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 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 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 absorption
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 the proposed Merger, including among other things:
• the successful completion of our acquisition by Parent and Merger Sub, or our
failure to complete such acquisition;
• the impact of the pendency of our acquisition by Parent and Merger Sub on our
business and operations;
• the timing and expected financing of the Offer and the Merger;
• uncertainty surrounding how many of the our stockholders will tender their
shares of our common stock in the Offer;
• the possibility that any or all of the various conditions to the consummation
of the Offer may not be satisfied or waived in a timely manner, if at all;
• the possibility of business disruptions due to transaction-related
uncertainty;
• the occurrence of any event, change or other circumstance that could give rise
to the termination of the Merger Agreement;
• 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.
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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. 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 and severance charges, general and administrative costs excluding acquisition transaction costs and severance charges as a percentage of home sales revenue, selling, marketing and general and administrative costs excluding acquisition transaction costs and severance charges, selling, marketing and general and administrative costs excluding acquisition transaction costs and 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), 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 impairments and 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 and severance charges, general and administrative expenses
excluding acquisition transaction costs and severance charges as a percentage of
homes sales revenue, selling, marketing and general and administrative expenses
excluding acquisition transaction costs and severance charges and selling,
marketing and general and administrative expenses excluding acquisition
transaction costs and severance charges as a percentage of home sales revenue,
please see "-- Results of Operations - Selling, General and Administrative
Expenses."
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Selected Financial Information
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(Dollars in thousands)
Revenues:
Home sales $ 135,940 $ 77,757 $ 229,795 $ 173,416
Land sales - 10 - 157
Fee building, including management fees 4,586 21,193 9,887 57,420
140,526 98,960 239,682 230,993
Cost of Sales:
Home sales 112,453 66,216 190,301 150,938
Home sales impairments - 19,000 - 19,000
Land sales - 10 - 157
Fee building 4,494 20,985 9,691 56,482
116,947 106,211 199,992 226,577
Gross Margin:
Home sales 23,487 (7,459 ) 39,494 3,478
Land sales - - - -
Fee building 92 208 196 938
23,579 (7,251 ) 39,690 4,416
Home sales gross margin 17.3 % (9.6 )% 17.2 % 2.0 %
Home sales gross margin before
impairments 17.3 % 14.8 % 17.2 % 13.0 %
Land sales gross margin N/A - % N/A - %
Fee building gross margin 2.0 % 1.0 % 2.0 % 1.6 %
Selling and marketing expenses (7,778 ) (6,386 ) (14,432 ) (13,852 )
General and administrative expenses (9,453 ) (6,892 ) (17,724 ) (12,915 )
Equity in net income (loss) of
unconsolidated joint ventures - (19,962 ) 174 (21,899 )
Interest expense (91 ) (1,271 ) (445 ) (1,989 )
Project abandonment costs (21 ) (94 ) (89 ) (14,130 )
Gain on early extinguishment of debt - 702 - 579
Other income (expense), net (116 ) (68 ) (50 ) 155
Pretax income (loss) 6,120 (41,222 ) 7,124 (59,635 )
(Provision) benefit for income taxes (1,346 ) 16,929 (1,797 ) 26,866
Net income (loss) $ 4,774 $ (24,293 ) $ 5,327 $ (32,769 )
Earnings (loss) per share:
Basic $ 0.26 $ (1.32 ) $ 0.29 $ (1.71 )
Diluted $ 0.26 $ (1.32 ) $ 0.29 $ (1.71 )
Interest incurred $ 5,751 $ 6,150 $ 11,082 $ 12,530
Adjusted EBITDA(1) $ 13,932 $ 6,394 $ 22,095 $ 13,375
Adjusted EBITDA margin percentage(1) 9.9 % 6.5 % 9.2 % 5.8 %
LTM(2) Ended June 30,
2021 2020
Interest incurred $ 22,488 $ 25,982
Adjusted EBITDA(1) $ 46,045 $ 36,859
Adjusted EBITDA margin percentage (1) 8.9 % 6.0 %
Ratio of Adjusted EBITDA to total interest incurred (1) 2.0x 1.4x
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(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 June 30, Six Months Ended June 30, June 30,
2021 2020 2021 2020 2021 2020
(Dollars in thousands)
Net income (loss)
