New Home Co Inc. - FORM 10-Q - October 31, 2018

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - New Home Co Inc.	exhibit32293018.htm
EX-32.1 - EXHIBIT 32.1 - New Home Co Inc.	exhibit32193018.htm
EX-31.2 - EXHIBIT 31.2 - New Home Co Inc.	exhibit31293018.htm
EX-31.1 - EXHIBIT 31.1 - New Home Co Inc.	exhibit31193018.htm
EX-10.1 - EXHIBIT 10.1 - New Home Co Inc.	ex101firstamendarantinelp.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



	FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2018 or



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

For the transition period from ______to ______



	Commission File Number 001-36283

The New Home Company Inc.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		27-0560089
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

85 Enterprise, Suite 450

Aliso Viejo, California 92656

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (949) 382-7800



	Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Non-accelerated filer	¨	Accelerated filer	ý	Smaller reporting company	¨	Emerging growth company	ý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý

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

Registrant’s shares of common stock outstanding as of October 29, 2018: 20,438,409

THE NEW HOME COMPANY INC.

FORM 10-Q

INDEX




		Page Number

PART I Financial Information

Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017	4
	Unaudited Condensed Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2018 and 2017	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4.	Controls and Procedures	59

Part II Other Information

Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	62

	Signatures	63

PART I – FINANCIAL INFORMATION



Item 1.	Financial Statements

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value amounts)



	September 30,		December 31,
	2018		2017
	(Unaudited)
Assets
Cash and cash equivalents	$	44,070	$	123,546
Restricted cash	795		424
Contracts and accounts receivable	20,857		23,224
Due from affiliates	1,235		1,060
Real estate inventories	562,315		416,143
Investment in and advances to unconsolidated joint ventures	53,344		55,824
Other assets	26,186		24,291
Total assets	$	708,802	$	644,512

Liabilities and equity
Accounts payable	$	38,681	$	23,722
Accrued expenses and other liabilities	30,131		38,054
Unsecured revolving credit facility	62,000		—
Senior notes, net	319,775		318,656
Total liabilities	450,587		380,432
Commitments and contingencies (Note 11)
Equity:
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding	—		—
Common stock, $0.01 par value, 500,000,000 shares authorized, 20,438,409 and 20,876,837, shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	204		209
Additional paid-in capital	195,164		199,474
Retained earnings	62,771		64,307
Total stockholders' equity	258,139		263,990
Non-controlling interest in subsidiary	76		90
Total equity	258,215		264,080
Total liabilities and equity	$	708,802	$	644,512

See accompanying notes to the unaudited condensed consolidated financial statements.

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues:
Home sales	$	119,874		$	114,622		$	316,771		$	280,957
Fee building, including management fees from unconsolidated joint ventures of $859, $1,324, $2,511 and $3,755, respectively	39,240			43,309			121,129			146,107
	159,114			157,931			437,900			427,064
Cost of Sales:
Home sales	102,124			95,992			274,496			238,545
Home sales impairments	—			—			—			1,300
Fee building	38,124			41,808			117,861			141,633
	140,248			137,800			392,357			381,478

Gross Margin:
Home sales	17,750			18,630			42,275			41,112
Fee building	1,116			1,501			3,268			4,474
	18,866			20,131			45,543			45,586

Selling and marketing expenses	(9,206		)	(6,860		)	(25,311		)	(18,237		)
General and administrative expenses	(6,184		)	(6,465		)	(18,182		)	(17,150		)
Equity in net income of unconsolidated joint ventures	34			99			249			606
Other income (expense), net	(110		)	69			(228		)	34
Pretax income	3,400			6,974			2,071			10,839
Provision for income taxes	(944		)	(2,656		)	(151		)	(4,168		)
Net income	2,456			4,318			1,920			6,671
Net loss attributable to non-controlling interest	3			—			14			10
Net income attributable to The New Home Company Inc.	$	2,459		$	4,318		$	1,934		$	6,681

Earnings per share attributable to The New Home Company Inc.:
Basic	$	0.12		$	0.21		$	0.09		$	0.32
Diluted	$	0.12		$	0.21		$	0.09		$	0.32
Weighted average shares outstanding:
Basic	20,693,473			20,876,315			20,859,402			20,839,507
Diluted	20,762,441			20,999,673			20,970,050			20,949,499

See accompanying notes to the unaudited condensed consolidated financial statements.

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands)

(Unaudited)



	Stockholders’ Equity Three Months Ended September 30														Non-controlling Interest in Subsidiary			Total Equity
	Number of Shares of Common Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interest in Subsidiary			Total Equity
Balance at June 30, 2017	20,875,666		$	209		$	197,983		$	49,518		$	247,710		$	91		$	247,801
Net income	—		—			—			4,318			4,318			—			4,318
Stock-based compensation expense	—		—			780			—			780			—			780
Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans	(555	)	—			(6		)	—			(6		)	—			(6		)
Shares issued through stock plans	1,512		—			—			—			—			—			—
Balance at September 30, 2017	20,876,623		$	209		$	198,757		$	53,836		$	252,802		$	91		$	252,893

Balance at June 30, 2018	20,855,778		$	209		$	198,234		$	60,312		$	258,755		$	79		$	258,834
Net income (loss)	—		—			—			2,459			2,459			(3		)	2,456
Stock-based compensation expense	—		—			622			—			622			—			622
Shares net settled with the Company to satisfy minimum employee personal income tax liabilities resulting from share based compensation plans	(510	)	—			(5		)	—			(5		)	—			(5		)
Shares issued through stock plans	1,512		—			—			—			—			—			—
Repurchase of common stock	(418,371	)	(5		)	(3,687		)	—			(3,692		)	—			(3,692		)
Balance at September 30, 2018	20,438,409		$	204		$	195,164		$	62,771		$	258,139		$	76		$	258,215

	Stockholders’ Equity Nine Months Ended September 30														Non-controlling Interest in Subsidiary			Total Equity
	Number of Shares of Common Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Total Stockholders’ Equity			Non-controlling Interest in Subsidiary			Total Equity
Balance at December 31, 2016	20,712,166		$	207		$	197,161		$	47,155		$	244,523		$	101		$	244,624
Net income (loss)	—		—			—			6,681			6,681			(10		)	6,671
Stock-based compensation expense	—		—			2,086			—			2,086			—			2,086
Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans	(55,962	)	—			(590		)	—			(590		)	—			(590		)
Shares issued through stock plans	220,419		2			100			—			102			—			102
Balance at September 30, 2017	20,876,623		$	209		$	198,757		$	53,836		$	252,802		$	91		$	252,893

Balance at December 31, 2017	20,876,837		$	209		$	199,474		$	64,307		$	263,990		$	90		$	264,080
Adoption of ASC 606 and ASU 2018-07 (see Note 1)	—		—			(18		)	(3,347		)	(3,365		)	—			(3,365		)
Net income (loss)	—		—						1,934			1,934			(14		)	1,920
Stock-based compensation expense	—		—			2,326			—			2,326			—			2,326
Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans	(86,692	)	—			(982		)	—			(982		)	—			(982		)
Shares issued through stock plans	271,875		2			(2		)	—			—			—			—
Repurchase of common stock	(623,611	)	(7		)	(5,634		)	(123		)	(5,764		)	—			(5,764		)
Balance at September 30, 2018	20,438,409		$	204		$	195,164		$	62,771		$	258,139		$	76		$	258,215

See accompanying notes to the unaudited condensed consolidated financial statements.

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Nine Months Ended September 30,
	2018			2017
Operating activities:
Net income	$	1,920		$	6,671
Adjustments to reconcile net income to net cash used in operating activities:
Deferred taxes	(1,481		)	(54		)
Amortization of stock-based compensation	2,326			2,086
Distributions of earnings from unconsolidated joint ventures	715			1,588
Inventory impairments	—			1,300
Abandoned project costs	81			238
Equity in net income of unconsolidated joint ventures	(249		)	(606		)
Deferred profit from unconsolidated joint ventures	136			560
Depreciation and amortization	4,497			344
Net changes in operating assets and liabilities:
Contracts and accounts receivable	2,367			13,448
Due from affiliates	(247		)	504
Real estate inventories	(138,632		)	(179,607		)
Other assets	(8,324		)	(3,766		)
Accounts payable	14,959			2,859
Accrued expenses and other liabilities	(14,036		)	(6,257		)
Net cash used in operating activities	(135,968		)	(160,692		)
Investing activities:
Purchases of property and equipment	(215		)	(145		)
Cash assumed from joint venture at consolidation	—			995
Contributions and advances to unconsolidated joint ventures	(12,670		)	(21,296		)
Distributions of capital and repayment of advances from unconsolidated joint ventures	14,316			13,650
Interest collected on advances to unconsolidated joint ventures	178			468
Net cash provided by (used in) investing activities	1,609			(6,328		)
Financing activities:
Borrowings from credit facility	115,000			72,000
Repayments of credit facility	(53,000		)	(190,000		)
Proceeds from senior notes	—			324,465
Payment of debt issuance costs	—			(7,382		)
Repurchases of common stock	(5,764		)	—
Tax withholding paid on behalf of employees for stock awards	(982		)	(590		)
Proceeds from exercise of stock options	—			102
Net cash provided by financing activities	55,254			198,595
Net (decrease) increase in cash, cash equivalents and restricted cash	(79,105		)	31,575
Cash, cash equivalents and restricted cash – beginning of period	123,970			31,081
Cash, cash equivalents and restricted cash – end of period	$	44,865		$	62,656

See accompanying notes to the unaudited condensed consolidated financial statements.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

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

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts have been eliminated upon consolidation.

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The accompanying unaudited condensed financial statements include all adjustments (consisting of normal recurring entries) necessary for the fair presentation of our results for the interim period presented. Results for the interim period are not necessarily indicative of the results to be expected for the full year.

Unless the context otherwise requires, the terms "we", "us", "our" and "the Company" refer to the Company and its wholly owned subsidiaries, on a consolidated basis.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying condensed consolidated financial statements and notes. Accordingly, actual results could differ materially from these estimates.

Reclassification

Certain items in the prior year unaudited condensed consolidated statements of cash flows have been reclassified to conform with current year presentation. These reclassifications have not changed the results of operations of prior periods. On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18") under the full retrospective method. As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows. For additional detail on restricted cash, please see Note 1 - Restricted Cash.

Segment Reporting

Accounting Standards Codification ("ASC") 280, Segment Reporting ("ASC 280") established standards for the manner in which public enterprises report information about operating segments. In accordance with ASC 280, we have determined that our homebuilding division and our fee building division are our operating segments, which are also our reportable segments.

Cash and Cash Equivalents

We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short term liquid investments with a maturity date of less than three months from the date of purchase.

Restricted Cash

Restricted cash of $0.8 million and $0.4 million as of September 30, 2018 and December 31, 2017, respectively, is held in accounts for payments of subcontractor costs incurred in connection with various fee building projects.

The table below shows the line items and amounts of cash and cash equivalents and restricted cash as reported within the Company's condensed consolidated balance sheets for each period shown that sum to the total of the same such amounts at the end of the periods shown in the accompanying condensed consolidated statements of cash flows.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	Nine Months Ended September 30,
	2018		2017
	(Dollars in thousands)
Cash and cash equivalents	$	44,070	$	62,443
Restricted cash	795		213
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	44,865	$	62,656

Real Estate Inventories and Cost of Sales

We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect construction costs. Pre-acquisition costs, including nonrefundable land deposits, are expensed to other income (expense), net if we determine continuation of the prospective project is not probable.

Land, development and other common costs are typically allocated to real estate inventories using a methodology that approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost of sales for homes closed includes the estimated total construction costs of each home at completion and an allocation of all applicable land acquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value of the home within each project. Changes in estimated development and common costs are allocated prospectively to remaining homes in the project.

In accordance with ASC 360, Property, Plant and Equipment ("ASC 360"), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset on a periodic basis or whenever indicators of impairment exist. Real estate assets include projects actively selling and projects under development or held for future development. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases in gross margins or sales absorption rates, costs significantly in excess of budget, and actual or projected cash flow losses.

If there are indicators of impairment, we perform a detailed budget and cash flow review of the applicable real estate inventories to determine whether the estimated undiscounted future cash flows of the project are more or less than the asset’s carrying value. If the estimated undiscounted future cash flows exceed the asset’s carrying value, no impairment adjustment is required. However, if the estimated undiscounted future cash flows are less than the asset’s carrying value, the asset's fair value is determined and compared to the asset's carrying value. If the asset's carrying value exceeds the asset's fair value, it is deemed impaired and written down to its fair value.

When estimating undiscounted future cash flows of a project, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other projects, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, and the level of time sensitive costs (such as indirect construction, overhead and carrying costs). Depending on the underlying objective of the project, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase the velocity of sales. These objectives may vary significantly from project to project and change over time.

If a real estate asset is deemed impaired, the impairment is calculated by determining the amount the asset's carrying value exceeds its fair value. We calculate the fair value of real estate inventories using a land residual value analysis or a discounted cash flow analysis. Under the land residual value analysis, we estimate what a willing buyer would pay and what a willing seller would sell a parcel of land for (other than in a forced liquidation) in order to generate a market rate operating margin and return. Under the discounted cash flow method, the fair value is determined by calculating the present value of future cash flows using a risk adjusted discount rate. Some of the critical assumptions involved with measuring the asset's fair value include

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

estimating future revenues, sales absorption rates, development and construction costs, and other applicable project costs. This evaluation and the assumptions used by management to determine future estimated cash flows and fair value require a substantial degree of judgment, especially with respect to real estate projects that have a substantial amount of development to be completed, have not started selling or are in the early stages of sales, or are longer in duration. Actual revenues, costs and time to complete and sell a community could vary from these estimates which could impact the calculation of fair value of the asset and the corresponding amount of impairment that is recorded in our results of operations. For the nine months ended September 30, 2017, we recorded an impairment charge of $1.3 million relating to one community in Southern California. For additional detail regarding the impairment charge, please see Note 4.

Capitalization of Interest

We follow the practice of capitalizing interest to real estate inventories during the period of development and to investments in unconsolidated joint ventures, when applicable, in accordance with ASC 835, Interest ("ASC 835"). Interest capitalized as a cost component of real estate inventories is included in cost of home sales as related homes or lots are sold. To the extent interest is capitalized to investment in unconsolidated joint ventures, it is included as a reduction of income from unconsolidated joint ventures when the related homes or lots are sold to third parties. In instances where the Company purchases land from an unconsolidated joint venture, the pro rata share of interest capitalized to investment in unconsolidated joint ventures is added to the basis of the land acquired and recognized as a cost of sale upon the delivery of the related land to a third-party buyer. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively selling or under development as well as investments in unconsolidated joint ventures accounted for under the equity method until such equity investees begin their principal operations.

Revenue Recognition

Effective January 1, 2018, we adopted the requirements of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASC 606") under the modified retrospective method. For additional detail on the new standard and the impact to our condensed consolidated financial statements, refer to "Recently Issued Accounting Standards" below. Under ASC 606, we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To do this, the Company performs the following five steps as outlined in ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

Home Sales and Profit Recognition

In accordance with ASC 606, home sales revenue is recognized when our performance obligations within the underlying sales contracts are fulfilled. We consider our obligations fulfilled when closing conditions are complete, title has transferred to the homebuyer, and collection of the purchase price is reasonably assured. Sales incentives are recorded as a reduction of revenues when the respective home is closed. The profit we record is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales." When it is determined that the earnings process is not complete, the related revenue and profit are deferred for recognition in future periods.

For periods prior to January 1, 2018, the company recognized home sales and other real estate sales revenue in accordance with ASC 360. Under ASC 360, revenue from home sales and other real estate sales was recorded and a profit was recognized when the sales process was complete under the full accrual method. The sales process was considered complete for home sales and other real estate sales when all conditions of escrow were met, including delivery of the home or other real estate asset, title passes, appropriate consideration is received and collection of associated receivables, if any, is reasonably assured.

Fee Building

The Company enters into fee building agreements to provide services whereby it builds homes on behalf of third-party property owners. The third-party property owner funds all project costs incurred by the Company to build and sell the homes. The Company primarily enters into cost plus fee contracts where it charges third-party property owners for all direct and indirect costs plus a fee. The fee is typically a per-unit fixed fee or based on a percentage of the cost or home sales revenue of the project, depending on the terms of the agreement with the third-party property owner. For these types of contracts, the Company recognizes revenue based on the actual total costs it has incurred plus the applicable fee. In accordance with ASC 606

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for periods after January 1, 2018 and ASC 605, Revenue Recognition ("ASC 605") for prior periods, we apply the percentage-of-completion method, using the cost-to-cost approach, as it most accurately measures the progress of our efforts in satisfying our obligations within the fee building agreements. Under this approach, revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred. In the course of providing fee building services, the Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are passed through to the property owners and, in accordance with GAAP, are included in the Company’s revenue and cost of sales.

The Company also provides construction management and coordination services and sales and marketing services as part of agreements with third parties and its unconsolidated joint ventures. In certain contracts, the Company also provides project management and administrative services. For most services provided, the Company fulfills its related obligations as time-based measures, according to the input method guidance described in ASC 606. Accordingly, revenue is recognized on a straight-line basis as the Company's efforts are expended evenly throughout the performance period. The Company may also have an obligation to manage the home or lot sales process as part of providing sales and marketing services. This obligation is considered fulfilled when related homes or lots close escrow, as these events represent milestones reached according to the output method guidance described in ASC 606. Accordingly, revenue is recognized in the period that the corresponding lots or homes close escrow. Costs associated with these services are recognized as incurred. Prior to the adoption of ASC 606, the Company recognized revenues from these services in accordance with ASC 605 under a proportional performance method or completed performance method. Under ASC 605, revenue was earned as services were provided in proportion to total services expected to be provided to the customer or on a straight line basis if the pattern of performance could not be determined.

