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," "seeks," "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 the 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, 2020 and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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, 2020 , 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, 2021 . • Risks related to our business, including among other things:
• adverse impacts to our business due to the COVID-19 pandemic, including
long-term economic impacts;
• our geographic concentration primarily in
availability of land to acquire and our ability to acquire such land on
favorable terms or at all;
• mortgage financing, as well as our customer's ability to obtain suchfinancing, interest rate increases or changes in federal lending programs;
• 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;
• shortages of or increased prices for labor, land or raw materials used in
housing construction;
• 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 or a reduction in sales absorbtion
levels;
• a reduction in our sales absorption levels may force us to incur and absorb
additional community-level costs;
• increases in our cancellation rate;
• a large proportion of our fee building revenue being dependent upon one
customer and the termination of this contract;
• increased costs, delays in land development or home construction and reduced
consumer demand resulting from adverse weather conditions or other events
outside our control;
• 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;
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Table of Contents • Risks related to laws and regulations, including among other things:
• construction defect, product liability, warranty, and personal injury claims,
including the cost and availability of insurance;
• employment-related liabilities with respect to our contractors' employees;
• 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 or an ownership change could limit our operating loss
carryforwards;
• 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;
• failure to comply with privacy laws or information systems interruption or
breach in security that releases personal identifying information or other
confidential information;
• 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 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;
• 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 2025 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; and
• there is no assurance that the existence of a stock repurchase plan will
enhance shareholder value.
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 Adjusted EBITDA, Adjusted EBITDA margin percentage, ratio of Adjusted EBITDA to total interest incurred, adjusted net income (loss), adjusted net income (loss) per diluted share, net debt, ratio of net debt-to-capital, general and administrative costs excluding acquisition transaction costs, general and administrative costs excluding acquisition transaction costs as a percentage of home sales revenue, selling, marketing and general and administrative costs excluding acquisition transaction costs, selling, marketing and general and administrative costs excluding acquisition transaction costs as a percentage of home sales revenue, adjusted homebuilding gross margin (or homebuilding gross margin before interest in cost of home sales), adjusted homebuilding gross margin percentage and homebuilding gross margin and margin percentage before purchase accounting adjustments. For a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the comparable GAAP measures, please see "--Overview." For a reconciliation of adjusted homebuilding gross margin (or homebuilding gross margin before interest in cost of home sales), adjusted homebuilding gross margin percentage, and homebuilding gross margin and margin percentage before purchase accounting adjustments 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 general and administrative costs excluding acquisition transaction costs, general and administrative expenses excluding acquisition transaction costs as a percentage of homes sales revenue, selling, marketing and general and administrative expenses excluding acquisition transaction costs and selling, marketing and general and administrative expenses excluding acquisition transaction costs as a percentage of home sales revenue, please see "-- Results of Operations - Selling, General and Administrative Expenses." 38
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Table of Contents
Selected Financial Information
Three Months Ended March 31,
2021 2020
(Dollars in thousands)
Revenues:
Home sales $ 93,855 $ 95,659
Land sales - 147
Fee building, including management fees 5,301 36,227
99,156 132,033
Cost of Sales:
Home sales 77,848 84,722
Land sales - 147
Fee building 5,197 35,497
83,045 120,366
Gross Margin:
Home sales 16,007 10,937
Land sales - -
Fee building 104 730
16,111 11,667
Home sales gross margin 17.1 % 11.4 %
Land sales gross margin N/A - %
Fee building gross margin 2.0 % 2.0 %
Selling and marketing expenses (6,654 ) (7,466 )
General and administrative expenses (8,271 ) (6,023 )
Equity in net income (loss) of unconsolidated joint ventures 174 (1,937 )
Interest expense (354 ) (718 )
Project abandonment costs (68 ) (14,036 )
Loss on early extinguishment of debt - (123 )
Other income (expense), net 66 223
Pretax income (loss) 1,004 (18,413 )
(Provision) benefit for income taxes (451 ) 9,937
Net income (loss) $ 553 $ (8,476 )
Earnings (loss) per share:
Basic $ 0.03 $ (0.42 )
Diluted $ 0.03 $ (0.42 )
Interest incurred $ 5,331 $ 6,380
Adjusted EBITDA(1) $ 8,163 $ 6,981
Adjusted EBITDA margin percentage(1) 8.2 % 5.3 %
LTM(2) Ended March 31,
2021 2020
Interest incurred $ 22,887 $ 27,438
Adjusted EBITDA(1) $ 38,507 $ 41,536
Adjusted EBITDA margin percentage (1) 8.1 % 6.1 %
Ratio of Adjusted EBITDA to total interest incurred (1) 1.7x 1.5x
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Table of Contents
(1) Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted
EBITDA to total interest incurred are non-GAAP measures. Adjusted EBITDA
margin percentage is calculated as a percentage of total revenue.