$ (32,769 ) $ 5,227 $ (40,374 ) Add: Interest amortized to cost of sales excluding impairment charges, and interest expensed 5,707 5,872 10,088 12,736 24,871 28,817 Provision (benefit) for income taxes 1,346 (16,929 ) 1,797 (26,866 ) 2,076 (30,991 ) Depreciation and amortization 1,471 1,778 2,727 3,623 5,825 7,538 Amortization of stock-based compensation 613 521 1,258 1,110 2,345 2,281 Cash distributions of income from unconsolidated joint ventures - - - - 110 95 Severance charges - 1,091 - 1,091 - 1,091 Acquisition transaction costs - - 983 - 983 - Noncash inventory impairments and abandonments 21 19,094 89 33,130 57 43,405 Less: (Gain) loss on early extinguishment of debt - (702 ) - (579 ) 7,833 (774 ) Equity in net (income) loss of unconsolidated joint ventures - 19,962 (174 ) 21,899 (3,282 ) 25,771
Adjusted EBITDA
$ 13,375 $ 46,045 $ 36,859 Total Revenue$ 140,526 $ 98,960 $239,682 $ 230,993 $ 516,100 $ 618,745 Adjusted EBITDA margin percentage 9.9 % 6.5 % 9.2 % 5.8 % 8.9 % 6.0 %
Interest incurred
$ 12,530 $ 22,488 $ 25,982 Ratio of Adjusted LTM(2) EBITDA to total interest incurred 2.0x 1.4x
(2) "LTM" indicates amounts for the trailing 12 months.
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Table of Contents Overview The robust housing demand that has been building since the second half of 2020 continued into the 2021 second quarter resulting in strong pricing power as the Company continued to focus on managing sales price and pace. We continue to experience challenges related to cost increases and elongated construction cycle times, particularly in ourArizona andColorado markets, but successfully raised prices to cover the majority of these costs during the quarter. We attribute the recent higher levels of demand to a number of factors, including low interest rates, a continued undersupply of both new and resale homes, consumers' increased focus on the importance of home, and a general desire for more indoor and outdoor space. This demand along with pricing power led to sequential improvement in our homebuilding gross margin for the 2021 second quarter to 17.3% as compared to 17.1% in the 2021 first quarter, and was up 250 basis points over the 2020 second quarter of 14.8%* after excluding$19.0 million of inventory impairment charges in the prior year period. The strength in gross margins coupled with the SG&A leverage we experienced during the 2021 second quarter due to a 75% increase in home sales revenue resulted in a positive operating margin of 4.6% and pretax income of$6.1 million , a significant improvement as compared to the$41.2 million pretax loss in the 2020 second quarter. Total revenues for the 2021 second quarter were$140.5 million compared to$99.0 million in the prior year period. The year-over-year increase in revenues was driven largely by a 75% increase in home sales revenue to$135.9 million as compared to$77.8 million in the prior year period. The improvement in home sales revenue was the result of a 98% increase in deliveries, which was partially offset by a 12% decrease in average sales price per delivery consistent with our strategy to offer more affordable price points, including a significant increase in deliveries from ourArizona operation. Net income for the 2021 second quarter was$4.8 million , or$0.26 per diluted share, compared to a net loss of$24.3 million , or ($1.32 ) per diluted share for the 2020 second quarter, which included$39.0 million in impairment charges,$1.1 million in severance charges and a$1.8 million net deferred tax asset remeasurement benefit. Adjusted net loss for the 2020 second quarter, after excluding impairments, severance charges and the net deferred tax asset remeasurement benefit was$0.7 million * or ($0.04 ) adjusted net loss per diluted share*. Despite the Company's efforts to meter sales and manage its homes in backlog, net new home orders for the 2021 second quarter increased 14% as compared to the prior year period to 187 homes. The increase in net new home orders was driven primarily by a 50% increase in our monthly sales absorption rate to 3.3 net orders per community in the 2021 second quarter as compared to 2.2 net new home orders per community for the 2020 second quarter. The 2020 second quarter absorption rates were negatively impacted by slower sales activity and cancellations due to economic disruption and the initial loss in consumer confidence due to stay-at-home orders implemented related to COVID-19 during the latter part of the 2020 first quarter. The Company ended the 2021 second quarter with 632 homes in backlog, a 169% increase as compared to the end of the 2020 second quarter (up 119% excluding backlog related toColorado ), with the dollar value in backlog of$439.4 million , up 160% as compared to the prior year. The Company generated operating cash flow of$2.5 million during the 2021 second quarter and ended the quarter