The Company’s fee building revenues have historically been concentrated with a small number of customers. For the three and nine months ended September 30, 2018 and 2017, one customer comprised 93%, 95%, 97%, and 97%, respectively, of fee building revenue. The balance of the fee building revenues primarily represented management fees earned from unconsolidated joint ventures and third-party customers. As of September 30, 2018 and December 31, 2017, one customer comprised 65% and 49% of contracts and accounts receivable, respectively, with the balance of accounts receivable primarily representing escrow receivables from home sales.

Variable Interest Entities

The Company accounts for variable interest entities in accordance with ASC 810, Consolidation ("ASC 810"). Under ASC 810, a variable interest entity ("VIE") is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights.

Once we consider the sufficiency of equity and voting rights of each legal entity, we then evaluate the characteristics of the equity holders' interests, as a group, to see if they qualify as controlling financial interests. Our real estate joint ventures consist of limited partnerships and limited liability companies. For entities structured as limited partnerships or limited liability companies, our evaluation of whether the equity holders (equity partners other than us in each our joint ventures) lack the characteristics of a controlling financial interest includes the evaluation of whether the limited partners or non-managing members (the non-controlling equity holders) lack both substantive participating rights and substantive kick-out rights, defined as follows:


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


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

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

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If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE.

Under ASC 810, a nonrefundable deposit paid to an entity may be deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are classified as real estate inventories, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a nonrefundable deposit, a VIE may have been created.

As of September 30, 2018 and December 31, 2017, the Company was not required to consolidate any VIEs. In accordance with ASC 810, we reassess on an ongoing basis whether we are the primary beneficiary of a VIE.

Non-controlling Interest

During 2013, the Company entered into a joint venture agreement with a third-party property owner. In accordance with ASC 810, the Company analyzed this arrangement and determined that it was not a VIE; however, the Company determined it was required to consolidate the joint venture as the Company has a controlling financial interest with the powers to direct the major decisions of the entity. As of September 30, 2018 and December 31, 2017, the third-party investor had an equity balance of $0.1 million and $0.1 million, respectively.

Investments in and Advances to Unconsolidated Joint Ventures

We use the equity method to account for investments in homebuilding and land development joint ventures when any of the following situations exist: 1) the joint venture qualifies as a VIE and we are not the primary beneficiary, 2) we do not control the joint venture but have the ability to exercise significant influence over its operating and financial policies, or 3) we function as the managing member or general partner of the joint venture and our joint venture partner has substantive participating rights or can replace us as managing member or general partner without cause.

As of September 30, 2018, the Company concluded that none of its joint ventures were VIEs and accounted for these entities under the equity method of accounting.

Under the equity method, we recognize our proportionate share of earnings and losses generated by the joint venture upon the delivery of lots or homes to third parties. Our proportionate share of intra-entity profits and losses are eliminated until the related asset has been sold by the unconsolidated joint venture to third parties. We classify cash distributions received from equity method investees using the cumulative earnings approach consistent with ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). Under the cumulative earnings approach, distributions received are considered returns on investment and shall be classified as cash inflows from operating activities unless the cumulative distributions received exceed cumulative equity in earnings. When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and shall be classified as cash inflows from investing activities. Our ownership interests in our unconsolidated joint ventures vary, but are generally less than or equal to 35%. The accounting policies of our joint ventures are consistent with those of the Company with an exception for the requirements of ASC 606 which our joint ventures had not adopted at September 30, 2018.

We review real estate inventory held by our unconsolidated joint ventures for impairment, consistent with how we review our real estate inventories as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales." We also review our investments in and advances to unconsolidated joint ventures for evidence of other-than-temporary declines in value. To the extent we deem any portion of our investment in and advances to unconsolidated joint ventures as not recoverable, we impair our investment accordingly. For the three and nine months ended September 30, 2018 and 2017, no impairments related to investment in and advances to unconsolidated joint ventures were recorded.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Selling and Marketing Expense

Effective January 1, 2018, costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and model landscaping and furnishings are capitalized to other assets in the accompanying condensed consolidated balance sheets under ASC 340, Other Assets and Deferred Costs ("ASC 340"). These costs are depreciated to selling and marketing expenses generally over the shorter of 24 months or the actual estimated life of the selling community. All other selling and marketing costs, such as commissions and advertising, are expensed as incurred. Prior to January 1, 2018, the Company followed the guidance under ASC 970-340, Real Estate - Other Assets and Deferred Costs ("ASC 970"), and capitalized certain selling and marketing costs to other assets in the consolidated balance sheet if the costs were reasonably expected to be recovered from the sale of the project or from incidental operations, and were incurred for tangible assets that were used directly through the selling period to aid in the sale of the project or services that had been performed to obtain regulatory approval of sales. These capitalizable selling and marketing costs included, but were not limited to, model home design, model home decor and landscaping, and sales office/design studio setup. These costs were amortized to selling and marketing expense as the underlying homes were delivered.

Warranty Accrual

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

Contracts and Accounts Receivable

Contracts and accounts receivable primarily represent the fees earned, but not collected, and reimbursable project costs incurred in connection with fee building agreements. The Company periodically evaluates the collectability of its contracts receivable, and, if it is determined that a receivable might not be fully collectible, an allowance is recorded for the amount deemed uncollectible. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts involved and the financial condition of its customers. Factors considered in such evaluations include, but are not limited to: (i) customer type; (ii) historical contract performance; (iii) historical collection and delinquency trends; (iv) customer credit worthiness; and (v) general economic conditions. In addition to contracts receivable, escrow receivables are included in contracts and accounts receivable in the accompanying condensed consolidated balance sheets. As of September 30, 2018 and December 31, 2017, no allowance was recorded related to contracts and accounts receivable.

Property, Equipment and Capitalized Selling and Marketing Costs

Property, equipment and capitalized selling and marketing costs are recorded at cost and included in other assets in the accompanying condensed consolidated balance sheets. Property and equipment are depreciated to general and administrative expenses using the straight-line method over their estimated useful lives ranging from three to five years. Leasehold improvements are stated at cost and are amortized to general and administrative expenses using the straight-line method generally over the shorter of either their estimated useful lives or the term of the lease. Capitalized selling and marketing costs are depreciated using the straight-line method to selling and marketing expenses over the shorter of either 24 months or the actual estimated life of the selling community.

Income Taxes

Income taxes are accounted for in accordance with ASC 740, Income Taxes ("ASC 740"). The consolidated provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Each quarter we access our deferred tax asset to determine whether all or any portion of the asset is more likely than not (defined as a likelihood of more than 50%) unrealizable under ASC 740. We are required to establish a valuation allowance for

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any portion of the tax asset we conclude is more likely than not unrealizable. Our assessment considers, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with operating loss and tax credit carryforwards and the planning alternatives, to the extent these items are applicable. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial statements.

ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. In addition, these provisions provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. At September 30, 2018, the Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements.

The Company classifies any interest and penalties related to income taxes assessed as part of income tax expense. As of September 30, 2018, the Company has not been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.

Stock-Based Compensation

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

ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in a company's financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.

On June 26, 2015, the Company entered into an agreement that transitioned Joseph Davis' role within the Company from Chief Investment Officer to a non-employee consultant to the Company. On February 16, 2017, the Company entered into an agreement that transitioned Wayne Stelmar's role within the Company from Chief Investment Officer to a non-employee consultant and non-employee director. Per the agreements, Mr. Davis' and Mr. Stelmar's outstanding equity awards will continue to vest in accordance with their original terms. Under ASC 505-50, if an employee becomes a non-employee and continues to vest in an award pursuant to the award's original terms, that award will be treated as an award to a non-employee prospectively, provided the individual is required to continue providing services to the employer (such as consulting services). Based on the terms and conditions of both Mr. Davis' and Mr. Stelmar's consulting agreements noted above, we accounted for their share-based awards in accordance with ASC 505-50 through March 31, 2018. ASC 505-50 required that these awards be accounted for prospectively, such that the fair value of the awards will be re-measured at each reporting date until the earlier of (a) the performance commitment date or (b) the date the services required under the transition agreement with Mr. Davis or Mr. Stelmar have been completed. ASC 505-50 required that compensation cost ultimately recognized in the Company's financial statements be the sum of (a) the compensation cost recognized during the period of time the individual was an employee (based on the grant-date fair value) plus (b) the fair value of the award determined on the measurement date determined in accordance with ASC 505-50 for the pro-rata portion of the vesting period in which the individual was a non-employee. Mr. Davis' outstanding awards fully vested during January 2017 and were fully expensed.

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

decrease to additional paid-in capital as of the beginning of the 2018 fiscal year. The remaining unamortized expense for Mr. Stelmar's award as of September 30, 2018 was $62,000.

Stock Retirement

When shares are retired, the Company’s policy is to allocate the excess of the repurchase price over the par value of shares acquired to both retained earnings and additional paid-in capital. The portion allocated to additional paid-in capital is determined by applying a percentage, which is determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additional paid-in capital as of the retirement date. The residual, if any, is allocated to retained earnings as of the retirement date.

During the three and nine months ended September 30, 2018, the Company repurchased and retired 418,371 and 623,611 shares of its common stock at an aggregate purchase price of $3.7 million and $5.8 million, respectively. The shares were returned to the status of authorized but unissued.

Dividends

No dividends were paid on our common stock during the three and nine months ended September 30, 2018 and September 30, 2017. We currently intend to retain our future earnings to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, compliance with Delaware law, restrictions contained in any financing instruments, including but not limited to, our unsecured credit facility and senior notes indenture, and such other factors as our board of directors deem relevant.

Recently Issued Accounting Standards

The Company qualifies as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Section 102 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. As previously disclosed, the Company has chosen, irrevocably, to "opt out" of such extended transition period, and as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

In May 2014, the FASB issued ASC 606, which supersedes existing accounting literature relating to how and when a company recognizes revenue. Under ASC 606, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. Additionally, ASC 606 supersedes existing industry-specific accounting literature relating to how a company expenses certain selling and marketing costs. Effective January 1, 2018, the Company adopted the requirements of ASC 606 using the modified retrospective approach.

Under the modified retrospective approach, the Company recognized the cumulative effect of initially applying the new standard as a $3.4 million, tax-effected decrease to the opening balance of retained earnings as of January 1, 2018. The comparative information has not been restated and continues to be reported as it was previously, under the appropriate accounting standards in effect for those periods. The adjustment to retained earnings related to a $4.7 million write-down of certain recoverable selling and marketing costs included in other assets that were formerly capitalized under ASC 970, but that no longer qualify for capitalization under the Company's accounting policy reflecting the changes upon the adoption of ASC 606. As a result of this write-down, the Company's deferred tax asset increased by $1.3 million. For the three and nine months ended September 30, 2018, the Company expensed $0.5 million and $1.8 million, respectively, in selling and marketing costs that would have been capitalized and expensed over the underlying home closings under ASC 970. For the three and nine months ended September 30, 2018, the Company depreciated $0.3 million and $1.1 million, respectively, less in selling and marketing expenses for its capitalized selling and marketing assets than it would have if these expenses were recognized as required by the guidance in ASC 970. In addition, the accounting policy change resulted in depreciation expense for capitalized selling and marketing assets to be included in the line item "depreciation and amortization" in the condensed consolidated statement of cash flows for the nine months ended September 30, 2018, compared to including the expense in the net change to other assets line item. The adoption of ASC 606 did not have a material impact on other areas of the Company's condensed consolidated balance sheet and statement of cash flows for the nine months ended September 30, 2018 or the condensed consolidated statements of operations for the three and nine months ended September 30, 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASC 842"). ASC 842 will require organizations that lease assets (referred to as "lessees") to present lease assets and lease liabilities on the balance sheet at their

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

gross value based on the the rights and obligations created by those leases. Under ASC 842, a lessee will be required to recognize assets and liabilities for leases with greater than 12 month terms. Lessor accounting remains substantially similar to current GAAP. Additional disclosures including qualitative and quantitative information regarding leasing activities are also required. ASC 842 is effective for interim and annual reporting periods beginning after December 15, 2018 and mandates a modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements ("ASU 2018-11") which provides for an additional transition method that allows companies to apply the new lease standard at the adoption date, eliminating the requirement to apply the standard to the earliest period presented in the financial statements. The Company's lease agreements that will be impacted by ASC 842 primarily relate to our corporate headquarters, several other office locations and office or construction equipment where we are the lessee. We believe all applicable agreements would be considered operating leases. Upon adoption of ASC 842, we expect to add a right-of-use asset and a related lease liability to our consolidated balance sheets. We expect to recognize lease expense on a straight-line basis.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology. The standard is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted, and requires full retrospective application upon adoption. The Company is currently evaluating the impact of ASU 2016-13 and expects no material impact to its consolidated financial statements as a result of adoption.

In August 2016, the FASB issued ASU 2016-15. ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Our adoption of ASU 2016-15 on January 1, 2018, did not have an impact on our condensed consolidated financial statements and disclosures as the Company had previously classified cash distributions received from equity method investees using the cumulative earnings approach.

In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ("ASU 2017-05"). ASU 2017-05 clarifies the guidance for derecognition of nonfinancial assets and in-substance nonfinancial assets when the asset does not meet the definition of a business and is not a not-for-profit activity. We adopted ASU 2017-05 on January 1, 2018 under the modified retrospective approach. There was no effect of initially applying the new standard and there was no impact to our condensed consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting ("ASU 2017-09"). The guidance provides clarity and reduces diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. We adopted ASU 2017-09 on January 1, 2018 and its adoption did not have an impact on our condensed consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"), which amends Income Taxes (Topic 740) by incorporating the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin 118 (“SAB 118”) issued on December 22, 2017. SAB 118 provides guidance on accounting for the effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). We recognized the income tax effects of the Tax Act in our 2017 financial statements in accordance with SAB 118. Please see Note 14.

In June 2018, the FASB issued ASU 2018-07, which was adopted by the Company on April 1, 2018 using the modified retrospective basis and resulted in a cumulative-effect adjustment of an $18,000 increase to retained earnings and an equal decrease to additional paid-in capital as of the beginning of the 2018 fiscal year. For further discussion of our adoption of this ASU, see “Stock-Based Compensation.”

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify certain disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 and expects no material impact to the consolidated financial statements as a result of adoption.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Computation of Earnings Per Share

The following table sets forth the components used in the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Dollars in thousands, except per share amounts)
Numerator:
Net income attributable to The New Home Company Inc.	$	2,459	$	4,318	$	1,934	$	6,681

Denominator:
Basic weighted-average shares outstanding	20,693,473		20,876,315		20,859,402		20,839,507
Effect of dilutive shares:
Stock options and unvested restricted stock units	68,968		123,358		110,648		109,992
Diluted weighted-average shares outstanding	20,762,441		20,999,673		20,970,050		20,949,499

Basic earnings per share attributable to The New Home Company Inc.	$	0.12	$	0.21	$	0.09	$	0.32
Diluted earnings per share attributable to The New Home Company Inc.	$	0.12	$	0.21	$	0.09	$	0.32

Antidilutive stock options and unvested restricted stock units not included in diluted earnings per share	952,882		831,270		931,310		838,572

3. Contracts and Accounts Receivable

Contracts and accounts receivable consist of the following:



	September 30,			December 31,
	2018			2017
	(Dollars in thousands)
Contracts receivable:
Costs incurred on fee building projects	$	117,861		$	184,827
Estimated earnings	3,268			5,497
	121,129			190,324
Less: amounts collected during the period	(107,662		)	(178,704		)
Contracts receivable	$	13,467		$	11,620

Contracts receivable:
Billed	$	—		$	—
Unbilled	13,467			11,620
	13,467			11,620
Accounts receivable:
Escrow receivables	6,146			11,554
Other receivables	1,244			50
Contracts and accounts receivable	$	20,857		$	23,224

Billed contracts receivable represent amounts billed to customers that have yet to be collected. Unbilled contracts receivable represents the contract revenue recognized but not yet invoiced. All unbilled receivables as of September 30, 2018

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

and December 31, 2017 are expected to be billed and collected within 30 days. Accounts payable at September 30, 2018 and December 31, 2017 includes $12.6 million and $11.3 million, respectively, related to costs incurred under the Company’s fee building contracts.

4. Real Estate Inventories

Real estate inventories are summarized as follows:



	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Deposits and pre-acquisition costs	$	19,144	$	35,846
Land held and land under development	78,031		47,757
Homes completed or under construction	408,636		302,884
Model homes	56,504		29,656
	$	562,315	$	416,143

All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0.9 million and $0.8 million as of September 30, 2018 and December 31, 2017, respectively.

Land held and land under development includes land costs and costs incurred during site development such as development, indirects, and permits. Homes completed or under construction and model homes include all costs associated with home construction, including land, development, indirects, permits, materials and labor (except for capitalized selling and marketing costs, which are classified in other assets).