Management believes that Adjusted EBITDA 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 andother 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(2) Ended
Three Months Ended March 31, March 31,
2021 2020 2021 2020
(Dollars in thousands)
Net income (loss) $ 553 $ (8,476 ) $ (23,840 ) $ (14,490 )
Add:
Interest amortized to cost
of sales excluding
impairment charges, and
interest expensed 4,381 6,864 25,036 29,246
Provision (benefit) for
income taxes 451 (9,937 ) (16,199 ) (13,088 )
Depreciation and
amortization 1,256 1,845 6,132 8,146
Amortization of stock-based
compensation 645 589 2,253 2,283
Cash distributions of income
from unconsolidated joint
ventures - - 110 114
Severance charges - - 1,091 -
Acquisition transaction
costs 983 - 983 -
Noncash inventory
impairments and abandonments 68 14,036 19,130 24,325
Less:
(Gain) loss on early
extinguishment of debt - 123 7,131 (624 )
Equity in net (income) loss
of unconsolidated joint
ventures (174 ) 1,937 16,680 5,624
Adjusted EBITDA $ 8,163 $ 6,981 $ 38,507 $ 41,536
Total Revenue $ 99,156 $ 132,033 $ 474,534 $ 682,534
Adjusted EBITDA margin
percentage 8.2 % 5.3 % 8.1 % 6.1 %
Interest incurred $ 5,331 $ 6,380 $ 22,887 $ 27,438
Ratio of Adjusted LTM(2)
EBITDA to total interest
incurred 1.7x 1.5x
(2) "LTM" indicates amounts for the trailing 12 months.
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Table of Contents Overview During the 2021 first quarter, the Company made significant progress with growing its backlog, improving its gross margins and expanding into a new market through its acquisition ofColorado based homebuilder,Epic Homes . In connection with the acquisition, the Company assumed backlog of 102 homes valued at approximately$100 million as of the closing date onFebruary 26, 2021 , and assumed control of 294 owned and controlled lots, including three active communities and one soon-to-be-opened community. The Company started the year on a strong note as robust housing demand continued through the first quarter across all of our regions and resulted in a 114% increase in net new orders in the 2021 first quarter to 283 homes. The increase in net new home orders was driven primarily by a 120% increase in our monthly sales absorption rate, with the 2021 first quarter monthly sales absorption pace of 4.4 representing the highest reported monthly sales absorption pace 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 the 2021 first quarter with a strong level of the number of homes in backlog, up 273% as compared to the end of the 2020 first quarter (up 208% excluding backlog related toColorado ). The increase in sales pace and improved pricing power experienced in the 2021 first quarter, as well as the prior two quarters, provided opportunities for meaningful price increases at many of the Company's communities which helped offset recent increases in construction costs and contribute to an increase in gross margin. The Company's gross margin percentage for the 2021 first quarter improved 570 basis points to 17.1% as compared to 11.4% in the prior year period. Total revenues for the 2021 first quarter were$99.2 million compared to$132.0 million in the prior year period. The year-over-year decrease in revenues was driven largely by an 85% decrease in fee building revenue as a result of a decrease in construction activity at fee building communities inIrvine, California . Net income for the 2021 first quarter was$0.6 million , or$0.03 per diluted share, compared to a net loss of$8.5 million , or$(0.42) per diluted share for the 2020 first quarter. The year-over-year increase in net income was primarily attributable to the 570 basis point improvement in home sales gross margin percentage for the 2021 first quarter compared to the prior year period, and a$16.3 million reduction in project abandonment and joint venture impairment charges. Adjusted net income for the 2021 first quarter, after excluding transaction costs and the remeasurement impact to the deferred tax asset related to the acquisition ofEpic Homes , was$1.5 million *, or$0.08 per diluted share*, compared to an adjusted net loss of$1.1 million *, or ($0.05 ) per diluted share*, for the 2020 first quarter after excluding$16.3 million in pretax charges and a$2.1 million net deferred tax asset revaluation benefit. The Company generated operating cash flow of$2.5 million for the 2021 first quarter and ended the quarter with$114.8 million in cash and cash equivalents and had no borrowings outstanding under its revolving credit facility. The Company also completed a$35 million tack-on offering of our 2025 Senior Notes during the 2021 first quarter that were issued at an effective yield of 6.427%. AtMarch 31, 2021 , the Company had a debt-to-capital ratio of 58.7% and a net debt-to capital ratio of 45.5%*, which represented a 330-basis point improvement compared to the 2020 first quarter. The Company also repurchased 141,823 shares of our common stock during the 2021 first quarter for$0.8 million . The Company has been actively evaluating new land opportunities to rebuild its pipeline. The Company plans to execute a balanced approach of acquiring new land positions where it believes such investments will yield results that meet its investment criteria and improve our operating metrics to generate positive shareholder returns, all while appropriately managing its financial position.