with$117.3 million in cash and cash equivalents and had no borrowings outstanding under its revolving credit facility. AtJune 30, 2021 , the Company had a debt-to-capital ratio of 58.1% and a net debt-to capital ratio of 44.6%*, which represented a 690-basis point improvement in the net debt-to capital ratio compared to the 2020 second quarter. OnJuly 23, 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withNewport Holdings, LLC , aDelaware limited liability company ("Parent") which is controlled by funds managed by affiliates of Apollo Global Management Inc., andNewport Merger Sub, Inc. , aDelaware corporation and a wholly owned, direct subsidiary of Parent ("Merger Sub"), pursuant to which Merger Sub will conduct a cash tender offer (the "Offer") to acquire any and all of the issued and outstanding shares of our common stock at a price per share of$9.00 , in cash, net to the holder thereof, without interest and subject to applicable withholding (the "Offer Price"). Upon the consummation of the Offer, Merger Sub will merge with and into us (the "Merger") pursuant to Section 251(h) of the Delaware General Corporation Law ("DGCL") with us as the surviving corporation. For a detailed discussion of the proposed Apollo Funds acquisition, please see Note 17, Subsequent Events to the accompanying notes to our condensed unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q which is incorporated herein by reference. -------------------------------------------------------------------------------- *Adjusted homebuilding gross margin percentage (or homebuilding gross margin percentage before impairments), 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 homebuilding gross margin percentage, please see "-- Results of Operations - Homebuilding Gross Margin." 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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Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(Dollars in thousands, except per share amounts)
Net income (loss) $ 4,774 $ (24,293 ) $ 5,327 $ (32,769 )
Acquisition transaction costs, net of
tax - - 765 -
Inventory impairments, abandoned project
costs, joint venture impairments and
severance charges, net of tax - 25,414 - 34,847
Noncash deferred tax asset remeasurement - (1,827 ) 175 (3,941 )
Adjusted net income (loss) $ 4,774 $ (706 ) Earnings (loss) per share: Basic$ 0.26 $ (1.32 ) $ 0.29 $ (1.71 ) Diluted$ 0.26 $ (1.32 ) $ 0.29 $ (1.71 ) Adjusted earnings (loss) per share: Basic$ 0.26 $ (0.04 ) $ 0.35 $ (0.10 ) Diluted$ 0.26 $ (0.04 ) $ 0.34 $ (0.10 ) Weighted average shares outstanding for adjusted earnings (loss) per share: Basic 18,075,687 18,341,549 18,092,259 19,146,687 Diluted 18,446,015 18,341,549 18,431,276 19,146,687 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 Acquisition transaction costs - - 983 - Less: Related tax benefit - (14,715 ) (218 ) (21,569 ) Acquisition transaction costs, inventory impairments, abandoned project costs, joint venture impairments and severance charges, net of tax $ -$ 25,414 $ 765 $ 34,847
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 both new and resale 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 first half of 2021 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 resurgence of COVID-19 cases due to more contagious variants, such as the Delta variant or 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. 43
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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) 2021 2020 Amount % 2021 2020 Amount % Net new home orders: Southern California 40 75 (35 ) (47 )% 97 137 (40 ) (29 )% Northern California 75 60 15 25 % 204 128 76 59 % Arizona 51 29 22 76 % 133 31 102 329 % Colorado 21 - 21 N/A 36 - 36 N/A Total net new home orders 187 164 23 14 % 470 296 174 59 % Monthly sales absorption rate per community: (1) Southern California 5.7 2.3 3.4 148 % 4.4 2.1 2.3 110 % Northern California 4.2 1.9 2.3 121 % 4.7 2.1 2.6 124 % Arizona 2.6 3.2 (0.6 ) (19 )% 3.2 2.2 1.0 45 % Colorado 1.9 - N/A N/A 2.6 - N/A N/A Total monthly sales absorption rate per community (1) 3.3 2.2 1.1 50 % 3.9 2.1 1.8 86 % Cancellation rate 7 % 11 % (4 )% N/A 7 % 14 % (7 )% N/A Selling communities at end of period: Southern California 2 11 (9 ) (82 )% Northern California 6 10 (4 ) (40 )% Arizona 7 4 3 75 % Colorado 4 - 4 N/A Total selling communities 19 25 (6 ) (24 )% Average selling communities: Southern California 2 11 (9 ) (82 )% 4 11 (7 ) (64 )% Northern California 6 11 (5 ) (45 )% 7 10 (3 ) (30 )% Arizona 7 3 4 133 % 7 2 5 250 % Colorado 4 - 4 N/A 2 - 2 N/A Total average selling communities 19 25 (6 ) (24 )% 20 23 (3 ) (13 )%