In accordance with ASC 360, inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset at the community-level on a quarterly basis or whenever indicators of impairment exist. For the nine months ended September 30, 2017, the Company recognized real estate-related impairments of $1.3 million in cost of sales resulting in a decrease of the same amount to pretax income (loss) for our homebuilding segment. Fair value for the homebuilding project impaired during the nine months ended September 30, 2017 was calculated under a discounted cash flow model with project cash flows discounted at an 8% rate. The following table summarizes inventory impairments recorded during the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Dollars in Thousands)
Inventory impairments:
Home sales	$	—	$	—	$	—	$	1,300
Total inventory impairments	$	—	$	—	$	—	$	1,300

Remaining carrying value of inventory impaired at period end	$	—	$	—	$	—	$	11,310
Number of projects impaired during the period	—		—		—		1
Total number of projects subject to periodic impairment review during the period ⁽¹⁾	26		26		26		26

⁽¹⁾ Represents the peak number of real estate projects that we had during each respective period. The number of projects outstanding at the end of each period

may be less than the number of projects listed herein.

The home sales impairment of $1.3 million for the nine month period ended September 30, 2017 related to homes completed or under construction for one active homebuilding community located in Southern California. This community was experiencing a slow monthly sales absorption rate, and the Company determined that additional incentives were required to sell the remaining homes at estimated aggregate sales prices that would be lower than its previous carrying value.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Capitalized Interest

Interest is capitalized to inventory and investment in unconsolidated joint ventures during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales as related homes are closed. Interest capitalized to investment in unconsolidated joint ventures is amortized to equity in net income of unconsolidated joint ventures as related joint venture homes or lots close, or in instances where lots are sold from the unconsolidated joint venture to the Company, the interest is added to the land basis and included in cost of sales when the related lots or homes are sold to third-party buyers. For the three and nine months ended September 30, 2018 and 2017 interest incurred, capitalized and expensed was as follows:



	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Interest incurred	$	7,270		$	6,780		$	20,598		$	15,217
Interest capitalized to inventory	(7,270		)	(6,232		)	(19,614		)	(13,982		)
Interest capitalized to investment in unconsolidated joint ventures	—			(548		)	(984		)	(1,235		)
Interest expensed	$	—		$	—		$	—		$	—

Capitalized interest in beginning inventory	$	22,288		$	10,821		$	16,453		$	6,342
Interest capitalized as a cost of inventory	7,270			6,232			19,614			13,982
Capitalized interest acquired from unconsolidated joint venture at consolidation	—			76			—			76
Capitalized interest transferred from investment in unconsolidated joint venture to inventory upon lot acquisition	505			—			510			—
Previously capitalized interest included in cost of home sales	(4,296		)	(2,448		)	(10,810		)	(5,719		)
Capitalized interest in ending inventory	$	25,767		$	14,681		25,767			14,681

Capitalized interest in beginning investment in unconsolidated joint ventures	$	2,402		$	687		$	1,472		$	—
Interest capitalized to investment in unconsolidated joint ventures	—			548			984			1,235
Capitalized interest transferred from investment in unconsolidated joint venture to inventory upon consolidation	—			(76		)	—			(76		)
Capitalized interest transferred from investment in unconsolidated joint venture to inventory upon lot acquisition	(505		)	—			(510		)	—
Previously capitalized interest included in equity in net income of unconsolidated joint ventures	(33		)	(5		)	(82		)	(5		)
Capitalized interest in ending investment in unconsolidated joint ventures	1,864			1,154			1,864			1,154
Total capitalized interest in ending inventory and investments in unconsolidated joint ventures	$	27,631		$	15,835		$	27,631		$	15,835

Capitalized interest as a percentage of inventory	4.6		%	3.1		%	4.6		%	3.1		%
Interest included in cost of home sales as a percentage of home sales revenue	3.6		%	2.1		%	3.5		%	2.0		%

Capitalized interest as a percentage of investment in and advances to unconsolidated joint ventures	3.5		%	2.0		%	3.5		%	2.0		%

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Investments in and Advances to Unconsolidated Joint Ventures

As of September 30, 2018 and December 31, 2017, the Company had ownership interests in 10 unconsolidated joint ventures with ownership percentages that generally ranged from 5% to 35%. The condensed combined balance sheets for our unconsolidated joint ventures accounted for under the equity method were as follows:



	September 30,			December 31,
	2018			2017
	(Dollars in thousands)
Cash and cash equivalents	$	26,023		$	30,017
Restricted cash	19,389			15,041
Real estate inventories	420,142			396,850
Other assets	2,989			3,942
Total assets	$	468,543		$	445,850

Accounts payable and accrued liabilities	$	39,265		$	34,959
Notes payable	68,970			78,341
Total liabilities	108,235			113,300
The New Home Company's equity	51,480			50,523
Other partners' equity	308,828			282,027
Total equity	360,308			332,550
Total liabilities and equity	$	468,543		$	445,850
Debt-to-capitalization ratio	16.1		%	19.1		%
Debt-to-equity ratio	19.1		%	23.6		%

As of September 30, 2018 and December 31, 2017, the Company had advances outstanding of approximately $0 and $3.8 million, respectively, to one of its unconsolidated joint ventures, which were included in the notes payable balances of the unconsolidated joint ventures in the table above. The advances related to an unsecured promissory note entered into on October 31, 2016 and amended on February 3, 2017 with Encore McKinley Village LLC ("Encore McKinley"), an unconsolidated joint venture of the Company. The note bore interest at 10% per annum and was fully repaid during the 2018 second quarter.

The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity method were as follows:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018		2017
	(Dollars in thousands)
Revenues	$	55,467		$	45,889	$	121,359	$	107,680
Cost of sales and expenses	55,636			45,463		121,010		108,772
Net income (loss) of unconsolidated joint ventures	$	(169	)	$	426	$	349	$	(1,092	)
Equity in net income of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations	$	34		$	99	$	249	$	606

For the three and nine months ended September 30, 2018 and 2017, the Company earned $0.9 million, $2.5 million, $1.3 million, and $3.8 million respectively, in management fees from its unconsolidated joint ventures. For additional detail regarding management fees, please see Note 12 - "Related Party Transactions."

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the cost basis of our previous investment in unconsolidated joint ventures related to this joint venture are included in real estate inventories at September 30, 2018 and December 31, 2017.

During the 2017 second quarter, our Larkspur Land 8 Investors LLC unconsolidated joint venture ("Larkspur") allocated $0.1 million of income to the Company from a reduction in cost to complete reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, other assets, and accrued liabilities, including warranty and the remaining costs to complete reserves, of the joint venture. As part of this transaction, the Company also recognized a gain of $0.3 million, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.

7. Other Assets

Other assets consist of the following:



	September 30,		December 31,
	2018		2017
	(Dollars in thousands)

Property, equipment and capitalized selling and marketing costs, net⁽¹⁾⁽²⁾	$	10,743	$	603
Deferred tax asset, net	7,798		6,317
Prepaid income taxes	307		—
Prepaid expenses	6,136		4,937
Warranty insurance receivable⁽³⁾	1,202		1,202
Capitalized selling and marketing costs⁽¹⁾⁽⁴⁾	—		11,232
	$	26,186	$	24,291

(1)

Under the adoption of the requirements of ASC 606 on January 1, 2018, certain selling and marketing costs that were previously capitalized under former accounting guidance were written off. For the current year, remaining selling and marketing costs and those incurred during the first half of 2018 that are permitted to be capitalized under ASC 340 are included as "Property, equipment and capitalized selling and marketing costs, net" within "Other Assets." Under the modified retrospective adoption approach, the December 31, 2017 balance has not been restated. For more information on the adoption of ASC 606, please refer to Note 1.

(2)

The Company depreciated $1.8 million and $4.2 million of capitalized selling and marketing costs to selling and marketing expenses during the three and nine months ended September 30, 2018, respectively. The Company depreciated $0.1 million, $0.3 million, $0.1 million and $0.3 million of property and equipment to general and administrative expenses during the three and nine months ended September 30, 2018 and 2017, respectively.


(3)	Of the $1.2 million amount for December 31, 2017, approximately $0.6 million related to 2016 estimated warranty insurance recoveries. For further discussion, please see Note 8.


(4)	The Company amortized $1.8 million and $5.1 million of capitalized selling and marketing costs to selling and marketing expenses during the three and nine months ended September 30, 2017, respectively.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:



	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Warranty accrual⁽¹⁾	$	7,101	$	6,859
Accrued compensation and benefits	3,735		9,164
Accrued interest	12,329		6,217
Completion reserve	2,864		5,792
Income taxes payable	—		6,368
Deferred profit from unconsolidated joint ventures	—		136
Other accrued expenses	4,102		3,518
	$	30,131	$	38,054

(1)

Included in the amount at December 31, 2017 is approximately $1.2 million of additional warranty liabilities estimated to be covered by our insurance policies that were adjusted to present the warranty reserves and related estimated warranty insurance receivable on a gross basis at December 31, 2017. Of this amount, approximately $0.6 million related to 2016 estimated warranty insurance recoveries.

Changes in our warranty accrual are detailed in the table set forth below:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Beginning warranty accrual for homebuilding projects	$	6,776		$	5,076		$	6,634		$	4,608
Warranty provision for homebuilding projects	529			411			1,515			1,013
Warranty assumed from joint ventures at consolidation	—			—			—			358
Warranty payments for homebuilding projects	(417		)	(279		)	(1,261		)	(771		)
Ending warranty accrual for homebuilding projects	6,888			5,208			6,888			5,208

Beginning warranty accrual for fee building projects	222			323			225			323
Warranty provision for fee building projects	—			—			—			—
Warranty efforts for fee building projects	(9		)	—			(12		)	—
Ending warranty accrual for fee building projects	213			323			213			323
Total ending warranty accrual	$	7,101		$	5,531		$	7,101		$	5,531

We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related warranty and construction defect claims. Our warranty accrual and related estimated insurance recoveries are based on historical claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual insurance recoveries could differ significantly from amounts currently estimated.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. Senior Notes and Unsecured Revolving Credit Facility

Notes payable consisted of the following:



	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
7.25% Senior Notes due 2022, net	$	319,775	$	318,656
Unsecured revolving credit facility	62,000		—
Total Notes Payable	$	381,775	$	318,656

The carrying amount of our Senior Notes listed above at September 30, 2018 is net of the unamortized discount of $1.8 million, unamortized premium of $1.4 million, and unamortized debt issuance costs of $4.9 million, each of which are amortized and capitalized to interest costs on a straight-line basis over the respective terms of the notes which approximates the effective interest method. The carrying amount for the Senior Notes listed above at December 31, 2017, is net of the unamortized discount of $2.2 million, unamortized premium of $1.8 million, and unamortized debt issuance costs of $5.9 million. Debt issuance costs for the unsecured revolving credit facility are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement.

On March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Notes due 2022 (the "Existing Notes"), in a private placement. The Existing Notes were issued at an offering price of 98.961% of their face amount, which represents a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on private placement offering through the sale of an additional $75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is paid semiannually in arrears on April 1 and October 1. The Notes were exchanged in an exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act of 1933, as amended and are freely tradeable in accordance with applicable law.

The Notes are general senior unsecured obligations that rank equally in right of payment to all existing and future senior indebtedness, including borrowings under the Company's senior unsecured revolving credit facility. The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. Exceptions to the limitation include, among other things, borrowings of up to $260 million under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2017 and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of $15 million. The Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries. See Note 17 for information about the guarantees and supplemental financial statement information about our guarantor subsidiaries group and non-guarantor subsidiaries group.

The Company's unsecured revolving credit facility ("Credit Facility") is with a bank group and matures on September 1, 2020. Total commitments under the Credit Facility are $200 million with an accordion feature that allows the facility size thereunder to be increased up to an aggregate of $300 million, subject to certain conditions, including the availability of bank commitments. As of September 30, 2018, we had $62.0 million of outstanding borrowings under the credit facility. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin ranging from 2.25% to 3.00% depending on the

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Company’s leverage ratio as calculated at the end of each fiscal quarter. As of September 30, 2018, the interest rate under the Credit Facility was 5.26%. Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as defined in the Credit Facility, including (i) a minimum tangible net worth; (ii) maximum leverage ratios; (iii) a minimum liquidity covenant; and (iv) a minimum fixed charge coverage ratio based on EBITDA (as detailed in the Credit Facility) to interest incurred. As of September 30, 2018, the Company was in compliance with all financial covenants.

The Credit Facility also provides a $25 million sublimit for letters of credit, subject to conditions set forth in the agreement. As of September 30, 2018 and December 31, 2017, the Company had $3.4 million in outstanding letters of credit issued under the Credit Facility.

10. Fair Value Disclosures

ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:



•	Level 1 – Quoted prices for identical instruments in active markets
•	Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date
•	Level 3 – Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date

Fair Value of Financial Instruments

The following table presents an estimated fair value of the Company's Notes and Credit Facility. The Notes are classified as Level 2 and primarily reflect estimated prices obtained from outside pricing sources. The Company's Credit Facility is classified as Level 3 within the fair value hierarchy. The Company had an outstanding balance of $62.0 million under its Credit Facility at September 30, 2018, and the estimated fair value of the outstanding balance approximated the carrying value due to the short-term nature of LIBOR contracts.



	September 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
7.25% Senior Notes due 2022, net ⁽¹⁾	$	319,775	$	332,313	$	318,656	$	336,375
Unsecured revolving credit facility	$	62,000	$	62,000	$	—	$	—

(1) The carrying value for the Senior Notes, as presented at September 30, 2018, is net of the unamortized discount of $1.8 million, unamortized premium of $1.4 million, and unamortized debt issuance costs of $4.9 million. The carrying value for the Senior Notes, as presented at December 31, 2017, is net of the unamortized discount of $2.2 million, unamortized premium of $1.8 million, and unamortized debt issuance costs of $5.9 million. The unamortized discount, unamortized premium and debt issuance costs are not factored into the estimated fair value.

The Company considers the carrying value of cash and cash equivalents, restricted cash, contracts and accounts receivable, accounts payable, and accrued expenses and other liabilities to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due from affiliates is not determinable due to the related party nature of such amounts.

Non-Recurring Fair Value Adjustments

Nonfinancial assets and liabilities include items such as inventory and long-lived assets that are measured at cost when acquired and adjusted for impairment to fair value, if deemed necessary. For the nine months ended September 30, 2017, the Company recognized a real estate-related impairment adjustment of $1.3 million related to one homebuilding community. The impairment adjustment was made using Level 3 inputs and assumptions, and the carrying value of the real estate inventories subject to the 2017 impairment adjustment was $11.3 million at September 30, 2017.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11. Commitments and Contingencies

From time-to-time, the Company is involved in various legal matters arising in the ordinary course of business. These claims and legal proceedings are of a nature that we believe are normal and incidental to a homebuilder. We make provisions for loss contingencies when they are probable and the amount of the loss can be reasonably estimated. Such provisions are assessed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. In view of the inherent unpredictability of litigation, we generally cannot predict their ultimate resolution, related timing or eventual loss. At this time, we do not believe that our loss contingencies, individually or in the aggregate, are material to our consolidated financial statements.

As an owner and developer of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of real estate in the vicinity of the Company’s real estate and other environmental conditions of which the Company is unaware with respect to the real estate could result in future environmental liabilities.

The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements comprise acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of September 30, 2018 and December 31, 2017, $40.1 million and $38.6 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was $6.7 million and $6.7 million, respectively, as of September 30, 2018 and December 31, 2017. In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion agreements. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion agreements to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from "bad boy acts" of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy.

We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. As of September 30, 2018 and December 31, 2017, the Company had outstanding surety bonds totaling $46.6 million and $52.1 million, respectively. The estimated remaining costs to complete of such improvements as of September 30, 2018 and December 31, 2017 were $15.6 million and $24.4 million, respectively. The beneficiaries of the bonds are various municipalities and other organizations. In the event that any such surety bond issued by a third party is called because the required improvements are not completed, the Company could be obligated to reimburse the issuer of the bond.

12. Related Party Transactions

During the three and nine months ended September 30, 2018 and 2017, the Company incurred construction-related costs on behalf of its unconsolidated joint ventures totaling $1.3 million, $4.9 million, $1.8 million and $5.8 million, respectively. As of September 30, 2018 and December 31, 2017, $0.2 million and $0.1 million, respectively, are included in due from affiliates in the accompanying condensed consolidated balance sheets related to such costs.

The Company has entered into agreements with its unconsolidated joint ventures to provide management services related to the underlying projects (collectively referred to as the "Management Agreements"). Pursuant to the Management Agreements, the Company receives a management fee based on each project’s revenues. During the three and nine months ended September 30, 2018 and 2017, the Company earned $0.9 million, $2.5 million, $1.3 million and $3.8 million,

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

respectively, in management fees, which have been recorded as fee building revenues in the accompanying condensed consolidated statements of operations. As of September 30, 2018 and December 31, 2017, $0.1 million and $0.3 million, respectively, of management fees are included in due from affiliates in the accompanying condensed consolidated balance sheets.

One member of the Company's board of directors beneficially owns more than 10% of the Company's outstanding common stock through an affiliated entity, IHP Capital Partners VI, LLC, and is also affiliated with entities that have investments in two of the Company's unconsolidated joint ventures, TNHC Meridian Investors LLC and TNHC Russell Ranch LLC ("Russell Ranch"). A former member of the Company's board of directors is affiliated with entities that have investments in three of the Company's unconsolidated joint ventures, Arantine Hills Holdings LP ("Bedford"), Calabasas Village LP, and TNHC-TCN Santa Clarita, LP. As of September 30, 2018, the Company's investment in these five unconsolidated joint ventures totaled $36.7 million. During the 2017 second quarter, the Bedford joint venture agreement was amended to increase the Company's funding obligation by $4.0 million over the existing contribution cap. During the 2017 third quarter, the Company amended the Russell Ranch joint venture agreement pursuant to which it, among other things, agreed to acquire lots in Phase 1 of the project which were taken down in July 2018. At December 31, 2017, the Company had a $5.1 million nonrefundable deposit outstanding related to this purchase, which was subsequently applied to the $34.0 million purchase price of the land.