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*Adjusted net income (loss), adjusted net income (loss) per diluted share, and
net debt-to-capital ratio are non-GAAP measures. For a reconciliation of
adjusted net income (loss) and adjusted net income (loss) per diluted share to
the appropriate GAAP measures, please see the table below. For a reconciliation
of net debt-to-capital to the appropriate GAAP measure, please see "-- Liquidity
and Capital Resources - Debt-to-Capital Ratios."
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Table of Contents
Three Months Ended
March 31,
2021 2020
(Dollars in thousands, except per
share amounts)
Net income (loss) $ 553 $ (8,476 )
Acquisition transaction costs, net of tax 781 -
Abandoned project costs and joint venture impairment, net of tax
- 9,505
Noncash deferred tax asset remeasurement 175 (2,114 )
Adjusted net income (loss) $ 1,509 $ (1,085 )
Earnings (loss) per share:
Basic $ 0.03 $ (0.42 )
Diluted $ 0.03 $ (0.42 )
Adjusted earnings (loss) per share:
Basic $ 0.08 $ (0.05 )
Diluted $ 0.08 $ (0.05 )
Weighted average shares outstanding for adjusted
earnings (loss) per share:
Basic 18,109,015 19,951,825
Diluted 18,420,631 19,951,825
Abandoned projects costs related to
$ - $ 14,000
Joint venture impairment related to joint venture exit - 2,287
Acquisition transaction costs 983 -
Less: Related tax benefit (202 ) (6,782 ) Acquisition transaction costs, abandoned project costs and joint venture impairment, net of tax
$ 781 $ 9,505
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Table of Contents
Market Conditions and COVID-19 Impact
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 a significant drop in sales 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, stability and growth in the equity markets, 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. 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. The economy inthe United States has continued to improve in the 2021 first quarter with millions of American receiving COVID-19 vaccines and states and municipalities increasingly reopening. However, this favorable outlook could be affected materially by adverse developments, if any, related to the COVID-19 pandemic, including new or more restrictive public health requirements recommended or imposed by federal, state and local authorities. Until the COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and more severe disruption of global and national economies, cause political uncertainty and civil unrest, and diminish consumer confidence, all of which could impact theU.S. housing market and our business, including our net orders, backlog and revenues. In addition, we are continuing to see building material cost pressures, particularly with respect to lumber, that could negatively impact our margins in future periods. Despite these challenges, and other factors, which may individually or in combination slow or reverse the current housing recovery from the COVID-19 pandemic-induced disruptions, we believe we are well-positioned to operate effectively through the present environment. Results of Operations Net New Home Orders Three Months Ended March 31, Increase/(Decrease) 2021 2020 Amount % Net new home orders: Southern California 57 62 (5 ) (8 )% Northern California 129 68 61 90 % Arizona 82 2 80 4,000 % Colorado 15 - 15 N/A Total net new home orders 283 132 151 114 % Monthly sales absorption rate per community: (1) Southern California 3.8 1.9 1.9 100 % Northern California 5.2 2.3 2.9 126 % Arizona 3.9 0.4 3.5 875 % Colorado 5.0 - N/A N/A Total monthly sales absorption rate per community (1) 4.4 2.0 2.4 120 % Cancellation rate 8 % 16 % (8 )% N/A Selling communities at end of period: Southern California 5 11 (6 ) (55 )% Northern California 8 10 (2 ) (20 )% Arizona 7 1 6 600 % Colorado 3 - 3 N/A Total selling communities 23 22 1 5 % Average selling communities: Southern California 5 11 (6 ) (55 )% Northern California 8 10 (2 ) (20 )% Arizona 7 2 5 250 % Colorado 1 - 1 N/A Total average selling communities 21 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.