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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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Homebuyer demand remained strong during the 2021 second quarter which resulted in a 14% increase in net new home orders as compared to the same period in 2020 primarily due to a 50% increase in our monthly sales absorption rate to 3.3 net orders per community in the 2021 first quarter. The Company intentionally limited sales releases during the 2021 second quarter to balance sales pricing with sales pace in order to better manage unstarted homes in backlog and to help offset construction cost increases and improve gross margins. We continue to attribute the higher level of demand to a number of factors, including low interest rates, an undersupply of both new and resale homes, consumers' increased focus on the importance of the home and strong equity markets. The 2020 second quarter absorption rates were negatively impacted by slower sales activity and cancellations due to economic disruption and weaker consumer confidence resulting from stay-at-home orders implemented related to COVID-19 during the latter part of the 2020 first quarter. However, demand improved beginning inJune 2020 and continued throughout the balance of 2020 and into 2021 as COVID-19 restrictions eased, with February reaching the highest monthly absorption rate in the Company's history coming in at 4.8 net orders per community. Monthly absorption pace at our more-affordable, entry-level product continued to out-pace the Company average for the 2021 second quarter. For the 2021 second quarter, entry-level communities recorded net new orders of 3.9 sales per month per actively selling community compared to a 2021 second quarter companywide monthly sales pace of 3.3 per community. Orders from entry-level communities grew to total approximately 55% of total net new orders for the 2021 second quarter from approximately 47% of total net new orders for the prior year period. Net new home orders for the six months endedJune 30, 2021 increased 59% as compared to the same period in 2020 primarily due to an 86% increase in our monthly sales absorption rate to 3.9 net orders per community for the six months endedJune 30, 2021 . Demand was strongest during the six months endedJune 30, 2021 for our more-affordable, entry-level product, which averaged a monthly sales pace of 4.7 per community compared to a companywide average of 3.9 per community. Orders from entry-level communities grew to total approximately 57% of total net new orders for the six months endedJune 30, 2021 from approximately 44% of total net new orders for the 2020 period. The Company experienced modest cancellation activity with a cancellation rate of 7% for the 2021 second quarter compared to 11% in the 2020 second quarter. The cancellation rate for the six months endedJune 30, 2021 was 7% compared to 14% in the comparable prior year period. The higher cancellation rate in the prior year was due to increased cancellations occurring in March and April as a result of the economic impact COVID-19 had on our buyers. Backlog As of June 30, 2021 2020 % Change Average Homes Dollar Value Price Homes Dollar Value Average Price Homes Dollar Value Average Price (Dollars in thousands) Southern California 59$ 45,601 $ 773 91$ 74,547 $ 819 (35 )% (39 )% (6 )% Northern California 227 166,041 731 117 81,909 700 94 % 103 % 4 % Arizona 229 97,684 427 27 12,337 457 748 % 692 % (7 )% Colorado 117 130,110 1,112 - - N/A N/A N/A N/A Total 632$ 439,436 $ 695 235$ 168,793 $ 718 169 % 160 % (3 )% Backlog reflects the number of homes, net of cancellations, for which we have entered into sales contracts with customers, but for which we have not yet delivered the homes. The number of homes in backlog as ofJune 30, 2021 was up 169% as compared to the prior year period primarily due to a higher number of beginning backlog units, the 14% increase in net new orders during the quarter, a lower backlog conversion rate for the 2021 second quarter, and the acquisition of 102 homes in backlog related to the acquisition ofEpic Homes during the 2021 first quarter. Our backlog conversion rate was 31% for the 2021 second quarter as compared to 59% in the prior year period. The decrease in the 2021 conversion rate was due to a 273% increase in beginning backlog for the 2021 second quarter as a result of increased presold homes during the fourth quarter of 2020 and first quarter of 2021 due to strong demand trends across all our markets as well as fewer speculative homes available to sell and deliver than in the prior year period. The dollar value of backlog at the end of the 2021 second quarter was up 160% year-over-year to$439.4 million , primarily due to the higher