ 201,589 $ 974 14 % (16 )% (26 )%
Backlog reflects the number of homes, net of cancellations, for which we have
entered into sales contracts with customers, but for which we have not yet
delivered the homes. The number of homes in backlog as of June 30, 2020 was up
14% as compared to the prior year period primarily due to a lower quarterly
backlog conversion rate for the 2020 second quarter coupled with a 6% increase
in net orders resulting from a higher average community count. The decrease in
the conversion rate to 59% for the 2020 second quarter as compared to 74% in the
prior year period resulted from a lower beginning backlog to start the 2020
second quarter due to weaker demand and higher cancellations in March and April
stemming from economic volatility from COVID-19, including severe job losses and
turmoil in the financial and mortgage markets, which resulted in a temporary
decline in consumer confidence and housing demand. The dollar value of backlog
at the end of the 2020 second quarter was down 16% year-over-year to $168.8
million , primarily due to a 26% decrease in average selling price as the Company
continues its pivot to more-affordable product.
The year-over-year decline in backlog dollar value and average price was
greatest in Arizona , due to the 2020 second quarter opening of a mini masterplan
in Gilbert consisting of an entry-level neighborhood with three distinct selling
communities, which have average base selling prices starting around $300,000 .
Prior year backlog units for Arizona were mainly comprised of homes from our
higher-end, closed-out community in Gilbert, Arizona where the average price of
homes in backlog was $1.0 million at June 30, 2019 . The 25% decrease in the
number of homes in backlog for Arizona was primarily due to a low beginning
backlog as a result of two nearly closed-out communities with limited inventory
and low order volume. Northern California's 38% increase in backlog units was
the highest of the divisions due to higher beginning backlog units, a decrease
in backlog conversion rate to 46% for the 2020 second quarter from 62% in the
prior year period, and a 13% increase in orders from a higher number of average
selling communities. The increase in the number of homes in Northern
California backlog contributed to a 14% increase in backlog dollar value, which
was partially offset by a 17% decrease in the average price as the division's
community growth has been concentrated within the more-affordable Sacramento
region. In Southern California , the increase in ending backlog units for the
2020 second quarter was offset by a decrease in total backlog dollar value as a
result of the 24% decrease in average selling price. The mix of homes in
Southern California ending backlog shifted to more-affordable communities, as
the prior year had a higher number of homes in backlog with average selling
prices over $1.0 million , including a large concentration at a luxury community
in south Orange County which was near close-out at June 30, 2020 .
Due to the uncertainty surrounding the COVID-19 pandemic, we could experience
higher cancellation rates compared to prior periods related to homes within our
backlog as of June 30, 2020 .
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Lots Owned and Controlled
As of June 30, Increase/(Decrease)
2020 2019 Amount %
Lots Owned:
Southern California 397 581 (184 ) (32 )%
Northern California 558 729 (171 ) (23 )%
Arizona 397 294 103 35 %
Total 1,352 1,604 (252 ) (16 )%
Lots Controlled:(1)
Southern California 415 200 215 108 %
Northern California 210 503 (293 ) (58 )%
Arizona 262 477 (215 ) (45 )%
Total 887 1,180 (293 ) (25 )%
Total Lots Owned and Controlled - Wholly
Owned 2,239 2,784 (545 ) (20 )%
Fee Building Lots(2) 892 1,231 (339 ) (28 )%
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(1) Includes lots that we control under purchase and sale agreements or option
agreements that are subject to customary conditions and have not yet
closed. There can be no assurance that such acquisitions will occur.
(2) Lots owned by third party property owners for which we perform general
contracting or construction management services.
The Company's wholly owned lots owned and controlled decreased 20%
year-over-year to 2,239 lots, of which 40% were controlled through option
contracts compared to 42% optioned in the prior year period. The decrease in
wholly owned lots owned and controlled was due to more deliveries in the last
twelve months ended June 30, 2020 than lots contracted during the same period,
the sale of certain lots in Northern California as part of a strategic decision
to generate cash flow and reduce our concentration of capital investments in
certain markets, and the termination of a purchase contract for lots in Northern
California that the Company decided to no longer pursue. The Company reduced the
level of land acquisition over the last year as a result of its focus to
generate cash flows and reduce its leverage.
The decrease in fee building lots at June 30, 2020 as compared to the prior year
period was primarily attributable to the delivery of 377 homes to customers
during the last twelve months ended June 30, 2020 , partially offset by a new
contract for 38 lots located in Irvine, California in the same period.