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Table of Contents
Net new home orders for the 2021 first quarter increased 114% as compared to the same period in 2020 primarily due to a 120% increase in our monthly sales absorption rate to 4.4 net orders per community in the 2021 first quarter. The 2020 first quarter absorption rates were negatively impacted by slower sales activity and cancellations due to stay-at-home orders implemented related to COVID-19 during the latter part of the 2020 first quarter, fear in the overall economic markets which resulted in volatile equity markets and severe and sudden job losses. The improved demand experienced since the beginning ofJune 2020 steadily grew in the 2020 third and fourth quarters and continued into the 2021 first quarter with February reaching the highest monthly net order total in the Company's history at 4.8 net orders per community. We continue to attribute the higher level of demand to a number of factors, including low interest rates, an undersupply of homes, consumers' increased focus on the importance of the home and strong equity markets. 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 2021 first quarter. Home buyers continue to demonstrate 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. Monthly absorption pace at our more-affordable, entry-level product continued to out-pace the company average for the 2021 first quarter. For the 2021 first quarter, entry-level communities recorded net new orders of 5.3 sales per month, per actively selling community compared to a 2021 first quarter companywide monthly sales pace of 4.4 per community. Orders from entry-level communities grew to total approximately 58% of total net new orders for the 2021 first quarter from approximately 40% of total net new orders for the prior year period. The Company experienced modest cancellation activity with a cancellation rate of 8% for the 2021 first quarter compared to 16% in the 2020 first quarter. Over half of the cancellations during the prior period 2020 first quarter occurred during the second half of the month of March, primarily as a result of the economic impact COVID-19 had on our buyers. Backlog As of March 31, 2021 2020 % Change Average Homes Dollar Value Average Price
Homes Dollar Value Price Homes Dollar Value Average Price
(Dollars in thousands)
Southern California 81 $ 61,820 $ 763 66 $ 53,934 $ 817 23 % 15 % (7 )%
Northern California 231 158,628 687 105 71,082 677 120 % 123 % 1 %
Arizona 224 91,872 410 3 5,141 1,714 7,367 % 1,687 % (76 )%
Colorado 113 110,772 980 - - - N/A N/A N/A
Total 649 $ 423,092 $ 652 174 $ 130,157 $ 748 273 % 225 % (13 )%
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 March 31, 2021 was up
273% as compared to the prior year period primarily due to a higher number of
beginning backlog units, the 114% increase in net new orders during the quarter,
a lower backlog conversion rate for the 2021 first quarter, and the assumption
of 102 homes in backlog related to the acquisition of Epic Homes . Our backlog
conversion rate was 36% for the 2021 first quarter as compared to 72% in the
prior year period. The decrease in the 2021 conversion rate was due to a 175%
increase in beginning backlog for the 2021 first quarter as a result of
increased presold homes during the third and fourth quarters of 2020 due to
strong demand trends across all our markets. The dollar value of backlog at the
end of the 2021 first quarter was up 225% year-over-year to $423.1 million ,
primarily due to the higher number of homes in backlog resulting from higher
sales absorption rates and the acquired backlog from Epic Homes , which was
partially offset by a 13% decrease in average selling price of homes in backlog
as the Company continues to diversify its product offerings, including its
expansion into more affordable communities in Arizona .
In Southern California , the total backlog dollar value increased year-over-year
primarily as a result of a 23% increase in ending backlog units for the 2021
first quarter, partially offset by a 7% decrease in average selling price. The
mix of homes in Southern California ending backlog in the prior year included
approximately 12% of homes with average selling prices over $1.8 million ,
related to a higher-priced second move up community and one luxury community in
Orange County which were closed out as of December 31, 2020 .
Northern California ending backlog units increased 120% year-over-year due to a
90% increase in orders during the 2021 first quarter and a higher number of
beginning backlog units to start the quarter. The increase in the number of
homes in Northern California backlog contributed to a 123% increase in backlog
dollar value.
In Arizona , the year-over-year increase in homes in backlog dollar value was due
to the division opening seven new communities in 2020. All seven new communities
have average selling prices within the $300,000 to $550,000 range, as compared
to prior year backlog units for Arizona which were comprised of homes from
two high-end, closed-out communities where the average price of homes in backlog
was $1.7 million at March 31, 2020 .
