The New Home Company Inc.
Q4 2018 Earnings Call Transcript

Published: 15 Feb 2019

[Operator:]

Greetings and welcome to The New Home Company's Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Drew Mackintosh, Investor Relations for The New Home Company. Thank you. You may begin.

[Drew Mackintosh:]

Good morning. Welcome to The New Home Company's earnings conference call. Earlier today, the company released it's financial results for the fourth quarter and full year of 2018. 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 in it's most recent Annual Report on Form 10-K and in it's 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 to 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 it's filings with the SEC. Hosting the call today is Larry Webb, Chief Executive Officer; Leonard Miller, President and Chief Operating Officer; and John Stephens, Chief Financial Officer. With that, I will now turn the call over to Larry.

[Larry Webb:]

Thanks, Drew and good morning to everyone joining us on the call today. This morning, I will provide some high-level thoughts on our company and the state of the housing market. Leonard will then give some additional color on local market conditions, and John will provide more detail on the numbers. Following our prepared remarks, we will open it up for questions. In 2018, we took another step forward in implementing our strategy to reach more buyers to more affordable priced communities. However, the fourth quarter of 2018 proved to be a challenge as potential buyers in our markets exercised a high degree of caution which resulted in slower absorption rates. Several factors contributed to this slowdown including heightened affordability concerns driven by higher home prices and rising interest rates, a decline in the number of foreign buyers in the Southern California market, and reduced buyer confidence due in part to a volatile stock market. These issues combine to create a difficult sales environment for our company and the industry as a whole. That said, we continue to have confidence in the fundamental drivers of our business and the quality of our home offerings. However, we recognize that this sale office may continue for the foreseeable future, and have adjusted our outlook accordingly. This more conservative outlook contributed to impairment charges we took at two Southern California communities, and one-way in development of joint venture in Northern California. The cumulative pre-tax impact of these charges totaled $30 million or roughly 4% of our total assets. While this resulted in a significant loss for us in the quarter, we believe these actions should allow us to turn through these communities at a more accelerated rate. Re-deploy our capital within our existing or new markets and generate cash flow more quickly. In addition to the impairment charges, our more conservative outlook has compelled us to make changes across our business. We are re-evaluating our way in pipeline with increased scrutiny making sure that every deal makes sense in the context of this new demand environment. With over 40% of our lots controlled via option agreement, we can renegotiate with sellers if the market tows [ph] further, or not take down the underlying land to preserve capital if we cannot generate adequate returns. We are actively rebidding many of our projects to make sure we are getting the most competitive prices from our trade partners and suppliers. We have also significantly cut overhead expenses internally and reduced headcount to keep our organization as streamlined as possible. These are difficult steps to take but are necessary in light of the current demand environment. The underlying strength of our company is our experienced management team and we've responded quickly to the slower market conditions to ensure that New Home will be well positioned moving forward. There were some silver linings to the fourth quarter; we saw a slight sequential increase in our sales pace from November to December and again, from December into January. New Home deliveries increased 35% as compared to the fourth quarter of 2017 and would have been higher if not for some construction delay so encountered our C-Block community project imply investor [ph]. These homes remain in backlog and are scheduled to close beginning later in the first quarter. Total backlog at the end of the quarter increased 25% versus last year in terms of unit, and 28% on a dollar value basis to $207 million. And our wholly on community count increased 18% to start 2019 versus 2018. These positives coupled with our ongoing shift to more affordable product and a still favorable economic backdrop for our industry gives us some sense of optimism as we head into the spring selling season. Now I'd like to turn it over to Leonard who'll provide more color on local market conditions.

[Leonard Miller:]

