S-1 1 d417400ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on December 21, 2012

Registration No. 333-          

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

TRI POINTE HOMES, LLC

(to be converted into TRI Pointe Homes, Inc.)

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   1531   27-3201111
(State or other jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)   Classification Code Number)   Identification Number)

 

19520 Jamboree Road, Suite 200

Irvine, California 92612

(949) 478-8600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Douglas F. Bauer

Chief Executive Officer and Manager

TRI Pointe Homes, LLC

19520 Jamboree Road, Suite 200

Irvine, California 92612

(949) 478-8600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

Michael A. Gordon, Esq.

Sidley Austin LLP

One South Dearborn Street

Chicago, Illinois 60603

Tel (312) 853-7000

Fax (312) 853-7036

 

J. Gerard Cummins, Esq.

Sidley Austin LLP

787 Seventh Avenue

New York, New York 10019

Tel (212) 839-5300

Fax (212) 839-5599

 

Dhiya El-Saden, Esq.

Gibson, Dunn & Crutcher LLP

333 South Grand Avenue

Los Angeles, California 90071

Tel (213) 229-7196

Fax (213) 229-6196

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.    ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)(2)
  Amount of
Registration Fee

Common Stock, $0.01 par value per share

  $172,500,000   $23,529

 

 

 

(1)   

Estimated solely for purposes of determining the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

(2)   

Includes shares of common stock which may be purchased by the underwriters to cover their option to purchase additional shares of common stock.

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 21, 2012

 

PRELIMINARY PROSPECTUS

 

LOGO

 

Shares

 

TRI Pointe Homes, Inc.

 

Common Stock

$        per share

 

This is the initial public offering of our common stock. We are selling                     shares of our common stock. We currently expect the initial public offering price to be between $             and $             per share of our common stock.

 

We have granted the underwriters an option to purchase up to            additional shares of our common stock.

 

We have applied to list the shares of our common stock on the New York Stock Exchange under the symbol “TPH.”

 

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 17.

 

We are an “emerging growth company” under the federal securities laws and are eligible for reduced reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.”

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                            $                        

Underwriting discount

   $         $     

Proceeds to us (before expenses)

   $         $     

 

The underwriters expect to deliver the shares to purchasers on or about                      , 2013 through the book-entry facilities of The Depository Trust Company.

 

Joint Book-Running Managers

 

Citigroup   Deutsche Bank Securities   FBR

 

Lead Manager

 

  Moelis & Company  

 

                         , 2013


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We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

 

 

 

TABLE OF CONTENTS

 

     Page  

Summary

     1   

Risk Factors

     17   

Cautionary Note Concerning Forward-Looking Statements

     38   

Use of Proceeds

     39   

Capitalization

     40   

Dilution

     41   

Dividend Policy

     43   

Selected Financial Data

     44   

Management’s Discussion and Analysis of Financial Condition and Results Of Operations

     46   

Market Opportunity

     72   

Our Business

     110   

Management

     128   

Executive and Director Compensation

     136   

Certain Relationships and Related Party Transactions

     143   

Conflicts of Interest

     145   

Principal Stockholders

     146   

Description of Capital Stock

     150   

Shares Eligible for Future Sale

     154   

Certain Material Federal Income Tax Considerations

     156   

Underwriting

     161   

Legal Matters

     166   

Experts

     166   

Where You Can Find More Information

     166   

Index to Consolidated Financial Statements

     F-1   

 

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We use market data and industry forecasts and projections throughout this prospectus, and in particular in the sections entitled “Summary,” “Market Opportunity” and “Our Business.” We have obtained substantially all of this information from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (“JBREC”), an independent research provider and consulting firm. We have paid JBREC a fee of $24,600 for that market study, plus an amount charged at an hourly rate for additional information we may require from JBREC from time to time in connection with that market study. Such information is included in this prospectus in reliance on JBREC’s authority as an expert on such matters. Any forecasts prepared by JBREC are based on data (including third-party data), models and experience of various professionals, and are based on various assumptions (including the completeness and accuracy of third-party data), all of which are subject to change without notice. See “Experts.” In addition, certain market and industry data has been taken from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. We have not independently verified the data obtained from these sources, and we cannot assure you of the accuracy or completeness of the data. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus.

 

Special Note on Ownership of Our Common Stock

 

As part of our formation transactions, the members of TRI Pointe Homes, LLC (the entity that will be converted into a Delaware corporation and renamed TRI Pointe Homes, Inc. as part of our formation transactions) (“TPH LLC”) will receive an aggregate of        shares of our common stock. The members of TPH LLC include a private equity fund (which, together with its wholly-owned subsidiaries, we refer to as the “Starwood Fund”) managed by an affiliate of Starwood Capital Group Global, L.P., the members of our management team and a third-party investor. In addition to their membership interest in TPH LLC, members of our management team also hold incentive units in TPH LLC and we refer to them in their capacity as holders of incentive units as “Incentive Unit Holders.”

 

The allocation of the        shares of our common stock among the members of TPH LLC (other than the Incentive Unit Holders) and the Incentive Unit Holders depends on a calculation of an internal rate of return to the members of TPH LLC (other than the Incentive Unit Holders) resulting from this offering, which in turn depends upon the timing of this offering and the value per share of our common stock. Under the operating agreement of TPH LLC, that value per share of our common stock is based initially upon the midpoint of the price range set forth on the cover page of this prospectus. Such value is subject to adjustment following the completion of this offering such that the number of shares that are allocated to the members of TPH LLC (other than the Incentive Unit Holders), on the one hand, may increase or decrease and the number of shares that are allocated to the Incentive Unit Holders, on the other hand, may correspondingly decrease or increase, in an amount limited to up to 1.0% of the aggregate number of shares of our common stock outstanding immediately following the completion of this offering. The adjustment is based upon (1) the average of the closing price of the shares of our common stock on the New York Stock Exchange for the ten trading-day period initially following this offering and (2) the number of shares of our common stock outstanding on the date of the completion of this offering. Although the allocation of shares of our common stock among the members of TPH LLC (other than the Incentive Unit Holders) and the Incentive Unit Holders is subject to a minor adjustment based on the foregoing, the number of shares of our common stock received by the members of TPH LLC (other than the Incentive Unit Holders) and the Incentive Unit Holders in the aggregate will not change as a result of such adjustment. For a more detailed discussion regarding the numbers of shares of our common stock that will be received by the members of TPH LLC (other than the Incentive Unit Holders), on the one hand, and the Incentive Unit Holders, on the other hand, see “Principal Stockholders.”

 

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SUMMARY

 

This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you may consider important in making your investment decision. Therefore, you should read this entire prospectus carefully, including, in particular, the “Risk Factors” section beginning on page 17 of this prospectus. As used in this prospectus, unless the context otherwise requires or indicates, references to “the Company,” “our company,” “we,” “our” and “us” (1) for periods prior to September 24, 2010, the date on which the Starwood Fund agreed to make its investment in us, refer to the entities through which we conducted our business during such periods, which we refer to collectively as “our predecessor,” (2) for periods from and after September 24, 2010 and prior to the completion of our formation transactions, refer to TRI Pointe Homes, LLC and its subsidiaries and affiliates, which we sometimes refer to as “TPH LLC,” and (3) following the completion of our formation transactions, refer to TRI Pointe Homes, Inc. and its subsidiaries and affiliates; references to “the Starwood Fund” refer to a private equity fund (together with its wholly-owned subsidiaries) managed by an affiliate of Starwood Capital Group; and references to “Starwood Capital Group” refer to Starwood Capital Group Global, L.P., its predecessors and owned affiliates.

 

Unless otherwise indicated, market data is derived from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (“JBREC”).

 

Unless the context otherwise requires, the information in this prospectus assumes that: (1) our formation transactions have been completed, (2) the shares of our common stock to be sold in this offering are sold at $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and (3) the underwriters’ option to purchase additional shares is not exercised.

 

Our Company

 

We are engaged in the design, construction and sale of innovative single-family homes in planned communities in major metropolitan areas located throughout Southern and Northern California. Our company was founded in April 2009, towards the end of an unprecedented downturn in the national homebuilding industry, by our current management team with over a century of collective industry experience. As a “next generation” regional homebuilder, we are focused on taking advantage of opportunities in selected markets in California and are prudently evaluating opportunities in other Southwestern states with improving local market conditions. Unburdened by underperforming assets or legacy issues, our growth strategy generally seeks to capitalize on high demand in selected “core” markets with favorable population and employment growth as a result of proximity to job centers or primary transportation corridors. Our current operations consist of 13 communities, eight of which are actively selling, containing 695 lots under various stages of development (including three communities, one of which is actively selling, containing 143 lots for our fee building projects, as described below) in Southern and Northern California.

 

Our company was founded by the members of our management team, who have worked together for over 20 years. They have firmly established our company’s core values of quality, integrity and excellence, which are the driving forces behind our innovative designs and strong customer commitment. Given our relative size and regional focus, our management team employs a disciplined, hands-on approach, leveraging strong local market relationships and established reputation to source acquisitions, achieve land entitlements (which provide basic development rights to the owner) and deliver quality homes on budget and on schedule.

 

Prior to this offering, we have operated our business through TRI Pointe Homes, LLC, which, immediately prior to the completion of this offering, will be converted into a Delaware corporation and renamed TRI Pointe Homes, Inc. The members of TRI Pointe Homes, LLC, which members include a fund affiliated with Starwood Capital Group, the members of our management team and a third-party investor, will receive an aggregate of              shares of our common stock in connection with our conversion into a corporation.

 

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Since our formation, we have sold over 350 homes (including fee building projects), a number of which are located in prestigious master planned communities in California, and we have forged relationships with several leading national land developers. Our construction expertise across an extensive product offering allows us flexibility to pursue a wide array of land acquisition opportunities and appeal to a broad range of potential homebuyers, including entry-level, move-up and higher income customers. As a result, we build across a variety of price points, ranging from approximately $300,000 to $1,500,000, and home sizes, ranging from approximately 1,250 to 4,300 square feet. Cutting edge product development as well as exemplary customer service are key components of the lifestyle connection we seek to establish with each individual homebuyer. Additionally, we believe our diversified product strategy enables us to adapt quickly to changing market conditions and to optimize returns while strategically reducing portfolio risk.

 

In September 2010, we received an equity commitment of $150 million from a fund affiliated with Starwood Capital Group, a private equity firm founded and controlled by Barry Sternlicht, the chairman of our board of directors. Starwood Capital Group is a key strategic partner, providing access to acquisition opportunities within our markets as well as a wide range of knowledge in all aspects of real estate finance and operations. As of September 30, 2012, the Starwood Fund had contributed the entire $150 million of its commitment to us, and it has no further obligation to contribute capital to us. The Starwood Fund’s investment has enabled us to acquire or control, through options or non-binding letters of intent, 1,436 lots in 20 current and future communities. Prior to the Starwood Fund’s investment, most of our operations consisted of “fee building projects” in which we built, marketed and sold homes for independent third-party property owners with whom we have revenue sharing agreements on projects typically marketed under the TRI Pointe Homes brand name.

 

Our home sales revenue has grown rapidly from $4.1 million in 2010 to $26.5 million in the twelve months ended September 30, 2012 and our business mix has shifted away from fee building. We have experienced losses since we were founded in 2009, including losses of $3.9 million and $4.6 million for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. As of September 30, 2012, we owned 552 lots and controlled 841 lots (689 lots that are under land option contracts or purchase contracts, 91 lots that are under non-binding letters of intent and 61 additional lots that are under an option contract executed in October 2012), representing approximately two to three years of supply to support our current growth plan. We seek to invest only in land inventory that we can efficiently develop over a 24 to 36 month horizon in order to maximize our returns on capital and minimize our exposure to market risk. We continually evaluate new communities and have an attractive pipeline of land acquisition opportunities.

 

Industry Overview

 

National Housing Market

 

The U.S. housing market continues to show signs of stabilization and improvement from the cyclical low points reached during the 2008 – 2009 global recession. Between the 2005 – 2006 market peak and 2011, single family housing starts declined 75%, according to data compiled by the U.S. Census Bureau, and median home prices declined 34%, as measured by the S&P Case-Shiller Index. In 2012, as a result of an improving macroeconomic backdrop and modest improvement in unemployment, early signs of a recovery began to materialize in many markets around the country. In the nine months ended September 30, 2012, new housing permits increased 32% and the median single-family home price increased 6% over the same period in 2011. Growth in sales of new homes have outpaced growth in sales of existing homes over the same period, increasing 23% versus 8% for existing homes.

 

Historically, strong housing markets have been associated with affordability, a healthy domestic economy, positive demographic trends such as population growth and household formation, low interest rates, increases in renters that qualify as homebuyers and locally based dynamics such as housing demand relative to housing

 

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supply. Many markets across the U.S. are beginning to exhibit several of these positive characteristics. Relative to long-term historical averages, the U.S. economy is creating more jobs for every homebuilding permit issued, the inventory of resale and new unsold homes is relatively low and affordability is near its highest level in over 30 years, as measured by the ratio of homeownership costs to household income.

 

However, despite recent momentum, the U.S. housing market has not fully recovered from the 2008 – 2009 recession as consumer confidence remains below average levels, mortgage underwriting standards remain tight, and inventories of vacant and distressed homes remain elevated relative to historic averages. Additionally, real estate is a local industry and not all markets exhibit the same trends.

 

California Housing Market

 

California residential real estate markets are significantly more supply-constrained and have experienced deeper contraction than other regions in the U.S. during the most recent global economic recession. Between the peak in 2005 and the trough in 2011, annual single-family homebuilding permits in the state of California declined a total of 86% versus the national decline of 75%. Despite being one of the largest housing markets in the nation, having issued an average of over 86,500 single-family homebuilding permits annually between 2001 and 2011, California added fewer than 26,000 single-family permits annually from 2009 through 2011. For the nine months ended September 30, 2012, California homebuilding permits grew 32% over the same period of the prior year, in line with the national average of 32%. The median existing family home price increased by an average of 7.4% from one year prior versus the national average of 5.8%, with more accelerated rates of appreciation in recent months.

 

The Company’s “core” markets in Southern and Northern California are expected to exhibit strong absolute or relative population growth, a key indicator of housing demand. According to a JBREC study of the 65 largest markets in the country, based on absolute population growth for the years 2012 – 2016, Los Angeles, San Diego and Riverside-San Bernardino are expected to rank among the top 15 markets in the country, with Orange County and Denver expected to rank in the top 25 markets. Additionally, supply constraints and increasing demand present more opportunities to build higher-density, infill projects (which are projects to construct new homes on vacant or under-utilized lots among existing properties in established communities) in the coastal submarkets.

 

While California experienced some of the greatest distress and sharpest price declines during the downturn, it remains in the early stages of a potential recovery. In 2011, unemployment was approximately 2.8 percentage points above the national average of 8.9%, a gap that widened from less than one percentage point in 2007. A reversion to long-term historical averages in terms of housing permits and sales volumes would represent meaningful improvement to current market conditions in many California markets. However, the Company’s “core” markets possess many positive attributes critical for a healthy housing market and are expected to exhibit solid growth.

 

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Our Competitive Strengths

 

We believe the following strengths will provide us with a significant competitive advantage in implementing our business strategy:

 

Experienced and Proven Leadership

 

Douglas Bauer, our Chief Executive Officer, Thomas Mitchell, our President and Chief Operating Officer, and Michael Grubbs, our Chief Financial Officer, have worked together for over 20 years and have a successful track record of managing and growing a public homebuilding company. Their combined real estate industry experience includes land acquisition, financing, entitlement, development, construction, marketing and sales of single-family detached and attached homes in communities in a variety of markets. Prior to forming our company in 2009, Messrs. Bauer, Mitchell and Grubbs worked together for 17 years at William Lyon Homes from its formation in 1992, ultimately serving as its President and Chief Operating Officer, Executive Vice President and Senior Vice President and Chief Financial Officer, respectively. William Lyon Homes was formed with a nominal investment, and listed its shares on the New York Stock Exchange in 1999 until the company was taken private in 2006. During their tenure at William Lyon Homes, the company focused its operations in California, Arizona and Nevada. During its public operating period, the company delivered over 2,800 homes per year on average, generated revenues averaging over $1.0 billion per year and increased shareholders’ equity from $53 million to over $600 million. We believe that our management team’s prior experience, extensive relationships and strong local reputation provide us with a competitive advantage in being able to secure projects, obtain entitlements, build quality homes and complete projects on schedule.

 

Focus on High Growth Core Markets in California and Other Southwestern States

 

Our business is well-positioned to capitalize on the broader national housing market recovery. We are focused on the design, construction and sale of innovative single-family detached and attached homes in planned communities in major metropolitan areas in Southern and Northern California and, more recently, in Colorado (where we have land under a purchase contract). Additionally, we plan to evaluate expansion opportunities on an opportunistic basis in other markets in the Southwestern United States. According to JBREC, the Southwestern region represents some of the largest single family housing markets in the country, as defined by sales, starts and building permits. In Southern California, we principally operate in the counties of Los Angeles, Orange, San Diego, Ventura and Riverside-San Bernardino, and in Northern California, we principally operate in the counties of Santa Clara, San Mateo and Alameda. In Colorado, we anticipate that we will principally operate in the counties of Douglas, Denver, Arapahoe and Jefferson. These markets are generally characterized by high job growth and increasing populations, creating strong demand for new housing, and we believe they represent attractive homebuilding markets with opportunities for long-term growth. Moreover, our management team has deep local market knowledge of the California and Colorado homebuilding and development industries. We believe this experience and strong relationships with local market participants enable us to efficiently source, entitle and close on land.