In Colorado , the 113 homes in backlog as of March 31, 2021 were comprised of 46
homes from a first time move community in Aurora with an average selling price
of homes in backlog of approximately $592,000 , and 67 homes from two second
move-up communities in Broomfield and Parker with average selling prices of
homes in backlog of $1.3 million and $1.1 million , respectively.
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Table of Contents
Lots Owned and Controlled
As of March 31, Increase/(Decrease)
2021 2020 Amount %
Lots Owned:
Southern California 248 437 (189 ) (43 )%
Northern California 536 588 (52 ) (9 )%
Arizona 483 385 98 25 %
Colorado 150 - 150 N/A
Total 1,417 1,410 7 0 %
Lots Controlled:(1)
Southern California 589 426 163 38 %
Northern California 229 348 (119 ) (34 )%
Arizona 125 279 (154 ) (55 )%
Colorado 142 - 141 N/A
Total 1,085 1,053 31 3 %
Total Lots Owned and Controlled - Wholly
Owned 2,502 2,463 38 2 %
Fee Building Lots(2) 38 1,070 (1,032 ) (96 )%
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(1) Includes lots that we control under purchase and sale 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.
The Company's wholly owned lots owned and controlled as of March 31, 2021
increased 2% year-over-year to 2,502 lots, of which 43% were controlled through
option contracts in both periods. The increase in wholly owned lots owned and
controlled was due to 294 lots we assumed control of in connection with the
acquisition of Epic Homes in Denver, Colorado , partially offset by more
deliveries in the last twelve months ended March 31, 2021 than lots contracted
during the same period and the termination of a purchase contract for lots in
Northern California that the Company decided to no longer pursue. The Company
had reduced the level of land acquisition over the last two years as a result of
its focus to generate cash flows and reduce its leverage, however, during the
latter part of 2020 and into 2021, the Company has been actively evaluating new
land opportunities to rebuild its pipeline.
The decrease in fee building lots at March 31, 2021 as compared to the prior
year period was primarily attributable to the delivery of homes to customers
during the last twelve months ended March 31, 2021 , and as a result of the
decision made by Irvine Pacific, previously our largest customer, to wind down
its fee building arrangement with the Company, which ceased in the 2021 first
quarter. Please see "Fee Building " section below for additional information.
Home Sales Revenue and New Homes Delivered
Three Months Ended March 31,
2021 2020 % Change
Average
Homes Dollar Value Average Price Homes Dollar Value Price Homes Dollar Value
Average Price
(Dollars in thousands)
Southern California 52 $ 37,541 $ 722 68 $ 63,017 $ 927 (24 )% (40 )% (22 )%
Northern California 70 45,673 652 29 20,264 699 141 % 125 % (7 )%
Arizona 20 7,698 385 10 12,378 1,238 100 % (38 )% (69 )%
Colorado 4 2,943 736 - - - N/A N/A N/A
Total 146 $ 93,855 $ 643 107 $ 95,659 $ 894 36 % (2 )% (28 )%
New home deliveries increased 36% for the 2021 first quarter compared to the
prior year period. The increase in deliveries was the result of a higher number
of homes in beginning backlog. Home sales revenue for the three months ended
March 31, 2021 declined 2% year-over-year, primarily due to the 28% decrease in
average sales price per delivery, which was partially offset by the increase in
deliveries. The decrease in average selling price for the period was consistent
with the Company's strategic shift to more-affordable product and increased
deliveries from the Company's Northern California and Arizona operations.
