The New Home Company Inc.

Good morning. Welcome to The New Home Company’s earnings conference call.

Earlier today, the company released its financial results for the second quarter 2021. Documents detailing these results are available in the Investor Relations section of the company’s website at nwhm.com.

Before the call begins, I would like to remind everyone that certain statements made in the course of this call, which are not historical facts, are forward-looking statements that involve risks and uncertainties. A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company’s filings made with the SEC, including its most recent Annual Report on Form 10-K and in its quarterly reports on Form 10-Q.

The company undertakes no duty to update these forward-looking statements that are made during the course of this call. Additionally, non-GAAP financial measures may be discussed on this conference call.

Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through The New Home Company’s website and in its filings with the SEC. Hosting the call today is Larry Webb, Executive Chairman; Leonard Miller, President and Chief Executive Officer; and John Stephens, Chief Financial Officer.

With that, I will now turn the call over to Larry.

Thanks, Drew and good morning to everyone joining us on the call today. Last week, we announced that The New Home Company has entered into a definitive agreement with certain funds managed by affiliates of Apollo Global Management to acquire the company in an all-cash transaction for $9 per share.

Our Board of Directors unanimously approved this decision following a thorough review of alternatives to maximize value for its stockholders, ultimately concluding that the proposed transaction with Apollo represented the best way forward for our company and our stockholders. We believe that the proposed transaction will provide our stockholders with immediate liquidity in the form of an all-cash offer at an attractive premium and aligns our company with a highly respected global alternative asset manager with a proven track record of success.

We are excited for this next phase of The New Home Company’s evolution and believe our potential partnership with Apollo can take our company to new heights. In terms of our results this quarter, The New Home Company continued to make progress on a variety of fronts in the second quarter of 2021 and generated earnings of $0.26 per share.

Home sale revenue grew 75% year-over-year, thanks to a 98% increase in new home deliveries. Our home sales gross margin continued to move higher on a year-over-year and sequential basis, coming in at 17.3% for the quarter, as we were successful in implementing price increases ahead of cost inflation.

We are very pleased with these financial results and look forward to carrying this operational momentum forward. In addition, order activity remained healthy in the second quarter, as we averaged 3.3 sales per community per month, a 50% improvement over last year.

Demand continues to outstrip supply in all our markets, putting us in a favorable position with respect to our sales efforts. Similar to last quarter, we intentionally metered sales releases at a number of communities in an effort to raise prices and manage our backlog and construction schedules.

This strategic decision has been instrumental in our ability to improving our operating margin and better align construction starts with sales. Another strategic initiative that has paid off for our company is the product repositioning we undertook to target more affordable segments of the market.

Our goal over the last several years was to bring our award-winning new home designs and customer experience to a wider audience by expanding our product offering to include more affordable product. We believe we have established a presence in this market as well as continuing to offer more traditional move up product.

With most of our competitors trending towards the entry level segments of the market, we believe that there was a great opportunity for New Home to gain share among move up buyers who are looking to get more out of their homes than just a place to live. This belief was further strengthened by the pandemic, which placed an even greater emphasis on how and where we live.

The overall improvement in the housing market at large has been a key factor in our success, but we think our product repositioning has played an equally important role. In terms of the broader market, we continue to see favorable conditions for our business, thanks to the low interest rate environment, improving economic conditions and a low supply of new and existing homes on the market.

With a healthy industry outlook and improved market presence and a significant quarter ending backlog, The New Home Company is well positioned to build on our strong results from the second quarter. With that, I would like to turn it over to Leonard for more color on our operations this quarter.

Thanks and good morning to everyone on the call today. I want to echo Larry’s excitement for the announcement of the proposed Apollo transaction, which we believe represent a great opportunity for our stockholders to maximize the value of their investment in us.

Their vision for the industry and the company aligns with ours, and I am excited to work with their team to build on the significant progress we’ve made. Turning to our results, I am extremely pleased with how our teams performed this quarter as we were able to surpass the high end of our stated guidance for both revenues and gross margin.

This was no easy task considering the well-documented operational challenges that persist in the market today, and I’m appreciative for how our teams executed during the second quarter. As Larry mentioned, homebuilding fundamentals remained strong in all of our markets, characterized by limited supply and a motivated pool of buyers.

We took advantage of this demand by raising prices in all of our communities during the quarter, which led to margin improvement in the quarter and in our homes in backlog. We generally expect more normalized seasonality trends in the back half of the year, while pricing should remain firm, given the ongoing lack of supply we see in our markets.

New home community counts are down significantly year-over-year in our markets and are expected to remain lower, given the robust sales environment and difficulty all builders are having bringing new product to the market. In terms of local market color, Phoenix remains a great example of the opportunities and challenges facing every builder as demand in the market stayed elevated during the quarter, but sales and new home construction were limited by labor and material availability.

Demand continues to be driven by a healthy local economy as well as a steady flow of buyers from other states. Orders in our Arizona operation were up 76% year-over-year for us in the market-driven by higher community count and could have been higher if it were not for the intentional metering of sales we implemented during the quarter.

Our Southern California operations posted the best absorption pace in the quarter for our company at 5.7 orders per community per month. We continue to see buyers migrate to the more affordable segments of this region, which drove strong sales and pricing at our more inland communities during the quarter.

This market is also characterized by a lack of available supply. As total new home community count as of the end of June was down 36% and 38% in the Riverside and LA County markets, respectively, when compared to last year according to the market research firm, Zonda.