 

Attractive Land Positions to Support Future Growth

 

We believe that we have strong land positions strategically located within our core markets, all of which have been acquired since 2010. We select communities with convenient access to metropolitan areas that are generally characterized by diverse economic and employment bases and demographics that we believe will support long-term growth. Our Southern California assets are well located along key transportation corridors in major job centers in our submarkets. In Northern California, our assets are located within and around the Silicon Valley, a major employment center. Additionally, our planned project in Castle Rock, Colorado is conveniently located near the hub of the Denver Tech Center, a major employment center in Denver, with a concentration of larger technology and communications companies and excellent schools.

 

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As of September 30, 2012, we owned 552 lots in California in which we had commenced development, held options or were under contract to acquire an additional 689 lots in eight new communities in California and Colorado and had entered into non-binding letters of intent to acquire an additional 91 lots in one new and one existing community in Southern California. In October 2012, we entered into an option contract to acquire an additional 61 lots in Southern California. We closed the purchase of an aggregate of 164 of the controlled lots in our inventory in November 2012 for an aggregate purchase price of $40.7 million (including the application of $6.5 million of previously paid deposits). However, there can be no assurance that we will acquire any of the remaining land parcels on the terms or timing anticipated or at all or that we will proceed to build and sell homes on any of this land. See “—Pending Acquisitions” below.

 

Strong Operational Discipline and Controls

 

Our management team possesses significant operating expertise, including running a much larger public homebuilder. The perspective gained from that experience has helped shape the strict discipline and hands-on approach with which our company is managed. From monthly financial and operating performance “dashboard” updates on each project to quarterly operating committee review and financial accountability at the project management level, our strict operating discipline is a key part of our strategy to maximize returns while minimizing risk.

 

Our Relationship with Starwood Capital Group

 

We believe that our relationship with Starwood Capital Group, which has approximately $20 billion of real estate-related assets under management, gives us a strong competitive advantage, in particular by providing us with access to the personnel, relationships and the investing and operational expertise of Starwood Capital Group. Additionally, Barry Sternlicht, the Chairman and Chief Executive Officer of Starwood Capital Group, is also the chairman of our board. As a former Chairman and Chief Executive Officer of Starwood Hotels & Resorts Worldwide, Inc., a Fortune 500 company, and current Chairman and Chief Executive Officer of Starwood Property Trust, Inc., a commercial real estate finance company, Mr. Sternlicht brings a unique perspective on building a world class real estate operating business to the chairman position.

 

Through our relationship with Starwood Capital Group, our management team has drawn upon the deep real estate knowledge base of Starwood Capital Group’s personnel and its established track record of investing in real estate operating companies. On behalf of funds sponsored by Starwood Capital Group, members of its executive team have created or taken public three successful companies, including Starwood Hotels & Resorts Worldwide, Inc., Starwood Property Trust, Inc. and iStar Financial, Inc. They also participated in the formation of Equity Residential Properties Trust, one of the premier U.S. multi-family REITs. We believe the breadth of experience and the relationships that Starwood Capital Group has fostered since its inception, particularly in the residential land business, will provide us with competitive advantages in acquiring land and developing homes. Over the past five years, affiliates of Starwood Capital Group have purchased over 19,400 residential lots in targeted markets. As of September 30, 2012, affiliates of Starwood Capital Group controlled more than 21,100 residential lots across the United States, including approximately 9,600 lots in California, Arizona and Colorado. Affiliates of Starwood Capital Group may make available to us for purchase, at market prices, certain of their owned residential land holdings.

 

No Legacy Issues

 

Given our recent formation in 2009 and that our current land inventory was accumulated following the Starwood Fund’s investment in us in September 2010, we do not have distressed legacy assets or liabilities to manage, unlike many competitors that were affected by the unprecedented downturn in the real estate markets that resulted from the recession of 2008 – 2009. As a result, all of our real estate assets as well as those we have under option contracts, purchase contracts or non-binding letters of intent are located in markets that we targeted

 

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after the downturn commenced, whereas many of our competitors continue to own legacy properties in economically stagnant locations or land options either on undesirable properties or with unfavorable terms. The absence of legacy issues has also allowed us to hire experienced and talented real estate development personnel who became available during the downturn. We believe that our strong balance sheet and absence of legacy issues enables us to focus on future growth, as opposed to having resources diverted to manage troubled assets.

 

Our Business Strategy

 

Our business strategy is focused on the design, construction and sale of innovative single-family detached and attached homes in planned communities in major metropolitan areas in Southern and Northern California and, more recently, Colorado (where we have land under a purchase contract), as well as the eventual entry into other Southwestern markets. Our business strategy is driven by the following:

 

Acquire Attractive Land Positions While Reducing Risk

 

We believe that our reputation and extensive relationships with land sellers, master plan developers, financial institutions, brokers and other builders, as well as our relationship with Starwood Capital Group, will enable us to continue to acquire well-positioned land parcels in our target markets in Southern and Northern California, Colorado and other Southwestern markets and provide us access to a greater number of acquisition opportunities. We believe our expertise in land development and planning enables us to create desirable communities that meet or exceed our target customer’s expectations, while operating at competitive costs. We also believe that our strategy of holding an inventory of land that will provide us with a two to three year supply of developed lots and focusing on the development of entitled parcels that we can complete within approximately 24 to 36 months from the start of sales allows us to limit exposure to land development and market cycle risk while pursuing attractive returns on our capital. We also seek to minimize our exposure to land risk through disciplined management of entitlements, as well as the use of land options and other flexible land acquisition arrangements.

 

Increase Market Position in Growth Markets

 

We believe that there are significant opportunities to profitably expand in our existing and target markets, and we continually review our selection of markets based on both aggregate demographic information and our own operating results. We use the results of these reviews to re-allocate our investments to those markets where we believe we can maximize our profitability and return on capital over the next several years. While our primary growth strategy will focus on increasing our market position in our existing markets, we may, on an opportunistic basis, explore expansion into other markets through organic growth or acquisition.

 

Provide Superior Design and Homeowner Experience and Service

 

We consider ourselves a “progressive” homebuilder driven by exemplary customer experience, cutting-edge product development and exceptional execution. Our core operating philosophy is to provide a positive, memorable experience to our homeowners through active engagement in the building process, tailoring our product to the buyer’s lifestyle needs and enhancing communication, knowledge and satisfaction. We believe that the new generation of home buying families has different ideas about the kind of home buying experience it wants. As a result, our selling process focuses on the homes’ features, benefits, quality and design in addition to the traditional metrics of price and square footage. In addition, we devote significant resources to the research and design of our homes to better meet the needs of our buyers. Through our “TRI-e3 Green” platform, we provide homes that we believe are earth-friendly, enhance homeowners’ comfort, promote a healthier lifestyle and deliver tangible operating cost savings versus less efficient resale homes. Collectively, we believe these steps enhance the selling process, lead to a more satisfied homeowner and increase the number of buyers referred to our communities.

 

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Offer a Diverse Range of Products

 

We are a builder with a wide variety of product lines that enable us to meet the specific needs of each of our core markets, which we believe provides us with a balanced portfolio and an opportunity to increase market share. We have demonstrated expertise in effectively building homes across product offerings from entry-level through first-time and second-time “move-up” housing. We spend extensive time studying and designing our products through the use of architects, consultants and homeowner focus groups for all levels and price points in our target markets. We believe our diversified product strategy enables us to best serve a wide range of buyers, adapt quickly to changing market conditions and optimize performance and returns while strategically reducing portfolio risk. Within each of our core markets we determine the profile of buyers we hope to address and design neighborhoods and homes with the specific needs of those buyers in mind.

 

Focus on Efficient Cost Structure and Target Attractive Returns

 

We believe that our homebuilding platform, which carries no legacy assets or liabilities, and our focus on controlling costs position us well to generate attractive returns for our investors. Our experienced management team is vigilant in maintaining its focus on controlling costs. We competitively bid each phase of development while maintaining strong relationships with our trade partners by managing production schedules closely and paying our vendors on time.

 

We combine decentralized management in those aspects of our business where we believe detailed knowledge of local market conditions is critical (such as governmental processing, construction, land development and sales and marketing), with centralized management in those functions where we believe central control is required (such as approval of land acquisitions, financial, treasury, human resources and legal matters). We have also made significant investments in systems and infrastructure to operate our business efficiently and to support the planned future growth of our company as a result of executing our expansion strategy.

 

Utilize Prudent Leverage

 

We intend to employ 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 access capital on the best terms available. 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. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise be recourse. As of September 30, 2012, we had approximately $86.0 million of aggregate loan commitments, of which $46.4 million was outstanding. Our aggregate loan commitments consist of a $20 million secured revolving credit facility, which provides financing for several real estate projects, two project-specific revolving loans and several other loan agreements related to the acquisition and development of lots and the construction of model homes and homes for sale. As a means of sustaining our long-term financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized.

 

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Project Sales by Market

 

The following table sets forth home sales revenue and units delivered by market for our owned projects, in which we built and sold the homes for our own account, during the nine months ended September 30, 2012 and the preceding two calendar years. In addition, the following table sets forth units delivered by market for our fee building projects, in which we built the homes for independent third-party property owners. In our fee building business, we receive management fees for homes we build for independent third-party property owners and do not record the home sales revenue from the homes sold.

 

     Nine Months
Ended
September 30,
2012
     Year Ended December 31,  
        2011      2010(1)  
     Home Sales      Units
Delivered
     Home Sales      Units
Delivered
     Home Sales      Units
Delivered
 
     (dollars in thousands)  

Southern California

                 

Owned Projects

                 

Riverside County:

                 

Amberview, Riverside

   $ 4,412         10       $               $           

Topazridge, Riverside

     3,481         8                                   

Sagebluff, Riverside

     4,946         14                                   

Castlerock, Riverside

                     7,117         21         2,728         8   

San Diego County:

                 

Eagle Ridge, Oceanside

     4,970         12         6,408         15         1,415         3   

Los Angeles County:

                 

Los Arboles, Simi Valley

     4,468         11                                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total—Owned Projects

   $ 22,277         55       $ 13,525         36       $ 4,143         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fee Building Projects

                 

Orange County:

                 

Andalucia, Irvine(2)

                              3   

Sonoma, Irvine(2)

                   19            76   

San Marino, Irvine(3)

        16            20              

San Diego County:

                 

Patria, Chula Vista(2)

                   29            23   
     

 

 

       

 

 

       

 

 

 

Total—Fee Building Projects

        16            68            102   
     

 

 

       

 

 

       

 

 

 

Total—Company

        71            104            113   
     

 

 

       

 

 

       

 

 

 

 

(1)   

Included in the table for the year ended December 31, 2010 are 46 units related to fee building projects completed prior to the Starwood Fund’s investment in us on September 24, 2010. Since the Starwood Fund’s investment in us, we have focused primarily on building and selling homes for our own account.

 

(2)   

We entered into a construction management agreement to build, sell and market homes in this community for an independent third-party property owner. This project is marketed under the TRI Pointe Homes brand name.

 

(3)   

We entered into a construction management agreement to only build homes in this community for an independent third-party property owner. This project is marketed under the independent third-party property owner’s name.

 

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Description of Completed Projects and Communities under Development

 

Our homebuilding projects usually take approximately 24 to 36 months to complete from the start of sales. The following table presents project information relating to each of our markets as of September 30, 2012 and includes information for all completed projects from our inception and current projects under development where we are building and selling homes for our own account and all completed projects from our inception and current projects under development where we are acting as a fee builder.

 

County, Project, City

  Year of
First
Delivery(1)
    Total
Number of

Homes(2)
    Cumulative
Units

Closed as of
September 30,
2012
    Backlog at
September 30,
2012(3)(4)
    Lots
as of
September 30,
2012(5)
    Sales Price
Range
(in 000’s)(6)
    Home Size
Range
(sq. ft.)
 
Owned Projects      

Southern California

             

Orange County:

             

Brio, La Habra

    2013        91                      91      $ 410 – $445        1,744 – 2,259   

San Diego County:

             

Eagle Ridge, Oceanside

    2010        30        30                    $ 425 – $435        2,362 – 2,495   

Candera, San Marcos

    2012        50               22        50      $ 297 – $357        1,524 – 2,014   

Candera, San Marcos

    2012        8               5        8      $ 440 – $490        2,361 – 2,929   

Civita, San Diego

    2013        45                      45      $ 570 – $630        1,615 – 2,017   

Riverside County:

             

Castlerock, Riverside

    2010        29        29                    $ 315 – $335        2,336 – 2,661   

Amberview, Riverside

    2012        11        10        1        1      $ 390 – $440        2,713 – 4,291   

Topazridge, Riverside

    2012        68        8        5        60      $ 390 – $440        2,567 – 3,773   

Sagebluff, Riverside

    2012        47        14        9        33      $ 350 – $380        2,866 – 3,206   

Los Angeles County:

             

Los Arboles, Simi Valley

    2012        43        11        12        32      $ 385 – $420        1,300 – 1,521   

Tamarind Lane, Azusa

    2012        62               6        62      $ 425 – $450        2,015 – 2,098   
   

 

 

   

 

 

   

 

 

   

 

 

     

Southern California Total

      484        102        60        382       
   

 

 

   

 

 

   

 

 

   

 

 

     

Northern California

             

Santa Clara County:

             

Chantrea, San Jose

    2012        38               13        38      $ 1,245– $1,465        3,390 – 4,250   

Ironhorse South, Morgan Hill

    2012        37               9        37      $ 500 – $676        1,818 – 2,672   

Ironhorse North, Morgan Hill

    2013        32                      32      $ 500 – $676        1,818 – 2,672   

San Mateo County:

             

Amelia, San Mateo

    2013        63                      63      $ 690 – $1,030        1,256 – 2,521   
   

 

 

   

 

 

   

 

 

   

 

 

     

Northern California Total

      170               22        170       
   

 

 

   

 

 

   

 

 

   

 

 

     

Company Total—Owned Projects

      654        102        82        552       
   

 

 

   

 

 

   

 

 

   

 

 

     
Fee Building Projects     

Southern California

             

Orange County:

             

Andalucia, Irvine(7)

    2010        3        3                    $ 849 – $1,028        1,961 – 2,596   

Sonoma, Irvine(7)

    2010        95        95                    $ 755 – $900        2,330 – 2,622   

San Marino, Irvine(8)

    2011        39        36               3        N/A        2,808 – 3,121   

San Diego County:

             

Patria, Chula Vista(7)

    2010        52        52                    $ 503 – $553        2,687 – 3,341   

Ventura County:

             

Meridian Hills, Moorpark(7)

    2013        83                      83      $ 620 – $775        2,650 – 3,883   

Lagunitas, Carpinteria(9)

    2013        57               3        57      $ 450 – $815        1,360 – 2,605   
   

 

 

   

 

 

   

 

 

   

 

 

     

Southern California Total

      329        186        3        143       
   

 

 

   

 

 

   

 

 

   

 

 

     

Company Total—Fee Building Projects

      329        186        3        143       
   

 

 

   

 

 

   

 

 

   

 

 

     

Grand Totals:

             

Owned Projects

      654        102        82        552       

Fee Building Projects

      329        186        3        143       
   

 

 

   

 

 

   

 

 

   

 

 

     
      983        288        85        695       
   

 

 

   

 

 

   

 

 

   

 

 

     

 

(1)   

Year of first delivery for future periods is based upon management’s estimates and is subject to change.

 

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(2)  

The number of homes to be built at completion is subject to change, and there can be no assurance that we will build these homes.

 

(3)  

Backlog consists of homes under sales contracts that had not yet closed, and there can be no assurance that closings of sold homes will occur.

 

(4)  

Of the total homes subject to pending sales contracts that have not closed as of September 30, 2012, 82 represent homes completed or under construction on our owned projects and three represent homes completed on our fee building projects.

 

(5)  

Owned lots and fee building lots as of September 30, 2012 include owned lots and fee building lots in backlog as of September 30, 2012.

 

(6)  

Sales price range reflects base price only and excludes any lot premium, buyer incentives and buyer selected options, which may vary from project to project. Sales prices for homes required to be sold pursuant to affordable housing requirements are excluded from sales price range.

 

(7)  

We entered into a construction management agreement to build, sell and market homes in this community for an independent third-party property owner. This project is marketed under the TRI Pointe Homes brand name.

 

(8)  

We entered into a construction management agreement to only build homes in this community for an independent third-party property owner. This project is marketed under the independent third-party property owner’s name.

 

(9)  

We entered into a non-binding letter of intent to only build homes in this community for an independent third-party property owner. There can be no assurance that we will enter into a binding agreement or that we will complete this project as planned.

 

Pending Acquisitions

 

As of September 30, 2012, we had options or were under contract to acquire land for an aggregate purchase price of approximately $109.3 million (net of deposits) on which we expect to build 689 homes in eight new communities in California and Colorado. These projects are located in Rancho Mission Viejo (Orange County), Huntington Beach (Orange County) (two communities), Mountain View (Santa Clara County), Alameda (Alameda County) (three communities) and in Castle Rock (Douglas County, Colorado). As of September 30, 2012, we had paid $16.5 million in non-refundable deposits relating to these pending acquisitions. We have also entered into non-binding letters of intent, and, in October 2012, entered into an option contract, to acquire land for an aggregate purchase price of $56.0 million on which we expect to build 152 homes in two new communities and one existing community. The following table presents certain information with respect to each of these pending acquisitions as of September 30, 2012(1).