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The decrease in home sales revenue was primarily driven bySouthern California , where homes sales revenue was down 40% year-over-year as a result of a 24% decrease in homes delivered due to a decrease in backlog conversion rate, a lower community count and a 22% decrease in average selling price due to the prior year period including deliveries from several higher-priced, closed-outOrange County andLos Angeles communities. The decrease in home sales revenue during the 2021 first quarter forArizona was primarily due to a 69% decrease in average sales price due to product mix and, partially offset by a 100% increase in units delivered. InNorthern California , home sales revenue for the 2021 first quarter increased 125% due to a 141% increase in homes delivered, partially offset by a 7% decrease in average selling price related to a shift in deliveries from the higher-pricedBay Area to the more-affordableSacramento region. TheColorado division also contributed$2.9 million in home sales revenue from the delivery of four homes from its acquired backlog as ofFebruary 26, 2021 , three of which were from a first time move community in Aurora with an average sales price per delivery of$611,000 , and one delivery from a second move up community inBroomfield with a sales price of$1.1 million . Homebuilding Gross Margin Homebuilding gross margin for the 2021 first quarter was 17.1% compared to 11.4% for the prior year period. The 570 basis point improvement was primarily due to a product mix shift, pricing increases and a 230 basis point decrease in interest costs included in cost of home sales. The positive product mix shift was driven by a higher percentage of our total homes sales revenue generated at more affordably-priced communities, which had higher gross margins, as well as more deliveries at one higher margin move-up community inSacramento, California . The 2021 first quarter cost of home sales included$295,000 of purchase accounting adjustments related to the acquisition ofEpic Homes . Excluding these adjustments, gross margin from home sales for the 2021 first quarter was 17.4%*. Adjusted homebuilding gross margin, which excludes interest in cost of home sales, was 21.3% and 17.9% for the 2021 and 2020 first quarters, respectively. Adjusted homebuilding gross margin is a non-GAAP measure. See the table below reconciling this non-GAAP measure to homebuilding gross margin, the nearest GAAP equivalent. Excluding the impact of interest in cost of sales, the 340 basis point improvement in the 2021 first quarter was primarily the result of a product mix shift and improved pricing power experienced over the last three quarters. Three Months Ended March 31, 2021 % 2020 % (Dollars in thousands) Home sales revenue$ 93,855 100.0 %$ 95,659 100.0 % Cost of home sales 77,848 82.9 % 84,722 88.6 % Homebuilding gross margin 16,007 17.1 % 10,937 11.4 % Add: Interest in cost of home sales 4,027 4.2 % 6,146 6.5 % Adjusted homebuilding gross margin(1)$ 20,034 21.3 %$ 17,083 17.9 % Home sales revenue$ 93,855 100.0 %$ 95,659 100.0 % Cost of home sales 77,848 82.9 % 84,722 88.6 % Homebuilding gross margin 16,007 17.1 % 10,937 11.4 % Add: Purchase accounting adjustments 295 0.3 % - N/A
Homebuilding gross margin before
purchase accounting adjustments(1)
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(1) Adjusted homebuilding gross margin and margin percentage (or homebuilding
gross margin excluding interest in cost of homes sales) and homebuilding
gross margin and margin percentage before purchase accounting
adjustments are non-GAAP financial measures. We believe this information is
meaningful as it isolates the impact that leverage, our cost of debt
capital and purchase accounting have on homebuilding gross margin and
permits investors to make better comparisons with our competitors
break out and adjust gross margins in a similar fashion.
Land Sales
During the three months ended March 31, 2020 , the Company recognized $147,000 of
deferred revenue for the remaining completed work on a land sale that initially
occurred in the 2019 third quarter. The Company did not record any land sales
during the three months ended March 31, 2021 .
Fee Building
In the 2021 first quarter, fee building revenues decreased 85% from the prior
year period. The decrease in fee revenues resulted primarily from a decrease in
construction activity at fee building communities in Irvine, California . In
August 2020 , Irvine Pacific, previously our largest customer, made a decision to
begin building homes using their own general contractor's license, effectively
terminating our fee building arrangement with them moving forward. During the
2021 first quarter, we completed the transition of our construction management
responsibilities to Irvine Pacific and the recognition of all revenues related
to the contract. 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 reduction in Irvine Pacific business in future years,
such as our new fee building relationship with FivePoint in Irvine, California .
Our fee building revenues have historically been concentrated with a small
number of customers. For the three months ended March 31, 2021 and 2020,
together, Irvine Pacific and FivePoint comprised 96% and 99% of total fee
building revenue, respectively.
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The cost of fee building decreased 85% in the 2021 first quarter compared to the
prior year period consistent with the decrease in fee building activity, and to
a lesser extent, lower allocated G&A expenses. The amount of G&A expenses
included in the cost of fee building was $0.2 million and $1.0 million for the
2021 and 2020 first quarters, respectively.