Thanks, Larry and good morning to everyone on the call. As Larry mentioned, we experienced challenging sales conditions across our markets in the fourth quarter as potential buyers exercised a higher degree of caution during what is already a decently slow period for our industry. Net new orders for the 2018 fourth quarter were down 36% as compared to the prior year. Our monthly sales absorption rate for the fourth quarter was 1.2% per community compared to an unseasonably tough comparison in this prior year quarter of 2.3% per community. Our projects in Southern California experienced a pullback in demand driven in part by affordability concerns, as well as a noticeable drop off in foreign buyer activity. While this buyer segment is not currently a large portion of our business, their absence shrink the overall pool of buyers as a whole making each sale more difficult to come by. We are also hampered by construction delays at our C-Block [ph] community which not only pushed out a number of closings into the fourth quarter but also delayed the opening of our sales models. In Northern California, the Bay Area saw significant slowdown in demand driven by some of the same factors I mentioned earlier. Another headwind was likely the sharp decline experienced by the stock market to the end of the year which negatively impacted the valuation of local tech companies, thereby diminishing the purchasing power of many local buyers. Trends were relatively more stable in the Sacramento market, particularly at price points around $500,000. Similar dynamics played out in Arizona in the fourth quarter as our higher priced community struggled to gain traction with buyers. However, we have seen a recent pickup in activity at our Belmont community in Gilbert with 6 sales thus far in 2019 at an aggregate average price of approximately $875,000. Overall, the Phoenix market appears to be stronger at more affordable price points which bodes well for us as we have several new communities that we are already currently developing and should come online in the first half of 2020 at base prices starting between $275,000 and $400,000. We believe these new communities will give us much needed scale in the market and increase our exposure to a deeper pool of buyers. Now, I'd like to turn it over to John for more detail on the numbers.

[John Stephens:]

Thank you, Leonard and good morning. For the 2018 fourth quarter, we reported a net loss of $16.2 million or $0.80 per diluted share compared to net income of $10.5 million or $0.50 per diluted share in the prior year. The 2018 fourth quarter included $10 million of inventory impairments and $20 million of joint venture impairments compared to $900,000 of inventory impairments for the 2017 period. The 2017 fourth quarter also included a $3.2 income tax charge related to the revaluation of our divert tax asset in connection with the change in corporate tax rates enacted in 2017. Adjusted net income for the 2018 fourth quarter after excluding inventory and joint venture impairments was $5.6 million or $0.28 per diluted share. As compared to adjusted net income of $14.2 million or $0.67 per diluted share for the 2017 fourth quarter after excluding impairment and the tax charge. Home sales revenue for the fourth quarter was approximately $187 million as compared to $280 million in the prior year and down 13% or $28 million from the low end of our guidance. The year-over-year decline was driven primarily by 50% decline in average selling price to $1 million which was partially offset by 35% increase in deliveries. The revenue mess relative to the low end of our guidance was largely a result of construction delays at our multifamily condominium project imply a Vista[ph] which represented approximately $20 million in revenues. The balance of the Q- 4 revenue mess was attributable to construction delays in our Arizona division and to a lesser extent slower sales absorption rates experienced in the fourth quarter. We expect our first quarter average selling price to be approximately $925,000. Our GAAP gross margin from home sales for the fourth quarter was 8.1% and included $10 million of inventory impairments related to two higher price communities in Orange County California. Excluding impairments, our gross margin for the 2018 fourth quarter was 13.5% as compared to 16.2% in the prior year period. The 270 basis point decline in gross margin was primarily due to higher interest costs and to a lesser extent a product mix shift and slightly higher incentives. The lower gross margins as compared to the previous quarters guidance was largely due to a delivery mix shift and higher incentives at a few higher price communities in Orange County. On a positive note, our remaining exposure to the high end market in Orange County has shrunk considerably. Other than the two communities that we impaired during the fourth quarter, there are only three remaining communities in Orange County priced above $1 million. Two of these communities represent 10 unsold lots and in Irvine that are selling fine and the other community is our luxury product in Covenant Hills in South Orange County that is selling well with healthy margins. Excluding impairments and interest in cost of sales, our gross margin from home sales for the 2018 fourth quarter was 17.7% compared to 18% in the year ago period. Our SG&A rate, as a percentage of home sales revenue for the fourth quarter was 9.9% versus 8.4% of the prior year. The 150 basis point increase was primarily due to lower leverage resulting from a 33% drop in home sales revenue. Higher Co-broker commissions and higher sales personnel and advertising costs associated with increased community count. These items were partially offset by decrease in absolute G&A dollars resulting from lower compensation related costs. Also, as Larry mentioned earlier, we have made adjustments in our staffing levels and organization which will result in a restructuring charge in that first quarter of approximately $2 million. For the 2019 first quarter, we expect our SG&A rate inclusive of restructuring charges to be in the low 16% range. Excluding the anticipated restructuring charges, we expect our first quarter SG&A rate to be in the high 13% range. Our share of joint venture activity for the 2018 fourth quarter result in a pre-tax loss of $19.9 million as compared to approximately $300,000 of income in the prior year period. The JV loss for the quarter was driven by a $20 million impairment related to our Russell Ranch land development joint venture in Northern California. The impairment was primarily from lower anticipated revenues from land sales as well as our decision that we would no longer incorporate a potential home building component within the existing land development joint venture. We believe that by foregoing a future home building component, the company will preserve capital and reduce our investment exposure to this one geographic location. For the 2019 first quarter, we are projecting about a breakeven for our share of joint venture income. Our fee building revenue for the fourth quarter was $42 million as compared to $44 million a year ago. Our fee building gross margin for the quarter was $1.1 million or 2.7% versus $1 million or 2.3% in the prior year period. We expect to see substantially lower fee building revenue in 2019 due to lower expected demand and production levels in Irvine. We ended the fourth quarter with 20 active communities which represented 18% increase over the 2017 fourth quarter. We expect to grow our 2019 year-end wholly owned community count by approximately 15%. We ended the quarter with $42 million cash, $566 million in real estate inventories and $388 million in debt including $68 million outstanding under our $200 million revolving credit facility. During the quarter we spent approximately $66 million on land and for the full year of 2018 spent approximately $223 million. Also, during the quarter we repurchased approximately 379,000 shares of common stock for an aggregate total of $2.8 million. We ended the quarter with a net debt to capital ratio of 59%. We expect our 2019 first and second quarter net leverage to be the highest of the year and then decline with a goal of being in the low to mid 50% leverage range by year end. We expect to spend just under $100 million in land for the full year 2019 and also have Land sales of approximately $35 million scheduled for the middle of the year which should help bring down our leverage increase our liquidity. Now, I'd like to provide you with some additional guidance regarding our 2019 first quarter. We are estimating home sales revenue of between $80 million and $90 million. Fee building revenue of between $20 million and $30 million and home sales gross margin of between 12.6% and 13.0%. I'll now turn the call back to Larry for his concluding remarks.