 

Market

   Total Lots
Controlled(1)
     Communities      Aggregate Purchase
Price, Net(2)
 

Southern California

     387         5       $ 103,875,000   

Northern California

     305         4         52,850,000   

Colorado

     149         1         8,579,000   
  

 

 

    

 

 

    

 

 

 

Company total

     841         10       $ 165,304,000   
  

 

 

    

 

 

    

 

 

 

 

(1)  

Includes (i) 689 lots that are under land option contracts or purchase contracts, (ii) 91 lots that are under non-binding letters of intent and (iii) 61 lots that are under an option contract executed in October 2012. The aggregate purchase price of the lots under non-binding letters of intent and the option contract executed in October 2012 is $56.0 million. With respect to the lots under non-binding letters of intent, there can be no assurance that we will enter into binding agreements or as to the terms thereof.

 

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(2)  

Includes the estimated aggregate purchase price of all the lots per region less aggregate deposits paid of $16.5 million as of September 30, 2012.

 

We closed on an aggregate of 164 of the controlled lots in our inventory in November 2012, located in Rancho Mission Viejo (Orange County) and Mountain View (Santa Clara County), for an aggregate purchase price of $40.7 million (including the application of $6.5 million of previously paid deposits). However, there can be no assurance that we will acquire any of the remaining land parcels on the terms or timing anticipated or at all or that we will proceed to build and sell homes on any of this land.

 

Owned and Controlled Lots

 

As of September 30, 2012, we owned or controlled, pursuant to option contracts, purchase contracts or non-binding letters of intent, an aggregate of 1,393 lots. The following table presents certain information with respect to our owned and controlled lots as of September 30, 2012(1).

 

Market

   Lots Owned      Lots Controlled(1)      Lots Owned and
Controlled(1)
 

Southern California

     382         387         769   

Northern California

     170         305         475   

Colorado

             149         149   
  

 

 

    

 

 

    

 

 

 

Company total

     552         841         1,393   
  

 

 

    

 

 

    

 

 

 

 

 

(1)  

Includes (i) 689 lots that are under land option contracts or purchase contracts, (ii) 91 lots that are under non-binding letters of intent and (iii) 61 lots that are under an option contract executed in October 2012. With respect to the lots under non-binding letters of intent, there can be no assurance that we will enter into binding agreements or as to the terms thereof. In November 2012, we closed the purchase of an aggregate of 164 of the controlled lots in our inventory.

 

Summary Risk Factors

 

An investment in the shares of our common stock involves risks. You should consider carefully the risks discussed below and described more fully along with other risks under “Risk Factors” in this prospectus before investing in our common stock.

 

   

Our long-term growth depends upon our ability to successfully identify and acquire desirable land parcels for residential buildout.

 

   

Adverse changes in general economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.

 

   

Our geographic concentration could materially and adversely affect us if the homebuilding industry in our markets should decline.

 

   

Because most of our homebuyers finance the purchase of their homes, the terms and availability of mortgage financing can affect the demand for and the ability to complete the purchase of a home, which could materially and adversely affect us.

 

   

Interest rate increases or changes in federal lending programs or other regulations could lower demand for our homes, which could materially and adversely affect us.

 

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Our business and results of operations are dependent on the availability and skill of subcontractors.

 

   

Fluctuations in real estate values may require us to write-down the book value of our real estate assets.

 

   

The Starwood Fund holds a majority equity interest in our company and its interests may not be aligned with yours, and as a result of Starwood Capital Group’s relationship with us, conflicts of interests may arise with respect to transactions involving or with Starwood Capital Group or its affiliates.

 

   

We have no contractual right to access the personnel, relationships or the investing and operational expertise of Starwood Capital Group, which may be withheld from us at any time, and we are likely to lose such access if and when the Starwood Fund ceases to hold a material investment in our company. Starwood Capital Group may pursue competing transactions.

 

   

We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.

 

   

We have a limited operating history and we may not be able to successfully operate our business.

 

   

There is currently no public market for shares of our common stock, a trading market for our common stock may never develop following this offering and our common stock prices may be volatile and could decline substantially following this offering.

 

   

The offering price per share of our common stock offered under this prospectus may not accurately reflect the value of your investment.

 

Our Offices

 

Our principal executive offices are located at 19520 Jamboree Road, Suite 200, Irvine, California 92612. Our main telephone number is (949) 478-8600. Our internet website is www.tripointehomes.com. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These provisions include, among other matters:

 

   

an exemption to provide fewer years of financial statements and other financial data in an initial public offering registration statement;

 

   

an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;

 

   

an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;

 

   

reduced disclosure about the emerging growth company’s executive compensation arrangements; and

 

   

no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We have determined to opt out of the exemption from compliance with new or revised financial accounting standards. Our decision to opt out of this exemption is irrevocable.

 

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We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of our elections, which may cause a less active trading market for our common stock and more volatility in our stock price.

 

We will remain an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

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The Offering

 

Common stock offered

                shares

 

Common stock to be outstanding immediately following this offering

                shares(1)

 

Underwriters’ option

Up to                 shares

 

Use of proceeds

We expect to receive net proceeds from this offering of approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares in full (assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering (including any additional proceeds that we may receive if the underwriters exercise their option to purchase additional shares) primarily for the acquisition of land, including the land described above under “—Pending Acquisitions,” and for development, home construction and other related purposes. See “Use of Proceeds.”

 

Dividend policy

We currently intend to retain our future earnings, if any, 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, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant. See “Dividend Policy.”

 

New York Stock Exchange symbol

We have applied to list the shares of our common stock on the New York Stock Exchange under the symbol “TPH.”

 

Risk factors

Investing in our common stock involves a high degree of risk. For a discussion of factors you should consider in making an investment, see “Risk Factors” beginning on page 17 of this prospectus.

 

(1)  

Excludes: (i) an aggregate of                 restricted stock units to be granted to our executive officers and director nominees upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan; (ii) options to purchase an aggregate of                 shares of our common stock to be granted to our executive officers upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan; (iii)                 shares of our common stock reserved for future issuance under our 2013 Long-Term Incentive Plan; and (iv) up to                 shares of our common stock issuable upon the exercise by the underwriters of their option to purchase additional shares.

 

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Summary of Selected Financial Data

 

The following sets forth our summary of selected financial and operating data on a historical basis. You should read the following summary of selected financial data in conjunction with our consolidated historical financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

Our historical consolidated statements of operations information for the year ended December 31, 2011, the period from September 24, 2010 (inception date of TRI Pointe Homes, LLC) through December 31, 2010 and the period from January 1, 2010 through September 23, 2010 (our predecessor) have been derived from the historical consolidated financial statements audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this prospectus. From April 2009 to September 23, 2010, our principals were engaged primarily in the business of constructing homes for independent third-party property owners through a number of different entities.

 

Our unaudited historical consolidated balance sheet information as of September 30, 2012 and consolidated statements of operations information for the nine-month periods ended September 30, 2012 and 2011 are derived from our unaudited historical consolidated financial statements, which we believe include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. Our results of operations for the interim period ended September 30, 2012 are not necessarily indicative of the results to be obtained for the full calendar year.

 

               

Period From

    Our Predecessor  
    Nine Months
Ended  September 30, 
    Year Ended
December 31,
2011
    September 24,
2010  (Inception)
Through
December  31,
2010
    Period From
January 1,
2010 Through
September  23,
2010
 
    2012     2011        
   

(unaudited)

                   

Statement of Operations Data

           

Home sales

  $ 22,277,000      $ 9,279,000      $ 13,525,000      $ 4,143,000      $   

Cost of home sales

    (19,663,000     (8,408,000     (12,075,000     (3,773,000       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding gross profit

    2,614,000        871,000        1,450,000        370,000          

Fee building gross margin

    38,000        198,000        150,000        814,000        2,665,000   

Sales and marketing

    (2,351,000     (1,062,000     (1,553,000     (408,000     (136,000

General and administrative

    (4,155,000     (3,112,000     (4,620,000     (1,875,000     (1,401,000

Organizational costs

                         (1,061,000       

Other income (expense), net

    (86,000     (41,000     (20,000     (15,000     (43,000
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (3,940,000   $ (3,146,000   $ (4,593,000   $ (2,175,000   $ 1,085,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited pro forma loss per share

           

Basic

  $                     $                      
 

 

 

     

 

 

       

Diluted

  $                     $                      
 

 

 

     

 

 

       

Operating Data-Owned Projects

           

Net new home orders

    129        34        42        9        4   

New homes delivered

    55        26        36        11          

Average sales price of homes delivered

  $ 405,000      $ 357,000      $ 376,000      $ 377,000      $   

Cancellation rate

    17     8     13     19     20

Average selling communities

    5        2        2        2        1   

Selling communities at end of period

    7        2        3        2        1   

Backlog at end of period, number of homes

    82        10        8        2        4   

Backlog at end of period, aggregate sales value

  $ 46,126,000      $ 4,004,000      $ 3,364,000      $ 696,000      $ 1,392,000   

Operating Data-Fee Building Projects

           

Net new home orders

    17        31        34        24        114   

New homes delivered

    16        65        68        56        46   

Average sales price of homes delivered

  $ 1,020,000      $ 775,000      $ 786,000      $ 794,000      $ 787,000   

 

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     As of September 30, 2012  
     Actual      As Adjusted(1)  

Balance Sheet Data (at period end)

     

Cash and cash equivalents

   $ 45,242,000       $                    

Real estate inventories

   $ 148,468,000       $ 148,468,000   

Total assets

   $ 195,514,000       $     

Notes payable

   $ 46,436,000       $ 46,436,000   

Total liabilities

   $ 52,924,000       $     

Common units subject to redemption(2)

   $ 37,000,000       $     

Members’ equity

   $ 105,590,000       $   

Stockholders’ equity

   $       $     

 

 

(1)  

This column gives effect to (i) our formation transactions, (ii) the sale of                 shares of our common stock in this offering, assuming an initial public offering price of $                per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us (and assuming no exercise of the underwriters’ option to purchase additional shares), and (iii) the application of the net proceeds from this offering.

 

(2)  

During the period ended September 30, 2012, the Starwood Fund made an additional capital contribution to TPH LLC in the amount of $37 million, representing the contribution of the remainder of its $150 million equity commitment to TPH LLC, in exchange for additional common units. As of September 30, 2012, we were required to return this $37 million capital contribution (or a lesser amount specified by the Starwood Fund) to the Starwood Fund if this offering were not to close by February 28, 2013, or if this offering were to terminate prior to that time. In November 2012, we obtained written approval from the Starwood Fund, pursuant to an amendment of the operating agreement of TPH LLC, to remove the redemption feature of the $37 million of common units.

 

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RISK FACTORS

 

An investment in our common stock involves a high degree of risk and should be considered highly speculative. Before making an investment decision, you should carefully consider the following risk factors, which address the material risks concerning our business and an investment in our common stock, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occur, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the trading price of our common stock could decline significantly and you could lose all or a part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Concerning Forward-Looking Statements.”

 

Risks Related to Our Business

 

Our long-term growth depends upon our ability to successfully identify and acquire desirable land parcels for residential buildout.

 

Our future growth depends upon our ability to successfully identify and acquire attractive land parcels for development of our single-family homes at reasonable prices and with terms that meet our underwriting criteria. Our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning and other market conditions. If the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other reason, our ability to grow could be significantly limited, and the number of homes that we build and sell could decline. Additionally, our ability to begin new projects could be impacted if we elect not to purchase land parcels under option contracts. To the extent that we are unable to purchase land parcels timely or enter into new contracts for the purchase of land parcels at reasonable prices, our home sales revenue and results of operations could be negatively impacted.

 

Adverse changes in general economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.

 

The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability of financing for acquisitions, construction and permanent mortgages, interest rate levels, inflation and demand for housing. Since early 2006, the U.S. housing market has been negatively impacted by declining consumer confidence, restrictive mortgage standards and large supplies of foreclosures, resales and new homes, among other factors. When combined with a prolonged economic downturn, high unemployment levels, increases in the rate of inflation and uncertainty in the U.S. economy, these conditions have contributed to decreased demand for housing, declining sales prices and increasing pricing pressure. In the event that these economic and business trends continue or decline further, we could experience declines in the market value of our inventory and demand for our homes, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

The health of the residential homebuilding industry may also be significantly affected by “shadow inventory” levels. “Shadow inventory” refers to the number of homes with a mortgage that are in some form of distress but that have not yet been listed for sale. Shadow inventory can occur when lenders put properties that have been foreclosed or forfeited to lenders on the market gradually, rather than all at once, or delay the foreclosure process. They may choose to do so because of regulations and foreclosure moratoriums, because of the additional costs and resources required to process and sell foreclosed properties, or because they want to avoid depressing housing prices further by putting many distressed properties up for sale at the same time. A significant shadow inventory in our markets could, were it to be released into our markets, adversely impact

 

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home prices and demand for our homes, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

In addition, an important segment of our customer base consists of first time and second time “move-up” buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. The difficulties facing these buyers in selling their homes during recessionary periods may adversely affect our sales. Moreover, during such periods, we may need to reduce our sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins.

 

Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should decline.

 

Our business strategy is focused on the design, construction and sale of innovative single-family detached and attached homes in planned communities in major metropolitan areas in Southern and Northern California and, more recently, Colorado (where we have land under a purchase contract with an entity managed by an affiliate of Starwood Capital Group but no current real estate ownership), as well as the eventual entry into other Southwestern markets. In Southern California, we principally operate in the counties of Los Angeles, Orange, San Diego, Ventura and Riverside-San Bernardino, and in Northern California, we principally operate in the counties of Santa Clara, San Mateo and Alameda. In Colorado, we anticipate that we will principally operate in the counties of Douglas, Denver, Arapahoe and Jefferson. Because our operations are concentrated in these areas, a prolonged economic downturn in one or more of these areas, particularly within California, could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations. For the nine months ended September 30, 2012, we generated all of our revenues from our California real estate inventory. During the downturn from 2008 to 2010, land values, the demand for new homes and home prices declined substantially in California. In addition, the state of California is experiencing severe budget shortfalls and is considering raising taxes and increasing fees to offset the deficit. If these conditions in California persist or worsen, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations. If the current, relatively weak buyer demand for new homes in California continues or worsens, home prices could stagnate or continue to decline, which would have a material adverse effect on us.

 

Because most of our homebuyers finance the purchase of their homes, the terms and availability of mortgage financing can affect the demand for and the ability to complete the purchase of a home, which could materially and adversely affect us.

 

Our business depends on the ability of our homebuyers to obtain financing for the purchase of their homes. Many of our homebuyers must sell their existing homes in order to buy a home from us. Since 2009, the U.S. residential mortgage market as a whole has experienced significant instability due to, among other things, defaults on subprime and other loans, resulting in the declining market value of such loans. In light of these developments, lenders, investors, regulators and other third parties questioned the adequacy of lending standards and other credit requirements for several loan programs made available to borrowers in recent years. This has led to tightened credit requirements and an increase in indemnity claims for mortgages. Deterioration in credit quality among subprime and other nonconforming loans has caused most lenders to eliminate subprime mortgages and most other loan products that do not conform to Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”), Federal Housing Administration (the “FHA”) or Veterans Administration (the “VA”) standards. Fewer loan products and tighter loan qualifications, in turn, make it more difficult for a borrower to finance the purchase of a new home or the purchase of an existing home from a potential “move-up” buyer who wishes to purchase one of our homes. In general, these developments have delayed any general improvement in the housing market. If our potential homebuyers or the buyers of our homebuyers’ existing homes cannot obtain suitable financing, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.

 

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Interest rate increases or changes in federal lending programs or other regulations could lower demand for our homes, which could materially and adversely affect us.

 

Substantially all purchasers of our homes finance their acquisitions with mortgage financing. Rising interest rates, decreased availability of mortgage financing or of certain mortgage programs, higher down payment requirements or increased monthly mortgage costs may lead to reduced demand for our homes and mortgage loans. Increased interest rates can also hinder our ability to realize our backlog because our home purchase contracts provide customers with a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event that they cannot arrange for adequate financing. As a result, rising interest rates can decrease our home sales and mortgage originations. Any of these factors could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

In addition, as a result of the turbulence in the credit markets and mortgage finance industry, the federal government has taken on a significant role in supporting mortgage lending through its conservatorship of Fannie Mae and Freddie Mac, both of which purchase home mortgages and mortgage-backed securities originated by mortgage lenders, and its insurance of mortgages originated by lenders through the FHA and the VA. The availability and affordability of mortgage loans, including consumer interest rates for such loans, could be adversely affected by a curtailment or cessation of the federal government’s mortgage-related programs or policies. The FHA may continue to impose stricter loan qualification standards, raise minimum down payment requirements, impose higher mortgage insurance premiums and other costs, and/or limit the number of mortgages it insures. Due to growing federal budget deficits, the U.S. Treasury may not be able to continue supporting the mortgage-related activities of Fannie Mae, Freddie Mac, the FHA and the VA at present levels, or it may revise significantly the federal government’s participation in and support of the residential mortgage market. Because the availability of Fannie Mae, Freddie Mac, FHA- and VA-backed mortgage financing is an important factor in marketing and selling many of our homes, any limitations, restrictions or changes in the availability of such government-backed financing could reduce our home sales, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Furthermore, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This legislation provides for a number of new requirements relating to residential mortgages and mortgage lending practices, many of which are to be developed further by implementing rules. These include, among others, minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees and incentive arrangements, retention of credit risk and remedies for borrowers in foreclosure proceedings. The effect of such provisions on lending institutions will depend on the rules that are ultimately enacted. However, these requirements, as and when implemented, are expected to reduce the availability of loans to borrowers and/or increase the costs to borrowers to obtain such loans. Any such reduction could result in a decline of our home sales, which could materially and adversely affect us.