Home Sales Revenue and New Homes Delivered
Three Months Ended June 30,
2020 2019 % Change
Average Average
Homes Dollar Value Price Homes Dollar Value Price Homes Dollar Value Average Price
(Dollars in thousands)
Southern California 50 $ 41,440 $ 829 91 $ 95,534 $ 1,050 (45 )% (57 )% (21 )%
Northern California 48 30,156 628 53 37,296 704 (9 )% (19 )% (11 )%
Arizona 5 6,161 1,232 7 7,634 1,091 (29 )% (19 )% 13 %
Total 103 $ 77,757 $ 755 151 $ 140,464 $ 930 (32 )% (45 )% (19 )%
Six Months Ended June 30,
2020 2019 % Change
Average Average
Homes Dollar Value Price Homes Dollar Value Price Homes Dollar Value Average Price
(Dollars in thousands)
Southern California 118 $ 104,457 $ 885 152 $ 160,127 $ 1,053 (22 )% (35 )% (16 )%
Northern California 77 50,420 655 81 56,035 692 (5 )% (10 )% (5 )%
Arizona 15 18,539 1,236 17 23,488 1,382 (12 )% (21 )% (11 )%
Total 210 $ 173,416 $ 826 250 $ 239,650 $ 959 (16 )% (28 )% (14 )%
New home deliveries decreased 32% for the 2020 second quarter compared to the
prior year period. The decrease in deliveries was the result of lower beginning
backlog coupled with a lower backlog conversion rate during the 2020 second
quarter as a result of the slowdown in sales at the beginning of the quarter
which led to fewer speculative homes sold and delivered during the quarter. The
2019 second quarter had a higher backlog conversion rate due to success with selling and delivering more speculative homes during this quarter. Home sales revenue for the three months endedJune 30, 2020 declined 45% compared to the same period in 2019, primarily due to the decrease in new home deliveries, and to a lesser extent, a 19% decrease in average sales price per delivery for the period. The decrease in average selling price for the period was consistent with the Company's strategic shift to more-affordable product. 53
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The decrease in home sales revenue was primarily driven bySouthern California , where homes sales revenue was down 57% year-over-year due to 45% less deliveries in the 2020 second quarter and a 21% decline in average selling price.Southern California deliveries were down due to lower beginning backlog, a 17% year-over-year decrease in orders and a lower backlog conversion rate compared to the 2019 second quarter. A product mix shift in our 2020 second quarter deliveries to our more-affordable Inland Empire communities from higher-priced, close-out communities inOrange County andLos Angeles during the 2019 second quarter drove the decrease in average selling price forSouthern California . InNorthern California , 2020 second quarter home sales revenue was down 19% due to a 9% decrease in homes delivered and an 11% decline in average selling price related to a shift in deliveries from the higher-pricedBay Area to the more-affordableSacramento region. The decrease in home sales revenue forArizona was primarily due to fewer units delivered, but was partially offset by a 13% increase in average sales price due to product mix. New home deliveries decreased 16% for the six months endedJune 30, 2020 compared to the prior year period due to a lower number of homes in backlog at the beginning of the period. Home sales revenue for the six months endedJune 30, 2020 decreased 28% compared to the same period in 2019, due to the decrease in new home deliveries and a 14% decrease in average sales price per delivery for the period. Average selling price was down inSouthern California due to the 2019 period including deliveries from several higher-priced, closed-outOrange County andLos Angeles communities. Average selling price inNorthern California slightly declined due to the increase in deliveries from more-affordable communities and fewerBay Area deliveries, which generally are high-priced, during the first half of 2020 as compared to the prior year period. InArizona , the decrease in average sales price was primarily due to the decline in average sales price for our luxury condominium project inScottsdale, Arizona as a result of significantly higher sales incentives during the 2020 period. Homebuilding Gross Margin Homebuilding gross margin for the 2020 second quarter was (9.6%) compared to 12.1% for the prior period. Homebuilding gross margin for the 2020 second quarter included$19.0 million in noncash inventory impairment charges related to five homebuilding communities experiencing slower sales pace due to the COVID-19 pandemic, resulting in higher incentives and carrying costs for these projects. No inventory impairment charges were recorded during the 2019 second quarter. For more information on these impairments, please refer to Note 4 of the Notes to our condensed consolidated financial statements. Excluding impairment charges, homebuilding gross margin was 14.8% for the 2020 second quarter as compared to 12.1% for the prior year period. The 270 basis point increase was primarily due to a$2.2 million benefit from a profit participation settlement related to two communities during the 2020 second quarter and a product mix shift. The positive product