[Larry Webb:]

Thanks, John. In conclusion, the fourth quarter of 2018 turned out to be much more challenging than we had anticipated. New Home demand in our markets were soft for the fourth quarter despite a fundamental backdrop that remains stable [ph]. While we are optimistic that this softness will eventually prove to be temporary, we are positioning our company to be prepared for the possibility that it is not. We are taking the necessary steps to right-size our cost structure, re-look at all land options, turn our projects more quickly and improve our leverage. Our leadership team has a wealth of experience operating in difficult demand environments and I believe this experience will serve us well going forward. That concludes our prepared remarks and now I will be happy to take your questions.

[Operator:]

Our first question comes from the line of Scott Schrier with Citi.

[Scott Schrier:]

Hi, good morning gentlemen. I appreciate all the color and everything and I want to step back and take the big picture look with respect to your comments on how you're preparing the business to be right size for the change in market conditions; whether temporary or potentially more sustained. So, you've been buying back a decent chunk of stock to take advantage of it's best stock price. You've talked about deleveraging, you know, your leverage is a little bit high and then we're addressing the land acquisition strategy and growing in more affordable markets. So if I'm thinking about the capital allocations, kind of in those buckets; how do you think about it? And I know one of things you just talked about where your leverage target aided by potential land sale -- but if land slows a little bit or maybe some of those land sells don't materialize in the manner that you had hoped; what kind of sensitivity analysis or cushion do have built in there? So I just want to get some more thinking about how you are thinking about capital allocations with respect to all of these different factors I discussed [ph]?

[John Stephens:]

I'll kind of take a shot at it first and let Larry sort of chime-in. Obviously, you know the number one thing we're focused on now is sort of reducing our leverage and generating cash flow. You know I think the steps we've taken really in the fourth quarter and into the first quarter in terms of, you know right-sizing our business and Leonard may want to talk about some of the cuts we made in the overhead front but you know we've got about $35 million of land sales scheduled for the middle of the year. So that's factored in actually into the third quarter of this year. It's possible that it happens in the second quarter but we factored in the third quarter. And we're going to spend a lot less money on land this year than we did last year in the prior year. We've currently targeted just under $100 million for this coming year. Most of that relates to auctions that we currently have under control; about 40% of our lots are under option. And then in terms of balancing you know stock buyback relative to leverage, obviously that's something that we're paying very close attention to. We thought that it made sense to buy some stock at the levels we've been trading at despite having to -- these impairments in the fourth quarter. Our book value relative to where we're trading is much lower than we thought it made sense to do some of that but we will balance that going forward with our land acquisition as well as the focus on generating cash and bringing down our leverage going forward.