 

Any limitation on, or reduction or elimination of, tax benefits associated with owning a home would have an adverse effect upon the demand for our home products, which could be material to our business.

 

Changes in federal income tax laws may affect demand for new homes. Current tax laws generally permit significant expenses associated with owning a home, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual’s federal, and in many cases, state, taxable income. Various proposals have been publicly discussed to limit mortgage interest deductions and to limit the exclusion of gain from the sale of a principal residence. If such proposals were enacted without offsetting provisions, the after-tax cost of owning a new home would increase for many of our potential customers. Enactment of any such proposal may have an adverse effect on the homebuilding industry in general, as the loss or reduction of homeowner tax deductions could decrease the demand for new homes.

 

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Difficulty in obtaining sufficient capital could result in an inability to acquire land for our developments or increased costs and delays in the completion of development projects.

 

The homebuilding industry is capital-intensive and requires significant up-front expenditures to acquire land parcels and begin development. If internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have recently experienced significant volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be unable to acquire land for our housing developments and/or to develop the housing. Additionally, if we cannot obtain additional financing to fund the purchase of land under our option contracts or purchase contracts, we may incur contractual penalties and fees. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

We face potentially substantial risk with respect to our land and lot inventory.

 

We intend to acquire land parcels for replacement and expansion of land inventory within our current and any new markets. The risks inherent in purchasing and developing land parcels increase as consumer demand for housing decreases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. The market value of land parcels, building lots and housing inventories can fluctuate significantly as a result of changing market conditions, and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. When market conditions are such that land values are not appreciating, previously entered into option agreements may become less desirable, at which time we may elect to forego deposits and pre-acquisition costs and terminate the agreements. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all.

 

Adverse weather and geological conditions may increase costs, cause project delays and reduce consumer demand for housing, all of which could materially and adversely affect us.

 

As a homebuilder, we are subject to numerous risks, many of which are beyond our management’s control, such as droughts, floods, wildfires, landslides, soil subsidence, earthquakes and other weather-related and geologic events which could damage projects, cause delays in completion of projects, or reduce consumer demand for housing, and shortages in labor or raw materials, which could delay project completion and cause increases in the prices for labor or raw materials, thereby affecting our sales and profitability. Our current markets are primarily in Southern and Northern California, areas which have historically experienced significant earthquake activity and seasonal wildfires. Areas in Colorado (where we have land under a purchase contract with an entity managed by an affiliate of Starwood Capital Group but no current real estate ownership) have also been subjected to seasonal wildfires and soil subsidence. In addition to directly damaging our projects, earthquakes, wildfires or other geologic events could damage roads and highways providing access to those projects, thereby adversely affecting our ability to market homes in those areas and possibly increasing the costs of completion.

 

There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes and other geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

 

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Our business and results of operations are dependent on the availability and skill of subcontractors.

 

Substantially all of our construction work is done by third-party subcontractors with us acting as the general contractor. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. While we anticipate being able to obtain sufficient materials and reliable subcontractors during times of material shortages and believe that our relationships with subcontractors are good, we do not have long-term contractual commitments with any subcontractors, and there can be no assurance that skilled subcontractors will continue to be available at reasonable rates and in the areas in which we conduct our operations. Certain of the subcontractors engaged by us are represented by labor unions or are subject to collective bargaining arrangements. A strike or other work stoppage involving any of our subcontractors could also make it difficult for us to retain subcontractors for our construction work. In addition, union activity could result in higher costs to retain our subcontractors. The inability to contract with skilled subcontractors at reasonable costs on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

In addition, despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices or installing defective materials in our homes. When we discover these issues, we, generally through our subcontractors, repair the homes in accordance with our new home warranty and as required by law. We reserve up to 1.0% of the sales price of each home we sell to provide the customer service to our homebuyers. These reserves are established based on market practices, our historical experiences, and our judgment of the qualitative risks associated with the types of homes built. However, the cost of satisfying our warranty and other legal obligations in these instances may be significantly higher than our warranty reserves, and we may be unable to recover the cost of repair from such subcontractors. Regardless of the steps we take, we can in some instances be subject to fines or other penalties, and our reputation may be injured.

 

Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could materially and adversely affect us.

 

The residential construction industry experiences serious labor and raw material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and raw material shortages can be more severe during periods of strong demand for housing or during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures. The cost of labor and raw materials may also be adversely affected during periods of shortage or high inflation. During the recent economic downturn, a large number of qualified tradespeople went out of business or otherwise exited the market. A reduction in available tradespeople will likely exacerbate labor shortages when demand for new housing increases. Shortages and price increases could cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Utility shortages or price increases could have an adverse impact on operations.

 

Certain of the areas in which we operate, particularly in Southern and Northern California, have experienced power shortages, including mandatory periods without electrical power, as well as significant increases in utility costs. We may incur additional costs and may not be able to complete construction on a timely basis if such power shortages and utility rate increases continue. In addition, power shortages and rate increases may adversely affect the local economies in which we operate, which may reduce demand for housing in our markets. Our operations may be adversely impacted if further rate increases and/or power shortages occur.

 

New and existing laws and regulations or other governmental actions may increase our expenses, limit the number of homes that we can build or delay completion of our projects.

 

We are subject to numerous local, state, federal and other statutes, ordinances, rules and regulations concerning zoning, development, building design, construction and similar matters which impose restrictive zoning and density requirements, the result of which is to limit the number of homes that can be built within the

 

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boundaries of a particular area. Projects that are not entitled may be subjected to periodic delays, changes in use, less intensive development or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future. Local governments also have broad discretion regarding the imposition of development fees and exactions for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety and welfare issues, which can further delay these projects or prevent their development. As a result, home sales could decline and costs increase, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

We may be unable to obtain suitable bonding for the development of our housing projects.

 

We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. As a result of market conditions, surety providers have been reluctant to issue new bonds and some providers are requesting credit enhancements (such as cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. If we are unable to obtain required bonds in the future for our projects, or if we are required to provide credit enhancements with respect to our current or future bonds, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected.

 

We are subject to environmental laws and regulations, which may increase our costs, limit the areas in which we can build homes and delay completion of our projects.

 

We are subject to a variety of local, state, federal and other statutes, ordinances, rules and regulations concerning the environment. The particular environmental laws which apply to any given homebuilding site vary according to multiple factors, including the site’s location, its environmental conditions and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas. In addition, in those cases where an endangered or threatened species is involved, environmental rules and regulations can result in the restriction or elimination of development in identified environmentally sensitive areas. From time to time, the United States Environmental Protection Agency (the “EPA”) and similar federal or state agencies review homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs. Further, we expect that increasingly stringent requirements will be imposed on homebuilders in the future. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber. California is especially susceptible to restrictive government regulations and environmental laws.

 

Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may be required to investigate and clean up hazardous or toxic substances or petroleum product releases, and may be held liable to a governmental entity or to third parties for related damages, including for bodily injury, and for investigation and clean-up costs incurred by such parties in connection with the contamination. A mitigation system may be installed during the construction of a home if a cleanup does not remove all contaminants of concern or to address a naturally occurring condition such as methane. Some buyers may not want to purchase a home with a mitigation system.

 

We may not be able to compete effectively against competitors in the homebuilding industry.

 

Competition in the homebuilding industry is intense, and there are relatively low barriers to entry into our business. Homebuilders compete for, among other things, home buying customers, desirable land parcels, financing, raw materials and skilled labor. Increased competition could hurt our business, as it could prevent us

 

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from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion, and lead to pricing pressures on our homes that may adversely impact our margins and revenues. If we are unable to successfully compete, our business, prospects, liquidity, financial condition and results of operations could be materially and adversely affected. Our competitors may independently develop land and construct housing units that are superior or substantially similar to our products. Furthermore, a number of our primary competitors are significantly larger, have a longer operating history and may have greater resources or lower cost of capital than ours; accordingly, they may be able to compete more effectively in one or more of the markets in which we operate. Many of these competitors also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. We also compete for sales with individual resales of existing homes and with available rental housing.

 

Increases in our cancellation rate could have a negative impact on our home sales revenue and homebuilding margins.

 

The cancellation rate of buyers for our owned projects who contracted to buy a home but did not close escrow (as a percentage of overall orders) was approximately 17% during the nine months ended September 30, 2012 and 13% during the year ended December 31, 2011. Home order cancellations negatively impact the number of closed homes, net new home orders, home sales revenue and results of operations, as well as the number of homes in backlog. Home order cancellations can result from a number of factors, including declines or slow appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, homebuyers’ inability to sell their existing homes, homebuyers’ inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions. Upon a home order cancellation, the homebuyer’s escrow deposit is returned to the homebuyer (other than with respect to certain design-related deposits, which we retain). An increase in the level of our home order cancellations could have a negative impact on our business, prospects, liquidity, financial condition and results of operations.

 

We are subject to product liability and warranty claims arising in the ordinary course of business.

 

As a homebuilder, we are subject to construction defect, product liability and home warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. While we maintain general liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for some portion of the liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be collectable or adequate to cover any or all construction defect and warranty claims for which we may be liable. For example, contractual indemnities can be difficult to enforce, we are often responsible for applicable self-insured retentions (particularly in markets where we include our subcontractors on our general liability insurance and our ability to seek indemnity for insured claims is significantly limited), certain claims may not be covered by insurance or may exceed applicable coverage limits, and one or more of our insurance carriers could become insolvent. Additionally, in the event we determine to obtain product liability insurance, the coverage offered by and availability of such insurance for construction defects is limited and costly. There can be no assurance that coverage will not be further restricted, become more costly or even be available. Furthermore, any product liability or warranty claims made against us, whether or not they are viable, may lead to negative publicity, which could impact our reputation and our home sales.

 

In addition, we conduct the substantial portion of our business in California, one of the most highly regulated and litigious jurisdictions in the United States, which imposes a ten year, strict liability tail on many construction liability claims. As a result, our potential losses and expenses due to litigation, new laws and regulations may be greater than those of our competitors who have smaller California operations.

 

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Our operating performance is subject to risks associated with the real estate industry.

 

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for operations, as well as the value of our real estate assets. These events include, but are not limited to:

 

   

adverse changes in international, national or local economic and demographic conditions;

 

   

adverse changes in financial conditions of buyers and sellers of properties, particularly residential homes and land suitable for development of residential homes;

 

   

competition from other real estate investors with significant capital, including other real estate operating companies and developers and institutional investment funds;

 

   

reductions in the level of demand for and increases in the supply of land suitable for development;

 

   

fluctuations in interest rates, which could adversely affect our ability, or the ability of homebuyers, to obtain financing on favorable terms or at all;

 

   

unanticipated increases in expenses, including, without limitation, insurance costs, development costs, real estate assessments and other taxes and costs of compliance with laws, regulations and governmental policies; and

 

   

changes in enforcement of laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990.

 

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in the purchase of homes or an increased incidence of home order cancellations. If we cannot successfully implement our business strategy, our business, prospects, liquidity, financial condition and results of operations will be adversely affected.

 

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for reasonable prices in response to changing economic, financial and investment conditions may be limited and we may be forced to hold non-income producing properties for extended periods of time.

 

Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in response to changing economic, financial and investment conditions is limited and we may be forced to hold non-income producing assets for an extended period of time. We cannot predict whether we will be able to sell any property for the price or on the terms that we set or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

 

Fluctuations in real estate values may require us to write-down the book value of our real estate assets.

 

The homebuilding industry is subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with U.S. generally accepted accounting principles (“GAAP”), and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Inflation could adversely affect our business and financial results.

 

Inflation could adversely affect us by increasing the costs of land, raw materials and labor needed to operate our business. If the market continues to have an oversupply of homes relative to demand, we may be unable to offset any such increases in costs with corresponding higher sales prices for our homes. Inflation may also

 

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accompany higher interests rates, which could adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.

 

Acts of war or terrorism may seriously harm our business.

 

Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power or acts of terrorism may cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of construction, affect job growth and consumer confidence, or cause economic changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial condition and results of operations.

 

Risks Related to Conflicts of Interest

 

The Starwood Fund holds a majority equity interest in our company and its interests may not be aligned with yours.

 

Upon the completion of this offering, the Starwood Fund will beneficially own         shares of our common stock, which will represent         % of our common stock outstanding immediately after this offering, or         % if the underwriters exercise their option to purchase additional shares in full (in each case, based upon the midpoint of the price range set forth on the cover page of this prospectus and assuming this offering closes on         , 2013). See “Principal Stockholders.” The Starwood Fund is managed by an affiliate of Starwood Capital Group. For so long as the Starwood Fund continues to beneficially own a controlling stake in us, the Starwood Fund will have the power to elect and remove all of our directors and to approve any action requiring the majority approval of our stockholders. The Starwood Fund’s interests may not be fully aligned with yours and this could lead to a strategy that is not in your best interests. In addition, the Starwood Fund’s significant ownership in us and resulting ability to effectively control us may discourage someone from making a significant equity investment in us, or could discourage transactions involving a change in control, including transactions in which you as a holder of shares of our common stock might otherwise receive a premium for your shares over the then-current market price.

 

Moreover, for as long as the Starwood Fund’s beneficial ownership of our common stock continues to exceed 50%, we may elect to be treated as a “controlled company” for purposes of the New York Stock Exchange, which would allow us to opt out of certain corporate governance requirements, including requirements that a majority of the board of directors consist of independent directors and that the compensation committee and nominating committee be composed entirely of independent directors. We do not currently rely on the controlled company exemptions; however, to the extent we continue to qualify, we may choose to take advantage of these exemptions in the future.

 

As a result of Starwood Capital Group’s relationship with our company, conflicts of interest may arise with respect to any transactions involving or with Starwood Capital Group or its affiliates.

 

Barry Sternlicht, the chairman of our board, is the Chairman and Chief Executive Officer, and J. Marc Perrin, a member of our board, is a Managing Director, of Starwood Capital Group. As a result of our relationship with Starwood Capital Group, there may be transactions between us and Starwood Capital Group that could present an actual or perceived conflict of interest. These conflicts of interest may lead Mr. Sternlicht and Mr. Perrin to recuse themselves from actions of our board of directors with respect to any transactions involving or with Starwood Capital Group or its affiliates, or with Starwood Property Trust, Inc., a New York Stock Exchange-listed public mortgage REIT managed by an affiliate of Starwood Capital Group. In addition, Mr. Sternlicht and Mr. Perrin will

 

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devote only a portion of their business time to their duties with our board of directors, and they will devote the majority of their time to their duties with Starwood Capital Group and other commitments.

 

In addition to the acquisition of lots in Castle Rock, Colorado from an entity managed by an affiliate of Starwood Capital Group referred to under “Certain Relationships and Related Party Transactions,” we may in the future acquire additional land from affiliates of Starwood Capital Group. Any such acquisitions will be separately considered for approval by our independent directors.

 

We have no contractual right to access the personnel, relationships or the investing and operational expertise of Starwood Capital Group, which may be withheld from us at any time, and we are likely to lose such access if and when the Starwood Fund ceases to hold a material investment in our company. Starwood Capital Group may pursue competing transactions.

 

We believe that our relationship with Starwood Capital Group provides us with a competitive advantage by providing us with access to the personnel, relationships and the investing and operational expertise of Starwood Capital Group. However, we have not entered into, nor do we anticipate entering into, any exclusivity agreements with Starwood Capital Group, and we have no contractual right to access Starwood Capital Group’s personnel, relationships or expertise. Starwood Capital Group may cease to provide us with access to its personnel, relationships and expertise at any time, or from time to time, and we are likely to lose such access if and when the Starwood Fund ceases to hold a material investment in our company. Our inability to access Starwood Capital Group’s personnel, relationships or expertise as we currently expect, or the loss of such access in the future, could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations. For example, we believe that our relationship with Starwood Capital Group provides us with access to a greater number of acquisition opportunities than our competitors, and if we do not have access to those opportunities as we currently expect, our ability to grow could be significantly limited, and the number of homes that we build and sell could be materially lower than what we currently anticipate.

 

In addition, Starwood Capital Group is under no obligation to engage in any transactions with us, to present any acquisition opportunities to us or to assist us in any way in acquiring land parcels. As a result, Starwood Capital Group may pursue transactions that are competitive with our business, including engaging in acquisitions and/or sales of land and other residential properties for its own benefit, or for the benefit of entities that its affiliates manage, with third parties. In addition, Starwood Capital Group may sell land suitable for residential buildout in our current or target markets to our competitors. Any of the foregoing activities by Starwood Capital Group could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.

 

Although we do not pay any fees to Starwood Capital Group or its affiliates, we have reimbursed Starwood Capital Group for certain due diligence expenses, and for the out-of-pocket travel and lodging expenses of representatives of the Starwood Fund for their attendance at board and other meetings and in connection with site visits or other business of our company. We reimbursed Starwood Capital Group $3,966, $79,464 and $0 during the nine-month period ended September 30, 2012 and the years ended December 31, 2011 and 2010, respectively.