mix shift was driven by a higher percentage of our total homes sales revenue generated at more affordably-priced communities, which have had higher gross margins. These items were partially offset by a 160 basis point increase in interest costs included in cost of home sales. Adjusted homebuilding gross margin, which excludes homes sales impairments and interest in cost of home sales, was 20.8% and 16.5% for the 2020 and 2019 second quarters, respectively. Adjusted homebuilding gross margin is a non-GAAP measure. See the table below reconciling this non-GAAP measure to homebuilding gross margin, the nearest GAAP equivalent. Excluding the impact of impairment charges and interest in cost of sales, the 430 basis point improvement in the 2020 second quarter was a result of the profit participation settlement and a product mix shift. Homebuilding gross margin for the six months endedJune 30, 2020 and 2019 was 2.0% and 12.3%, respectively. The 2020 period included$19.0 million in inventory impairment charges as discussed above while the 2019 period included no impairments. Excluding impairments, homebuilding gross margin was 13.0% compared to 12.3% for the six months endedJune 30, 2020 and 2019, respectively. The 70 basis point increase was due to a$2.2 million benefit from a profit participation settlement during the 2020 second quarter and a product mix shift, partially offset by higher interest in cost of home sales. Adjusted homebuilding gross margin, which excludes impairments and interest in cost of home sales, was 19.2% and 17.0% for the six months endedJune 30, 2020 and 2019, respectively. The 220 basis point increase in adjusted homebuilding gross margin for the 2020 period was primarily a result of the profit participation settlement and a product mix shift. Three Months Ended June 30, Six Months Ended June 30, 2020 % 2019 % 2020 % 2019 % (Dollars in thousands) Home sales revenue$ 77,757 100.0 %$ 140,464
100.0 %
85,216 109.6 % 123,525 87.9 % 169,938 98.0 % 210,094 87.7 % Homebuilding gross margin (7,459 ) (9.6 )% 16,939 12.1 % 3,478 2.0 % 29,556 12.3 % Add: Home sales impairments 19,000 24.4 %
- - % 19,000 11.0 % - - %
Homebuilding gross margin
before impairments(1) 11,541 14.8 % 16,939 12.1 % 22,478 13.0 % 29,556 12.3 % Add: Interest in cost of home sales
4,601 6.0 % 6,301 4.4 % 10,747 6.2 % 11,153 4.7 %
Adjusted homebuilding gross
margin(1) $ 16,142 20.8 % $ 23,240 16.5 % $ 33,225 19.2 % $ 40,709 17.0 %
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(1) Homebuilding gross margin before impairments (also referred to as
homebuilding gross margin excluding impairments) and adjusted homebuilding
gross margin (or homebuilding gross margin excluding impairments and
interest in cost of homes sales) are non-GAAP financial measures. We
believe this information is meaningful as it isolates the impact that
impairments, leverage, and our cost of debt capital have on homebuilding
gross margin and permits investors to make better comparisons with our
competitors who also break out and adjust gross margins in a similar
fashion.
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Table of Contents Land Sales
During the three and six months ended
Fee Building Three Months Ended June 30, Six Months Ended June 30, 2020 % 2019 % 2020 % 2019 % (Dollars
in thousands)
Fee building revenues
20,985 99.0 % 21,770 97.7
% 56,482 98.4 % 41,038 97.8 %
Fee building gross margin
In the 2020 second quarter, fee building revenues decreased 5% from the prior year period, driven by a slowdown in construction activity at fee building communities inIrvine, California as a result of lower demand levels in that market. Additionally, management fees from joint ventures and construction management fees from third parties, which are included in fee building revenue, decreased year-over-year by$0.7 million for the 2020 second quarter. Included in fee building revenues for the three months endedJune 30, 2020 and 2019 were (i)$20.8 million and$21.2 million of billings to land owners, respectively, and (ii)$0.4 million and$1.1 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively. Our fee building revenues have historically been concentrated with a small number of customers. For the three months endedJune 30, 2020 and 2019, one customer comprised 94% and 95%, respectively, of fee building revenue. The cost of fee building decreased 4% in the 2020 second quarter compared to the prior year period primarily due to lower allocated G&A expenses, and to a lesser extent, the decrease in fee building activity, which was partially offset by accrued severance for a reduction in force of fee building personnel due to a production slowdown. The amount of G&A expenses included in the cost of fee building was$0.8 million and$1.5 million for the 2020 and 2019 second quarters, respectively. Fee building gross margin decreased to$0.2 million for the three months endedJune 30, 2020 from$0.5 million in the prior year period primarily due to$0.2 million of severance charges included in the cost of fee building during the 2020 second quarter. For the six