[Larry Webb:]

This is Larry. Scott, I would say that one of our strengths has been our strong relationship with land sellers in our marketplace. We've -- and part of that is illustrated by the large proportion -- large portion 40% of our land being under option. Internally we are looking hard at every one of those programs to make sure that, given current market conditions they are the right thing to do. And in addition, we believe that there will be more opportunities in strong locations for us you know through the mid and second half of this year. So you know we're confident that you know we're positioning ourselves in a strip -- in a positive way. We're focused on leverage and cash flow and really running our business and that's where we're going right now moving forward.

[Scott Schrier:]

Great, thanks for that. For my follow up, just a question on the comments on re-biding and re-evaluating your land purchase strategy. You can talk a little bit or elaborate whether underwriting criteria community size take down structures with respect to the options and I'm thinking how respective of the land -- are the land sellers? I understand that you do have those good relationships with them. Is there a lining here? Is competition easing? Is there a little bit of some easing with respect to land prices that we're seeing in the market?

[Larry Webb:]

The easy answer is yes. The reality is in California in particular, and I guess Phoenix too, if you listened to your land deck [ph] people, every deal they bring is the last deal they'll ever get. So I would say yes they is easing. We have seen that already ourselves but land will always be competitive in the markets we're in and that's a reality.

[Leonard Miller:]

Hi, this is Leonard. I'll add a little bit. I think it depends by market. In Phoenix it's still a very, very competitive market where you have everybody looking for land it seems to be nationally the most favored market so it's highly competitive and I don't think you're seeing any relieve there. I think when you're talking about California it kind of categorized it a couple ways. If you have a deal that you're currently looking at or that is into diligence, then I think both thoughts[ph] and all builders are going back based on where the current market is and trying to negotiate in some way whether it's terms or price. I think if you have a deal but you've got a hard-on, then I think what the reality is, is the land seller and everybody else is really looking and waiting to see what the spring selling season comes. So I think everybody is kind of paused looking at that so I think there's more opportunity today in southern northern California for land and you're not seeing many or anybody really committing and that's kind of been the environment over the last 60 to 90 days.

[Larry Webb:]

The one other point that I thought we should mention and that is in Phoenix, we have a great pipeline of land. You know its -- and it's land we'll be building homes from $250 to $275 to $500 and $550,000. So our pipeline is strong. We have roughly 8 to 10 communities that will be bringing on in the second half of this year and the first half of 2020. And we're quite optimistic about our opportunities there so even though it's a competitive environment we're well positioned in the Phoenix area.

[Operator:]

Our next question comes from the line of Thomas Maguire of Zelman & Associates.

[Thomas Maguire:]

Hey guys, nice job navigating a tough environment here. Just first on the impairment in the quarter. Can you just begin to know what transpired there and the decision to close those communities in just more broadly how you feel about the rest your land book and the risk of future impairments?

[John Stephens:]

Yes, good morning Thomas. This is John Stevens. Really what we did you know we looked at everything -- in light of where the market has softened and we looked at every project very, very hard in the fourth quarter and the two projects we took impairments on were too higher priced communities in Orange County. We've got I think in one of the communities we've -- which is a 40 lot community and we've got about 34 homes left to sell. They're actually selling homes; we're actually making a margin now there. It's a higher price point in effect -- I'd say $1.8 million to $2 million average price point. The other one is in South Orange County and a master plan at the higher end of the master plan that again higher prices 14 to15 and that neighborhood just start selling as well some of the lower priced communities and we've got about 25 houses in that community. We've sold 10 I believe so far to date and we continue to work through that the second half of that community we're going to convert into -- we're going to increase the density and bring down the price point. We think we are going to have pretty solid margins on the balance of that community after we redesign the product which we've already got approvals for on that front. And then so that kind of takes to the wholly own business and then the joint venture it was really one large plan of joint venture in Northern California where again, as I stated in the prepared remarks, we've decided we're not going to do a home building component within that venture, which is obviously reduced part of the profit component but it really conserves substantial amount of capital; call it anywhere from $40 million to upwards of $50 million of equity that we wouldn't have to put in that the joint venture additionally that we just thought that was the best decision to make and selling lots and not doing home building venture created an impairment there. I think on the other joint ventures we're in pretty good shape and we're looking forward real positively moving forward in this environment.

[Thomas Maguire:]

Got it, thanks. And then just -- Larry, you made the comment that you're still positive on the business fundamentals. Can you just expand on that for us a little you know what gets you comfortable with your outlook and what could change the buyer hesitancy that we're seeing right now and just kind of snap aside of that?