 

The employment agreements of our executive officers were not negotiated on an arm’s length basis and we may choose not to enforce, or to enforce less vigorously, our rights under these agreements because of our desire to maintain our ongoing relationship with them.

 

We will enter into new employment agreements with Douglas Bauer, our Chief Executive Officer, Thomas Mitchell, our President and Chief Operating Officer, and Michael Grubbs, our Chief Financial Officer, effective upon the completion of this offering, pursuant to which they will devote their full business time and attention to our affairs. See “Executive and Director Compensation—Employment Agreements.” These employment agreements were not negotiated on an arm’s-length basis. We may choose not to enforce, or to enforce less

 

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vigorously, our rights under these agreements because of our desire to maintain our ongoing relationship with the individuals party to these agreements.

 

Risks Related to Our Indebtedness

 

We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.

 

We expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise be recourse. As of September 30, 2012, we had approximately $86.0 million of aggregate loan commitments, of which $46.4 million was outstanding. Our board of directors 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. As a means of sustaining our long-term financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized. However, our charter does not contain a limitation on the amount of debt we may incur and our board of directors may change our target debt levels at any time without the approval of our stockholders.

 

Incurring substantial debt could subject us to many risks that, if realized, would adversely affect us, including the risk that:

 

   

our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt which is likely to result in acceleration of such debt;

 

   

our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing cost;

 

   

we may be required to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations and capital expenditures, future investment opportunities or other purposes; and

 

   

the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.

 

If we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance the debt through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flows and results of operations. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may be pledged to secure our obligations to foreclosure. Unsecured debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.

 

We expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise be recourse. As of September 30, 2012, we had approximately $86.0 million of aggregate loan

 

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commitments, of which $46.4 million was outstanding. Our access to additional third-party sources of financing will depend, in part, on:

 

   

general market conditions;

 

   

the market’s perception of our growth potential;

 

   

with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to be acquired and/or developed;

 

   

our current debt levels;

 

   

our current and expected future earnings;

 

   

our cash flow; and

 

   

the market price per share of our common stock.

 

Recently, domestic financial markets have experienced unusual volatility, uncertainty and a tightening of liquidity in both the investment grade debt and equity capital markets. Credit spreads for major sources of capital widened significantly during the U.S. credit crisis as investors demanded a higher risk premium. Given the current volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may charge us prohibitively high fees in order to obtain financing. Consequently, there is greater uncertainty regarding our ability to access the credit market in order to attract financing on reasonable terms. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all.

 

Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.

 

Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive covenants relating to our operations.

 

Our current financing arrangements contain, and the financing arrangements we enter into in the future likely will contain, covenants (financial and otherwise) affecting our ability to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our stockholders and otherwise affect our operating policies. If we fail to meet or satisfy any of these covenants in our debt agreements, we would be in default under these agreements, which could result in a cross-default under other debt agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. If we default on several of our debt agreements or any single significant debt agreement, it could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Secured indebtedness exposes us to the possibility of foreclosure on our ownership interests in our land parcels.

 

Incurring mortgage and other secured indebtedness increases our risk of loss of our ownership interests in our land parcels or other assets because defaults thereunder, and the inability to refinance such indebtedness, may result in foreclosure action initiated by lenders.

 

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Interest expense on debt we incur may limit our cash available to fund our growth strategies.

 

As of September 30, 2012, we had approximately $86.0 million of aggregate loan commitments, of which $46.4 million was outstanding. As part of our financing strategy, we may incur a significant amount of additional debt. Our current debt has, and any additional debt we subsequently incur may have, a floating rate of interest. Higher interest rates could increase debt service requirements on our current floating rate debt and on any floating rate debt we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay existing debt during periods of rising interest rates, we could be required to refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times which may not permit realization of the maximum return on such assets and could result in a loss. The occurrence of either such event or both could materially and adversely affect our cash flows and results of operations.

 

Failure to hedge effectively against interest rate changes may adversely affect us.

 

We may obtain in the future one or more forms of interest rate protection—in the form of swap agreements, interest rate cap contracts or similar agreements—to hedge against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations thereunder. In addition, we may be subject to risks of default by hedging counterparties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our assets at times which may not permit us to receive an attractive return on our assets in order to meet our debt service obligations.

 

Risks Related to Our Organization and Structure

 

We have a limited operating history and we may not be able to successfully operate our business.

 

Our predecessor was formed in April 2009 and TPH LLC was formed in September 2010. Prior to the completion of this offering, TRI Pointe Homes, LLC will be converted from a Delaware limited liability company into a Delaware corporation and renamed TRI Pointe Homes, Inc. Given our limited operating history, you will have little historical information upon which to evaluate our prospects, including our ability to acquire desirable land parcels, develop such land and market our homes. In addition, we cannot assure you that our past experience will be sufficient to enable us to operate our business successfully or implement our operating policies and business strategies as described in this prospectus. Furthermore, we may not be able to generate sufficient operating cash flows to pay our operating expenses or service our indebtedness. You should not rely upon the past performance of our management team, as past performance may not be indicative of our future results.

 

We depend on key personnel.

 

Our success depends to a significant degree upon the contributions of certain key personnel including, but not limited to, Douglas Bauer, our Chief Executive Officer, Thomas Mitchell, our President and Chief Operating Officer, and Michael Grubbs, our Chief Financial Officer, each of whom would be difficult to replace. Although we will enter into new employment agreements with Messrs. Bauer, Mitchell and Grubbs upon the completion of this offering, there is no guarantee that these executives will remain employed with us. If any of our key personnel were to cease employment with us, our operating results could suffer. Our ability to retain our key personnel or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial condition and results of operations. Further, such a loss could be negatively perceived in the capital markets. Although we are currently considering our coverages, we have not obtained key man life insurance that would provide us with proceeds in the event of death or disability of any of our key personnel.

 

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Termination of the employment agreements with the members of our management team could be costly and prevent a change in control of our company.

 

The employment agreements we will enter into with Douglas Bauer, our Chief Executive Officer, Thomas Mitchell, our President and Chief Operating Officer, and Michael Grubbs, our Chief Financial Officer, upon the completion of this offering each provide that if their employment with us terminates under certain circumstances, we may be required to pay them significant amounts of severance compensation, thereby making it costly to terminate their employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our common stock.

 

Certain anti-takeover defenses and applicable law may limit the ability of a third-party to acquire control of us.

 

Our charter and bylaws and Delaware law contain provisions that may delay or prevent a transaction or a change in control of our company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our stockholders, which could adversely affect the market price of our common stock. Certain of these provisions are described below.

 

Selected provisions of our charter and bylaws.    Our charter and/or bylaws contain anti-takeover provisions that:

 

   

authorize our board of directors, without further action by the stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series, and with respect to each series, to fix the number of shares constituting that series and establish the rights and other terms of that series;

 

   

require that actions to be taken by our stockholders may be taken only at an annual or special meeting of our stockholders and not by written consent;

 

   

specify that special meetings of our stockholders can be called only by our board of directors, the chairman of our board of directors or our chief executive officer;

 

   

establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of directors and other proposals to be brought before a stockholders meeting;

 

   

provide that our bylaws may be amended by our board of directors without stockholder approval;

 

   

allow our directors to establish the size of our board of directors by action of our board, subject to a minimum of three members;

 

   

provide that vacancies on our board of directors or newly created directorships resulting from an increase in the number of our directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

   

do not give the holders of our common stock cumulative voting rights with respect to the election of directors; and

 

   

prohibit us from engaging in certain business combinations with any “interested stockholder” unless specified conditions are satisfied as described below under “—Selected provisions of Delaware law.”

 

Selected provisions of Delaware law.    We have opted out of Section 203 of the Delaware General Corporation Law (the “DGCL”), which regulates corporate takeovers. However, our charter contains provisions that are similar to Section 203 of the DGCL. Specifically, our charter provides that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the person became an interested stockholder, unless:

 

   

prior to the time that person became an interested stockholder, our board of directors approved either the business combination or the transaction which resulted in the person becoming an interested stockholder;

 

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upon consummation of the transaction which resulted in the person becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding certain shares; or

 

   

at or subsequent to the time the person became an interested stockholder, the business combination is approved by our board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

 

Generally, a business combination includes a merger, consolidation, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an interested stockholder is a person who, together with that person’s affiliates and associates, owns, or within the previous three years owned, 15% or more of our voting stock. However, in the case of our company, the Starwood Fund and any of its affiliates and subsidiaries and any of their permitted transferees receiving 15% or more of our voting stock will not be deemed to be interested stockholders regardless of the percentage of our voting stock owned by them. This provision could prohibit or delay mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us.

 

We may change our operational policies, investment guidelines and our business and growth strategies without stockholder consent, which may subject us to different and more significant risks in the future.

 

Our board of directors will determine our operational policies, investment guidelines and our business and growth strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments or pursuing different business or growth strategies than those contemplated in this prospectus. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

The obligations associated with being a public company will require significant resources and management attention.

 

As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, including the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), certain corporate governance provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), related regulations of the Securities and Exchange Commission (the “SEC”) and requirements of the New York Stock Exchange, with which we were not required to comply as a private company. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.

 

Section 404 of the Sarbanes-Oxley Act requires our management and independent auditors to report annually on the effectiveness of our internal control over financial reporting. However, we are an “emerging growth company,” as defined in the JOBS Act, and, so for as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent auditors on the effectiveness of our internal control over financial reporting.

 

These reporting and other obligations will place significant demands on our management, administrative, operational and accounting resources and will cause us to incur significant expenses. We may need to upgrade

 

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our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could materially and adversely affect us.

 

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in implementing or maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could materially and adversely affect us.

 

We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements. We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of this offering, although a variety of circumstances could cause us to lose that status earlier. We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

In addition, Section 107 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 for complying with new or revised financial 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 determined to opt out of such extended transition period and, as a result, we will comply with new or revised financial 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 financial accounting standards is irrevocable.

 

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Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.

 

Accounting rules and interpretations for certain aspects of our operations are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.

 

Any joint venture investments that we make could be adversely affected by our lack of sole decision making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers.

 

We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development. In this event, we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that partners or co-venturers might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions or block or delay necessary decisions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.

 

We may become subject to litigation, which could materially and adversely affect us.

 

In the future we may become subject to litigation, including claims relating to our operations, security offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We generally intend to vigorously defend ourselves. However, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.

 

An information systems interruption or breach in security could adversely affect us.

 

We rely on fully integrated accounting, financial and operational management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, any security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

 

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Risks Related to this Offering and Ownership of Our Common Stock

 

There is currently no public market for shares of our common stock, a trading market for our common stock may never develop following this offering and our common stock prices may be volatile and could decline substantially following this offering.

 

Prior to this offering there has been no market for shares of our common stock. Although we have applied to list the shares of our common stock on the New York Stock Exchange under the symbol “TPH,” an active trading market for the shares of our common stock may never develop or if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:

 

   

the likelihood that an active trading market for shares of our common stock will develop or be sustained;

 

   

the liquidity of any such market;

 

   

the ability of our stockholders to sell their shares of common stock; or

 

   

the price that our stockholders may obtain for their common stock.

 

If an active market does not develop or is not maintained, the market price of our common stock may decline and you may not be able to sell your shares. Even if an active trading market develops for our common stock subsequent to this offering, the market price of our common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock.

 

Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include:

 

   

actual or anticipated variations in our quarterly operating results;

 

   

changes in market valuations of similar companies;

 

   

adverse market reaction to the level of our indebtedness;

 

   

additions or departures of key personnel;

 

   

actions by stockholders;

 

   

speculation in the press or investment community;

 

   

general market, economic and political conditions, including an economic slowdown or dislocation in the global credit markets;

 

   

our operating performance and the performance of other similar companies;

 

   

changes in accounting principles; and

 

   

passage of legislation or other regulatory developments that adversely affect us or the homebuilding industry.

 

The offering price per share of our common stock offered under this prospectus may not accurately reflect the value of your investment.

 

Prior to this offering there has been no market for our common stock. The offering price per share of our common stock offered by this prospectus was negotiated between us and the underwriters. Factors considered in determining the price of our common stock include:

 

   

the history and prospects of companies whose principal business is the design, construction and sale of single-family homes;

 

   

prior offerings of those companies;

 

   

our prospects for acquiring land parcels for development at attractive values;

 

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our capital structure;

 

   

an assessment of our management and its experience in acquiring land parcels and designing, constructing and selling homes;

 

   

general conditions of the securities markets at the time of this offering; and

 

   

other factors we deemed relevant.

 

The offering price may not accurately reflect the value of our common stock and may not be realized upon any subsequent disposition of the shares.

 

If you purchase common stock in this offering, you will experience immediate dilution.

 

The offering price of our common stock is higher than the net tangible book value per share of our common stock outstanding upon the completion of this offering. Accordingly, if you purchase common stock in this offering, you will experience immediate dilution of approximately $         in the net tangible book value per share of our common stock, based on the midpoint of the price range set forth on the cover page of this prospectus. This means that investors that purchase shares of our common stock in this offering will pay a price per share that exceeds the per share net tangible book value of our assets.

 

We do not intend to pay dividends on our common stock for the foreseeable future.

 

We currently intend to retain our future earnings, if any, 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, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

 

Future sales of our common stock or other securities convertible into our common stock could cause the market value of our common stock to decline and could result in dilution of your shares.

 

Our board of directors is authorized, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the issuance of preferred stock (including equity or debt securities convertible into common stock), options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may determine. Sales of substantial amounts of our common stock could cause the market price of our common stock to decrease significantly. We cannot predict the effect, if any, of future sales of our common stock, or the availability of our common stock for future sales, on the value of our common stock. Sales of substantial amounts of our common stock by the Starwood Fund or another large stockholder or otherwise, or the perception that such sales could occur, may adversely affect the market price of our common stock.

 

We are offering             shares of our common stock as described in this prospectus (excluding the underwriters’ option to purchase up to an additional             shares). Upon the completion of this offering, the members of our management team will collectively beneficially own             shares of our common stock (excluding grants of restricted stock units and options to purchase shares of our common stock), which will represent         % of our common stock outstanding immediately after this offering, or         % if the underwriters exercise their option to purchase additional shares in full (in each case, based upon the midpoint of the price range set forth on the cover page of this prospectus and assuming this offering closes on         , 2013). See “Principal Stockholders.” In addition, the members of our management team will be granted an aggregate of             restricted stock units and options to purchase an aggregate of             shares of our common stock upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan, and our director nominees will be granted an aggregate of              restricted stock units upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan. Further, upon the completion of this offering, the Starwood Fund will beneficially

 

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own             shares of our common stock, which will represent         % of our common stock outstanding immediately after this offering, or         % if the underwriters exercise their option to purchase additional shares in full (in each case, based upon the midpoint of the price range set forth on the cover page of this prospectus and assuming this offering closes on         , 2013). See “Principal Stockholders.” In connection with this offering, we, our officers and directors, the Starwood Fund and the third-party investor in TPH LLC have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citigroup Global Markets Inc., dispose of or hedge any shares or any securities convertible into or exchangeable for our common stock, subject to certain exceptions. Citigroup Global Markets Inc. in its sole discretion may release any of the securities subject to these lock-up agreements at any time, which, in the case of officers and directors, shall be with notice. If the restrictions under the lock-up agreements are waived, shares of our common stock may become available for resale into the market, subject to applicable law, which could reduce the market price for our common stock.

 

Pursuant to his employment agreement, each member of our management team will agree that, for a period of 36 months following the completion of this offering, during any calendar quarter, he will not sell shares of our common stock in an amount exceeding the greater of (1) 10% of the shares of our common stock owned by him on the date of the completion of this offering and (2) the percentage of shares of our common stock that has been sold or otherwise disposed of by the Starwood Fund during such calendar quarter. Any sales of shares of our common stock made pursuant to the foregoing will be subject to the restrictions imposed by the lock-up agreements referenced above and by applicable law.

 

We will enter into a registration rights agreement with the members of TPH LLC, including the Starwood Fund, the members of our management team and a third-party investor, with respect to the shares of our common stock that they will receive as part of our formation transactions. We refer to these shares collectively as the “registrable shares.” Pursuant to the registration rights agreement, we will grant the members of TPH LLC and their direct and indirect transferees shelf registration rights requiring us to file a shelf registration statement and to maintain the effectiveness of such registration statement so as to allow sales thereunder from time to time, demand registration rights to have the registrable shares registered for resale, and, in certain circumstances, the right to “piggy-back” the registrable shares in registration statements we might file in connection with any future public offering.

 

In connection with this offering, we intend to file a registration statement on Form S-8 to register the total number of shares of our common stock that may be issued under our 2013 Long-Term Incentive Plan, including the restricted stock units to be granted to our executive officers and director nominees, as well as the options to purchase shares of our common stock to be granted to our executive officers, in each case upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan.

 

Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

 

In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our common stock in this offering bear the risk of our future offerings reducing the market price of our common stock and diluting their ownership interest in our company.

 

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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.