months endedJune 30, 2020 , fee building revenues increased 37% from the prior year period, due to an increase in construction activity at fee building communities inIrvine, California during the 2020 first quarter, which subsequently slowed due to COVID-19 in the 2020 second quarter. Included in fee building revenues for the six months endedJune 30, 2020 and 2019 were (i)$56.5 million and$39.6 million of billings to land owners, respectively, and (ii)$0.9 million and$2.3 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively. Our fee building revenues have historically been concentrated with a small number of customers. For the six months endedJune 30, 2020 and 2019, one customer comprised 97% and 93%, respectively, of fee building revenue. The cost of fee building increased for the six months endedJune 30, 2020 compared to the same period in 2019 primarily due to the increase in fee building activity and severance costs mentioned above, partially offset by lower allocated G&A expenses due to lower joint venture activity and management fees. The amount of G&A expenses included in the cost of fee building was$1.8 million and$3.0 million for the six months endedJune 30, 2020 and 2019, respectively. Fee building gross margin percentage decreased to 1.6% for the six months endedJune 30, 2020 from 2.2% in the prior year period primarily due to the decrease in management fees from unconsolidated joint ventures and third-party land owners and the$0.2 million of severance charges included in the 2020 second quarter, as previously mentioned, partially offset by the decrease in allocated G&A expenses. 55
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Selling, General and Administrative Expenses
Three Months Ended As a Percentage of Six Months Ended As a Percentage of
June 30, Home Sales Revenue June 30, Home Sales Revenue
2020 2019 2020 2019 2020 2019 2020 2019
(Dollars in thousands)
Selling and marketing
expenses $ 6,386 $ 9,683 8.2 % 6.9 % $ 13,852 $ 18,362 8.0 % 7.7 %
General and
administrative expenses
("G&A") 6,892 5,841 8.9 % 4.2 % 12,915 13,232 7.4 % 5.5 %
Total selling, marketing
and G&A ("SG&A") $ 13,278 $ 15,524 17.1 % 11.1 % $ 26,767 $ 31,594 15.4 % 13.2 %
G&A $ 6,892 $ 5,841 8.9 % 4.2 % $ 12,915 $ 13,232 7.4 % 5.5 %
Less: Severance charges (873 ) - (1.2 )% - % (873 ) (1,788 ) (0.5 )% (0.8 )% G&A, excluding severance charges
$ 6,019 $ 5,841 7.7 % 4.2 %$ 12,042 $ 11,444 6.9 % 4.7 % Selling and marketing expenses$ 6,386 $ 9,683 8.2 % 6.9 %$ 13,852 $ 18,362 8.0 % 7.7 % G&A, excluding severance charges 6,019 5,841 7.7 % 4.2 % 12,042 11,444 6.9 % 4.7 % SG&A, excluding severance charges$ 12,405 $ 15,524 15.9 % 11.1 %$ 25,894 $ 29,806 14.9 % 12.4 % During the 2020 second quarter, our SG&A rate as a percentage of home sales revenue was 17.1% as compared to 11.1% in the prior year period. The 600 basis point increase was primarily due to a 45% drop in home sales revenue during the 2020 second quarter and to a lesser extent,$0.9 million in pretax severance charges in the 2020 second quarter related to staffing reductions made to lower headcount as a result of lower revenue volumes which were negatively impacted by COVID-19. Excluding severance charges, the Company's SG&A rate for the 2020 second quarter was 15.9% as compared to 11.1% in the prior year period. The 480 basis point increase was primarily due to the decline in home sales revenue, as overall SG&A spend was down year-over-year, as well as a$0.7 million reduction in G&A expenses allocated to fee building cost of sales during the 2020 second quarter. These items were partially offset by lower amortization of capitalized selling and marketing costs, advertising and model operation cost savings, and a reduction in personnel costs. During the six months endedJune 30, 2020 , our SG&A rate as a percentage of home sales revenue was 15.4%, up 220 basis points from the comparable prior year period. The 2020 period included$0.9 million in pretax severance charges, as mentioned above. The 2019 period included$1.8 million in pretax severance charges taken in the 2019 first quarter related to reducing headcount, including the departure of one of our executive officers. Excluding these severance charges, the Company's SG&A rate for the six months endedJune 30, 2020 was 14.9% compared to 12.4% in the prior year period. The 250 basis point increase was due to the decrease in home sales revenue and a$1.2 million year-over-year reduction in G&A expenses allocated to fee building cost of sales, which was partially offset by lower amortization of capitalized selling and marketing costs, advertising and model operation cost savings, and a reduction in personnel costs. SG&A excluding severance charges as a percentage of home sales revenue is a non-GAAP measure. See the table above reconciling this non-GAAP financial measure to SG&A as a percentage of home sales revenue, the nearest GAAP equivalent. We believe removing the impact of these charges from our SG&A rate is relevant to provide investors with a better comparison to rates that do not include these charges.