[Larry Webb:]

Sure. For the people on the call who don't know me very well my background was in market research before I got into the home building business and we spend an awful lot of time on consumer research and consumer attitudes and you know when I look at all the basic demographic drivers; job growth, consumer confidence overall, lack of availability of land, a lack of overbuilding by the home building community. We still believe that there's a runaway in this recovery. I've spoken to every major economist certainly in the western United States and we just really believe that there is a fundamental positive driver which still there. We have job growth and we have a lack of housing. The challenge has always been in California in particular affordability and I believe that the pause that occurred in the fourth quarter which primarily, you know a function of slightly rising interest rates and people taking a step back on the affordability issue. But you know overall we're positive still that this is a good -- business and that California is a good place to be a builder.

[Thomas Maguire:]

Really helpful. Thanks, Larry.

[Operator:]

Our next question comes from line of Sam [ph] with Credit Suisse.

[Unidentified Analyst:]

I may have missed this in your previous comments but can talk a little bit about how you think about land spend as we go into 2019? You know, on the overall level but also in terms of where you are going to focus that spending?

[John Stephens:]

Yes, like I said, the overall levels is going to be just under $100 million is what we're projecting. I'd say, you know, we're -- we have lots on option in Northern California and we're continuing to take down, we've got some properties in Vacaville that we're going to be spending some money there. And I would say Southern California, you know, continuing with the options, it's probably -- Southern California is probably 50% of our land spend, and that would include the Inland Empire as well. And then, I'd say some of the options we have, for example, in San Diego and what we're finishing out in Orange County. And then Northern California probably makes up plus or minus $30 million of that, and then Arizona makes up another $20 million plus or minus.

[Unidentified Analyst:]

And then with regard to the slowdown in demand; I mean have you seen any pickup following the rate decline? And what other things would you guys be looking for to happen before you would expect demand start to pick up?

[Leonard Miller:]

Yes, I would say that -- I think hype [ph] consistent with a lot of builders in what you're hearing is, it felt like demand bottomed out in November and so we saw sequential improvement in December, and then again we saw sequential improvement in January. So it seemed that kind of rates -- the rate stabilizing and then the lowering really kind of pushed that, we saw traffic bounced off of that, we've seen online traffic up significantly over the fourth quarter. So -- again, we're seeing sequential improvement month-over-month in the last 60 to 75 days. Now having said that, and it really feels like the market is stabilized but it's stabilizing at levels that are off of last year's top. So I think you know for the first half the year those comparisons with '18 are going to continue to be tough but the encouraging thing again is that we're seeing that sequential improvement, and again, seeing it stabilize market by market.

[Operator:]

Our next question comes from the line of [indiscernible] Asset Management.

[Unidentified Analyst:]

I had a question, just following up on the foreign buyer issue; I'm wondering if you could give us a little bit more color as to what percent foreign buyers are for you normally? And maybe what percent they are sort of in the market -- in the price points where you compete? And then how that was different in the fourth quarter, both for you and if you have any feel for the market? Thanks.

[Larry Webb:]

Sure. Well, foreign buyer is a pretty large general topic but let me maybe be a little more specific. In Southern California and primarily, Orange County and even more significantly Irvine, the foreign buyer and principally, the Chinese foreign buyer, first and second generations, made up 75% to 80% of the marketplace. And certainly, in the second half of last year, that buyer group was reduced significantly. Now we had been positioning ourselves for the last year and a half in anticipation of a reduction there. And as either Leonard or John mentioned, we literally have -- I think in the Irvine area 10 homes left to sell, so any reduction or continued reduced impact by that Chinese buyer really is minimal for us. South Orange County has never really had a large foreign buyer, and that's where we have 4 housing programs. In the Bay Area, the foreign buyer tends to be slightly different, tends to be tech-oriented; Indian, Pakistani, more than Chinese, and that buyer group is still prevalent but I would say that the stock market volatility impacts that buyer more than anything else. But overall, that's been a very strong market over the last five or six years but it did so well in the fourth quarter. So the Chinese buyer has slowed significantly in Southern California but it really will have very little impact on the New Home Company.

[Unidentified Analyst:]

Great, that's a great color. I appreciate it thank you.

[Larry Webb:]

Sure.

[Operator:]

Our next question comes from the line of Alex Barron with Housing Research Center.