Selling, General and Administrative Expenses
Three Months Ended As a Percentage of
March 31, Home Sales Revenue
2021 2020 2021 2020
(Dollars in thousands)
Selling and marketing expenses $ 6,654 $ 7,466 7.1 % 7.8 %
General and administrative expenses ("G&A") 8,271 6,023
8.8 % 6.3 %
Total selling, marketing and G&A ("SG&A")
15.9 % 14.1 % G&A$ 8,271 $ 6,023 8.8 % 6.3 % Less: Acquisition expenses (983 ) - (1.0 )% - % G&A, excluding acquisition expenses$ 7,288 $ 6,023 7.8 % 6.3 % Selling and marketing expenses$ 6,654 $ 7,466 7.1 % 7.8 % G&A, excluding acquisition expenses 7,288 6,023 7.8 % 6.3 %
SG&A, excluding acquisition expenses
14.9 % 14.1 % During the 2021 first quarter, our SG&A rate as a percentage of home sales revenue was 15.9% compared to 14.1% in the prior year period. The 2021 first quarter included$1.0 million in pretax acquisition related expenses, which included tail insurance expenses and professional fees, incurred in connection with our acquisition ofEpic Homes . Excluding these expenses, the Company's SG&A rate for the 2021 first quarter was 14.9% as compared to 14.1% in the prior year period. The 80 basis point increase was primarily due to a$0.8 million reduction in G&A expenses allocated to fee building cost of sales during the 2021 first quarter and an increase in incentive compensation, which was partially offset by lower amortization of capitalized selling and marketing costs and advertising and model operation cost savings. SG&A excluding acquisition related expenses 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 expenses from our SG&A rate is relevant to provide investors with a better comparison to rates that do not include these expenses.
Equity in Net Income (Loss) of
As ofMarch 31, 2021 and 2020, we had ownership interests in nine and ten unconsolidated joint ventures, respectively, none of which have active homebuilding or land development operations as ofMarch 31, 2021 . 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. We own interests in our unconsolidated joint ventures that generally range from 10% to 35% and these interests vary by entity. The Company's joint venture activity for the 2021 first quarter resulted in$0.2 million of pretax income as compared to a$1.9 million pretax loss for the 2020 period. The 2021 first quarter income related primarily to the release of reserves from a land development joint venture for which stated completion obligations were completed and released. In addition, we delivered the last two homes remaining within our Mountain Shadows luxury community inParadise Valley, Arizona , which recognized total home sales revenues of$4.8 million . The Company's joint venture loss in 2020 was primarily the result of an other-than-temporary noncash impairment charge of$2.3 million 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 its partner for less than our current carrying value which closed during the 2020 third quarter. Interest Expense During the three months endedMarch 31, 2021 and 2020, we expensed$0.4 million and$0.7 million , respectively, 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. Based on our current and expected qualified inventory levels, we do not expect to directly expense interest costs for the next several quarters. 47
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Table of Contents Project Abandonment Costs During the prior year 2020 first quarter, the Company terminated its option agreement for a luxury condominium project inScottsdale, 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 made in the 2020 first quarter 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.
Loss on Early Extinguishment of Debt
During the prior year period endedMarch 31, 2020 , the Company repurchased and retired approximately$4.8 million of its 7.25% Senior Notes due 2022 for a cash payment of approximately$4.8 million . The Company recognized a loss on early extinguishment of debt of$0.1 million and wrote off approximately$46,000 of unamortized discount, premium and debt issuance costs associated with notes retired.
Provision/Benefit for Income Taxes
For the three months endedMarch 31, 2021 , the Company recorded an income tax provision of$0.5 million which includes a$0.3 million discrete provision. The Company's effective tax rate for the three months endedMarch 31, 2021 , differs from the federal statutory rate primarily due to the discrete provision related to estimated blended state tax rate updates and stock compensation, as well as state income tax rates and tax credits for energy efficient homes. For the three months endedMarch 31, 2020 , the Company recorded an income tax benefit of$9.9 million . The Company's effective tax rate for the three months endedMarch 31, 2020 , differs from the federal statutory rate due to discrete items, state income tax rates and tax credits for energy efficient homes. The 2020 first quarter discrete items totaled an$8.1 million benefit,$5.8 million of which related to the$14.0 million project abandonment costs recorded during the quarter and a$2.1 million benefit related to the CARES Act signed into law onMarch 27, 2020 . The CARES Act allows companies to carry back net operating losses generated in 2018 through 2020 for five years. The Company recognized a$2.1 million discrete benefit in the 2020 first quarter 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.