Equity in Net Income (Loss) of
As ofJune 30, 2020 and 2019, we had ownership interests in 10 unconsolidated joint ventures, five of which have active homebuilding or land development operations. We own interests in our unconsolidated joint ventures that generally range from 5% to 35% and these interests vary by entity. The Company's joint venture activity for the three months endedJune 30, 2020 and 2019 resulted in pretax loss of$20.0 million and pretax income of$0.2 million , respectively. For the for the six months endedJune 30, 2020 and 2019, the Company's joint venture activity resulted in$21.9 million of pretax loss and$0.4 million of pretax income, respectively. The year-over-year decrease in joint venture income for the 2020 second quarter and year-to-date periods was primarily related to other-than-temporary impairment charges taken by the Company related to its investments in two unconsolidated land development joint ventures. During the 2020 second quarter, the Company recognized a$20.0 million other-than-temporary impairment charge in connection with its intent to exit theRussell Ranch land development joint venture inFolsom, California . The Company determined that the expected financial returns relative to the required future capital contributions did not outweigh the related market and cost risks for this development. In addition, exiting the venture allows the Company to pursue certain federal tax loss carryback refund opportunities form the passage of the CARES Act as well as preserve future capital. As a result, the Company determined that the value of its investment is not recoverable and wrote off its investment balance and recorded its remaining costs to complete. This impairment charge reflects the Company's current estimates but actual losses associated with exiting the joint venture could differ materially based on the ultimate sales price of the underlying asset. In addition, the Company recorded a$2.3 million impairment charge during the 2020 first quarter related to its investment in the Bedford joint venture as the result of an agreement by the Company to sell its interest in this joint venture to our partner for less than our current carrying value. 56
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The following sets forth supplemental operational and financial information
about our unconsolidated joint ventures. Such information is not included in our
financial data for GAAP purposes, but is reflected in our results as a component
of equity in net income (loss) of unconsolidated joint ventures. This data is
included for informational purposes only.
Three Months Ended Six Months Ended
June 30, Increase/(Decrease) June 30, Increase/(Decrease)
2020 2019 Amount % 2020 2019 Amount %
(Dollars in thousands)
Unconsolidated Joint
Ventures - Operational
Data
Net new home orders 3 28 (25 ) (89 )% 15 64 (49 ) (77 )%
New homes delivered 30 53 (23 ) (43 )% 50 90 (40 ) (44 )%
Average sales price of
homes delivered $ 873 $ 954 $ (81 ) (8 )% $ 915 $ 985 (70 ) (7 )%
Home sales revenue $ 26,198 $ 50,567 $ (24,369 ) (48 )% $ 45,746 $ 88,694 $ (42,948 ) (48 )%
Land sales revenue(1) 4,092 8,511 (4,419 ) (52 )% 16,191 12,671 3,520 28 %
Total revenues $ 30,290 $ 59,078 $ (28,788 ) (49 )% $ 61,937 $ 101,365 $ (39,428 ) (39 )%
Net income $ 1,618 $ 1,790 $ (172 ) (10 )% $ 2,980 $ 2,303 $ 677 29 %
Selling communities at end
of period 2 6 (4 ) (67 )%
Backlog (dollar value) $ 11,683 $ 44,775 $ (33,092 ) (74 )%
Backlog (homes) 14 50 (36 ) (72 )%
Average sales price of
backlog $ 835 $ 896 $ (61 ) (7 )%
Homebuilding lots owned
and controlled 24 121 (97 ) (80 )%
Land development lots
owned and controlled 1,768 1,924 (156 ) (8 )%
Total lots owned and
controlled 1,792 2,045 (253 ) (12 )%
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(1) Land sales revenue for the six months ended
million of revenues related to the sale of a mixed use building sold by a
homebuilding joint venture.