 

Because of our anticipated holdings in United States real property interests following the completion of our formation transactions, we believe we will be and will remain a “United States real property holding corporation” for United States federal income tax purposes. As a result, a non-U.S. holder (as defined in “Certain Material Federal Income Tax Considerations”) generally will be subject to United States federal income tax on any gain realized on a sale or disposition of shares of our common stock, and a purchaser of the stock generally will be required to withhold and remit to the Internal Revenue Service (the “IRS”) 10% of the purchase price, unless our common stock is regularly traded on an established securities market (such as the New York Stock Exchange) and such non-U.S. holder did not actually or constructively hold more than 5% of our common stock at any time during the shorter of (a) the five-year period preceding the date of the sale or disposition and (b) the non-U.S. holder’s holding period in such stock. A non-U.S. holder also will be required to file a United States federal income tax return for any taxable year in which it realizes a gain from the disposition of our common stock that is subject to United States federal income tax.

 

We anticipate that our common stock will be regularly traded on an established securities market following this offering. However, no assurance can be given in this regard and no assurance can be given that our common stock will remain regularly traded in the future. Non-U.S. holders should consult their tax advisors concerning the consequences of disposing of shares of our common stock.

 

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Various statements contained in this prospectus, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this prospectus speak only as of the date of this prospectus, and we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. 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:

 

   

economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;

 

   

continued or increased downturn in the homebuilding industry;

 

   

continued volatility and uncertainty in the credit markets and broader financial markets;

 

   

our future operating results and financial condition;

 

   

our business operations;

 

   

changes in our business and investment strategy;

 

   

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

 

   

availability, terms and deployment of capital;

 

   

continued or increased disruption in the availability of mortgage financing or the number of foreclosures in the market;

 

   

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

 

   

delays in land development or home construction resulting from adverse weather conditions or other events outside our control;

 

   

the cost and availability of insurance and surety bonds;

 

   

changes in, or the failure or inability to comply with, governmental laws and regulations;

 

   

the timing of receipt of regulatory approvals and the opening of projects;

 

   

the degree and nature of our competition;

 

   

our leverage and debt service obligations;

 

   

our relationship, and actual and potential conflicts of interest, with Starwood Capital Group;

 

   

availability of qualified personnel and our ability to retain our key personnel; and

 

   

additional factors discussed under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.”

 

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USE OF PROCEEDS

 

We expect to receive net proceeds from this offering of approximately $        million, or approximately $        million if the underwriters exercise their option to purchase additional shares in full (assuming an initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering (including any additional proceeds that we may receive if the underwriters exercise their option to purchase additional shares) primarily for the acquisition of land, including the land described under “Our Business—Pending Acquisitions,” and for development, home construction and other related purposes.

 

Pending these uses, we intend to invest the net proceeds from this offering in a variety of capital preservation investments, including short-term, interest-bearing investment grade securities, money market accounts, certificates of deposit and direct or guaranteed obligations of the U.S. government.

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of         shares in the number of shares offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase the net proceeds to us from this offering by approximately $         million, after deducting the underwriting discount and estimated offering expenses payable by us. Conversely, a decrease of         shares in the number of shares offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the net proceeds to us from this offering by approximately $        million, after deducting the underwriting discount and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of September 30, 2012, on an actual basis and as adjusted to give effect to (i) the issuance of                  shares of our common stock to the Starwood Fund, the members of our management team and a third-party investor in place of members’ equity resulting from our formation transactions and (ii) this offering, assuming an initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us. This table should be read in conjunction with the sections captioned “Use of Proceeds,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes thereto included elsewhere in this prospectus.

 

     As of September 30, 2012  
     Actual      As Adjusted(1)  
     (unaudited, in thousands except
per share amounts)
 

Debt:

     

Notes payable

   $ 46,436       $ 46,436   
  

 

 

    

 

 

 

Common units subject to redemption(2)

     37,000           
  

 

 

    

 

 

 

Members’ equity and Stockholders’ equity:

     

Members’ equity

     105,590           

Common stock, $0.01 par value per share, no shares authorized and no shares issued and outstanding, actual; 500,000,000 shares authorized and         shares issued and outstanding, as adjusted

          

Preferred Stock, $0.01 par value per share, no shares authorized and no shares issued and outstanding, actual; 50,000,000 shares authorized and no shares issued and outstanding as adjusted

               

Additional paid-in capital

          
  

 

 

    

 

 

 

Total members’ equity

     105,590           
  

 

 

    

 

 

 

Total stockholders’ equity

          
  

 

 

    

 

 

 

Total capitalization

   $ 189,026       $     
  

 

 

    

 

 

 

 

(1)  

The number of outstanding shares does not include: (i) any shares of our common stock that may be issued pursuant to the exercise by the underwriters of their option to purchase up to an additional         shares of our common stock; (ii) an aggregate of         restricted stock units to be granted to our executive officers and director nominees upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan; (iii) options to purchase an aggregate of         shares of our common stock to be granted to our executive officers upon the completion of this offering pursuant to our 2013 Long-Term Incentive Plan; and (iv)         shares of our common stock reserved and available for future issuance under our 2013 Long-Term Incentive Plan.

 

(2)  

During the period ended September 30, 2012, the Starwood Fund made an additional capital contribution to TPH LLC in the amount of $37 million, representing the contribution of the remainder of its $150 million equity commitment to TPH LLC, in exchange for additional common units. As of September 30, 2012, we were required to return this $37 million capital contribution (or a lesser amount specified by the Starwood Fund) to the Starwood Fund if this offering were not to close by February 28, 2013, or if this offering were to terminate prior to that time. In November 2012, we obtained written approval from the Starwood Fund, pursuant to an amendment of the operating agreement of TPH LLC, to remove the redemption feature of the $37 million of common units.

 

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DILUTION

 

Purchasers of shares of our common stock in this offering will incur an immediate and substantial dilution in net tangible book value per share of their shares of our common stock from the assumed initial public offering price, based on the midpoint of the price range set forth on the cover page of this prospectus.

 

The difference between the per share offering price paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to purchasers in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities, by the number of outstanding shares of our common stock.

 

As of September 30, 2012, our net tangible book value was approximately $            , or $        per share of our common stock. After giving effect to our formation transactions, the sale of shares of our common stock in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the receipt by us of the net proceeds from this offering and the deduction of the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value as of September 30, 2012 would have been approximately $            , or $        per share of our common stock (assuming no exercise by the underwriters of their option to purchase additional shares). This amount represents an immediate increase in net tangible book value of approximately $        per share of our common stock to our existing stockholders and an immediate dilution in net tangible book value of approximately $        per share of our common stock, or approximately         %, to purchasers in this offering.

 

The following table illustrates the dilution to purchasers in this offering on a per share basis:

 

Assumed initial public offering price per share

      $                    

Net tangible book value per share as of September 30, 2012

   $                   

Pro forma increase in net tangible book value per share attributable to purchasers in this offering

     
  

 

  

Pro forma net tangible book value per share immediately after this offering

     
     

 

 

 

Dilution in pro forma net tangible book value per share to purchasers in this offering

       

$
  
     

 

 

 

The pro forma net tangible book value per share immediately after this offering:

     

Numerator:

     

Net tangible book value as of September 30, 2012

   $   

Net proceeds from this offering(1)

     
  

 

  

Total pro forma net tangible book value immediately after this offering

   $   
  

 

  

Denominator:

     

Shares of our common stock outstanding prior to this offering

     

Shares of our common stock being sold in this offering

     
  

 

  

Total shares of our common stock

     
  

 

  

 

(1)  

Assumes no exercise by the underwriters of their option to purchase additional shares.

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro

 

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forma net tangible book value per share immediately after this offering by $        per share and the dilution in pro forma net tangible book value per share to purchasers in this offering by $        per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

 

We may also increase or decrease the number of shares we are offering. An increase of         shares in the number of shares of our common stock offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase the pro forma net tangible book value per share immediately after this offering and the dilution in pro forma net tangible book value per share to purchasers in this offering by $        and $            , respectively, after deducting the underwriting discount and estimated offering expenses payable by us. Conversely, a decrease of         shares in the number of shares of our common stock offered by us, together with a concomitant $1.00 decrease in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would decrease the pro forma net tangible book value per share immediately after this offering and the dilution in pro forma net tangible book value per share to purchasers in this offering by $        and $            , respectively, after deducting the underwriting discount and estimated offering expenses payable by us.

 

The following table sets forth, as of September 30, 2012, on the pro forma basis as described above, the differences between the number of shares of our common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by purchasers in this offering, before deducting the underwriting discount and estimated offering expenses payable by us, at an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

     Shares Purchased     Total Consideration  
      Number    Percent     Amount      Percent     Average Price
Per Share
 

Existing stockholders

        %      $                      %      $                

Purchasers in this offering

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0   $          100.0   $    
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

If the underwriters’ option to purchase additional shares is exercised in full, the following will occur:

 

   

the percentage of shares of our common stock held by our existing stockholders will decrease to approximately        % of the total number of shares of our common stock outstanding;

 

   

the number of shares of our common stock held by purchasers in this offering will increase to        shares, or approximately        % of the total number of shares of our common stock outstanding; and

 

   

the pro forma net tangible book value per share will be approximately $        per share and the immediate dilution experienced by purchasers in this offering will be approximately $        per share.

 

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DIVIDEND POLICY

 

We currently intend to retain our future earnings, if any, 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, restrictions contained in any financing instruments and such other factors as our board of directors deems relevant. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks Related to this Offering and Ownership of Our Common Stock—We do not intend to pay dividends on our common stock for the foreseeable future.”

 

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SELECTED FINANCIAL DATA

 

The following sets forth our selected financial and operating data on a historical basis. You should read the following summary of selected financial data in conjunction with our consolidated historical financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included elsewhere in this prospectus.

 

Our historical consolidated balance sheet information as of December 31, 2011 and 2010 and September 23, 2010, and consolidated statements of operations information for the year ended December 31, 2011, the period from September 24, 2010 (inception date of TRI Pointe Homes, LLC) through December 31, 2010 and the period from January 1, 2010 through September 23, 2010 (our predecessor) have been derived from the historical consolidated financial statements audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this prospectus. From April 2009 to September 23, 2010, our principals were engaged primarily in the business of constructing homes for independent third-party property owners through a number of different entities.

 

Our unaudited historical consolidated balance sheet information as of September 30, 2012 and consolidated statements of operations information for the nine-month periods ended September 30, 2012 and 2011 are derived from our unaudited historical consolidated financial statements, which we believe include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein. Our results of operations for the interim period ended September 30, 2012 are not necessarily indicative of the results to be obtained for the full calendar year.

 

                      Period From
September 24,
2010 (Inception)
Through

December 31,
2010
    Our Predecessor  
    Nine Months
Ended September 30,
    Year Ended
December 31,
2011
      Period From
January 1, 2010
Through
September 23,
2010
 
     2012     2011        
   

(unaudited)

                   

Statement of Operations Data:

         

Home sales

  $ 22,277,000      $ 9,279,000      $ 13,525,000      $ 4,143,000      $   

Cost of home sales

    (19,663,000     (8,408,000     (12,075,000     (3,773,000       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding gross profit

    2,614,000        871,000        1,450,000        370,000          

Fee building gross margin

    38,000        198,000        150,000        814,000        2,665,000   

Sales and marketing

    (2,351,000     (1,062,000     (1,553,000     (408,000     (136,000

General and administrative

    (4,155,000     (3,112,000     (4,620,000     (1,875,000     (1,401,000

Organizational costs

                         (1,061,000       

Other income (expense), net

    (86,000     (41,000     (20,000     (15,000     (43,000
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (3,940,000   $ (3,146,000   $ (4,593,000   $ (2,175,000   $ 1,085,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unaudited pro forma loss per share

         

Basic

  $                     $                    
 

 

 

     

 

 

     

Diluted

  $                     $                    
 

 

 

     

 

 

     
 

Operating Data-Owned Projects

         

Net new home orders

    129        34        42        9        4   

New homes delivered

    55        26        36        11          

Average sales price of homes delivered

  $ 405,000      $ 357,000      $ 376,000      $ 377,000      $   

Cancellation rate

    17     8     13     19     20

Average selling communities

    5        2        2        2        1   

Selling communities at end of period

    7        2        3        2        1   

Backlog at end of period, number of homes

    82        10        8        2        4   

Backlog at end of period, aggregate sales value

  $ 46,126,000      $ 4,004,000      $ 3,364,000      $ 696,000      $ 1,392,000   

 

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       Period From
September 24,
2010 (Inception)
Through
December 31,
2010
    Our Predecessor  
    Nine Months
Ended September 30,
     Year Ended
December 31,
2011
       Period From
January 1, 2010
Through
September 23,
2010
 
     2012      2011          
   

(unaudited)

                     

Operating Data-Fee Building Projects

            

Net new home orders

    17         31         34         24        114   

New homes delivered

    16         65         68         56        46   

Average sales price of homes delivered

  $ 1,020,000       $ 775,000       $ 786,000       $ 794,000      $ 787,000   
 

Balance Sheet Data (at period end)

            

Cash and cash equivalents

  $ 45,242,000       $ 7,171,000       $ 10,164,000       $ 11,744,000      $ 6,029,000   

Real estate inventories

  $ 148,468,000       $ 75,750,000       $ 82,023,000       $ 14,108,000      $ 8,117,000   

Total assets

  $ 195,514,000       $ 86,016,000       $ 93,776,000       $ 30,096,000      $ 15,672,000   

Notes payable

  $ 46,436,000       $       $ 6,873,000       $ 3,462,000      $ 4,494,000   

Total liabilities

  $ 52,924,000       $ 2,195,000       $ 11,285,000       $ 5,238,000      $ 4,983,000   

Common units subject to redemption(1)

  $ 37,000,000       $       $       $      $   

Members’ equity

  $ 105,590,000       $ 83,821,000       $ 82,491,000       $ 24,858,000      $ 10,689,000   

 

 

(1)   

During the period ended September 30, 2012, the Starwood Fund made an additional capital contribution to TPH LLC in the amount of $37 million, representing the contribution of the remainder of its $150 million equity commitment to TPH LLC, in exchange for additional common units. As of September 30, 2012, we were required to return this $37 million capital contribution (or a lesser amount specified by the Starwood Fund) to the Starwood Fund if this offering were not to close by February 28, 2013, or if this offering were to terminate prior to that time. In November 2012, we obtained written approval from the Starwood Fund, pursuant to an amendment of the operating agreement of TPH LLC, to remove the redemption feature of the $37 million of common units.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following in conjunction with the sections of this prospectus entitled “Risk Factors,” “Cautionary Note Concerning Forward-Looking Statements,” “Selected Financial Data” and “Our Business” and our historical financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.

 

We are engaged in the design, construction and sale of innovative single-family homes in planned communities in major metropolitan areas located throughout Southern and Northern California. We also provide fee building services whereby we build, market and sell homes for independent third-party property owners with whom we have revenue sharing agreements on projects typically marketed under the TRI Pointe Homes brand name. We have two reportable segments: homebuilding and fee building. Our corporate segment primarily provides management services to our operating segments.

 

Overview and Outlook

 

During the nine months ended September 30, 2012, the overall housing market continued to show signs of improvement largely driven by increasing consumer confidence levels related to the homebuilding industry, continued excellent housing affordability based on historical metrics, decreasing home inventory levels in many markets, and more positive consumer sentiment for the overall economy. Individual markets continue to experience varying results as local economic and employment situations strongly influence the local market demand and home buying abilities. However, most of our markets have shown positive indicators of a sustainable recovery. We improved on most key operating metrics during the nine months ended September 30, 2012 as compared to the same period in 2011, including increased net new home orders, home deliveries, average sales prices, home sales revenue, backlog units, backlog value and homebuilding gross margins.

 

Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and have been prepared in accordance with GAAP as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Our consolidated financial statements and notes thereto for interim periods presented are unaudited. In our opinion, these interim financial statements contain all adjustments (consisting of normal recurring adjustments) that are necessary for a fair statement of our operating results, financial position and cash flows. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent interim period or for the full fiscal year ending December 31, 2012.

 

Results of Operations

 

Our primary goal in 2011 was to source, perform due diligence, contract and acquire land or lots in targeted market areas to generate deliveries with profitable returns beginning in late 2012 and beyond. We are currently actively acquiring and developing lots in California to maintain and grow our lot supply and active selling communities that are strategically located in selected “core” markets with favorable population and employment growth as a result of proximity to job centers or primary transportation corridors. In addition to expanding our business in existing markets in California, we continue to prudently evaluate opportunities to expand in other Southwestern markets. Accordingly, in October 2012, we announced our entry into the Colorado market. During the nine months ended September 30, 2012, we acquired 199 lots in three communities in California and signed a land option contract, a purchase contract or a non-binding letter of intent to acquire an additional 547 lots in California and Colorado. As of September 30, 2012, we owned 552 lots in which we had commenced

 

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development, held options or were under contract to acquire an additional 689 lots and had entered into non-binding letters of intent to acquire an additional 91 lots in our target markets. In October 2012, we entered into an option contract to acquire an additional 61 lots in one new community in Southern California. With respect to the non-binding letters of intent, there can be no assurance that we will enter into binding agreements or that we will complete these projects as planned.

 

We also focus on increasing our number of active selling locations which we expect will contribute to our net new home order growth, homes in backlog and ultimately new home deliveries. We opened seven new selling locations during the nine-month period ended September 30, 2012, five in Southern California and two in Northern California. We experienced a 279% increase in net new home orders from 34 to 129, a 720% increase in backlog units from 10 to 82 and a 1,052% increase in backlog value from $4.0 million to $46.1 million for the nine months ended September 30, 2012, as compared to the same period in 2011. Home sales revenue was $22.3 million for the nine months ended September 30, 2012, representing an increase of $13.0 million, or 140%, when compared to the same period in the prior year, due to a 112% increase in the number of homes delivered from 26 to 55 and an increase in the average sales price of homes delivered from $357,000 to $405,000, representing an increase of $48,000, or 13%, during such period.