TL Fab LP, an affiliate of one of the Company's non-employee directors, was engaged by the Company and some of its unconsolidated joint ventures as a trade contractor to provide metal fabrication services. For the three and nine months ended September 30, 2018 and 2017, the Company incurred $0.1 million, $0.3 million, $0.1 million and $0.4 million, respectively, for these services. For the same periods, the Company's unconsolidated joint ventures incurred $0, $0.4 million, $0.1 million and $0.7 million, respectively, for these services. Of these costs, $6,000 and $11,000 was due to TL Fab LP from the Company at September 30, 2018 and December 31, 2017, respectively, and $0 was due to TL Fab LP from the Company's unconsolidated joint ventures at both September 30, 2018 and December 31, 2017.

In its ordinary course of business, the Company enters into agreements to purchase lots from unconsolidated land development joint ventures of which it is a member. In accordance with ASC 360-20, Property, Plant and Equipment - Real Estate Sales ("ASC 360-20"), the Company defers its portion of the underlying gain from the joint venture's sale of these lots. When the Company purchases lots directly from the joint venture, the deferred gain is recorded as a reduction to the Company's land basis on the purchased lots. In certain instances, a third party may purchase lots from our unconsolidated joint ventures with the intent to finish the lots with the Company having an option to acquire these finished lots from the third party. In these instances, the Company defers its portion of the underlying gain and records the deferred gain as deferred profit from unconsolidated joint ventures which is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Once the lot is purchased by the Company, the pro-rata share of the previously deferred profit is recorded as a reduction to the Company's land basis in the purchased lots. In both instances, the gain is ultimately recognized when the Company delivers lots to third-party home buyers at the time of the home closing. At September 30, 2018 and December 31, 2017, $0 and $0.1 million, respectively, of deferred gain from lot sale transactions is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets as deferred profit from unconsolidated joint ventures for lot transactions between the Company and its TNHC-HW Cannery LLC ("Cannery") unconsolidated joint venture. In addition, at September 30, 2018, $0.4 million of deferred gain from lot transactions with the Cannery, Bedford and Russell Ranch unconsolidated joint ventures remained unrecognized and included as a reduction to land basis in the accompanying condensed consolidated balance sheets. At December 31, 2017, $0.5 million, of deferred gain from the Cannery lot transactions remained unrecognized and was included as a reduction to land basis in the accompanying condensed consolidated balance sheets.

The Company’s land purchase agreement with the Cannery requires profit participation payments due upon the closing of each home. Payment amounts are calculated based upon a percentage of estimated net profits and are due every 90 days after the first home closing. During the nine months ended September 30, 2017, the Company was refunded $0.2 million from the Cannery for profit participation overpayments from prior periods due to a modification of the underlying calculation related to profit participation. As of September 30, 2018 and December 31, 2017, no profit participation was due to the Cannery. Also per the purchase agreement, the Company was reimbursed $0.1 million in fee credits from the Cannery during 2018. As of September 30, 2018 and December 31, 2017, $0 and $0.1 million, respectively, in fee credits was due to the Company from the Cannery, which is included in due from affiliates in the accompanying condensed consolidated balance sheets.

On June 18, 2015, the Company entered into an agreement that effectively transitioned Joseph Davis' role within the Company from that of Chief Investment Officer to that of a non-employee consultant to the Company effective June 26, 2015 ("Transition Date"). As of the Transition Date, Mr. Davis ceased being an employee of the Company and became an independent contractor performing consulting services. For his services, he is compensated $5,000 per month. His current agreement terminates on June 26, 2019 with the option to extend the agreement one year, if mutually consented to by the

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

parties. Either party may terminate the agreement at any time for any or no reason. At September 30, 2018, no fees were due to Mr. Davis for his consulting services. Additionally, the Company entered into a construction agreement effective September 7, 2017, with The Joseph and Terri Davis Family Trust Dated August 25, 1999 ("Davis Family Trust") of which Joseph Davis is a trustee. The agreement is a fee building contract pursuant to which the Company acts in the capacity of a general contractor to build a single family detached home on land owned by the Davis Family Trust. For its services, the Company will receive a contractor's fee and the Davis Family Trust will reimburse the Company's field overhead costs. During the three and nine months ended September 30, 2018, the Company billed the Davis Family Trust $1.1 million and $1.8 million, respectively, including reimbursable construction costs and the Company's contractor's fees which are included in fee building revenues in the accompanying condensed consolidated statements of operations. Contractor's fees comprised $33,000 and $50,000 of the total billings for the three and nine months ended September 30, 2018, respectively. The Company recorded $1.1 million and $1.7 million for the three and nine months ended September 30, 2018, respectively, for the cost of this fee building revenue which are included in fee building cost of sales in the accompanying condensed consolidated statements of operations. At September 30, 2018 and December 31, 2017, the Company was due $0.9 million and $0.5 million, respectively, from the Davis Family Trust for construction draws, which are included in due from affiliates in the accompanying condensed consolidated balance sheets.

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

On June 29, 2015, the Company formed a new unconsolidated joint venture, TNHC Tidelands LLC ("Tidelands"), and received capital credit in excess of our contributed land basis. As a result, the Company recognized $1.6 million in equity in net income of unconsolidated joint ventures and deferred $0.4 million in profit from unconsolidated joint ventures related to this transaction for the year ended December 31, 2015. During the three and nine months ended September 30, 2017, $0.1 million and $0.2 million, respectively, of the previously deferred revenue was recognized as equity in net income of unconsolidated joint ventures. During the third quarter of 2017, the Company acquired its partner's equity interest in the Tidelands joint venture. As part of this transaction, the remaining deferred profit was written off, and at December 31, 2017, no deferred profit remained unrecognized or was included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

As of September 30, 2018 and December 31, 2017, the Company had advances outstanding of approximately $0 and $3.8 million, respectively, to an unconsolidated joint venture, Encore McKinley. The note bore interest at 10% per annum and was fully repaid during the 2018 second quarter. For the three and nine months ended September 30, 2018 and 2017, the Company earned $0, $0.1 million, $0.1 million and $0.4 million, respectively, in interest income on the unsecured promissory note which is included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations. As of September 30, 2018 and December 31, 2017, $0 and $34,000, respectively, of interest income was due to the Company and included in due from affiliates in the accompanying condensed consolidated balance sheets.

During the 2017 second quarter, our Larkspur Land 8 Investors LLC unconsolidated joint venture ("Larkspur") allocated $0.1 million of income to the Company from a reduction in cost to complete reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, other assets, and accrued liabilities, including warranty and the remaining costs to complete reserves, of the joint venture. As part of this transaction the Company also recognized a gain of $0.3 million, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.

The Company entered into two transactions in each 2018 and 2017 to purchase land from affiliates of IHP Capital Partners VI, LLC, which owns more than 10% of the Company's outstanding common stock and is affiliated with one member of the Company's board of directors. The first 2017 agreement allows the Company the option to purchase lots in Northern California in a phased takedown for a gross purchase price of $16.1 million with profit participation and master marketing fees due to the seller as outlined in the contract. As of September 30, 2018, the Company has taken down approximately one-third of the lots and has a $0.6 million nonrefundable deposit outstanding on the remaining lots. The second 2017 transaction allows

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the Company to purchase finished lots in Northern California which includes customary profit participation and is structured as a rolling option takedown. The total purchase price, including the cost for the finished lot development and the rolling option, is expected to be approximately $56.1 million, and depends on timing of takedowns, as well as our obligation to pay certain fees and costs during the option maintenance period. As of September 30, 2018, the Company has made a $0.3 million nonrefundable deposit, reimbursed the owner $0.1 million for fees and costs, paid $1.9 million in option payments, and had taken down approximately 4% of the lots. In 2018, the Company agreed to purchase finished lots in Northern California for a gross purchase price of $8.0 million with additional profit participation, marketing fees and certain reimbursements due to the seller as outlined in the agreement. At September 30, 2018, the Company had a $0.1 million nonrefundable deposit outstanding related to this project and had not taken down any lots. Also during 2018, the Company entered an agreement to purchase land in a master-plan community in Arizona for an estimated purchase price of $3.8 million plus profit participation and marketing fees pursuant to contract terms. The Company has an outstanding, refundable deposit of $0.3 million related to this contract and had not taken down any lots as of September 30, 2018.

In August 2017, we acquired the remaining outside equity interest of our DMB/TNHC LLC (Sterling at Silverleaf) unconsolidated joint venture. The Company paid $2.6 million to our joint venture partner and upon the change of control was required to consolidate this venture as it is now a wholly-owned subsidiary of the Company. There was no remeasurement gain or loss on our unconsolidated interest prior to the change in control. The purchase consideration and the cost basis of our previous investment in unconsolidated joint ventures related to this joint venture are included in real estate inventories at September 30, 2018 and December 31, 2017.

In the first quarter 2018, the Company entered into an agreement with its Bedford joint venture that is affiliated with one former member of the Company's board of directors for the option to purchase lots in phased takedowns. As of September 30, 2018, the Company has made a $1.5 million nonrefundable deposit as consideration for this option, and a portion of the deposit will be applied to the purchase price across the phases. The gross purchase price of the land is $10.0 million with profit participation due to seller as outlined in the contract. The Company has taken down approximately one-third of the contracted lots and $0.9 million of the nonrefundable deposit remains outstanding.

FMR LLC beneficially owns over 10% of the Company's common stock, and an affiliate of FMR LLC ("Fidelity") provides investment management and record keeping services to the Company’s 401(k) Plan. For the three and nine months ended September 30, 2018 and 2017, the Company paid Fidelity approximately $5,000, $14,000, $4,000 and $11,000, respectively, for 401(k) Plan record keeping and investment management services. The participants in the Company's 401(k) Plan paid Fidelity approximately $2,000, $6,000, $2,000 and $4,000 for the three and nine ended September 30, 2018 and 2017, respectively, for record keeping and investment management services.

13. Stock-Based Compensation

The Company's 2014 Long-Term Incentive Plan (the "2014 Incentive Plan"), was adopted by our board of directors in January 2014. The 2014 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted stock awards, restricted stock units and performance awards. The 2014 Incentive Plan will automatically expire on the tenth anniversary of its effective date.

The number of shares of our common stock authorized to be issued under the 2014 Incentive Plan is 1,644,875 shares. To the extent that shares of the Company's common stock subject to an outstanding option, stock appreciation right, stock award or performance award granted under the 2014 Incentive Plan or any predecessor plan are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of common stock generally shall again be available under the 2014 Incentive Plan.

At our 2016 Annual Meeting of Shareholders on May 24, 2016, our shareholders approved the Company's 2016 Incentive Award Plan (the "2016 Incentive Plan"). The 2016 Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock- or cash-based awards. Non-employee directors of the Company and employees and consultants of the Company or any of its subsidiaries are eligible to receive awards under the 2016 Incentive Plan. On May 22, 2018, our shareholders approved the amended and restated 2016 Incentive Plan which increased the number of shares authorized for issuance under the plan from 800,000 to 2,100,000 shares. The amended and restated 2016 Incentive Plan will expire on April 4, 2028.

The Company has issued stock option and restricted stock unit awards under the 2014 Incentive Plan and restricted stock unit awards and performance share unit awards under the 2016 Incentive Plan. As of September 30, 2018, 51,681 shares remain available for grant under the 2014 Incentive Plan and 1,465,834 shares remain available for grant under the 2016 Incentive Plan. The exercise price of stock-based awards may not be less than the market value of the Company's common stock on the date of grant. The fair value for stock options is established at the date of grant using the Black-Scholes model for

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

time-based vesting awards. The Company's stock option, restricted stock unit awards, and performance share unit awards typically vest over a one to three year period and the stock options expire ten years from the date of grant.

A summary of the Company’s common stock option activity as of and for the nine months ended September 30, 2018 and 2017 is presented below:



	Nine Months Ended September 30,
	2018				2017
	Number of Shares		Weighted-Average Exercise Price per Share		Number of Shares		Weighted-Average Exercise Price per Share
Outstanding Stock Option Activity
Outstanding, beginning of period	826,498		$	11.00	835,786		$	11.00
Granted	—		$	—	—		$	—
Exercised	—		$	—	(9,288	)	$	11.00
Forfeited	(5,028	)	$	11.00	—		$	—
Outstanding, end of period	821,470		$	11.00	826,498		$	11.00
Exercisable, end of period	821,470		$	11.00	826,498		$	11.00

A summary of the Company’s restricted stock unit activity as of and for the nine months ended September 30, 2018 and 2017 is presented below:



	Nine Months Ended September 30,
	2018				2017
	Number of Shares		Weighted-Average Grant-Date Fair Value per Share		Number of Shares		Weighted-Average Grant-Date Fair Value per Share
Restricted Stock Unit Activity
Outstanding, beginning of period	562,082		$	10.72	474,989		$	10.66
Granted	179,268		$	11.24	343,933		$	10.84
Vested	(271,875	)	$	11.02	(211,131	)	$	10.75
Forfeited	(248	)	$	10.05	(26,194	)	$	10.82
Outstanding, end of period	469,227		$	10.75	581,597		$	10.72

A summary of the Company’s performance share unit activity as of and for the nine months ended September 30, 2018 is presented below:



	Nine Months Ended September 30,
	2018
	Number of Shares	Weighted-Average Grant-Date Fair Value per Share
Performance Share Unit Activity
Outstanding, beginning of period	—	$	—
Granted (at target)	125,422	$	11.68
Vested	—	$	—
Forfeited	—	$	—
Outstanding, end of period (at target)	125,422	$	11.68

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The expense related to the Company's stock-based compensation programs, included in general and administrative expense in the accompanying condensed consolidated statements of operations, was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Dollars in thousands)
Expense related to:
Stock options	$	—	$	—	$	—	$	11
Restricted stock units and performance share units	622		780		2,326		2,075
	$	622	$	780	$	2,326	$	2,086

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

At September 30, 2018, the amount of unearned stock-based compensation currently estimated to be expensed through 2021 is $3.4 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 1.6 years. If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

14. Income Taxes

For the three and nine months ended September 30, 2018, the Company recorded a provision for income taxes of $0.9 million and $0.2 million, respectively. Comparatively, the Company recorded respective tax provisions of $2.7 million and $4.2 million for the three and nine months ended September 30, 2017. The Company's effective tax rate for the three and nine months ended September 30, 2018, was 27.8% and 7.3%, respectively. For the three and nine months ended September 30, 2017, the Company's effective tax rates were 38.1% and 38.5%, respectively.

The effective tax rates for the three and nine months ended September 30, 2018 differ from the federal statutory tax rates due to state income taxes, estimated deduction limitations and discrete items. Discrete items comprised $0.5 million of the tax benefit for the nine months ended September 30, 2018 and were primarily related to benefits from energy tax credits that were extended in February 2018 for 2017 closings and, to a lesser extent, an adjustment to the Company's deferred tax asset revaluation required as a result of the federal tax rate cut. The effective tax rates for the three and nine months September 30, 2017 differ from the federal statutory tax rates due primarily to state income taxes, offset partially by the benefit from production activities.

With the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), the corporate federal income tax rate dropped from a maximum of 35% to a flat 21% rate effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act and provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

As of December 31, 2017, we have completed the majority of our accounting for the tax effects of the Tax Act. As a result of the rate change, the Company was required to revalue its net deferred tax asset at December 31, 2017 and recorded a provisional adjustment to reduce its value by $3.2 million. The provisional amount recorded at December 31, 2017, is subject to revisions as we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, FASB, and other standard-setting and regulatory

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

bodies. During the 2018 first quarter the Company recorded an immaterial adjustment to the provisional amount, and our accounting for the tax effects of the Tax Act will be completed during the one-year measurement period.

15. Segment Information

The Company’s operations are organized into two reportable segments: homebuilding and fee building. In determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross margins, production processes, suppliers, subcontractors, regulatory environments, land acquisition results, and underlying demand and supply in accordance with ASC Topic 280, Segment Reporting.

Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached

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

The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 1. Operational results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented. Financial information relating to reportable segments was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018			2017
	(Dollars in thousands)
Revenues:
Homebuilding	$	119,874	$	114,622	$	316,771		$	280,957
Fee building, including management fees	39,240		43,309		121,129			146,107
Total	$	159,114	$	157,931	$	437,900		$	427,064

Pretax income (loss):
Homebuilding	$	2,284	$	5,473	$	(1,197	)	$	6,365
Fee building, including management fees	1,116		1,501		3,268			4,474
Total	$	3,400	$	6,974	$	2,071		$	10,839



	September 30,		December 31,
	2018		2017
	(Dollars in thousands)
Assets:
Homebuilding	$	692,224	$	631,087
Fee building	16,578		13,425
Total	$	708,802	$	644,512

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

16. Supplemental Disclosure of Cash Flow Information

The following table presents certain supplemental cash flow information:



	Nine Months Ended September 30,
	2018		2017
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Interest paid, net of amounts capitalized	$	—	$	—
Income taxes paid	$	7,000	$	9,700
Supplemental disclosures of non-cash transactions
Assets assumed from unconsolidated joint ventures	$	—	$	3,877
Liabilities and equity assumed from unconsolidated joint ventures	$	—	$	4,872

17. Supplemental Guarantor Information

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

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS



	September 30, 2018
	NWHM Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	15,690	$	28,212	$	168	$	—		$	44,070
Restricted cash	—		795		—		—			795
Contracts and accounts receivable	10		22,411		—		(1,564		)	20,857
Intercompany receivables	178,562		—		—		(178,562		)	—
Due from affiliates	—		1,235		—		—			1,235
Real estate inventories	—		562,315		—		—			562,315
Investment in and advances to unconsolidated joint ventures	—		53,344		—		—			53,344
Investment in subsidiaries	447,082		—		—		(447,082		)	—
Other assets	12,660		13,531		—		(5		)	26,186
Total assets	$	654,004	$	681,843	$	168	$	(627,213	)	$	708,802

Liabilities and equity
Accounts payable	$	94	$	38,585	$	2	$	—		$	38,681
Accrued expenses and other liabilities	13,996		17,604		90		(1,559		)	30,131
Intercompany payables	—		178,562		—		(178,562		)	—
Due to affiliates	—		10		—		(10		)	—
Unsecured revolving credit facility	62,000		—		—		—			62,000
Senior notes, net	319,775		—		—		—			319,775
Total liabilities	395,865		234,761		92		(180,131		)	450,587
Stockholders' equity	258,139		447,082		—		(447,082		)	258,139
Non-controlling interest in subsidiary	—		—		76		—			76
Total equity	258,139		447,082		76		(447,082		)	258,215
Total liabilities and equity	$	654,004	$	681,843	$	168	$	(627,213	)	$	708,802

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	December 31, 2017
	NWHM Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	99,586	$	23,772	$	188	$	—		$	123,546
Restricted cash	—		424		—		—			424
Contracts and accounts receivable	10		24,238		—		(1,024		)	23,224
Intercompany receivables	129,414		—		—		(129,414		)	—
Due from affiliates	—		1,060		—		—			1,060
Real estate inventories	—		416,143		—		—			416,143
Investment in and advances to unconsolidated joint ventures	—		55,824		—		—			55,824
Investment in subsidiaries	356,443		—		—		(356,443		)	—
Other assets	8,464		15,827		—		—			24,291
Total assets	$	593,917	$	537,288	$	188	$	(486,881	)	$	644,512

Liabilities and equity
Accounts payable	$	237	$	23,479	$	6	$	—		$	23,722
Accrued expenses and other liabilities	11,034		27,954		80		(1,014		)	38,054
Intercompany payables	—		129,414		—		(129,414		)	—
Due to affiliates	—		10		—		(10		)	—
Senior notes, net	318,656		—		—		—			318,656
Total liabilities	329,927		180,857		86		(130,438		)	380,432
Stockholders' equity	263,990		356,431		12		(356,443		)	263,990
Non-controlling interest in subsidiary	—		—		90		—			90
Total equity	263,990		356,431		$	102	(356,443		)	264,080
Total liabilities and equity	$	593,917	$	537,288	$	188	$	(486,881	)	$	644,512

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS



	Three Months Ended September 30, 2018
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Revenues:
Home sales	$	—		$	119,874		$	—	$	—		$	119,874
Fee building	—			39,240			—		—			39,240
	—			159,114			—		—			159,114
Cost of Sales:
Home sales	—			102,124			—		—			102,124
Fee building	—			38,124			—		—			38,124
	—			140,248			—		—			140,248

Gross Margin:
Home sales	—			17,750			—		—			17,750
Fee building	—			1,116			—		—			1,116
	—			18,866			—		—			18,866
Selling and marketing expenses	—			(9,206		)	—		—			(9,206		)
General and administrative expenses	1,183			(7,367		)	—		—			(6,184		)
Equity in net income of unconsolidated joint ventures	—			34			—		—			34
Equity in net income of subsidiaries	1,796			—			—		(1,796		)	—
Other income (expense), net	(13		)	(97		)	—		—			(110		)
Pretax income	2,966			2,230			—		(1,796		)	3,400
Provision for income taxes	(507		)	(437		)	—		—			(944		)
Net income	2,459			1,793			—		(1,796		)	2,456
Net loss attributable to non-controlling interest in subsidiary	—			—			3		—			3
Net income attributable to The New Home Company Inc.	$	2,459		$	1,793		$	3	$	(1,796	)	$	2,459

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	Three Months Ended September 30, 2017
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Revenues:
Home sales	$	—		$	114,622		$	—	$	—		$	114,622
Fee building	—			43,309			—		—			43,309
	—			157,931			—		—			157,931
Cost of Sales:
Home sales	—			95,992			—		—			95,992
Fee building	364			41,444			—		—			41,808
	364			137,436			—		—			137,800

Gross Margin:
Home sales	—			18,630			—		—			18,630
Fee building	(364		)	1,865			—		—			1,501
	(364		)	20,495			—		—			20,131
Selling and marketing expenses	—			(6,860		)	—		—			(6,860		)
General and administrative expenses	(350		)	(6,115		)	—		—			(6,465		)
Equity in net income of unconsolidated joint ventures	—			99			—		—			99
Equity in net income of subsidiaries	4,695			—			—		(4,695		)	—
Other income (expense), net	127			(58		)	—		—			69
Pretax income	4,108			7,561			—		(4,695		)	6,974
Benefit (provision) for income taxes	210			(2,866		)	—		—			(2,656		)
Net income	4,318			4,695			—		(4,695		)	4,318
Net (income) loss attributable to non-controlling interest in subsidiary	—			—			—		—			—
Net income attributable to The New Home Company Inc.	$	4,318		$	4,695		$	—	$	(4,695	)	$	4,318



	Nine Months Ended September 30, 2018
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Revenues:
Home sales	$	—		$	316,771		$	—		$	—		$	316,771
Fee building	—			121,129			—			—			121,129
	—			437,900			—			—			437,900
Cost of Sales:
Home sales	—			274,474			22			—			274,496
Fee building	—			117,861			—			—			117,861
	—			392,335			22			—			392,357

Gross Margin:
Home sales	—			42,297			(22		)	—			42,275
Fee building	—			3,268			—			—			3,268
	—			45,565			(22		)	—			45,543
Selling and marketing expenses	—			(25,311		)	—			—			(25,311		)
General and administrative expenses	382			(18,561		)	(3		)	—			(18,182		)
Equity in net income of unconsolidated joint ventures	—			249			—			—			249
Equity in net income of subsidiaries	1,620			—			—			(1,620		)	—
Other income (expense), net	63			(291		)	—			—			(228		)
Pretax income (loss)	2,065			1,651			(25		)	(1,620		)	2,071
Provision for income taxes	(131		)	(20		)	—			—			(151		)
Net income (loss)	1,934			1,631			(25		)	(1,620		)	1,920
Net loss attributable to non-controlling interest in subsidiary	—			—			14			—			14
Net income (loss) attributable to The New Home Company Inc.	$	1,934		$	1,631		$	(11	)	$	(1,620	)	$	1,934

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	Nine Months Ended September 30, 2017
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Revenues:
Home sales	$	—		$	280,957		$	—		$	—		$	280,957
Fee building	—			146,107			—			—			146,107
	—			427,064			—			—			427,064
Cost of Sales:
Home sales	—			238,514			31			—			238,545
Home sales impairments	—			1,300			—			—			1,300
Fee building	1,449			140,184			—			—			141,633
	1,449			379,998			31			—			381,478

Gross Margin:
Home sales	—			41,143			(31		)	—			41,112
Fee building	(1,449		)	5,923			—			—			4,474
	(1,449		)	47,066			(31		)	—			45,586
Selling and marketing expenses	—			(18,237		)	—			—			(18,237		)
General and administrative expenses	(1,504		)	(15,646		)	—			—			(17,150		)
Equity in net income of unconsolidated joint ventures	—			606			—			—			606
Equity in net income of subsidiaries	8,389			—			—			(8,389		)	—
Other income (expense), net	171			(137		)	—			—			34
Pretax income (loss)	5,607			13,652			(31		)	(8,389		)	10,839
Benefit (provision) for income taxes	1,074			(5,242		)	—			—			(4,168		)
Net income (loss)	6,681			8,410			(31		)	(8,389		)	6,671
Net loss attributable to non-controlling interest in subsidiary	—			—			10			—			10
Net income (loss) attributable to The New Home Company Inc.	$	6,681		$	8,410		$	(21	)	$	(8,389	)	$	6,681

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Nine Months Ended September 30, 2018
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Net cash used in operating activities	$	(46,038	)	$	(89,209	)	$	(20	)	$	(701	)	$	(135,968	)
Investing activities:
Purchases of property and equipment	(27		)	(188		)	—			—			(215		)
Contributions and advances to unconsolidated joint ventures	—			(12,670		)	—			—			(12,670		)
Contributions to subsidiaries from corporate	(205,459		)				—			205,459			—
Distributions of capital from subsidiaries	112,374						—			(112,374		)	—
Distributions of capital and repayment of advances from unconsolidated joint ventures	—			14,316			—			—			14,316
Interest collected on advances to unconsolidated joint ventures	$	—		$	178		$	—		$	—		$	178
Net cash (used in) provided by investing activities	$	(93,112	)	$	1,636		$	—		$	93,085		$	1,609
Financing activities:
Borrowings from credit facility	115,000			—			—			—			115,000
Repayments of credit facility	(53,000		)	—			—			—			(53,000		)
Contributions to subsidiaries from corporate	—			205,459			—			(205,459		)	—
Distributions to corporate from subsidiaries	—			(113,075		)	—			113,075			—
Repurchases of common stock	(5,764		)	—			—			—			(5,764		)
Tax withholding paid on behalf of employees for stock awards	(982		)	—			—			—			(982		)
Net cash provided by financing activities	$	55,254		$	92,384		$	—		$	(92,384	)	$	55,254
Net (decrease) increase in cash, cash equivalents and restricted cash	(83,896		)	4,811			(20		)	—			(79,105		)
Cash, cash equivalents and restricted cash – beginning of period	99,586			24,196			188			—			123,970
Cash, cash equivalents and restricted cash – end of period	$	15,690		$	29,007		$	168		$	—		$	44,865

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	Nine Months Ended September 30, 2017
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Net cash used in operating activities	$	(20,466	)	$	(135,740	)	$	(65	)	$	(4,421	)	$	(160,692	)
Investing activities:
Purchases of property and equipment	(46		)	(99		)	—			—			(145		)
Cash assumed from joint venture at consolidation	—			995			—			—			995
Contributions and advances to unconsolidated joint ventures	—			(21,296		)	—			—			(21,296		)
Contributions to subsidiaries from corporate	(207,849		)	—			—			207,849			—
Distributions of capital from subsidiaries	50,759			—			—			(50,759		)	—
Distributions of capital and repayment of advances from unconsolidated joint ventures	—			13,650			—			—			13,650
Interest collected on advances to unconsolidated joint ventures	—			468			—			—			468
Net cash used in investing activities	$	(157,136	)	$	(6,282	)	$	—		$	157,090		$	(6,328	)
Financing activities:
Borrowings from credit facility	72,000			—			—			—			72,000
Repayments of credit facility	(190,000		)	—			—			—			(190,000		)
Proceeds from senior notes	324,465			—			—			—			324,465
Payment of debt issuance costs	(7,382		)	—			—			—			(7,382		)
Contributions to subsidiaries from corporate	—			207,849			—			(207,849		)	—
Distributions to corporate from subsidiaries	—			(55,180		)	—			55,180			—
Tax withholding paid on behalf of employees for stock awards	(590		)	—			—			—			(590		)
Proceeds from exercise of stock options	102			—			—			—			102
Net cash provided by financing activities	$	198,595		$	152,669		$	—		$	(152,669	)	$	198,595
Net increase (decrease) in cash, cash equivalents and restricted cash	20,993			10,647			(65		)	—			31,575
Cash, cash equivalents and restricted cash – beginning of period	16,385			14,427			269			—			31,081
Cash, cash equivalents and restricted cash – end of period	$	37,378		$	25,074		$	204		$	—		$	62,656



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

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements contained in this quarterly report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. These forward-looking statements are frequently accompanied by words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "goal," "plan," "could," "can," "might," "should," and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, 2017 and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A "Risk Factors" of this quarterly report on 10-Q. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements:


•	Risks related to our business, including among other things:


◦	our geographic concentration primarily in California;


◦	the cyclical nature of the homebuilding industry which is affected by general economic real estate and other business conditions;


◦	availability of land to acquire and our ability to acquire such land on favorable terms or at all;


◦	shortages of or increased prices for labor, land or raw materials used in housing construction;


◦	availability and skill of subcontractors at reasonable rates;


◦	employment-related liabilities with respect to our contractors' employees;


◦	the illiquid nature of real estate investments;


◦	the degree and nature of our competition;


◦	delays in the development of communities;


◦	increases in our cancellation rate;


◦	a large proportion of our fee building revenue being dependent upon one customer;


◦	construction defect product liability and warranty claims, including the cost and availability of insurance;


◦	increased costs, delays in land development or home construction and reduced consumer demand resulting from adverse weather conditions or other events outside our control;


◦	increased cost and reduced consumer demand resulting from power, water and other natural resource shortages or price increases;


◦	because of the seasonal nature of our business, our quarterly operating results fluctuate;


◦	we may be unable to obtain suitable bonding for the development of our housing projects;


◦	inflation could adversely affect our business and financial results;


◦	a major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage;


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


◦	information systems interruption or breach in security;


◦	we may incur a variety of costs to engage in future growth or expansion of our operations or acquisitions of businesses, and the anticipated benefits may never be realized;


◦	a reduction in our sales absorption levels may force us to incur and absorb additional community-level costs;


◦	future terrorist attacks against the United States or increased domestic or international instability could have an adverse effect on our operations;


•	Risks related to laws and regulations, including among other things:


◦	mortgage financing, as well as our customer’s ability to obtain such financing, interest rate increases or changes in federal lending programs;


◦	changes in tax laws can increase the after tax cost of owning a home, and further tax law changes or government fees could adversely affect demand for the homes we build, increase our costs, or negatively affect our operating results;


◦	new and existing laws and regulations, including environmental laws and regulations, or other governmental actions may increase our expenses, limit the number of homes that we can build or delay the completion of our projects;


◦	legislation relating to energy and climate change could increase our costs to construct homes;


•	Risks related to financing and indebtedness, including among other things:


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


◦	our level of indebtedness may adversely affect our financial position and prevent us from fulfilling our debt obligations, and we may incur additional debt in the future;


◦	the significant amount and illiquid nature of our joint venture partnerships, in which we have less than a controlling interest;


◦	a breach of the covenants under the Indenture or any of the other agreements governing our indebtedness could result in an event of default under the Indenture or other such agreements;


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


◦	interest expense on debt we incur may limit our cash available to fund our growth strategies;


◦	we may be unable to repurchase the Notes upon a change of control as required by the Indenture;


•	Risks related to our organization and structure, including among other things:


◦	our dependence on our key personnel;


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


◦	the obligations associated with being a public company require significant resources and management attention;


◦	our status as an emerging growth company with a limited operating history;


•	Risks related to ownership of our common stock, including among other things:


◦	the price of our common stock is subject to volatility and our trading volume is relatively low;


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


◦	we do not intend to pay dividends on our common stock for the foreseeable future;


◦	certain stockholders have rights to cause our Company to undertake securities offerings;


◦	our senior notes rank senior to our common stock upon bankruptcy or liquidation;


◦	certain large stockholders own a significant percentage of our shares and exert significant influence over us;


◦	Non-U.S. holders of our common stock may be subject to United States income tax on gain realized on the sale of disposition of such shares.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this quarterly report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

The forward-looking statements in this quarterly report on Form 10-Q speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements, 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 homebuilding gross margin before impairments (or home sales gross margin before impairments), homebuilding gross margin percentage before impairments, Adjusted EBITDA, Adjusted EBITDA margin percentage, the ratio of Adjusted EBITDA to total interest incurred, net debt, the ratio of net debt-to-capital, adjusted homebuilding gross margin (or homebuilding gross margin before impairments and interest

in cost of home sales), adjusted homebuilding gross margin percentage and effective tax rate before discrete items. For a reconciliation of homebuilding gross margin before impairments (or home sales gross margin before impairments), homebuilding gross margin percentage before impairments, Adjusted EBITDA, Adjusted EBITDA margin percentage, and the ratio of Adjusted EBITDA to total interest incurred to the comparable GAAP measures please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Selected Financial Information." For a reconciliation of net debt and ratio of net debt-to-capital to the comparable GAAP measures, please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt-to-Capital Ratios." For a reconciliation of adjusted homebuilding gross margin (or homebuilding gross margin excluding impairments and interest in cost of home sales) and adjusted homebuilding gross margin percentage to the comparable GAAP measures please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Homebuilding Gross Margin." For a reconciliation of the effective tax rate before discrete items to the comparable GAAP measure please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Provision for Income Taxes."