number of homes in backlog resulting from higher sales absorption rates and the acquired backlog fromEpic Homes , which was partially offset by a 3% 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 inArizona . InSouthern California , the total backlog dollar value decreased year-over-year primarily as a result of a 35% decrease in ending backlog units and a 6% decrease in average selling price for the 2021 second quarter. The year-over-year decrease in backlog units was due to the division closing out of five communities in 2021, four of which closed out during the 2021 second quarter.Northern California's ending backlog units increased 94% year-over-year due to a 25% increase in orders during the 2021 second quarter and a higher number of beginning backlog units to start the quarter. The increase in the number of homes inNorthern California backlog contributed to a 103% increase in backlog dollar value. 45
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InArizona , the 748% year-over-year increase in backlog dollar value was due to the division opening seven new communities in 2020, of which, three opened in the middle of the 2020 second quarter and the remaining four opened in the third quarter. InColorado , the 117 homes in backlog as ofJune 30, 2021 were comprised of 38 homes from a first time move community in Aurora with an average selling price of homes in backlog of approximately$625,000 , and 79 homes from three second move-up communities with average selling prices of homes in backlog ranging from$1.2 million to$1.7 million . Lots Owned and Controlled As of June 30, Increase/(Decrease) 2021 2020 Amount % Lots Owned: Southern California 186 397 (211 ) (53 )% Northern California 511 558 (47 ) (8 )% Arizona 499 397 102 26 % Colorado 191 - 191 N/A Total 1,387 1,352 35 3 % Lots Controlled:(1) Southern California 589 415 174 42 % Northern California 175 210 (35 ) (17 )% Arizona 63 262 (199 ) (76 )% Colorado 84 - 84 N/A Total 911 887 24 3 % Total Lots Owned and Controlled - Wholly Owned 2,298 2,239 59 3 % Fee Building Lots(2) 38 892 (854 ) (96 )%
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(1) Includes lots that we control under purchase and sale agreements or option
agreements with nonrefundable deposits and certain agreements with
refundable deposits that we have a high degree of confidence that we will
pursue, all of which are subject to customary conditions and have not yet
closed. This table excludes 2,511 lots controlled through purchase and sale
agreements or option agreements with refundable deposits totaling
million that are still undergoing due diligence. There can be no assurance
that any of the foregoing 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 June 30, 2021
increased 3% year-over-year to 2,298 lots, of which 40% were controlled through
option contracts in both periods. The slight increase in wholly owned lots owned
and controlled was due to 275 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 June 30, 2021 than lots contracted
during the same period. 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 June 30, 2021 as compared to the prior year
period was primarily attributable to the delivery of homes to customers during
the last twelve months ended June 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 June 30,
2021 2020 % Change
Average
Homes Dollar Value Average Price Homes Dollar Value Price Homes Dollar Value
Average Price
(Dollars in thousands)
Southern California 62 $ 49,399 $ 797 50 $ 41,440 $ 829 24 % 19 % (4 )%
Northern California 79 52,518 665 48 30,156 628 65 % 74 % 6 %
Arizona 46 18,366 399 5 6,161 1,232 820 % 198 % (68 )%
Colorado 17 15,657 921 - - N/A N/A N/A N/A
Total 204 $ 135,940 $ 666 103 $ 77,757 $ 755 98 % 75 % (12 )%
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Six Months Ended June 30,
2021 2020 % Change
Average
Homes Dollar Value Average Price Homes Dollar Value Price Homes Dollar Value Average Price
(Dollars in thousands)
Southern California 114 $ 86,940 $ 763 118 $ 104,457 $ 885 (3 )% (17 )% (14 )%
Northern California 149 98,191 659 77 50,420 655 94 % 95 % 1 %
Arizona 66 26,064 395 15 18,539 1,236 340 % 41 % (68 )%
Colorado 21 18,600 886 - - N/A N/A N/A N/A
Total 350 $ 229,795 $ 657 210 $ 173,416 $ 826 67 % 33 % (20 )%
New home deliveries increased 98% for the 2021 second quarter as 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
June 30, 2021 increased 75% year-over-year, primarily due to the increase in
deliveries, which was partially offset by a 12% decrease in average sales price
per delivery. 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 Arizona operations, where its average
selling price was $399,000 during the 2021 second quarter.