[Alex Barron:]

I had a few questions. I guess maybe we can start with the Arizona market, though you guys have a pretty nice backlog but no deliveries yet. So I'm trying to figure out what the average built time for these homes or why hasn't there been any deliveries as yet?

[Leonard Miller:]

Alex, this is Leonard. Really, a couple of things; we -- sales rate has been really successful to the community referring to at Belmont. Two things really happened to delay that; first and foremost, we had a deal with the developers where they were going to finish the lots and they kind of missed -- they had delays and missed their timing by 4 to 5 months which met our first home -- housing starts were really in April of last year. And then the second part of that homes that we would've hoped to have built in approximately 8 months are trending more towards a 10-month timeline, and that all has been centered around really kind of the shortage of labor in the market. So we started delivering and delivering our first homes in January of this year, and our goal is to get that cycle time down. I know a lot of people are struggling with that in the Arizona market but we have started delivering homes and we should start seeing more of an even flow going forward out of Belmont.

[Alex Barron:]

Okay, that's great to hear. My second question is with regards to the communities that you guys impaired in Southern California. Are you starting to see some sales again? I guess given whatever you get for the price there? Are buyers starting to respond positively?

[Leonard Miller:]

Yes. Alex, this was something that we dealt with obviously during the fourth quarter, and we really looked at the one, the first one that John mentioned, Mary Woods; went out really looked at the asset, right priced each of the lots and I would say over the last 60 to 75 days we've basically sold 7 homes and so we feel like we've found the market, we wish the pricing was a little bit higher. So we feel pretty good going forward on that one. And then the second one which was Topaz [ph] in South Orange County; again, I think we have 14 left to sell -- 14 or 15 left to sell before we go to the new product. Again, we've made the adjustments but it's the highest price point in that master plan, so it's going to be one of those that would probably will average about 1.5 sales a month and kind of work our way through it before we -- kind of get to the second product segment. But yes, I think we've addressed it. I feel okay about where we're going -- moving going forward.

[Alex Barron:]

Okay, great to hear. If I could ask one more, did I hear you correctly say that the fee building business was going to be above breakeven this next quarter?

[John Stephens:]

I said the joint venture income. So joint venture income is going to be about a breakeven, is what I said.

[Alex Barron:]

Okay, I misheard. Thank you so much.

[John Stephens:]

You're welcome.

[Operator:]

[Operator Instructions] Our next question is a follow-up from the line of Scott Schrier with Citi.

[Scott Schrier:]

Hi, I wanted to go back to Sam's question on weakened demand trends and outside of interest rates, market activity, foreign buyers; one of the factors in terms of pulling back California buyers put into the fire lines a little bit, but uncertainty with respect to how tax reform is going to ultimately shake out. You know, another folks are starting to do their tax returns; I'm curious -- are you hearing any color on the ground, out one way or another on how any impact that's having on whether traffic, demand, urgencies, confidence or any other dynamic you can think of?

[Leonard Miller:]

Scott, this is Leonard, I'll take a shot at that. Right up to that I'd say first and foremost surprisingly, no. Every Sunday night we get reports from every community, and we have weekly calls with our teams and we keep anticipating that's going to be the case. So what I would say is, I'm not certain if just because it's early February that those people that would be most impacted, probably I would guess filed a little bit later than that first time homebuyer and that lower price point person, so we're not seeing it yet. We believe there is got to be some impact to it but having said that, every survey that we see in market research is people continue to still want to buy homes. So I would anticipate some impact but we're not feeling it yet.

[John Stephens:]

Yes, and I would just add to that, that I think that it's probably the higher earning individuals that are to be impacted more. So they typically have little more discretionary spending money but I think those are the folks that are going to feel it more because of the high-income tax rate in California, and in certain communities where you have higher property taxes as well. So, it's again -- I think the entry level sort of first move up probably doesn't feel it as much because I think some of those folks are getting a benefit from the Fed -- on the federal side.

[Operator:]

Thank you. That concludes our question-and-answer session I'll turn the floor back to Mr. Webb for any final comment.

[Larry Webb:]

Thank you. As we've stated, fourth quarter was challenging for us but I want to re-emphasize for everyone that we have an extremely experienced management team and we have been successful -- consistently successful in both, good times and tougher times. We have made some pretty strong moves in the fourth quarter to make sure that The New Home Company will be viable and a key factor in the home building industry for many years to come. And I want to assure everybody that our focus moving forward is on our cash flow and our leverage and making sure that everything we do is focused on improvement. So I want to thank you for your time and thank you for your questions.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.