Selected Financial Information



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Revenues:
Home sales	$	119,874		$	114,622		$	316,771		$	280,957
Fee building, including management fees from unconsolidated joint ventures of $859, $1,324, $2,511 and $3,755, respectively	39,240			43,309			121,129			146,107
	159,114			157,931			437,900			427,064
Cost of Sales:
Home sales	102,124			95,992			274,496			238,545
Home sales impairments	—			—			—			1,300
Fee building	38,124			41,808			117,861			141,633
	140,248			137,800			392,357			381,478
Gross Margin:
Home sales	17,750			18,630			42,275			41,112
Fee building	1,116			1,501			3,268			4,474
	18,866			20,131			45,543			45,586

Home sales gross margin	14.8		%	16.3		%	13.3		%	14.6		%
Home sales gross margin before impairments⁽¹⁾	14.8		%	16.3		%	13.3		%	15.1		%
Fee building gross margin	2.8		%	3.5		%	2.7		%	3.1		%

Selling and marketing expenses	(9,206		)	(6,860		)	(25,311		)	(18,237		)
General and administrative expenses	(6,184		)	(6,465		)	(18,182		)	(17,150		)
Equity in net income of unconsolidated joint ventures	34			99			249			606
Other income (expense), net	(110		)	69			(228		)	34
Pretax income	3,400			6,974			2,071			10,839
Provision for income taxes	(944		)	(2,656		)	(151		)	(4,168		)
Net income	2,456			4,318			1,920			6,671
Net loss attributable to non-controlling interest	3			—			14			10
Net income attributable to The New Home Company Inc.	$	2,459		$	4,318		$	1,934		$	6,681

Interest incurred	$	7,270		$	6,780		$	20,598		$	15,217
Adjusted EBITDA⁽²⁾	$	10,206		$	10,248		$	20,333		$	21,508
Adjusted EBITDA margin percentage⁽²⁾	6.4		%	6.5		%	4.6		%	5.0		%

							LTM⁽³⁾ Ended September 30,
							2018			2017
Interest incurred							$	27,359		$	17,458
Adjusted EBITDA⁽²⁾							$	48,970		$	48,781
Adjusted EBITDA margin percentage⁽²⁾							6.4		%	6.5		%
Ratio of Adjusted EBITDA to total interest incurred ⁽²⁾							1.8x			2.8x


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



	Three Months Ended September 30,								Nine Months Ended September 30,
	2018		%		2017		%		2018		%		2017		%
	(Dollars in thousands)
Home sales revenue	$	119,874	100.0	%	$	114,622	100.0	%	$	316,771	100.0	%	$	280,957	100.0	%
Cost of home sales	102,124		85.2	%	95,992		83.7	%	274,496		86.7	%	239,845		85.4	%
Homebuilding gross margin	17,750		14.8	%	18,630		16.3	%	42,275		13.3	%	41,112		14.6	%
Add: Home sales impairments	—		—	%	—		—	%	—		—	%	1,300		0.5	%
Homebuilding gross margin before impairments	$	17,750	14.8	%	$	18,630	16.3	%	$	42,275	13.3	%	$	42,412	15.1	%

(2)

Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred are non-GAAP measures. Adjusted EBITDA margin percentage is calculated as a percentage of total revenue. Management believes that Adjusted EBITDA, which is a non-GAAP measure, assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, interest costs, tax position and inventory impairments. Due to the significance of the GAAP components excluded, Adjusted EBITDA should not be considered in isolation or as an alternative to net income, cash flows from operations or any other performance measure prescribed by GAAP. The table below reconciles net income, calculated and presented in accordance with GAAP, to Adjusted EBITDA.



	Three Months Ended September 30,						Nine Months Ended September 30,						LTM⁽³⁾ Ended September 30,
	2018			2017			2018			2017			2018			2017
	(Dollars in thousands)
Net income	$	2,456		$	4,318		$	1,920		$	6,671		$	12,390		$	20,445
Add:
Interest amortized to cost of sales and equity in net income of unconsolidated joint ventures	4,329			2,453			10,892			5,719			16,230			8,033
Provision for income taxes	944			2,656			151			4,168			11,373			12,474
Depreciation and amortization	1,851			108			4,497			344			4,602			474
Amortization of stock-based compensation	622			780			2,326			2,086			3,043			2,955
Cash distributions of income from unconsolidated joint ventures	—			—			715			1,588			715			3,399
Noncash impairments and abandonments	38			32			81			1,538			1,126			5,120
Less:
Gain from notes payable principal reduction	—			—			—			—			—			(250		)
Equity in net income of unconsolidated joint ventures	(34		)	(99		)	(249		)	(606		)	(509		)	(3,869		)
Adjusted EBITDA	$	10,206		$	10,248		$	20,333		$	21,508		$	48,970		$	48,781
Total Revenue	$	159,114		$	157,931		$	437,900		$	427,064		$	762,002		$	749,513
Adjusted EBITDA margin percentage	6.4		%	6.5		%	4.6		%	5.0		%	6.4		%	6.5		%
Interest incurred	$	7,270		$	6,780		$	20,598		$	15,217		$	27,359		$	17,458
Ratio of Adjusted LTM⁽³⁾ EBITDA to total interest incurred													1.8x			2.8x


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

Overview

The Company further progressed in expanding and diversifying its product portfolio during the 2018 third quarter. We began to see results from our investments in new, affordably-priced communities with net new home orders up 63% and deliveries up 55% over the prior year period. The rise in orders was attributable to an 82% increase in average active selling communities and drove a 70% increase in ending backlog units at September 30, 2018 compared to a year ago. Ending community count for the 2018 third quarter increased 67% to 20 communities compared to 12 at the end of the 2017 third quarter, including opening our second new community in the Inland Empire market of Southern California, a market we have targeted for further geographic expansion.

During the 2018 third quarter, the Company continued to see the impact of a mix shift in our product offerings resulting from the Company's strategy to transition to more affordably-priced product in our portfolio. As anticipated, this change caused the average selling price of homes delivered and homes in backlog for the 2018 third quarter to decline by 32% and 45%, respectively, from the prior year period. The reduction in the average selling price of homes delivered was more than offset by a 55% increase in the number of homes delivered, driving a 5% increase in home sales revenues during the 2018 third quarter, compared to the prior year. The decline in the average selling price of backlog homes at September 30, 2018 was largely offset by a 70% increase in backlog units, resulting in a 6% decrease in backlog dollar value when compared to the prior year.

Net income generated during the 2018 third quarter was $2.5 million, or $0.12 per diluted share, compared to net income of $4.3 million, or $0.21 per diluted share, in the prior year period. The year-over-year decrease in net income was largely due to a 170 basis point increase in selling and marketing expenses as a percentage of home sales revenue and a 150 basis point decline in home sales gross margin. These items were partially offset by a 5% increase in home sales revenue, a 50 basis point improvement in general and administrative expenses as a percentage of homes sales revenue, and a lower effective income tax rate.

We continue to focus on finding high-quality locations in the markets where we build, which drove a 32% increase in wholly owned lot count year-over-year at September 30, 2018. The Company ended the quarter with $44.1 million in cash and cash equivalents, $381.8 million in debt, of which $62.0 million was outstanding under its $200 million revolving credit facility. The Company's debt-to-capital ratio was 59.7% and its net debt-to-capital ratio of 56.6%*. During the 2018 third quarter, the Company accelerated its stock repurchase activity and purchased 418,371 shares of common stock for approximately $3.7 million, or an average price of $8.80 per share.

*Net debt-to-capital ratio is a non-GAAP measure. For a reconciliation to the appropriate GAAP measure, please see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt-to-Capital Ratios."

Results of Operations

Net New Home Orders



	Three Months Ended September 30,				Increase/(Decrease)				Nine Months Ended September 30,				Increase/(Decrease)
	2018		2017		Amount		%		2018		2017		Amount		%

Net new home orders:
Southern California	75		43		32		74	%	248		143		105		73	%
Northern California	42		38		4		11	%	189		162		27		17	%
Arizona	15		—		15		NA		30		—		30		NA
Total net new home orders	132		81		51		63	%	467		305		162		53	%

Selling communities at end of period:
Southern California									13		7		6		86	%
Northern California									5		5		—		—	%
Arizona									2		—		2		NA
Total selling communities									20		12		8		67	%

Average selling communities	20		11		9		82	%	19		12		7		58	%
Monthly sales absorption rate per community⁽¹⁾	2.2		2.5		(0.3	)	(12	)%	2.7		2.8		(0.1	)	(4	)%
Cancellation rate	12	%	11	%	1	%	NA		8	%	9	%	(1	)%	NA

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

Net new home orders for the 2018 third quarter increased 63% as compared to the same period in 2017 as a result of an 82% increase in average selling communities, partially offset by a decline in the monthly sales absorption rate. The change in monthly sales absorption pace was driven primarily by Northern California, where monthly sales per community were 2.3 for the 2018 third quarter compared to 2.9 for the 2017 third quarter. This decline in the monthly sales rate was the result of significant initial order activity in September 2017 at a popular Bay Area townhome community in Milpitas, California. The monthly absorption rate in Southern California decreased slightly to 2.0 sales per community in the 2018 third quarter compared to 2.2 in the 2017 period, which was driven primarily by slower sales at two higher-priced communities which have seen a slower demand. Partially offsetting the absorption rate decreases in California were contributions of 2.5 sales per month in the 2018 third quarter from our Arizona operation, which was largely driven by our new Belmont community in Gilbert.

Net new home orders for the nine months ended September 30, 2018 were up 53% compared to the 2017 period, resulting from a 58% increase in average selling communities from 12 to 19. Buyer demand for the nine months ended September 30, 2018 was solid with a year-to-date monthly absorption rate of 2.7, nearly even with a rate of 2.8 for the prior year period. The slight decline in monthly sales per community for the nine months ended September 30, 2018 was primarily impacted by slower sales at several higher-end communities in Southern California and one in Arizona.

The Company's cancellation rate was 12% for the three months ended September 30, 2018 as compared to 11% in the prior year period, and a cancellation rate of 8% for the nine months ended September 30, 2018 as compared to 9% for the same period in 2017. We believe our cancellation rate is one of the lowest in the industry due to many factors, including loan prequalifying buyers before ratifying sales contracts, the high level of personalized options that our homebuyers select, which creates emotional attachment, and a higher proportion of affluent buyers with strong credit profiles. As we transition to more affordably-priced product, our cancellation rate may increase moderately.

Backlog



	As of September 30,
	2018					2017					% Change
	Homes	Dollar Value		Average Price		Homes	Dollar Value		Average Price		Homes		Dollar Value		Average Price
	(Dollars in thousands)
Southern California	139	$	155,054	$	1,115	103	$	274,037	$	2,661	35	%	(43	)%	(58	)%
Northern California	140	123,912		885		79	56,602		716		77	%	119	%	24	%
Arizona	30	31,856		1,062		—	—		—		NA		NA		NA
Total	309	$	310,822	$	1,006	182	$	330,639	$	1,817	70	%	(6	)%	(45	)%

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 September 30, 2018 was up 70% as compared to the prior year period primarily due to a 53% increase in net orders resulting from a higher average community count. Conversely, the dollar value of backlog was down 6% year-over-year to $310.8 million primarily due to a 45% decrease in average selling price, as a result of increased order activity from new communities with more affordable product.

The year-over-year decline in the Company's average selling price of homes in backlog was largely driven by the mix of backlog homes in Southern California as we expand our product offerings to include more affordably-priced communities. The 2017 third quarter backlog included homes from two higher-priced luxury communities located in Newport Coast, CA that closed out in the 2017 fourth quarter. The decline in Southern California backlog value was partially offset by a 119% increase in Northern California backlog value. Northern California backlog units and average selling prices were up year-over-year 77% and 24%, respectively, primarily resulting from our Bay Area townhome community in Milpitas that opened in the 2017 third quarter with average selling prices of approximately $1.2 million.

Lots Owned and Controlled



	September 30,		Increase/(Decrease)
	2018	2017	Amount		%
Lots Owned:
Southern California	545	579	(34	)	(6	)%
Northern California	699	268	431		161	%
Arizona	299	—	299		NA
Total	1,543	847	696		82	%
Lots Controlled:⁽¹⁾
Southern California	292	348	(56	)	(16	)%
Northern California	579	669	(90	)	(13	)%
Arizona	489	339	150		44	%
Total	1,360	1,356	4		—	%
Total Lots Owned and Controlled - Wholly Owned	2,903	2,203	700		32	%
Fee Building⁽²⁾	959	815	144		18	%
Total Lots Owned and Controlled	3,862	3,018	844		28	%


(1)	Includes lots that we control under purchase and sale agreements or option agreements subject to customary conditions and have not yet closed. There can be no assurance that such acquisitions will occur.


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

Consistent with our focus on growing our wholly owned business, the Company increased the number of wholly owned lots owned and controlled by 32% year-over-year to 2,903 lots, 47% of which were controlled through option contracts. The increase in wholly owned lots owned and controlled was primarily due to contracts entered into during the last twelve months ended September 30, 2018 for new developments across all markets. In Northern California, the Company executed an agreement for a new development with multiple planning areas for 418 lots in Vacaville, CA. In Southern California, contracts were executed for two communities for total control of 176 lots within the Inland Empire. Purchase agreements for three new

communities in the greater Phoenix area were executed for a total of 441 lots increasing our geographic footprint in the Arizona market.

The increase in fee building lots at September 30, 2018 as compared to the prior year period was primarily attributable to new contracts entered into during the last twelve months ended September 30, 2018, for 703 lots, including construction management contracts the company entered into with a new customer during the 2018 second quarter totaling 165 lots across five communities. These fee lot additions were largely offset by the delivery of 559 homes to customers in the same period.

Home Sales Revenue and New Homes Delivered



	Three Months Ended September 30,
	2018					2017					% Change
	Homes	Dollar Value		Average Price		Homes	Dollar Value		Average Price		Homes		Dollar Value		Average Price
	(Dollars in thousands)
Southern California	75	$	72,232	$	963	39	$	79,494	$	2,038	92	%	(9	)%	(53	)%
Northern California	55	47,642		866		45	35,128		781		22	%	36	%	11	%
Total	130	$	119,874	$	922	84	$	114,622	$	1,365	55	%	5	%	(32	)%

	Nine Months Ended September 30,
	2018					2017					% Change
	Homes	Dollar Value		Average Price		Homes	Dollar Value		Average Price		Homes		Dollar Value		Average Price
	(Dollars in thousands)
Southern California	180	$	204,090	$	1,134	88	$	190,696	$	2,167	105	%	7	%	(48	)%
Northern California	131	112,681		860		114	90,261		792		15	%	25	%	9	%
Total	311	$	316,771	$	1,019	202	$	280,957	$	1,391	54	%	13	%	(27	)%

New home deliveries increased 55% for the 2018 third quarter compared to the prior year period. The increase in deliveries was the result of a higher number of homes in backlog at the beginning of the period and an increase in net new home orders during the period. Home sales revenue for the three months ended September 30, 2018 increased 5% compared to the same period in 2017, primarily due to the 55% increase in new home deliveries, which was partially offset by a 32% lower average sales price per delivery for the period. The year-over-year decrease in average sales price related to the Company's strategic broadening of its homebuilding portfolio, particularly in Southern California, to include more affordably-priced product and grow in community count. Additionally, the average selling price for Southern California during the 2017 third quarter was influenced by deliveries from higher-priced luxury product from one community in Newport Coast, CA that delivered four homes with an average price of over $7 million.

New home deliveries increased 54% for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 due to a higher number of homes in backlog at December 31, 2017 and an increase in net new home orders during the 2018 nine month period. Home sales revenue for the nine months ended September 30, 2018 increased 13% compared to the same 2017 period primarily due to the significant increase in new home deliveries, which was partially offset by a 27% lower average sales price per delivery for the period. The year-over-year decrease in average sales price related to the product mix shift discussed above.

Homebuilding Gross Margin

Homebuilding gross margin for the 2018 third quarter was 14.8% versus 16.3% in the prior period. The 150 basis point decline in home sales gross margin was primarily due to higher interest costs, and to a lesser extent, a product mix shift. Adjusted homebuilding gross margin, which excludes impairments and interest in cost of home sales, was 18.4% for both the 2018 and 2017 third quarters, notwithstanding a considerable shift in the product mix of homes delivered. Adjusted homebuilding gross margin is a non-GAAP measure. See the table below reconciling this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent. The year-over-year mix shift included, among other things, significant deliveries in the 2018 third quarter from from two higher-margin townhome communities, as compared to more deliveries from various higher-priced product in Southern California, including a luxury community in Newport Coast, CA, for the 2017 third quarter.

Homebuilding gross margin for the nine months ended September 30, 2018 was 13.3%, compared to 14.6% for the 2017 period. The decrease in homebuilding gross margin was primarily due to higher interest costs and to a lesser extent, a product mix shift. During the nine month period for 2017, the Company incurred $1.3 million of impairment charges related to one community in Southern California compared to no impairment charges during the 2018 nine month period. Before impairments, home sales gross margin declined 180 basis points during the nine months ended September 30, 2018 compared to the same period in 2017. Excluding home sales impairments and interest in cost of home sales, the adjusted homebuilding gross margin percentages for the nine months ended September 30, 2018 and 2017 were 16.8% and 17.1%, respectively.