The increase in home sales revenue for the 2021 second quarter compared to the
prior year period was spread across all divisions. Southern California homes
sales revenue increased 19% year-over-year as a result of a 24% increase in
homes delivered, partially offset by a 4% decrease in average selling price due
to the prior year period including deliveries from several higher-priced,
closed-out Orange County communities. In Northern California , home sales revenue
for the 2021 second quarter increased 74% due to a 65% increase in homes
delivered and a 6% increase in average selling price. Arizona homes sales
revenue increased 198% year-over-year as a result of an 820% increase in homes
delivered, partially offset by a 68% decrease in average selling price due to
the 2020 period exclusively including deliveries from a second move-up and a
luxury condominium project, both of which closed-out during 2020. The Colorado
division also contributed $15.7 million in home sales revenue from the delivery
of 17 homes from the acquired backlog from the Epic Acquisition on February 26,
2021 .
New home deliveries increased 67% for the six months ended June 30, 2021
compared to the prior year period due to a higher number of homes in backlog at
the beginning of the period. Home sales revenue for the six months ended June
30, 2021 increased 33% compared to the same period in 2020, due to the increase
in deliveries, which was partially offset by a 20% decrease in average sales
price per delivery for the period. Average selling price was down in Southern
California due to the 2020 period including deliveries from several
higher-priced, closed-out Orange County communities. In Arizona , the decrease in
average sales price was primarily due to product mix shift.
Homebuilding Gross Margin
Homebuilding gross margin for the 2021 second quarter was 17.3% compared to
(9.6%) for the prior year period. Homebuilding gross margin for the 2020 second
quarter included $19.0 million in noncash inventory impairment charges related
to five homebuilding communities that had experienced slower sales pace due to
the COVID-19 pandemic, resulting in higher incentives and carrying costs for
these projects. No inventory impairments were recorded during the 2021 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 17.3% for the 2021 second
quarter as compared to 14.8% for the prior year period. The 250 basis point
increase was primarily due to a product mix shift, home price increases and a
190 basis point decrease in interest costs included in cost of home sales,
partially offset by the prior year period including a $2.2 million benefit from
a profit participation settlement related to two communities. The positive
product mix shift was driven by a higher percentage of our total homes sales
revenue generated from more affordably-priced communities, which had higher
gross margins. The 2021 second quarter cost of home sales included $730,000 of
purchase accounting adjustments related to the fair value write-up of inventory
in connection with the acquisition of Epic Homes . Excluding these adjustments,
gross margin from home sales for the 2021 second quarter was 17.8%. Adjusted
homebuilding gross margin, which excludes impairment charges and interest in
cost of home sales, was 21.4% and 20.8% for the 2021 and 2020 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 60 basis point improvement in the 2021 second quarter was
primarily the result of a product mix shift and improved pricing power
experienced over the last four quarters, which was partially offset by the
profit participation settlement in the 2020 second quarter.
Homebuilding gross margin for the six months ended June 30, 2021 and 2020 was
17.2% and 2.0%, respectively. The 2020 period included $19.0 million in
inventory impairment charges as discussed above while the 2021 period included
no impairments. Excluding impairments, homebuilding gross margin was 17.2%
compared to 13.0% for the six months ended June 30, 2021 and 2020, respectively.
The 420 basis point increase was due to a product mix shift and lower interest
in cost of home sales, partially offset by a $2.2 million benefit from a profit
participation settlement during the 2020 second quarter. Adjusted homebuilding
gross margin, which excludes impairments and interest in cost of home sales, was
21.4% and 19.2% for the six months ended June 30, 2021 and 2020, respectively.