 

We refer to our financial statement line items in the explanation of our period over period changes in results of operations. Below are general definitions of what those line items include and represent.

 

Revenues

 

Revenues are derived primarily from home deliveries and fee building services provided to independent third-party property owners. Home sales revenue is recorded at close of escrow of the homes while revenue for fee building services is recorded when services have been provided to independent third-party property owners.

 

Expenses

 

Expenses relate to cost of home sales and fee building cost of sales provided to independent third-party property owners. Cost of home sales includes the cost of land, land development, home construction, capitalized interest, indirect cost of construction, estimated warranty costs, real estate taxes and direct overhead costs incurred during development and home construction that benefit the entire project, and is recorded after close of escrow of the homes. Expense for fee building cost of sales is recorded when services have been provided to independent third-party property owners. Sales and marketing expense is comprised of direct selling expenses, including internal and external commissions, related sales and marketing expenses, such as advertising and model operations, and sales office costs and is recorded in the period incurred. General and administration expenses represent corporate and divisional overhead expenses such as salaries, benefits, office expenses, outside professional services, insurance and travel expenses and are recorded in the period incurred.

 

Organizational Costs

 

Organizational costs include legal, accounting and other expenditures incurred in connection with the formation of TPH LLC, which were expensed in their entirety during the period ended December 31, 2010.

 

Other Income (Expense), Net

 

Other income (expense), net, consists of interest income, national contract rebates, dead deal costs (pre-acquisition costs on projects where we determine continuation of the project is not probable) and certain consulting fees.

 

The historical financial data presented below are not necessarily indicative of the results to be expected for any future period.

 

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Consolidated Financial Data:

 

     Nine-months Ended
September 30,
    Year Ended
December 31,
    Period From
September
24,
2010
(Inception)
Through
December 31,
    Our Predecessor  
         Period From
January 1,
2010
Through
September 23,
 
     2012     2011     2011     2010     2010  
     (unaudited)                    

Revenues:

            

Home sales

   $ 22,277,000      $ 9,279,000      $ 13,525,000      $ 4,143,000      $   

Fee building

     244,000        5,635,000        5,804,000        14,844,000        19,853,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     22,521,000        14,914,000        19,329,000        18,987,000        19,853,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Expenses:

            

Cost of home sales

     19,663,000        8,408,000        12,075,000        3,773,000          

Fee building

     206,000        5,437,000        5,654,000        14,030,000        17,188,000   

Sales and marketing

     2,351,000        1,062,000        1,553,000        408,000        136,000   

General and administrative

     4,155,000        3,112,000        4,620,000        1,875,000        1,401,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     26,375,000        18,019,000        23,902,000        20,086,000        18,725,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (3,854,000     (3,105,000     (4,573,000     (1,099,000     1,128,000   

Organizational costs

                          (1,061,000       

Other income (expense), net

     (86,000     (41,000     (20,000     (15,000     (43,000
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (3,940,000   $ (3,146,000   $ (4,593,000   $ (2,175,000   $ 1,085,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Matters Affecting the Comparability of Our Financial Results

 

On September 24, 2010, we received an equity commitment of $150 million from the Starwood Fund, a private equity fund managed by an affiliate of Starwood Capital Group, a private equity firm founded and controlled by Barry Sternlicht, the chairman of our board. Prior to the Starwood Fund’s investment, most of our operations consisted of “fee building projects” in which we built, marketed and sold homes for independent third-party property owners with whom we have revenue sharing agreements on projects typically marketed under the TRI Pointe Homes brand name.

 

For periods prior to September 24, 2010, the date on which the Starwood Fund agreed to make its investment in us, we conducted our business through a number of different entities, which we refer to collectively as “our predecessor.” For periods from and after September 24, 2010 and prior to the completion of our formation transactions, we conducted our business through TPH LLC. As a result of the foregoing, the financial and operational data for 2010 that is presented and discussed in this prospectus is generally bifurcated between the period during 2010 that our business was conducted through our predecessor (January 1, 2010 through September 23, 2010) and the period during 2010 that our business was conducted through TPH LLC (September 24, 2010 through December 31, 2010). The historical results of operations of our predecessor may not be comparable to the results of operations of TPH LLC because each of our predecessor and TPH LLC used a different basis of accounting and our homebuilding operations have been our strategic focus since September 24, 2010 compared to our predecessor’s focus on fee building services prior to such date.

 

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Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

 

Net New Home Orders and Backlog

 

     Nine Months Ended
September 30,
    Increase (Decrease)  
     2012     2011     Amount     %  

Net new home orders

     129        34        95        279

Cancellation rate

     17     8     9     112

Average selling communities

     5        2        3        150

Selling communities at end of period

     7        2        5        250

Backlog (dollar value)

   $ 46,126,000      $ 4,004,000      $ 42,122,000        1,052

Backlog (units)

     82        10        72        720

Average sales price of backlog

   $ 563,000      $ 400,000      $ 163,000        40

 

Net new home orders for the nine months ended September 30, 2012 increased 279% to 129, compared to 34 during the same period in 2011. Our overall “absorption rate” (the rate at which home orders are contracted, net of cancellations) for the nine months ended September 30, 2012 was 25.8 per average selling community (2.87 monthly), compared to 17.0 per average selling community (1.89 monthly) during the same period in 2011. Our monthly absorption rates increased despite an increase in our cancellation rate. Our cancellation rate of buyers for our owned projects who contracted to buy a home but did not close escrow (as a percentage of overall orders) was approximately 17% for the nine months ended September 30, 2012 as compared to an unusually low 8% during the same period in 2011. We believe our current cancellation rate of 17% is more representative of an industry average cancellation rate as compared to 8% for the nine months ended September 30, 2011. We experienced substantial order growth primarily due to an increase in our average selling community count. Our average number of selling communities increased by three communities from two for the nine months ended September 30, 2011 to five for the nine months ended September 30, 2012. The increase was due to our opening seven new selling communities for the nine months ended September 30, 2012, offset by final net new home orders at two selling communities. The increase in net new home orders positively impacted our number of homes in backlog, which are homes we expect to close in future periods. We expect that our net new home orders and backlog increases will have a positive impact on revenues and cash flow in future periods.

 

Backlog reflects the number of homes, net of actual cancellations experienced during the period, for which we have entered into a sales contract with a customer but for which we have not yet delivered the home. Homes in backlog are generally closed within three to six months, although we may experience cancellations of sales contracts prior to closing. The increase in backlog units of 72 homes was driven by the 279% increase in net new home orders during the nine months ended September 30, 2012 as compared to the same period of the previous year. The dollar value of backlog increased $42.2 million, or 1,052%, as of September 30, 2012 from $4.0 million as of September 30, 2011. The increase in dollar amount of backlog reflects an increase in the number of homes in backlog of 72, or 720%, to 82 homes as of September 30, 2012 from 10 homes as of September 30, 2011 and an increase in the average sales price of homes in backlog. We experienced an increase in the average sales price of homes in backlog of $163,000, or 40%, to $563,000 as of September 30, 2012 compared to $400,000 as of September 30, 2011 due to the introduction of new product at seven new communities with a shift to larger square footage homes with corresponding higher average sales prices in the 2012 period, including one move-up product. The increase in the dollar amount of backlog of homes sold but not closed as described above generally results in an increase in operating revenues in subsequent periods.

 

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Home Sales Revenue and New Homes Delivered

 

     Nine Months Ended
September 30,
     Increase (Decrease)  
     2012      2011      Amount      %  

New homes delivered

     55         26         29         112

Home sales revenue

   $ 22,277,000       $ 9,279,000       $ 12,998,000         140

Average sales price of homes delivered

   $ 405,000       $ 357,000       $ 48,000         13

 

New home deliveries increased 29, or 112%, to 55 during the nine months ended September 30, 2012 from 26 during the nine months ended September 30, 2011. The increase in new home deliveries was primarily attributable to the increase in net new home orders and units in backlog due to the increase in the average number of selling communities. In addition, we were able to convert 59% of our units in backlog as of June 30, 2012 into home deliveries for the three months ended September 30, 2012.

 

Home sales revenue increased $13.0 million, or 140%, to $22.3 million for the nine months ended September 30, 2012 from $9.3 million for the nine months ended September 30, 2011. The increase was primarily attributable to: (1) an increase in revenue of $11.7 million due to a 112% increase in homes closed to 55 for the nine months ended September 30, 2012 from 26 for the nine months ended September 30, 2011, and (2) an increase in revenues of $1.4 million related to an increase in average sales price of $48,000 per unit to $405,000 for the nine months ended September 30, 2012 from $357,000 for the nine months ended September 30, 2011. The increase in the average sales price of homes delivered was attributable to a change in product mix from the deliveries at four new communities for the nine months ended September 30, 2012, which included an increase in the number of homes delivered with a sales price in excess of $400,000.

 

Homebuilding

 

     Nine Months Ended
September 30,
 
     2012     %     2011     %  

Home sales

   $ 22,277,000        100.0   $ 9,279,000        100.0

Cost of home sales

     19,663,000        88.3     8,408,000        90.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding gross margin

     2,614,000        11.7     871,000        9.4

Add: interest in cost of home sales

     211,000        1.0     181,000        1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted homebuilding gross margin(1)

   $ 2,825,000        12.7   $ 1,052,000        11.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding gross margin percentage

     11.7       9.4  
  

 

 

     

 

 

   

Adjusted homebuilding gross margin percentage(1)

     12.7       11.3  
  

 

 

     

 

 

   

 

(1)  

Non-GAAP financial measure (as discussed below).

 

Homebuilding gross margin represents home sales revenue less cost of home sales. Cost of home sales increased $11.3 million, or 134%, to $19.7 million for the nine months ended September 30, 2012 from $8.4 million for the nine months ended September 30, 2011. The increase was primarily due to a 112% increase in the number of homes delivered and the product mix of homes delivered from new communities in the 2012 period. Our homebuilding gross margin percentage increased to 11.7% for the nine months ended September 30, 2012 as compared to 9.4% for the same period in 2011, primarily due to the delivery unit mix from new projects, which achieve higher gross margins, along with additional cost savings on existing projects offset by 33% of our deliveries from existing older product with lower gross margins in the 2012 period as compared to the 2011 period.

 

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Excluding interest in cost of home sales, adjusted homebuilding gross margin percentage was 12.7% for the nine months ended September 30, 2012, compared to 11.3% for the nine months ended September 30, 2011. Adjusted homebuilding gross margin is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that leverage has on homebuilding gross margin and permits investors to make better comparisons with our competitors, who adjust gross margins in a similar fashion. See the table above reconciling this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.

 

Fee Building

 

     Nine Months Ended
September 30,
 
     2012      %     2011      %  

Fee building revenue

   $ 244,000         100.0   $ 5,635,000         100.0

Fee building cost

     206,000         84.4     5,437,000         96.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Fee building gross margin

   $ 38,000         15.6   $ 198,000         3.5
  

 

 

    

 

 

   

 

 

    

 

 

 

 

As of September 30, 2012, we had entered into one construction management agreement to build 83 homes in Moorpark, California and entered into a non-binding letter of intent to build 57 homes in Carpinteria, California. There can be no assurance that we will enter into a binding agreement or that we will complete this project as planned. In addition, we completed one fee building project in Irvine, California, whereby all homes were completed and delivered to the third-party property owner, leaving three active model homes remaining unsold. Fee building revenue, which was all recorded in Southern California, decreased $5.4 million, or 96%, to $244,000 for the nine months ended September 30, 2012 from $5.6 million for the nine months ended September 30, 2011. Fee building cost decreased $5.2 million, or 96%, to $206,000 for the nine months ended September 30, 2012 from $5.4 million for the nine months ended September 30, 2011. Fee building revenue and cost decreased primarily due to the close out of two of the three fee building projects in 2011, leaving only one remaining fee building project for the nine months ended September 30, 2012, which completed construction activity in early 2012. The two new fee building projects mentioned above, one of which began in September 2012, began generating fee building revenue and cost in October 2012. Fee building gross margin represents the net fee income earned related to our fee building projects.

 

Selling, General and Administrative Expense

 

     Nine Months Ended
September 30,
     As a Percentage  of
Home Sales Revenue
 
     2012      2011      2012     2011  

Sales and marketing

   $ 2,351,000       $ 1,062,000         10.5     11.4

General and administrative (“G&A”)

     4,155,000         3,112,000         18.7     33.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales and marketing and G&A

   $ 6,506,000       $ 4,174,000         29.2     45.0
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Sales and marketing expense increased $1.3 million, or 121%, to $2.4 million for the nine months ended September 30, 2012 from $1.1 million for the nine months ended September 30, 2011. The increase in sales and marketing expense was primarily attributable to a 150% increase in the average number of selling communities and a 112% increase in the number of homes delivered for the nine months ended September 30, 2012 compared to the same period in 2011. Sales and marketing expense was 10.5% and 11.4% of overall home sales revenue for the nine months ended September 30, 2012 and 2011, respectively. As a percentage of home sales revenue, we expect sales and marketing expense to decrease significantly as we begin to deliver homes in all of our active projects.

 

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General and administrative expenses increased $1.1 million, or 34%, to $4.2 million for the nine months ended September 30, 2012 from $3.1 million for the nine months ended September 30, 2011. The increase was primarily attributed to (1) an increase of $677,000 in our compensation-related expenses resulting largely from a 29% increase in our office headcount to 31 employees as of September 30, 2012 compared to 24 as of September 30, 2011, (2) an increase of $195,000 in office rent and office related expenses to $389,000 for the nine months ended September 30, 2012, as compared to $194,000 for the nine months ended September 30, 2011, due to our growth, and our resulting move to our Northern California office in August 2011 and our Southern California office in November 2011, and (3) moderate increases in outside professional services, depreciation, travel and other miscellaneous expenses related to increased operations from our growth in 2012. Our general and administrative expense as a percentage of home sales revenue was 18.7% and 33.6% for the nine months ended September 30, 2012 and 2011, respectively. We expect that our general and administrative expense as a percentage of home sales revenue will continue to decrease for the balance of 2012 and into the near future as our increase in new home deliveries from growth in our community count generate increased home sales revenue.

 

Other Income (Expense), Net

 

Other income (expense), net, increased $45,000, or 110%, to $86,000 for the nine months ended September 30, 2012 from $41,000 for the nine months ended September 30, 2011. The increase in other income (expense), net, was due to a decrease in other income of $98,000 related to a reduction in national contract rebates collected from closed projects, offset by a decrease in other expense of $59,000 related to the reduction in dead deal costs for the nine months ended September 30, 2012 as compared to the same period in 2011.

 

Other Items

 

Interest, which was incurred principally to finance land acquisitions, land development and home construction, totaled $1,297,000 and $108,000 for the nine months ended September 30, 2012 and 2011, respectively, all of which was capitalized to real estate inventory. The increase in interest incurred during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily attributable to our increase in outstanding debt, which was the result of the increase in the number of active projects and the growth in our real estate inventory.

 

Net Loss

 

As a result of the foregoing factors, net loss during the nine months ended September 30, 2012 was $3.9 million compared to a net loss during the nine months ended September 30, 2011 of $3.1 million.

 

Lots Owned and Controlled

 

The table below summarizes our lots owned and controlled as of the dates presented:

 

     September 30,      Increase (Decrease)  
     2012      2011      Amount      %  

Lots Owned

           

Southern California

     382         311         71         23

Northern California

     170         108         62         57
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     552         419         133         32
  

 

 

    

 

 

    

 

 

    

 

 

 

Lots Controlled(1)

           

Southern California

     387         326         61         18

Northern California

     305                 305           

Colorado

     149                 149           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     841         326         515         157
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Lots Owned and Controlled(1)

     1,393         745         648         87
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  

Includes (i) 689 lots that are under land option contracts or purchase contracts, (ii) 91 lots that are under non-binding letters of intent and (iii) 61 lots that are under an option contract executed in October 2012, in

 

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two new communities and one existing community in Southern California for an aggregate purchase price of approximately $56.0 million. With respect to the lots under non-binding letters of intent, there can be no assurance that we will enter into binding agreements or as to the terms thereof. In November 2012, we closed the purchase of an aggregate of 164 of the controlled lots in our inventory.

 

In Southern California, our owned and controlled land totaled 769 lots as of September 30, 2012. We plan to open sales locations at five new communities in 2013 in the following cities (counties): La Habra (Orange County), San Diego (San Diego County), Rancho Mission Viejo (Orange County), Azusa (Los Angeles County) and Irvine (Orange County). Lots under option contracts include two attractive infill development sites (which are new homes constructed on vacant or under-utilized lots among existing properties in established communities) in Huntington Beach (Orange County), which are projected to begin sales in 2014. In addition to our owned projects, we are managing three fee building projects for a total of 143 homes (including one project to build 57 homes pursuant to a non-binding letter of intent).

 

In Northern California, our owned and controlled land totaled 475 lots as of September 30, 2012. These lots are all in the highly desirable Bay Area, contiguous to Silicon Valley. We plan to open sales locations at two new communities located in Mountain View (Santa Clara County) and San Mateo (San Mateo County) in 2013. Lots under option contracts include three new projects in a well-located new community in Alameda (Alameda County), which are projected to open in 2014.