Interest Expense
During the three and six months ended June 30, 2020 , we expensed
$1.3 million and $2.0 million of interest costs related to the portion of our
debt in excess of our qualified assets in accordance with ASC 835, Interest. To
the extent our debt exceeds our qualified inventory in the future, we will
expense a portion of the interest related to such debt.
Project Abandonment Costs
During the 2020 first quarter, the Company terminated its option agreement for a
luxury condominium project in Scottsdale, Arizona due to lower demand levels
experienced at this community, substantial investment required to build out the
remainder of the project, uncertainty associated with the economic impacts of
COVID-19, and the opportunity to recognize a tax benefit from the resulting net
operating loss carrybacks. As a result of this strategic decision to forgo
developing the balance of the property, we recorded a project abandonment charge
of $14.0 million related to the capitalized costs, including interest,
associated with the portion of the project that was abandoned.
Gain on Early Extinguishment of Debt
During the three months endedJune 30, 2020 , the Company repurchased and retired approximately$5.8 million in face value of its 7.25% Senior Notes due 2022 for a cash payment of approximately$5.0 million . During the six months endedJune 30, 2020 , the Company repurchased and retired approximately$10.5 million of its Notes for a cash payment of approximately$9.8 million . The Company recognized a gain on early extinguishment of debt of$0.7 million and$0.6 million for the three and six months endedJune 30, 2020 , respectively, which included the respective write-off of approximately$49,000 and$95,000 of unamortized discount, premium and debt issuance costs associated with the Notes retired. During the three months endedJune 30, 2019 , the Company repurchased and retired approximately$7.0 million in face value of the Notes for a cash payment of approximately$6.3 million . During the six months endedJune 30, 2019 , the Company repurchased and retired approximately$12.0 million of its Notes for a cash payment of approximately$10.9 million . For the three and six months endedJune 30, 2019 , the Company recognized a total gain on early extinguishment of debt of$0.6 million and$1.0 million , respectively, which included the write-off of approximately$90,000 and$160,000 , respectively, of unamortized discount, premium and debt issuance costs associated with the Notes retired. 57
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Provision/Benefit for Income Taxes
For the three and six months endedJune 30, 2020 . the Company recorded an income tax benefit of$16.9 million and$26.9 million , respectively. The Company's effective tax rates for the three and six months endedJune 30, 2020 , include the benefit associated with net operating loss carrybacks to years when the Company was subject to a 35% federal tax rate. The effective tax rates for both 2020 periods differ from the federal statutory rate due the net operating loss carryback benefit, discrete items, state income tax rates and tax credits for energy efficient homes. The discrete benefit for the three months endedJune 30, 2020 totaled$1.8 million and was primarily related to the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") signed into law onMarch 27, 2020 . Discrete items for the six months endedJune 30, 2020 totaled a$9.9 million benefit,$5.8 million of which related to the$14.0 million project abandonment noncash charge recorded during the 2020 first quarter and a$3.9 million benefit related to the CARES Act. For more information on the abandonment costs, please refer to Note 4 of the Notes to our condensed consolidated financial statements. The CARES Act allows companies to carry back net operating losses generated in 2018 through 2020 for five years. For the three and six months endedJune 30, 2020 , the Company recognized a$1.8 million and$3.9 million discrete benefit, respectively, related to the remeasurement of deferred tax assets originally valued at a 21% federal statutory tax rate which are now available to be carried back to tax years with a 35% federal statutory rate. For the three and six months endedJune 30, 2019 , the Company recorded an income tax provision of$1.0 million and$0.3 million , respectively. The Company's effective tax rates for 2019 periods differ from the federal statutory tax rates due to state income taxes, estimated deduction limitations for executive compensation and discrete items. The provision for discrete items totaled$0.3 million for the six months endedJune 30, 2019 related to stock compensation and state income tax rate changes. Trends and Uncertainties OnMarch 11 , theWorld Health Organization characterized the outbreak of COVID-19 a global pandemic. There continues to be uncertainty regarding the impact and the duration of disruption that the COVID-19 outbreak and related containment and economic relief efforts will have on the economy, capital markets, consumer confidence, buyer demand for homes and availability of mortgage lending. The magnitude to which these factors will impact our business and results of operations is highly uncertain and cannot be predicted. The health and safety of our employees remains our primary focus during this pandemic. We have implemented the following actions in response to the pandemic: 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 over the past several months, state