The 220 basis point increase in adjusted homebuilding gross margin for the 2021
period was primarily a result of a product mix shift, partially offset by the
profit participation settlement.
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Three Months Ended June 30, Six Months Ended June 30,
2021 % 2020 % 2021 % 2020 %
(Dollars in thousands)
Home sales revenue
190,301 82.8 % 169,938 98.0 %
Homebuilding gross
margin 23,487 17.3 % (7,459 ) (9.6 )% 39,494 17.2 % 3,478 2.0 %
Add: Home sales
impairments - - % 19,000 24.4 % - - % 19,000 11.0 %
Homebuilding gross
margin before
impairments(1) 23,487 17.3 % 11,541 14.8 % 39,494 17.2 % 22,478 13.0 % Add: Interest in cost of home sales
5,616 4.1 % 4,601 6.0 % 9,643 4.2 % 10,747 6.2 % Adjusted homebuilding gross margin(1)
$ 29,103 21.4 %$ 16,142 20.8 %
Home sales revenue
190,301 82.8 % 169,938 98.0 % Homebuilding gross margin
23,487 17.3 % (7,459 ) (9.6 )% 39,494 17.2 % 3,478 2.0 %
Add: Purchase
accounting adjustments 730 0.5 % - N/A 1,025 0.4 % - N/A
Homebuilding gross
margin before purchase
accounting
adjustments(1) $ 24,217 17.8 % $ (7,459 ) (9.6 )% $ 40,519 17.6 % $ 3,478 2.0 %
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(1) Homebuilding gross margin and margin percentage before impairments (also
referred to as homebuilding gross margin excluding impairments) and
adjusted homebuilding gross margin and margin percentage (or homebuilding
gross margin excluding impairments and 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 impairments, leverage, our cost
of debt capital and purchase accounting have on homebuilding gross margin
and permits investors to make better comparisons with our competitors
also break out and adjust gross margins in a similar fashion.
Land Sales
During the three and six months ended
Fee Building In the 2021 second quarter, fee building revenues decreased 78% from the 2020 second quarter, and for the six months endedJune 30, 2021 , fee building revenues decreased 83% from the prior year period. The decrease in fee revenues for both periods resulted primarily from a decrease in construction activity at fee building communities inIrvine, California . InAugust 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 inIrvine, California . Our fee building revenues have historically been concentrated with a small number of customers. For the three months endedJune 30, 2021 and 2020, together, Irvine Pacific and FivePoint comprised 97% and 98% of total fee building revenue, respectively. For the six months endedJune 30, 2021 and 2020, together, Irvine Pacific and FivePoint comprised 96% and 99% of total fee building revenue, respectively. The cost of fee building decreased 79% in the 2021 second quarter and decreased 83% in the six months endedJune 30, 2021 compared to the corresponding prior year periods, respectively, 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$0.1 million and$0.8 million for the 2021 and 2020 second quarters, and$0.3 million and$1.8 million for the six months endedJune 30, 2021 and 2020, respectively. 48
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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
2021 2020 2021 2020 2021 2020 2021 2020
(Dollars in thousands)
Selling and marketing
expenses $ 7,778 $ 6,386 5.7 % 8.2 % $ 14,432 $ 13,852 6.3 % 8.0 %
General and
administrative
expenses ("G&A") 9,453 6,892 7.0 % 8.9 % 17,724 12,915 7.7 % 7.4 %
Total selling,
marketing and G&A
("SG&A") $ 17,231 $ 13,278 12.7 % 17.1 % $ 32,156 $ 26,767 14.0 % 15.4 %
G&A $ 9,453 $ 6,892 7.0 % 8.9 % $ 17,724 $ 12,915 7.7 % 7.4 %
Less: Acquisition
expenses and severance
charges - (873 ) - (1.2 )% (983 ) (873 ) (0.4 )% (0.5 )%
G&A, excluding
acquisition expenses
and severance charges $ 9,453 $ 6,019 7.0 % 7.7 % $ 16,741 $ 12,042 7.3 % 6.9 %
Selling and marketing
expenses $ 7,778 $ 6,386 5.7 % 8.2 % $ 14,432 $ 13,852 6.3 % 8.0 %
G&A, excluding
acquisition expenses
and severance charges 9,453 6,019 7.0 % 7.7 % 16,741 12,042 7.3 % 6.9 %
SG&A, excluding
acquisition expenses
and severance charges $ 17,231 $ 12,405 12.7 % 15.9 % $ 31,173 $ 25,894 13.6 % 14.9 %
During the 2021 second quarter, our SG&A rate as a percentage of home sales
revenue was 12.7% compared to 17.1% in the prior year period. The 440 basis
point decrease was primarily due to a 75% increase in home sales revenue during
the 2021 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
2021 second quarter was 12.7% as compared to 15.9% in the 2020 second quarter.