	Three Months Ended September 30,								Nine Months Ended September 30,
	2018		%		2017		%		2018		%		2017		%
	(Dollars in thousands)
Home sales revenue	$	119,874	100.0	%	$	114,622	100.0	%	$	316,771	100.0	%	$	280,957	100.0	%
Cost of home sales	102,124		85.2	%	95,992		83.7	%	274,496		86.7	%	239,845		85.4	%
Homebuilding gross margin	17,750		14.8	%	18,630		16.3	%	42,275		13.3	%	41,112		14.6	%
Add: Home sales impairments	—		—	%	—		—	%	—		—	%	1,300		0.5	%
Homebuilding gross margin before impairments⁽¹⁾	17,750		14.8	%	18,630		16.3	%	42,275		13.3	%	42,412		15.1	%
Add: Interest in cost of home sales	4,296		3.6	%	2,448		2.1	%	10,810		3.5	%	5,719		2.0	%
Adjusted homebuilding gross margin⁽¹⁾	$	22,046	18.4	%	$	21,078	18.4	%	$	53,085	16.8	%	$	48,131	17.1	%

(1)

Homebuilding gross margin before impairments and adjusted homebuilding gross margin (or homebuilding gross margin before impairments and interest in cost of home sales) are non-GAAP financial measures. We believe this information is meaningful as it isolates the impact that home sales impairments and leverage have on homebuilding gross margin and permits investors to make better comparisons with our competitors who also break out and adjust gross margins in a similar fashion.

Fee Building



	Three Months Ended September 30,								Nine Months Ended September 30,
	2018		%		2017		%		2018		%		2017		%
	(Dollars in thousands)
Fee building revenues	$	39,240	100.0	%	$	43,309	100.0	%	$	121,129	100.0	%	$	146,107	100.0	%
Cost of fee building	38,124		97.2	%	41,808		96.5	%	117,861		97.3	%	141,633		96.9	%
Fee building gross margin	$	1,116	2.8	%	$	1,501	3.5	%	$	3,268	2.7	%	$	4,474	3.1	%

Our fee building revenues include (i) billings to third-party land owners for general contracting services and (ii) management fees from our unconsolidated joint ventures and third-party land owners for construction and sales management services. Cost of fee building includes (i) labor, subcontractor, and other indirect construction and development costs that are reimbursable by the land owner and (ii) general and administrative, or G&A, expenses that are attributable to fee building activities and joint venture management overhead. Besides allocable G&A expenses, there are no other material costs associated with management fees from our unconsolidated joint ventures.

Billings to land owners for general contracting services are a function of construction activity and reimbursable costs are incurred generally once home construction begins. The total billings and reimbursable costs are driven by the pace at which the land owner executes its development plan. Management fees from our unconsolidated joint ventures are collected over the underlying project's life and as homes and lots are delivered. Construction management fees from third-party customers are collected over the life of the contract and sales management fees from third-party customers are collected as homes close escrow.

In the 2018 third quarter, fee building revenues decreased 9% from the prior year period, primarily due to a decrease in construction activity at fee building communities with higher fee arrangements. Included in fee building revenues for the three months ended September 30, 2018 and 2017 were (i) $37.5 million and $42.0 million of billings to land owners, respectively, and (ii) $1.7 million and $1.3 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively. Our fee building revenues have historically been concentrated with a small number of customers. For the three months ended September 30, 2018 and 2017, one customer comprised 93% and 97%, respectively, of fee building revenue.

The cost of fee building decreased in the 2018 third quarter compared to the same period in 2017 due to the differences in the volume of homes within each development phase of construction. The amount of G&A expenses included in the cost of fee building was $1.9 million for each the 2018 and 2017 third quarters. Fee building gross margin percentage decreased to 2.8% for the three months ended September 30, 2018 from 3.5% in the prior year period due to changes in certain fee building business agreements from a percentage of cost fee to a per-unit fixed fee arrangement, partially offset by the increase in management fees from third-party land owners.

For the nine months ended September 30, 2018, fee building revenues decreased 17% from the prior year period primarily due to a decrease in costs incurred from fee building activity resulting from a lower number of homes under construction during the period as well as lower fee arrangements. Included in fee building revenues for the nine months ended September 30, 2018 and 2017 were (i) $117.0 million and $142.4 million of billings to land owners, respectively, and (ii) $4.1 million and $3.8 million of management fees from our unconsolidated joint ventures and third-party land owners, respectively. For the nine months ended September 30, 2018 and 2017, one customer comprised 95% and 97%, respectively, of fee building revenue.

For the nine months ended September 30, 2018, cost of fee building decreased due to the decrease in fee building activity, compared to the same period during 2017. The amount of G&A expenses included in the cost of fee building was $5.3 million and $6.5 million for the nine months ended September 30, 2018 and 2017, respectively. Fee building gross margin percentage decreased to 2.7% for the nine months ended September 30, 2018 from 3.1% in the 2017 period due lower fee revenue and a change in the fee building business arrangements discussed above, partially offset by lower allocated G&A expenses.

Selling, General and Administrative Expenses



	Three Months Ended September 30,				As a Percentage of Home Sales Revenue				Nine Months Ended September 30,				As a Percentage of Home Sales Revenue
	Three Months Ended September 30,				As a Percentage of Home Sales Revenue				Nine Months Ended September 30,				As a Percentage of Home Sales Revenue
	2018		2017		2018		2017		2018		2017		2018		2017
	(Dollars in thousands)
Selling and marketing expenses	$	9,206	$	6,860	7.7	%	6.0	%	$	25,311	$	18,237	8.0	%	6.5	%
General and administrative expenses ("G&A")	6,184		6,465		5.1	%	5.6	%	18,182		17,150		5.7	%	6.1	%
Total selling, marketing and G&A ("SG&A")	$	15,390	$	13,325	12.8	%	11.6	%	$	43,493	$	35,387	13.7	%	12.6	%

During the 2018 third quarter, our SG&A rate as a percentage of home sales revenue increased 120 basis points to 12.8%, from 11.6% for the same period in 2017. The increase was primarily due to higher selling and marketing costs related to advertising for recently opened communities, increased master marketing fees, higher co-broker commissions, and increased sales personnel costs associated with community count growth. In addition, the increase also included a net $0.2 million increase in selling and marketing expenses in the 2018 third quarter related to accounting changes from the adoption of ASC 606, the updated revenue recognition standard. Partially offsetting the increases was a 50 basis point improvement in G&A rate for the 2018 third quarter primarily attributable to increased home sales revenue and lower compensation-related expenses.

For the nine months ended September 30, 2018, our SG&A expense ratio was 13.7% compared to 12.6% for the same period in 2017. The 110 basis point increase was largely attributable to higher selling and marketing costs due to new community ramp up and an increase in co-broker commissions and sales personnel costs. The impact of the adoption of ASC 606 was a net increase of $0.7 million to selling and marketing expenses for the nine months ended September 30, 2018. These increases were partially offset by a lower G&A rate as a percentage of home sales revenues due to increased home sales revenue.

Equity in Net Income of Unconsolidated Joint Ventures

As of September 30, 2018 and 2017, we had ownership interests in 10 and 11 unconsolidated joint ventures, respectively. We own interests in our unconsolidated joint ventures that generally range from 5% to 35% and these interests vary by entity.

The Company’s share of joint venture income was $34,000 for the 2018 third quarter compared to $99,000 for the 2017 period. The reduction in joint venture income was primarily the result of lower gross margins and the mix of joint venture deliveries.

The following sets forth supplemental operational and financial information about our unconsolidated joint ventures. Such information is not included in our financial data for GAAP purposes, but is recognized in our results as a component of equity in net income of unconsolidated joint ventures. This data is included for informational purposes only.



	Three Months Ended September 30,										Nine Months Ended September 30,
	Three Months Ended September 30,					Increase/(Decrease)					Nine Months Ended September 30,					Increase/(Decrease)
	2018			2017		Amount			%		2018		2017			Amount			%
	(Dollars in thousands)
Unconsolidated Joint Ventures - Homebuilding
Operational Data
Net new home orders	41			43		(2		)	(5	)%	119		136			(17		)	(13	)%
New homes delivered	24			50		(26		)	(52	)%	92		115			(23		)	(20	)%
Average sales price of homes delivered	$	1,038		$	905	$	133		15	%	$	936	$	910		$	26		3	%

Home sales revenue	$	24,903		$	45,242	$	(20,339	)	(45	)%	$	86,081	$	104,628		$	(18,547	)	(18	)%
Land sales revenue	30,564			647		29,917			4,624	%	35,278		3,052			32,226			1,056	%
Total revenue	$	55,467		$	45,889	$	9,578		21	%	$	121,359	$	107,680		$	13,679		13	%
Net income (loss)	$	(169	)	$	426	$	(595	)	(140	)%	$	349	$	(1,092	)	$	1,441		132	%

Selling communities at end of period											7		8			(1		)	(13	)%
Backlog (dollar value)											$	93,278	$	69,834		$	23,444		34	%
Backlog (homes)											107		83			24			29	%
Average sales price of backlog											$	872	$	841		$	31		4	%

Homebuilding lots owned and controlled											249		398			(149		)	(37	)%
Land development lots owned and controlled											1,913		2,415			(502		)	(21	)%
Total lots owned and controlled											2,162		2,813			(651		)	(23	)%

Provision for Income Taxes

For the three and nine months ended September 30, 2018, the Company recorded income tax provisions of $0.9 million and $0.2 million, respectively. Comparatively, the Company recorded respective tax provisions of $2.7 million and $4.2 million for the three and nine months ended September 30, 2017. The Company's effective tax rate for the three and nine months ended September 30, 2018, was 27.8% and 7.3%, respectively, and 29.5% and 29.2% before discrete items. For the three and nine months ended September 30, 2017, the Company's effective tax rates were 38.1% and 38.5%, respectively, and 38.1% and 38.1% before discrete items. Effective tax rate before discrete items is a non-GAAP measure, please see the table below for a reconciliation to effective tax rate, the nearest GAAP equivalent. The year-over-year decreases of effective tax rates before discrete items for the three and nine month periods were the result of the Tax Cuts and Jobs Act ("Tax Act") enacted in December 2017 that reduced the corporate federal tax rate from a maximum of 35% to a flat 21% rate, effective for 2018.

The effective tax rates for the three and nine months ended September 30, 2018 differ from the federal statutory tax rates due to state income taxes, estimated deduction limitations, and discrete items. Discrete items comprised $0.5 million of the tax benefit for the nine months ended September 30, 2018 and were primarily related to benefits from energy tax credits that were extended in February 2018 for 2017 closings and, to a lesser extent, an adjustment to the Company's deferred tax asset revaluation required as a result of the federal tax rate cut. The effective tax rates for the three and nine months September 30, 2017 differ from the federal statutory tax rates due primarily to state income taxes, offset partially by the benefit from production activities.

The Tax Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. In accordance with ASC 740, Income Taxes ("ASC 740"), the consolidated provision for income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. As a result of the reduction in the corporate income tax rate from 35% to 21% under the Tax Act, the Company revalued its net deferred tax asset at December 31, 2017 and recorded a noncash, provisional charge of $3.2 million, which was included in the tax provision for fiscal 2017. The Company is currently analyzing the effects

of the Tax Act and will update this provisional rate as it completes its analysis. During the 2018 first quarter, the Company recorded an immaterial adjustment to the provisional amount and no such adjustment was made in the 2018 second or third quarters. Our accounting for the tax effects of the Tax Act will be completed during the one-year measurement period from the date of the Tax Act enactment, as allowed by the SEC.

As part of the Tax Act, the Company will no longer be able to take certain tax deductions for production activities that reduced our effective tax rate in prior years. Additionally, the Company will be subject to increased deduction limitations on certain executive compensation.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands)
Effective tax rate for The New Home Company Inc.:
Pretax income	$	3,400		$	6,974		$	2,071		$	10,839
Provision for income taxes	$	(944	)	$	(2,656	)	$	(151	)	$	(4,168	)
Effective tax rate⁽¹⁾	27.8		%	38.1		%	7.3		%	38.5		%

Effective tax rate for The New Home Company Inc. before discrete items:
Provision for income taxes	$	(944	)	$	(2,656	)	$	(151	)	$	(4,168	)
Adjustment for discrete items	(60		)	(1		)	(454		)	39
Provision for income taxes before discrete items	$	(1,004	)	$	(2,657	)	$	(605	)	$	(4,129	)
Effective tax rate for The New Home Company Inc. before discrete items⁽¹⁾	29.5		%	38.1		%	29.2		%	38.1		%

⁽¹⁾Effective tax rate is computed by dividing the provision for income taxes by pretax income.

Liquidity and Capital Resources

Overview

Our principal sources of capital for the nine months ended September 30, 2018 were cash generated from home sales activities, borrowing from our credit facility, distributions from our unconsolidated joint ventures, and management fees from our fee building agreements. Our principal uses of capital for the nine months ended September 30, 2018 were land purchases, land development, home construction, contributions and advances to our unconsolidated joint ventures, repurchases of the Company's common stock and payment of operating expenses and routine liabilities.

Cash flows for each of our communities depend on their stage in the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our real estate inventories and not recognized in our consolidated statement of operations until a home is delivered, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with home and land construction were previously incurred. From a liquidity standpoint, we are actively acquiring and developing lots to increase our lot supply and community count. As we continue to expand our business, we expect cash outlays for land purchases, land development and home construction at times to exceed cash generated by operations.

We ended the third quarter of 2018 with $44.1 million of cash and cash equivalents, a $79.5 million decrease from December 31, 2017, primarily due to land acquisition and development and home construction costs in excess of proceeds from home sales during the first nine months of 2018. We expect to generate cash from the sale of our inventory, but intend to redeploy the net 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.

As of September 30, 2018 and December 31, 2017, we had $12.6 million and $11.3 million, respectively, in accounts payable that related to costs incurred under our fee building agreements. Funding to pay these amounts is the obligation of the third-party land owner, which is generally funded on a monthly basis. Similarly, contracts and accounts receivable and due from affiliates as of the same dates included $14.4 million and $11.6 million, respectively, related to the payment of the above payables.

We intend to utilize both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from continuing operations, to provide us with the financial flexibility to operate our business. In that regard, we expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. As of September 30, 2018, we had outstanding borrowings of $325.0 million in aggregate principal related to our senior notes and $62.0 million related to our credit facility. We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the ability of particular assets, and our company as a whole, to generate cash flow to cover the expected debt service. In addition, our debt contains certain financial covenants that limit the amount of leverage we can maintain.

We intend to finance future acquisitions and developments with what we believe to be the most advantageous source of capital available to us at the time of the transaction, which may include unsecured corporate level debt, property-level debt, and other public, private or bank debt, or common and preferred equity.

Senior Notes Due 2022

On March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Unsecured Notes due 2022 (the "Existing Notes"), in a private placement. The Notes were issued at an offering price of 98.961% of their face amount, which represents a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on private placement offering through the sale of an additional $75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes"). The Additional Notes were issued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is payable semiannually in arrears on April 1 and October 1. The Notes will mature on April 1, 2022. The Notes were exchanged in an exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act of 1933, as amended and are freely tradeable in accordance with applicable law.

The Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. The leverage and interest coverage conditions are summarized in the table below, as described and defined further in the indenture for the Notes. Exceptions to the additional indebtedness limitation include, among other things, borrowings of up to $260 million under existing or future bank credit facilities, non-recourse indebtedness, and indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 2017 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of $15 million. The Notes are guaranteed by all of the Company's 100% owned subsidiaries, for more information about these guarantees, please see Note 17 of the notes to our condensed consolidated financial statements.



	September 30, 2018
Financial Conditions	Actual	Requirement

Fixed Charge Coverage Ratio: EBITDA to Consolidated Interest Incurred; or	1.8	> 2.0 : 1.0
Leverage Ratio: Indebtedness to Tangible Net Worth	1.48	< 2.25 : 1.0

As of September 30, 2018, we were able to satisfy the leverage condition.

Senior Unsecured Revolving Credit Facility

As of September 30, 2018, we had $62.0 million outstanding borrowings under the Credit Facility. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin ranging from 2.25% to 3.00% depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter. As of September 30, 2018, the interest rate under the Credit Facility was 5.26%. Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as defined in the Credit Facility, including, but not limited to, those listed in the following table.



	September 30, 2018
Financial Covenants	Actual		Covenant Requirement
	(Dollars in thousands)
Unencumbered Liquid Assets (Minimum Liquidity Covenant)	$	44,070	$	10,000	⁽¹⁾
EBITDA to Interest Incurred⁽²⁾	1.78		> 1.75 : 1.0
Tangible Net Worth	$	258,139	$	187,395
Leverage Ratio	57%		< 65%
Adjusted Leverage Ratio⁽³⁾	NA		NA

(1)

So long as the Company is in compliance with the interest coverage test, the minimum unencumbered liquid assets that the Company must maintain as of the quarter end measurement date is $10 million. If the Company is not in compliance with the interest coverage test, the minimum liquidity requirement as of each quarter end measurement date is not less than the trailing 12 month consolidated interest incurred. As of September 30, 2018, the trailing 12 month consolidated interest incurred totaled $27.4 million.


(2)	If the test is not met, it will not be considered an event of default so long as the Company maintains unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred.

(3)

Adjusted Leverage Ratio is computed as total joint venture debt divided by total joint venture equity. The Adjusted Leverage Ratio requirement ceases to apply as of and after the fiscal quarter in which consolidated tangible net worth is at least $250 million. During any period when the Adjusted Leverage Ratio ceases to apply, consolidated tangible net worth shall be reduced by an adjustment equal to the aggregate amount of investments in and advance to unconsolidated joint ventures that exceed 35% of consolidated tangible net worth as calculated without giving effect to this adjustment (the "Adjustment Amount"). As of September 30, 2017, the Company's consolidated tangible net worth exceeded $250 million and therefore the Adjusted Leverage Ratio ceased to apply. In addition, the Adjustment Amount was considered in the calculation of consolidated tangible net worth.