and local governments began to relax certain "stay-at-home" and similar public health mandates that were implemented in response to the COVID-19 pandemic, with the resurgence of COVID-19 cases in many of the markets in which we operate, there is no assurance as to what level of activity may be permitted to continue. We have been able to continue most of our homebuilding operations during the government-mandated "stay-at-home" orders as residential construction was designated as an essential business as part of critical infrastructure in most jurisdictions in which we operate and homebuilding operations are continuing at all of our jobsites with appropriate safety measures in place. In lateJune 2020 , our model home sales offices reopened to the public with appropriate enhanced sanitation and social-distancing measures in place. While appointments are not necessary, they are still encouraged, and our sales operations continue to leverage our virtual sales tools to connect with our customers online. Our customer care warranty activities are limited to emergency and urgent work orders as well as request for exterior work to limit public contact. Although we allowed our corporate and divisional offices to reopen at limited capacity duringJune 2020 , we actively encourage our employees to utilize a work-from-home model where practicable to further limit capacity. During the reopening process, we instituted several safety protocols, such as distancing and personal protective equipment requirements and enhanced premises cleaning, all in accordance with applicable public health orders and advice. While all of the above-referenced steps are necessary and appropriate in light of the COVID-19 pandemic, they do impact our ability to operate our business in its ordinary and traditional course. These actions, combined with a reduction in the availability, capacity, and efficiency of municipal and private services necessary to progress land development, homebuilding, mortgage loan originations, and home sales, which in each case has varied by market depending on the scope of the restrictions local authorities have established, have tempered our sales pace and delayed home construction and deliveries for certain projects during the latter part of March and through much of the second quarter. The potential magnitude or duration of the business, operational and economic impacts from the unprecedented public health effort to contain and combat the spread of COVID-19 are uncertain and 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 not be able to conduct any business operations in certain of our served markets or at all for an indefinite period. 58
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We are, however, encouraged by our ability at the end of the 2020 second quarter to effectively resume nearly all of our operations and the recent improvements in net new orders and our cancellation rate, which we believe are indicators of underlying strength in the overall housing market and the markets in which we operate. During the 2020 second quarter, net new orders increased 6% on a year-over-year basis. This increase was led by June new orders which were driven by a 33% increase in sales pace. Our cancellation rate for the 2020 second quarter also returned closer to a more normalized level of 11%, which is even with the 2019 second quarter rate and down sequentially from 16% for the 2020 first quarter. Our year-over-year order improvement and even cancellation rate for the 2020 second quarter are 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, as further discussed below under Part II, Item 1A - Risk Factors. As the economy and housing markets continue to recover from the severe impacts of the pandemic and related COVID-19 control responses, we hope employment, consumer confidence and other fundamental business factors will also improve. However, the speed, trajectory and strength of any such recovery remains highly uncertain, and could be slowed or reversed by a number of factors, including a possible widespread resurgence in COVID-19 infections in many states, including the markets in which we operate without the availability of generally effective therapeutics or a vaccine for the disease. Given this uncertainty, the Company has taken steps to preserve capital by 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. Additionally, during the six months endedJune 30, 2020 , strategic decisions were made to (i) structure an exit from a land development joint venture inNorthern California which resulted in a$20.0 million other-than-temporary impairment charge in 2020 second quarter, (ii) to walk away from further development at a wholly owned community inScottsdale, Arizona resulting in a$14.0 million project abandonment charge during the 2020 first quarter, and (iii) agree to exit a land development joint venture inSouthern California which resulted in a$2.3 million other-than-temporary impairment charge in the 2020 first quarter. By not continuing with these projects, the Company will avoid significant capital outlays and help preserve capital for the future, as well as be able to seek federal tax refunds and receive a payment of approximately$5.1 million in the case of ourSouthern California joint venture exit.
Further discussion of the potential impacts on our business, results of operations, financial condition and cash flows from the COVID-19 pandemic is provided below under Part II, Item 1A "Risk Factors."