Demand trends were also strong in Northern California at both our more affordable and move-up communities as each new phase release was quickly snapped up by buyers during the quarter. We increased our closing volume by 65% year-over-year in the quarter despite the operational challenges that persist, a testament to our Northern California team’s ability to deliver homes in a difficult environment.

Our new division in Denver has transitioned smoothly into our homebuilding platform, and we are extremely optimistic about the opportunities in this market. Similar to Phoenix, Denver is benefiting from in migration to the market as well as solid job growth.

Despite the significant price appreciation Denver has already experienced, we believe there is further upside to pricing relative to other markets given the demographics and the steady growth in high-paying jobs. Overall, it feels like our business in general, is transitioning from a very strong market to a more normalized one characterized by a steady order activity and firm pricing.

We believe that this is a welcome change given the operational challenges of a overheated market composed and look forward to building on our successes from this quarter. Now, I would like to turn it over to John, who will provide more detail on our financial results from the quarter.

Thank you, Leonard and good morning to everyone on the call. For the 2021 second quarter, we generated pre-tax income of $6.1 million as compared to a pre-tax loss of $41.2 million in the prior year second quarter, which included $39 million of inventory and joint venture impairment charges and a $1.1 million in severance charges.

Net income for the 2021 second quarter was $4.8 million or $0.26 per diluted share compared to a net loss of $24.3 million or $1.32 per diluted share in the prior year period. Adjusted net loss for the 2020 second quarter after excluding impairment charges, severance and a net deferred tax asset re-measurement benefit was $706,000 or $0.04 per diluted share.

Our home sales revenue for the 2021 second quarter was $136 million as compared to $78 million in the prior year period. The 75% year-over-year increase was primarily attributable to a 98% increase in deliveries, driven by a significant increase in deliveries from Arizona and Northern California, and to a lesser extent, an increase in Southern California and the addition of our Colorado operation in 2021.

The increase in deliveries was partially offset by a 12% decrease in average selling price, driven by a mix shift to more affordable communities as a larger concentration of our deliveries incurred in Arizona, where the average selling price was $399,000 and fewer deliveries in Southern California as a percentage of the total mix. Our homebuilding gross margin for the second quarter was 17.3% as compared to a negative 9.6% for the prior year second quarter.

The prior year included $19 million in inventory impairment charges and excluding these charges, the homebuilding gross margin was 14.8% in the 2020 second quarter. The 250 basis point increase in gross margin was primarily driven by a 190 basis point reduction in interest in cost of sales as a percentage of home sales revenue and, to a lesser extent, price increases and a mix shift.

The 2021 second quarter also included $730,000 of purchase accounting adjustments related to the acquisition of Epic Homes. Excluding these adjustments, the homebuilding gross margin for the second quarter was 17.8%.

Excluding inventory impairments in the prior year and interest in cost of sales, our adjusted gross margin was 21.4% for the 2021 second quarter compared to 20.8% in the prior year. Our SG&A rate as a percentage of home sales revenue for the second quarter was 12.7% versus 17.1% in the year ago period.

The improvement in the 2021 SG&A rate was largely the result of higher home sales revenue during the quarter and, to a lesser extent, lower amortization of capitalized model costs in Southern California due to a lower community count and a $0.9 million in severance charges in the 2020 second quarter. These items were partially offset by higher personnel cost attributable to incentive compensation and our new Colorado operation and a $706,000 decrease in G&A expenses allocated to the fee building cost of sales compared to the prior year.

Net new orders for the quarter increased 14% to 187 homes compared to 164 in the prior year second quarter. This increase was driven by a 50% increase in absorption rate to 3.3 net orders per month per community and partially offset by a reduction in average community count.

Our cancellation rate for the quarter was 7% compared to 11% in the prior year period. We ended the quarter with a robust backlog of 632 homes, a 169% increase compared to the end of the 2020 second quarter.

The dollar value of homes and backlog at the end of the quarter was $439.4 million, up 160% compared to the prior year second quarter and our highest quarter ending backlog dollar value in the history of our company. In addition, our Arizona and Colorado operations combined to account for over 50% of our backlog dollar value, as we continue to diversify our geographic footprint.

We ended the quarter with 19 active communities compared to 25 in the 2020 second quarter. The reduction in community count was primarily attributable to our California markets, was partially offset by our acquisition of Epic Homes and a 75% increase in our community count in Arizona.

In regard to our balance sheet, we ended the quarter with $117 million in cash, $281 million of debt related to the senior notes due 2025 and no borrowings outstanding under the revolving credit facility. During the quarter, we generated $2.5 million in operating cash flow and spent approximately $33 million on land and land development.

I will now turn the call back to Larry for his concluding remarks.

Thanks, John. The last several years have been quite a journey for The New Home Company, as we transformed the company from a high-end homebuilder operating exclusively in California into a much more diversified builder with operations in three states.

Along the way, we strengthened our balance sheet, streamlined our cost structure and repositioned our product offerings to cater to a deeper pool of buyers. However, our ability to scale the business has always been constrained by our relatively small size and limited capital base.

As a Founder of The New Home Company, I have consistently communicated that building homes and communities was a noble occupation and with that came a responsibility to continually strive for improvement. I would like to thank all the members of The New Home team for accepting this belief.

It is through your hard work and dedication that we have been able to build the company into what it is today, and I’m very appreciative of your efforts. Finally, I’d like to thank our stockholders for their support for the last 7 years.

That concludes our prepared remarks.