The 320 basis point improvement was primarily due to the increase in home sales
revenue, as well as lower amortization of capitalized selling and marketing
costs and model operation cost savings. These items were partially offset by a
$0.7 million reduction in G&A expenses allocated to fee building cost of sales
during the 2021 second quarter and an increase in incentive compensation.
During the six months ended June 30, 2021 , our SG&A rate as a percentage of home
sales revenue was 14.0%, down 140 basis points from the comparable prior year
period. The 2021 period included $1.0 million in pretax acquisition related
expenses, which included tail insurance expenses and professional fees, incurred
in connection with our acquisition of Epic Homes in the 2021 first quarter. The
2020 period included $0.9 million in pretax severance charges, as mentioned
above. Excluding these expenses, the Company's SG&A rate for the six months
ended June 30, 2021 was 13.6% compared to 14.9% in the prior year period. The
130 basis point decrease was due to a 33% increase in home sales revenue, as
well as lower amortization of capitalized selling and marketing costs and
advertising and model operation cost savings. These items were partially offset
by a $1.5 million reduction in G&A expenses allocated to fee building cost of
sales during the six months ended June 30, 2021 and an increase in incentive
compensation.
SG&A excluding acquisition related expenses and 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 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 ofJune 30, 2021 and 2020, we had ownership interests in nine and ten unconsolidated joint ventures, respectively, none of which had active homebuilding or land development operations as ofJune 30, 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 50% and these interests vary by entity. 49
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The Company's joint venture activity for the six months endedJune 30, 2021 resulted in$0.2 million of pretax income as compared to a$21.9 million pretax loss for the prior year period. The 2021 income related primarily to the release of reserves from a land development joint venture for which stated completion obligations were completed and released during the first quarter. In addition, during the 2021 first quarter 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 a$20.0 million other-than-temporary impairment charge recognized by the Company in the 2020 second quarter in connection with its determination to exit theRussell Ranch land development joint venture inFolsom, California , and an other-than-temporary noncash impairment charge of$2.3 million recognized in 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 its partner for less than our current carrying value which closed during the 2020 third quarter. For more information on these impairments, please refer to Note 6 of the Notes to our condensed consolidated financial statements. Interest Expense During the three and six months endedJune 30, 2021 and 2020, we expensed$0.1 million ,$0.4 million ,$1.3 million and$2.0 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. 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.
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.
Provision/Benefit for Income Taxes
For the three and six months endedJune 30, 2021 , the Company recorded an income tax provision of$1.3 million and$1.8 million , respectively, which includes a$0.2 million discrete provision for the six months endedJune 30, 2021 . The Company's effective tax rate for the three and six months endedJune 30, 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 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. 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. 50
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Liquidity and Capital Resources
Overview Our principal sources of capital for the six months endedJune 30, 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 six months endedJune 30, 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 six months endedJune 30, 2021 , we generated cash flows from operating activities of$5.0 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 second quarter of 2021 with$117.3 million of cash and cash equivalents, a$10.1 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 home sales 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. During the 2021 first quarter, 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 ofJune 30, 2021 andDecember 31, 2020 , we had$1.8 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$2.1 million and$3.1 million , respectively, related to the payment of the above payables. We have utilized both debt and equity as part of our financing strategy, coupled with redeployment of cash flows from operations, to operate our business. As ofJune 30, 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, amongst other things, unsecured corporate level debt, property-level debt, and other public, private or bank debt, or land banking arrangements. 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. 51
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Table of Contents 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 is payable 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% 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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