We will continue to closely monitor any updates from the CDC and guidance from
federal and local and government and public health agencies and adjust our
operations accordingly. While we cannot reasonably estimate the length or
severity of this pandemic, an extended economic slowdown in the
Liquidity and Capital Resources
Overview Our principal sources of capital for the six months endedJune 30, 2020 were cash generated from home sales activities, distributions from our unconsolidated joint ventures, and management fees from our fee building agreements. Our principal uses of capital for the six months endedJune 30, 2020 were land purchases, land development, home construction, repurchases of the Company's common stock and bonds, contributions and advances to our unconsolidated joint ventures, and payment of operating expenses, interest and routine liabilities. Cash flows for each of our communities depend on their stage in the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our real estate inventories and not recognized in our consolidated statement of operations until a home is delivered, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with home and land construction were previously incurred. From a liquidity standpoint, we are generally active in acquiring and developing lots to maintain or grow our lot supply and community count. We expect cash outlays for land purchases, land development and home construction at times to exceed cash generated by operations. We are currently focused on reducing our debt levels and leverage and are reducing spend in response to the economic uncertainty produced by the COVID-19 pandemic and therefore expect to spend less on land purchases than we have over the last few years. During the six months endedJune 30, 2020 , we generated cash flows from operating activities of$22.0 million . We ended the second quarter of 2020 with$85.6 million of cash and cash equivalents, a$6.3 million increase fromDecember 31, 2019 . Generally, we intend to continue reducing our debt levels within our target net leverage ranges in the near term, and then to deploy a portion of cash generated from the sale of inventory to acquire and develop strategic, well-positioned lots that represent opportunities to generate future income and cash flows. However, the uncertainty of the COVID-19 pandemic may impact our ability to generate cash flows from operations which may limit our debt reduction and land acquisition efforts in the near to mid-term. As ofJune 30, 2020 andDecember 31, 2019 , we had$2.9 million and$9.6 million , respectively, in accounts payable that related to costs incurred under our fee building agreements. Funding to pay these amounts is the obligation of the third-party land owner, which is generally funded on a monthly basis. Similarly, contracts and accounts receivable as of the same dates included$3.8 million and$10.4 million , respectively, related to the payment of the above payables. 59
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We intend to utilize both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from operations, to operate our business. As ofJune 30, 2020 , we had outstanding borrowings of$297.5 million in aggregate principal related to our Notes and no borrowings outstanding under our credit facility. We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the ability of particular assets, and our Company as a whole, to generate cash flow to cover the expected debt service. In addition, our debt contains certain financial covenants, among others, that limit the amount of leverage we can maintain, and minimum tangible net worth and liquidity requirements. We intend to finance future acquisitions and developments with what we believe to be the most advantageous source of capital available to us at the time of the transaction, which may include unsecured corporate level debt, property-level debt, and other public, private or bank debt, seller land banking arrangements, or common and preferred equity. While the COVID-19 pandemic and related mitigation efforts have created significant uncertainty as to general economic and housing market conditions for the remainder of 2020 and beyond, we believe that we will be able to fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, and cash expected to be available from our revolving line of credit or through accessing debt or equity capital, as needed, although no assurance can be provided that such additional debt or equity capital will be available or on acceptable terms, especially in light of the current COVID-19 pandemic. Senior Notes Due 2022 OnMarch 17, 2017 , the Company completed the sale of$250 million in aggregate principal amount of 7.25% Senior Unsecured Notes due 2022 (the "Existing Notes"), in a private placement. The Notes were issued at an offering price of 98.961% of their face amount, which represented a yield to maturity of 7.50%. OnMay 4, 2017 , the Company completed a tack-on private placement offering through the sale of an additional$75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of 102.75% of their face amount plus accrued interest sinceMarch 17, 2017 , which represented a yield to maturity of 6.438%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company's revolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is payable semiannually in arrears onApril 1 andOctober 1 . The maturity date of the Notes isApril 1, 2022 . The Notes were exchanged in an exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act of 1933 and are freely tradeable in accordance with applicable law. During the six months endedJune 30, 2020 , the Company repurchased approximately$10.5 million of the Notes at 93.57% of face value reducing the outstanding aggregate principal amount to$297.5 million . The Company is entitled at its option to redeem all or a portion of the Notes at any time on and afterOctober 1, 2019 , upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed in percentages of principal amount on the redemption date), plus accrued interest to the redemption date (subject to the right of holders of record of the Notes on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12 or 6 month period, as applicable, commencing on each of the dates set forth below: Period Redemption PriceOctober 1, 2019 103.625 %October 1, 2020 101.813 %April 1, 2021 100.000 % The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. The leverage and interest coverage conditions are summarized in the table below, as described and defined further in the indenture for the Notes. Exceptions to the additional indebtedness limitation include, among other things, borrowings of up to$260 million under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income fromJanuary 1, 2017 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of$15 million . The Notes are guaranteed by all of the Company's 100% owned subsidiaries, for more information about these guarantees, please see Note 17 of the Notes to our condensed consolidated financial statements. 60
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