Liquidity and Capital Resources
Overview Our principal sources of capital for the three months endedMarch 31, 2021 were cash generated from home sales activities, proceeds from the tack-on offering of our 2025 Notes, and distributions from our unconsolidated joint ventures. Our principal uses of capital for the three months endedMarch 31, 2021 were land purchases, land development, home construction, the acquisition ofEpic Homes and repayment of the acquired company's third-party debt, repurchases of the Company's common stock, 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 are focused on rebuilding our land pipeline to meet surging housing demand driven by improved economic conditions. We expect cash outlays for land purchases, land development and home construction at times to exceed cash generated by operations. During the three months endedMarch 31, 2021 , we generated cash flows from operating activities of$2.5 million . Also during the 2021 first quarter, the Company completed a tack-on offering of its 2025 Notes generating proceeds of$36.1 million . We ended the first quarter of 2021 with$114.8 million of cash and cash equivalents, a$7.5 million increase fromDecember 31, 2020 . Generally, we intend to maintain our debt levels within our target net leverage ranges in the near term, and then to deploy a portion of our cash on hand and 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. Our investments in land and land development in the future will depend significantly on market conditions and available opportunities that meet our investment return standards. 48
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During the three months endedMarch 31, 2021 , the Company completed the sale of$35 million in aggregate principal amount of its 7.25% Senior Notes due 2025 (the "Additional 2025 Notes"). The Additional 2025 Notes were issued at an offering price of 103.25% of their face amount, which represents a yield to maturity of 6.427%. As ofMarch 31, 2021 andDecember 31, 2020 , we had$0.8 million and$2.6 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$1.1 million and$3.1 million , respectively, related to the payment of the above payables. We intend to utilize both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from operations, to operate our business. As ofMarch 31, 2021 , we had outstanding borrowings of$285 million in aggregate principal related to our 2025 Notes and no borrowings outstanding under our$60 million unsecured 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, land banking arrangements, or common and preferred equity. While the COVID-19 pandemic continues to create uncertainty as to general economic and housing market conditions for 2021 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, our revolving credit facility or, to the extent available, through accessing debt or equity capital, as needed, although no assurances can be provided that such additional debt or equity capital will be available or on acceptable terms. The 2025 Notes OnOctober 28, 2020 , the Company completed the sale of$250 million in aggregate principal amount of 7.25% Senior Notes due 2025 (the "Original 2025 Notes"), in a private placement to "qualified institutional buyers" as defined in Rule 144A under the Securities Act and outsidethe United States in reliance on Regulation S under the Securities Act. The 2025 Notes were issued at an offering price of 100% of their face amount, which represents a yield to maturity of 7.25%. Net proceeds from the offering of the Original 2025 Notes, together with cash on hand, were used to redeem all of the outstanding 2022 Notes at a redemption price of 101.813% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. OnFebruary 24, 2021 , the Company completed a tack-on private placement offering through the sale of an additional$35.0 million in aggregate principal amount of Additional 2025 Notes (together, with the Original 2025 Notes, the "2025 Notes"). The Additional 2025 Notes were issued at an offering price of 103.25% of their face amount, which represents a yield to maturity of 6.427%. Unamortized premium and debt issuance costs are amortized and capitalized to interest costs using the effective interest method. The 2025 Notes are general senior unsecured obligations that rank equally in right of payment to all existing and future senior indebtedness, including borrowings under the Company's senior unsecured revolving credit facility. The 2025 Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries. Pursuant to the indenture governing our 2025 Notes (the "Indenture"), interest on the 2025 Notes will be paid semiannually in arrears onApril 15 andOctober 15 of each year, commencing onApril 15, 2021 . The 2025 Notes will mature onOctober 15, 2025 . On or afterOctober 15, 2022 , the Company may redeem all or a portion of the 2025 Notes upon not less than 15 nor more than 60 days' notice, at the redemption prices (expressed as percentages of the principal amount on the redemption date) set forth below plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the 12-month period, as applicable, commencing onOctober 15 of the years as set forth below: Year Redemption Price 2022 103.625% 2023 101.813% 2024 100.000% 49
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The 2025 Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on incurring or guaranteeing additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. Exceptions to the limitation include, among other things, (1) borrowings under existing of future bank credit facilities of up to the greater of (i)$100 million and (ii) 20% of our consolidated tangible assets, (2) non-recourse indebtedness, and (3) indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either the leverage condition or interest coverage condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income fromJanuary 1, 2021 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible assets and a general basket of up to the greater of$15 million and 3% of our consolidated tangible assets. The Indenture contains certain other covenants, among other things, the ability of the Company and its restricted subsidiaries to issue certain equity interests, make payments in respect of subordinated indebtedness, make certain investments, sell assets, incur liens, create certain restrictions on the ability of restricted subsidiaries to pay dividends or to transfer assets, enter into transactions with affiliates, create unrestricted subsidiaries, and consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of exceptions and qualifications as set forth in the Indenture. The leverage and interest coverage conditions are summarized in the table below, as described and defined further in the Indenture.
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