As of September 30, 2018, we were in compliance with all financial covenants under our Credit Facility.

Stock Repurchase Program

On May 10, 2018, our board of directors approved a stock repurchase program (the "Repurchase Program") authorizing the repurchase of the Company's common stock with an aggregate value of up to $15 million. Repurchases of the Company's common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in block trades or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The Repurchase Program does not obligate the Company to repurchase any particular amount or number of shares of common stock, and it may be modified, suspended or discontinued at any time. The timing and amount of repurchases are determined by the Company’s management at its discretion and be based on a variety of factors, such as the market price of the Company’s common stock, corporate and contractual requirements, general market and economic conditions and legal requirements. As of September 30, 2018, the Company had repurchased and retired 623,611 shares totaling $5.8 million and had remaining authorization to purchase $9.2 million of common shares.

Debt-to-Capital Ratios

We believe that debt-to-capital ratios provide useful information to the users of our financial statements regarding our financial position and leverage. Net debt-to-capital ratio is a non-GAAP financial measure. See the table below reconciling this non-GAAP measure to debt-to-capital ratio, the nearest GAAP equivalent.



	September 30,			December 31,
	2018			2017
	(Dollars in thousands)
Total debt, net	$	381,775		$	318,656
Equity, exclusive of non-controlling interest	258,139			263,990
Total capital	$	639,914		$	582,646
Ratio of debt-to-capital⁽¹⁾	59.7		%	54.7		%

Total debt, net	$	381,775		$	318,656
Less: cash, cash equivalents and restricted cash	44,865			123,970
Net debt	336,910			194,686
Equity, exclusive of non-controlling interest	258,139			263,990
Total capital	$	595,049		$	458,676
Ratio of net debt-to-capital⁽²⁾	56.6		%	42.4		%


(1)	The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt, net by total capital (the sum of total debt, net plus equity), exclusive of non-controlling interest.

(2)

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

Cash Flows — Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

For the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, the comparison of cash flows is as follows:

•

Net cash used in operating activities was $136.0 million for the nine months ended September 30, 2018 versus $160.7 million for the nine months ended September 30, 2017. The year-over-year change was primarily a result of a net decrease in cash outflow related to real estate inventories to $138.6 million for the 2018 period compared to $179.6 million for the 2017 period. The change in real estate inventories cash flow was driven by the timing of land takedowns and increased proceeds from home sales in the 2018 period. Partially offsetting the positive impact from real estate inventories was a net decrease in cash inflows of $6.8 million due to the timing of trade account payments, accounts receivable collections and payment of accrued liabilities in the 2018 period, and a decrease in cash inflows of $4.8 million related to lower net income for the nine months ended September 30, 2018.

•

Net cash provided by investing activities was $1.6 million for the nine months ended September 30, 2018 compared to net cash used in investing activities of $6.3 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, net distributions from unconsolidated joint ventures were $1.6 million compared to net contributions and advances to unconsolidated joint ventures of $7.6 million for the nine months ended September 30, 2017.

•

Net cash provided by financing activities was $55.3 million for the nine months ended September 30, 2018 versus $198.6 million for the nine months ended September 30, 2017. The higher amount in 2017 reflects the net proceeds from the issuance of $325.0 million of our Senior Notes due 2022 while the 2018 period includes net borrowings of $62.0 million from our credit facility, partially offset by cash outflows of $5.8 million for share repurchases.

Off-Balance Sheet Arrangements and Contractual Obligations

Option Contracts

In the ordinary course of business, we enter into land option contracts in order to procure lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchase contracts typically require a cash deposit and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, to reduce the use of funds from our corporate financing sources, and to enhance our return on capital. Option contracts generally require a nonrefundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. We generally have the right at our discretion to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash deposit with no further financial responsibility to the land seller. In some instances, we may also expend funds for due diligence and development activities with respect to our option contracts prior to purchase which we would have to write off should we not purchase the land. As of September 30, 2018, we had $16.8 million of nonrefundable and $0.9 million of refundable cash deposits pertaining to land option contracts and purchase contracts with an estimated aggregate remaining purchase price of $194.9 million, net of deposits ("Aggregate Remaining Purchase Price"). These cash deposits are included as a component of our real estate inventories in our condensed consolidated balance sheets. In addition, the Company has agreed to liquidated damages of up to $9.1 million should the Company not fulfill its obligations under a contract to control $50.9 million of land under an option contract, which is included in the Aggregate Remaining Purchase Price noted above.

Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.

Joint Ventures

We enter into land development and homebuilding joint ventures from time to time as means of:


•	leveraging our capital base


•	accessing larger or desirable lot positions


•	expanding our market opportunities


•	managing financial and market risk associated with land holdings


•	establishing strategic alliances

These joint ventures have historically obtained secured acquisition, development and/or construction financing which reduces the use of funds from our corporate financing sources.

The Company has provided credit enhancements in connection with joint venture borrowings in the form of loan-to-value ("LTV") maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the Company's liability under such LTV maintenance agreements. The loans underlying the LTV maintenance agreements comprise acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of September 30, 2018 and December 31, 2017, $40.1 million and $38.6 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was $6.7 million as of September 30, 2018 and December 31, 2017. In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion guaranties. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion guaranties to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender

that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from customary "bad boy acts" of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy.

For more information about our off-balance sheet arrangements, please see Note 11 to our condensed consolidated financial statements.

As of September 30, 2018, we held membership interests in 10 unconsolidated joint ventures, six of which related to homebuilding activities and four related to land development as noted below. We were a party to two loan-to-value maintenance agreements related to unconsolidated joint ventures as of September 30, 2018. The following table reflects certain financial and other information related to our unconsolidated joint ventures as of September 30, 2018:



			September 30, 2018
	Year Formed	Location		Total Joint Venture						NWHM Equity ₍₂₎		Debt-to-Total Capital-ization		Loan-to- Value Maintenance Agreement	Future Capital Commitment₍₃₎		Lots Owned and Controlled
Joint Venture (Project Name)	Year Formed	Location	Ownership %	Assets		Debt⁽¹⁾		Equity		NWHM Equity ₍₂₎		Debt-to-Total Capital-ization		Loan-to- Value Maintenance Agreement	Future Capital Commitment₍₃₎		Lots Owned and Controlled
				(Dollars in 000's)
TNHC-HW San Jose LLC (Orchard Park)	2012	San Jose, CA	15%	2,152		—		343		103		—	%	N/A	—		—
TNHC-TCN Santa Clarita LP (Villa Metro)⁽⁴⁾	2012	Santa Clarita, CA	10%	830		—		273		68		—	%	N/A	—		—
TNHC Newport LLC (Meridian)⁽⁴⁾	2013	Newport Beach, CA	12%	2,028		—		1,616		292		—	%	N/A	—		—
Encore McKinley Village LLC (McKinley Village)	2013	Sacramento, CA	10%	78,735		22,486		51,976		5,200		30	%	Yes	—		184
TNHC Russell Ranch LLC (Russell Ranch)⁽⁴⁾⁽⁵⁾	2013	Folsom, CA	35%	81,546		1,153		65,833		23,129		2	%	No	7,635		476
TNHC-HW Foster City LLC (Foster Square)⁽⁵⁾	2013	Foster City, CA	35%	1,317		—		1,006		468		—	%	N/A	—		—
Calabasas Village LP (Avanti)⁽⁴⁾	2013	Calabasas, CA	10%	36,789		6,142		29,789		2,979		17	%	No	—		18
TNHC-HW Cannery LLC (Cannery Park)⁽⁵⁾	2013	Davis, CA	35%	7,588		—		6,108		2,138		—	%	N/A	—		16
Arantine Hills Holdings LP (Bedford)⁽⁴⁾⁽⁵⁾	2014	Corona, CA	5%	198,806		15,615		171,380		8,570		8	%	No	1,080		1,421
TNHC Mountain Shadows LLC (Mountain Shadows)	2015	Paradise Valley, AZ	25%	58,752		23,574		31,984		8,533		42	%	Yes	—		47
Total Unconsolidated Joint Ventures				$	468,543	$	68,970	$	360,308	$	51,480	16	%		$	8,715	2,162


(1)	The carrying value of the debt is presented net of $0.5 million in unamortized debt issuance costs. Scheduled maturities of the unconsolidated joint venture debt as of September 30, 2018 are as follows: $53.5 million matures in 2019 and $16.0 million matures in 2020. The Mountain Shadows project has multiple debt instruments, some of which do not have LTV maintenance agreements.


(2)	Represents the Company's equity in unconsolidated joint ventures. Equity does not include $1.9 million of interest capitalized to certain investments in unconsolidated joint ventures which along with equity, are included in investments in and advances to unconsolidated joint ventures in the accompanying condensed consolidated balance sheets.


(3)	Estimated future capital commitment represents our proportionate share of estimated future contributions to the respective unconsolidated joint ventures as of September 30, 2018. Actual contributions may differ materially.


(4)	Certain current and former members of the Company's board of directors are affiliated with entities that have an investment in these joint ventures. See Note 12 to the condensed consolidated financial statements.


(5)	Land development joint venture.

As of September 30, 2018, the unconsolidated joint ventures were in compliance with their respective loan covenants, where applicable, and we were not required to make any loan-to-value maintenance related payments during the three and nine months ended September 30, 2018.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes five to nine months to construct a new home, we typically deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and a higher level of cash receipts from home deliveries occurs during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future.

Our critical accounting estimates and policies have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2017 with the exception of our critical accounting policies for "Home Sales Revenue and Cost of Home Sales" and "Fee Building" which were updated upon the Company's adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) on January 1, 2018. Please see below for the updated policies.

Homes Sales Revenue and Cost of Homes Sales

In accordance with ASC 606, homebuilding revenue is recognized when our performance obligations within the underlying sales contracts are fulfilled. We consider our obligations fulfilled when closing conditions are complete, title has transferred to the homebuyer, and collection of the purchase price is reasonably assured. Sales incentives are recorded as a reduction of revenues when the respective home is closed. Cost of sales is recorded based upon total estimated costs to be allocated to each home within a community. Any changes to the estimated costs are allocated to the remaining undelivered lots and homes within their respective community. The estimation and allocation of these costs requires a substantial degree of judgment by management.

The estimation process involved in determining relative sales or fair values is inherently uncertain because it involves estimating future sales values of homes before sale and delivery. Additionally, in determining the allocation of costs to a particular land parcel or individual home, we rely on project budgets that are based on a variety of assumptions, including assumptions about construction schedules and future costs to be incurred. It is common that actual results differ from budgeted amounts for various reasons, including construction delays, increases in costs that have not been committed or unforeseen issues encountered during construction that fall outside the scope of existing contracts, or costs that come in less than originally anticipated. While the actual results for a particular construction project are accurately reported over time, a variance between the budget and actual costs could result in the understatement or overstatement of costs and have a related impact on gross margins between reporting periods. To reduce the potential for such variances, we have procedures that have been applied on a consistent basis, including assessing and revising project budgets on a periodic basis, obtaining commitments from subcontractors and vendors for future costs to be incurred, and utilizing the most recent information available to estimate costs. We believe that these policies and procedures provide for reasonably dependable estimates for purposes of calculating amounts to be relieved from inventories and expensed to cost of sales in connection with the delivery of homes.

Fee Building

The Company enters into fee building agreements to provide services whereby it builds homes on behalf of third-party property owners. The third-party property owner funds all project costs incurred by the Company to build and sell the homes. The Company primarily enters into cost plus fee contracts where it charges third-party property owners for all direct and indirect costs plus a fee. The fee is typically a per-unit fixed fee or based on a percentage of the cost or home sales revenue of the project depending on the terms of the agreement with the third-party property owner. For these types of contracts, the Company recognizes revenue based on the actual total costs it has incurred plus the applicable fee. In accordance with ASC 606, we apply the percentage-of-completion method, using the cost-to-cost approach, as it most accurately measures the progress of our efforts in satisfying our obligations within the fee building agreements. Under this approach, revenue is earned

in proportion to total costs incurred, divided by total costs expected to be incurred. In the course of providing fee building services, the Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are passed through to the property owners and, in accordance with GAAP, are included in the Company’s revenue and cost of sales.

The Company also provides construction management and coordination services and sales and marketing services as part of agreements with third parties and its unconsolidated joint ventures. Within these agreements, the Company does not bear any financial risks. In certain contracts, the Company also provides project management and administrative services. For most services provided, the Company fulfills its related obligations as time-based measures, according to the input method guidance described in ASC 606. Accordingly, revenue is recognized on a straight-line basis as the Company's efforts are expended evenly throughout the performance period. The Company may also have an obligation to manage the home or lot sales process as part of providing sales and marketing services. This obligation is considered fulfilled when related homes or lots close escrow, as these events represent milestones reached according to the output method guidance described in ASC 606. Accordingly, revenue is recognized in the period that the corresponding lots or homes close escrow. Costs associated with these services are recognized as incurred.

Recently Issued Accounting Standards

The portion of Note 1 to the accompanying notes to unaudited condensed consolidated financial statements under the heading "Recently Issued Accounting Standards" included in this quarterly report on Form 10-Q is incorporated herein by reference.

JOBS Act

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

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



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

There has been no material change to the information about our market risk is disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.



Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

At the end of the period being reported upon, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2018.

Changes in Internal Controls

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The following Risk Factor under the heading "Risks Related to Ownership of Our Common Stock" is added to the risk factors disclosed under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Risks Related to Ownership of Our Common Stock

Non-U.S. holders may be subject to United States federal income tax on gain realized on the sale or

disposition of shares of our common stock.

We believe that we are a “United States real property holding corporation,” or USRPHC, for United States

federal income tax purposes. If we are a USRPHC, Non-U.S. Holders (as defined below) may be subject to United States federal income tax (including withholding tax) upon a sale or disposition of our common stock, if (i) our common stock is not regularly traded on an established securities market, or (ii) our common stock is regularly traded on an established securities market, and the Non-U.S. Holder owned, actually or constructively, common stock with a fair market value of more than 5% of the total fair market value of such common stock throughout the shorter of the five-year period ending on the date of the sale or other disposition or the Non-U.S. Holder’s holding period for such common stock.

For purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of our common stock that is neither a “U.S. person” nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:


•	an individual who is a citizen or resident of the United States;


•	a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;


•	an estate, the income of which is subject to U.S. federal income tax regardless of its source; or


•	a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities



	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs⁽¹⁾	Approximate dollar value of shares that may be purchased under the plans or programs (in thousands)⁽¹⁾
July 1, 2018 to July 31, 2018	—	$	—	—	$	12,932
August 1, 2018 to August 31, 2018	264,710	$	8.80	264,710	$	10,604
September 1, 2018 to September 30, 2018	153,661	$	8.82	153,661	$	9,248
Total	418,371	$	8.80	418,371

(1) On May 10, 2018, our board of directors approved a stock repurchase program (the "Repurchase Program") authorizing the repurchase of the Company's common stock with an aggregate value of up to $15 million. The Repurchase Program was announced on May 14, 2018. Repurchases of the Company's common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in block trades or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The board of directors did not fix any expiration date for the Repurchase Program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit Number		Exhibit Description

3.1		Amended and Restated Certificate of Incorporation of The New Home Company Inc. (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013)

3.2		State of Delaware Certificate of Change of Registered Agent and/or Registered Office (incorporated by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed on August 1, 2016)

3.3		Amended and Restated Bylaws of The New Home Company Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on August 1, 2016)

4.1		Specimen Common Stock Certificate of The New Home Company Inc. (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1 (Amendment No. 10, filed on January 24, 2014))

4.2		Investor Rights Agreement among The New Home Company Inc., TNHC Partners LLC, IHP Capital Partners VI, LLC, WATT/TNHC LLC, TCN/TNHC LP and collectively H. Lawrence Webb, Wayne J. Stelmar, Joseph D. Davis and Thomas Redwitz (incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013)

4.3		Amendment No. 1 to Investor Rights Agreement among The New Home Company Inc., IHP Capital Partners VI, LLC, WATT/TNHC LLC, TCN/TNHC LP, H. Lawrence Webb, Wayne J. Stelmar, Joseph D. Davis and Thomas Redwitz in their individual capacities and as successors in interest to TNHC Partners LLC (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on May 23, 2018)

10.1*		First Amendment to Agreement of Limited Partnership of Arantine Hills Holdings LP, dated July 27, 2018, among TNHC-Arantine GP LLC, Arantine Hills Equity LP and TNHC Land Company LLC.

31.1*		Chief Executive Officer Section 302 Certification of Periodic Report

31.2*		Chief Financial Officer Section 302 Certification of Periodic Report

32.1**		Chief Executive Officer Section 906 Certification of Periodic Report

32.2**		Chief Financial Officer Section 906 Certification of Periodic Report

101*		The following materials from The New Home Company Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.



*	Filed herewith
**	Furnished herewith. The information in Exhibits 32.1 and 32.2 shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act, or the Exchange Act (including this Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.

SIGNATURES

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




				The New Home Company Inc.

				By:		/s/ H. Lawrence Webb
						H. Lawrence Webb
						Chief Executive Officer

				By:		/s/ John M. Stephens
						John M. Stephens
						Chief Financial Officer

Date: October 31, 2018

New Home Co Inc. - FORM 10-Q - October 31, 2018

Attached files

New Home Co Inc. Reports