 

In Colorado, our controlled land totaled 149 lots as of September 30, 2012. We plan to open a sales location in this community located south of Denver in Castle Rock (Douglas County) in 2013.

 

Year Ended December 31, 2011 Compared to the Period from September 24, 2010 through December 31, 2010

 

Net New Home Orders and Backlog

 

     Year Ended
December 31,
2011
    Period From
September 24, 2010
(Inception)
Through
December 31,
2010
   


Increase (Decrease)
 
       Amount     %  

Net new home orders

     42        9        33        367

Cancellation rate

     13     19     (6)     (32)

Average selling communities

     2        2              

Selling communities at end of period

     3        2        1        50

Backlog (dollar value)

   $ 3,364,000      $ 696,000      $ 2,668,000        383

Backlog (units)

     8        2        6        300

Average sales price of backlog

   $ 421,000      $ 348,000      $ 73,000        21

 

Net new home orders for the year ended December 31, 2011 increased 33, or 367%, to 42 compared to nine for the period from September 24, 2010 through December 31, 2010. Our overall absorption rate for the year ended December 31, 2011 was 21.0 per average selling community (1.75 monthly), compared to 4.5 per average selling community (1.50 monthly) for the period from September 24, 2010 through December 31, 2010. Our absorption rate per average selling community increased and we experienced substantial order growth because of the comparison of twelve months of order activity to just over three months in the 2010 period. Our cancellation rate was approximately 13% for the year ended December 31, 2011 as compared to 19% for the period from September 24, 2010 through December 31, 2010.

 

Backlog units increased by six homes, or 300%, to eight as of December 31, 2011 as compared to two as of December 31, 2010 primarily driven by the 367% increase in net new home orders for the year ended December 31, 2011. The dollar value of backlog increased $2.7 million, or 383%, to $3.4 million as of December 31, 2011 from $0.7 million as of December 31, 2010. The increase in dollar amount of backlog

 

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reflects an increase in the number of homes in backlog and an increase in the average sales price of homes in backlog. Our average sales price of homes in backlog increased $73,000, or 21%, to $421,000 for the period ended December 31, 2011 compared to $348,000 for the period from September 24, 2010 through December 31, 2010 due to the introduction of new product at new communities with a shift to larger square footage homes with corresponding higher average sales prices in the 2011 period.

 

Home Sales Revenue and New Homes Delivered

     Year Ended
December 31,
2011
     Period From
September 24,
2010 (Inception)
Through
December 31,
2010
    





Increase (Decrease)
 
           Amount     %  

New homes delivered

     36         11         25        227

Home sales revenue

   $ 13,525,000       $ 4,143,000       $ 9,382,000        226

Average sales price of homes delivered

   $ 376,000       $ 377,000       $ (1,000    

 

New home deliveries increased 25, or 227%, to 36 during the year ended December 31, 2011 from 11 during the period from September 24, 2010 through December 31, 2010. The increase in new home deliveries was primarily attributable to the increase in units in backlog and net new home orders because of the comparison of twelve months of activity to just over three months in the 2010 period.

 

Home sales revenue increased $9.4 million, or 226%, to $13.5 million for the year ended December 31, 2011 from $4.1 million for the period from September 24, 2010 through December 31, 2010, all of which is attributed to the increase in number of homes delivered given the slight change in the average sales price of homes delivered between the periods.

 

Homebuilding

 

     Year Ended
December 31,
2011
    %     Period From
September 24,
2010 (Inception)
Through
December 31,
2010
    %  

Home sales

   $ 13,525,000        100.0   $ 4,143,000        100.0

Cost of home sales

     12,075,000        89.3     3,773,000        91.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding gross margin

     1,450,000        10.7     370,000        8.9

Add: interest in cost of home sales

     269,000        2.0     88,000        2.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted homebuilding gross margin(1)

     1,719,000        12.7     458,000        11.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Homebuilding gross margin percentage

     10.7       8.9  
  

 

 

     

 

 

   

Adjusted homebuilding gross margin percentage(1)

     12.7       11.0  
  

 

 

     

 

 

   

 

(1)  

Non-GAAP financial measure (as discussed below).

 

Cost of home sales increased $8.3 million, or 220%, to $12.1 million for the year ended December 31, 2011 from $3.8 million for the period from September 24, 2010 through December 31, 2010, primarily due to the 227% increase in the number of homes delivered. Our homebuilding gross margin percentage increased to 10.7% for the year ended December 31, 2011 as compared to 8.9% for the period from September 24, 2010 through

 

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December 31, 2010. The increase in margins is primarily due to additional cost savings achieved at our two communities in the 2011 period as compared to the delivery unit mix of homes for the 2010 period, which included 27% of our deliveries from existing older product with lower gross margins versus the newer product currently being delivered. Excluding interest in cost of home sales, adjusted homebuilding gross margin percentage was 12.7% for the year ended December 31, 2011, compared to 11.0% for the period from September 24, 2010 through December 31, 2010. Adjusted homebuilding gross margin is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that leverage has on homebuilding gross margin and permits investors to make better comparisons with our competitors, who adjust gross margins in a similar fashion. See the table above reconciling this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.

 

Fee Building

 

     Year Ended
December 31,
2011
     %     Period From
September 24,
2010 (Inception)
Through
December 31,
2010
     %  

Fee building revenue

   $ 5,804,000         100.0   $ 14,844,000         100.0

Fee building cost

     5,654,000         97.4     14,030,000         94.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Fee building gross margin

   $ 150,000         2.6   $ 814,000         5.5
  

 

 

    

 

 

   

 

 

    

 

 

 

 

Fee building revenue, which was all recorded in Southern California, decreased $9.0 million, or 61%, to $5.8 million for the year ended December 31, 2011 from $14.8 million for the period from September 24, 2010 through December 31, 2010. Fee building cost decreased $8.4 million, or 60%, to $5.6 million for the year ended December 31, 2011 from $14.0 million for the period from September 24, 2010 through December 31, 2010. Fee building revenue and cost decreased primarily due to the close out of two fee building projects in 2011 and the change in the focus of our business from fee building to primarily building and selling homes for our own account.

 

Selling, General and Administrative Expense

 

                   As a Percentage of Home Sales
Revenue
 
     Year Ended
December 31,
2011
     Period From
September 24,
2010 (Inception)
Through
December 31,
2010
     Year Ended
December 31,
2011
    Period From
September 24,
2010 (Inception)
Through
December 31,
2010
 

Sales and marketing

   $ 1,553,000       $ 408,000         11.5     9.8

General and administrative (“G&A”)

     4,620,000         1,875,000         34.2     45.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales and marketing and G&A

   $ 6,173,000       $ 2,283,000         45.7     55.1
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Sales and marketing expense increased $1.1 million, or 281%, to $1.6 million for the year ended December 31, 2011 from $0.4 million for the period from September 24, 2010 through December 31, 2010. The increase in sales and marketing expense was primarily attributable to a 227% increase in the number of homes delivered for the year ended December 31, 2011 and the twelve months of model operations for the full year as compared to just over three months for the period from September 24, 2010 through December 31, 2010. Sales and marketing expense was 11.5% and 9.8% of overall home sales revenue for the year ended December 31, 2011 and the period from September 24, 2010 through December 31, 2010, respectively.

 

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General and administrative expenses increased $2.7 million, or 146%, to $4.6 million for the year ended December 31, 2011 from $1.9 million for the period from September 24, 2010 through December 31, 2010 primarily attributable to twelve months of general and administrative expenses for the full year as compared to just over three months for the period from September 24, 2010 through December 31, 2010. Our general and administrative expense as a percentage of home sales revenue was 34.2% and 45.3% for the year ended December 31, 2011 and the period from September 24, 2010 through December 31, 2010, respectively, as a result of the lower level of home sales revenue in the 2010 period given the startup nature of our company.

 

Other Income (Expense), Net

 

Other income (expense), net, increased $5,000, or 33%, to $20,000 for the year ended December 31, 2011 from $15,000 for the period from September 24, 2010 through December 31, 2010. The increase was primarily due to an increase in other income of $119,000 related to national contract rebates collected from closed projects, offset by an increase in other expense of $128,000 related to an increase in dead deal costs for the year ended December 31, 2011 as compared to the period from September 24, 2010 through December 31, 2010.

 

Organizational Costs

 

Organizational costs include legal, accounting and other expenditures incurred in connection with the formation of TPH LLC, which were expensed in their entirety during the period ended December 31, 2010.

 

Net Loss

 

As a result of the foregoing factors, net loss for the year ended December 31, 2011 was $4.6 million compared to a net loss for the period from September 24, 2010 through December 31, 2010 of $2.2 million.

 

Lots Owned and Controlled

 

The table below summarizes our lots owned and controlled as of the dates presented:

 

     December 31,      Increase (Decrease)  
     2011      2010      Amount      %  

Lots Owned

           

Southern California

     301         48         253         527

Northern California

     107                 107         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     408         48         360         750
  

 

 

    

 

 

    

 

 

    

 

 

 

Lots Controlled(1)

           

Southern California

     326         169         157         93

Northern California

     59                 59        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     385         169         216         128
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Lots Owned and Controlled(1)

     793         217         576         266
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   

Includes lots under an option contract or under non-binding letters of intent.

 

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Year Ended December 31, 2011 Compared to the Period from January 1, 2010 through September 23, 2010 (Our Predecessor)

 

Net New Home Orders and Backlog

 

           Our Predecessor        
     Year Ended
December 31,
   

Period From
January 1, 2010
Through

September 23,

       
       Increase (Decrease)  
     2011     2010     Amount     %  

Net new home orders

     42        4        38        950

Cancellation rate

     13     20     (7)     (35)

Average selling communities

     2        1        1        100

Selling communities at end of period

     3        1        2        200

Backlog (dollar value)

   $ 3,364,000      $ 1,392,000      $ 1,972,000        142

Backlog (units)

     8        4        4        100

Average sales price of backlog

   $ 421,000      $ 348,000      $ 73,000        21

 

Net new home orders for the year ended December 31, 2011 increased 38, or 950%, to 42 compared to four for the period from January 1, 2010 through September 23, 2010. Our overall absorption rate for the year ended December 31, 2011 was 21.0 per average selling community (1.75 monthly). The comparative analysis for the absorption rate for the period from January 1, 2010 through September 23, 2010 is not comparable given only one active selling location which opened in May 2010. Our absorption rate per average selling community increased and we experienced substantial order growth for the year ended December 31, 2011 as compared to the period from January 1, 2010 through September 23, 2010 due to twelve months of order activity from two selling communities versus four months of order activity from one selling location in the 2010 period. Our cancellation rate was approximately 13% for the year ended December 31, 2011 as compared to 20% for the period from January 1, 2010 through September 23, 2010. The cancellation rate was higher for the period from January 1, 2010 through September 23, 2010 due to the limited amount of orders as compared to a full year of activity ended December 31, 2011.

 

Backlog units increased by four homes, or 100%, to eight as of December 31, 2011 as compared to four homes as of September 23, 2010 primarily driven by the 950% increase in net new home orders offset by 36 home deliveries for the year ended December 31, 2011. The dollar value of backlog increased $2.0 million, or 142%, to $3.4 million as of December 31, 2011 from $1.4 million as of September 23, 2010. The increase in dollar amount of backlog reflects the increase in the number of homes in backlog and an increase in the average sales price of homes in backlog. Our average sales price of homes in backlog increased $73,000, or 21%, to $421,000 for the period ended December 31, 2011 compared to $348,000 for the period from January 1, 2010 through September 23, 2010 due to the introduction of new product at new communities with a shift to larger square footage homes with corresponding higher average sales prices in the 2011 period.

 

Home Sales Revenue and New Homes Delivered

 

            Our Predecessor       
     Year Ended
December 31,
    

Period From
January 1, 2010
Through

September 23,

      
         Increase (Decrease)
     2011      2010      Amount     

%

New homes delivered

     36                 —         36       N/A

Home sales revenue

   $ 13,525,000       $       $ 13,525,000       N/A

Average sales price of homes delivered

   $ 376,000       $       $ 376,000       N/A

 

Increase in new homes delivered, home sales revenue and average sale price is because we did not have any home sales during the predecessor period from January 1, 2010 through September 23, 2010. In addition, we have not included a homebuilding gross margin table for the same reason.

 

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Fee Building

 

                  Our Predecessor         
                  Period From         
                  January 1, 2010         
     Year Ended            Through         
     December 31,            September 23,         
     2011      %     2010      %  

Fee building revenue

   $ 5,804,000         100.0   $ 19,853,000         100.0

Fee building cost

     5,654,000         97.4     17,188,000         86.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Fee building gross margin

   $ 150,000         2.6   $ 2,665,000         13.4
  

 

 

    

 

 

   

 

 

    

 

 

 

 

Fee building revenue, which was all recorded in Southern California, decreased $14.0 million, or 71%, to $5.8 million for the year ended December 31, 2011 from $19.9 million for the period from January 1, 2010 through September 23, 2010. Fee building cost decreased $11.6 million, or 67%, to $5.6 million for the year ended December 31, 2011 from $17.2 million for the period from January 1, 2010 through September 23, 2010. Fee building revenue and cost decreased primarily due to the close out of two fee building projects in 2011 and the change in the focus of our business from fee building to primarily building and selling homes for our own account.

 

Selling, General and Administrative Expense

 

            Our Predecessor         
     Year Ended
December 31,
2011
     Period From
January  1,
2010
Through
September  23,
2010
        
        
        
         As a Percentage of  
         Home Sales Revenue  
         2011     2010  

Sales and marketing

   $ 1,553,000       $ 136,000         11.5     N/A   

General and administrative (“G&A”)

     4,620,000         1,401,000         34.2     N/A   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total sales and marketing and G&A

   $ 6,173,000       $ 1,537,000         45.7     N/A   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

Sales and marketing expense increased $1.5 million, or 1,042%, to $1.6 million for the year ended December 31, 2011 from $0.1 million for the period from January 1, 2010 through September 23, 2010. The increase in sales and marketing expense was primarily attributable to 36 homes delivered for the year ended December 31, 2011 and the twelve months of model operations for two communities for the full year 2011 as compared to no home deliveries and four months of model operations for one community for the period from January 1, 2010 through September 23, 2010. Sales and marketing expense was 11.5% of overall home sales revenue for the year ended December 31, 2011 with no comparative data for the period from January 1, 2010 through September 23, 2010 due to no home sales revenue.

 

General and administrative expenses increased $3.2 million, or 230%, to $4.6 million for the year ended December 31, 2011 from $1.4 million for the period from January 1, 2010 through September 23, 2010 primarily attributable to our growth in employees and operations for the full year 2011 as compared to the period from January 1, 2010 through September 23, 2010. Our general and administrative expense as a percentage of home sales revenue was 34.2% with no comparative data for the period from January 1, 2010 through September 23, 2010 due to no home sales revenue.

 

Other Income (Expense), Net

 

Other income (expense), net, decreased $23,000, or 53%, to $20,000 for the year ended December 31, 2011 from $43,000 for the period from January 1, 2010 through September 23, 2010. The decrease was primarily due to an increase in other income of $123,000 related to national contract rebates collected from closed projects and $11,000 of interest income, offset by an increase in other expense of $118,000 related to the increase in dead deal costs for the year ended December 31, 2011 as compared to the period from January 1, 2010 through September 23, 2010.

 

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Net Income (Loss)

 

As a result of the foregoing factors, net loss for the year ended December 31, 2011 was $4.6 million compared to net income for the period from January 1, 2010 through September 23, 2010 of $1.1 million.

 

Lots Owned and Controlled

 

The table below summarizes our lots owned and controlled as of the dates presented:

 

     December  31,
2011
     As of
September 23,
2010
     Increase (Decrease)  
             Amount        %  

Lots Owned

           

Southern California

     301         59         242         410

Northern California

     107                 107         N/A   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     408         59         349         592
  

 

 

    

 

 

    

 

 

    

 

 

 

Lots Controlled(1)

           

Southern California

     326         126         200         160

Northern California

     59                 59        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     385         126         259         206
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Lots Owned and Controlled(1)

     793         185         608         329
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   

Includes lots under an option contract or under non-binding letters of intent.

 

Liquidity and Capital Resources

 

Overview

 

Our principal uses of capital for the nine months ended September 30, 2012 were operating expenses, land purchases, land development, home construction and the payment of routine liabilities. We used funds generated by operations and available borrowings to meet our short-term working capital requirements. We remain focused on generating positive margins in our homebuilding operations and acquiring desirable land positions in order to maintain a strong balance sheet and keep us poised for growth.

 

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 inventory and not recognized in our statement of operations until a home closes, 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 outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are currently actively acquiring and developing lots in our markets to maintain and grow our lot supply and active selling communities that are strategically located in “core markets,” which are in major job centers or on transportation corridors to those job centers. We are also using our cash on hand to fund expansion into Colorado. As demand for new homes improves and we continue to expand our business, we expect that cash outlays for land purchases and land development to grow our lot inventory will exceed our cash generated by operations. During the nine months ended September 30, 2012, we closed 55 homes, purchased 199 lots for $35.2 million, spent $14.5 million on land development, and started construction on 183 homes. The opportunity to purchase substantially finished lots in desired locations is becoming increasingly more limited and competitive. As a result, we are spending more dollars on land development, as we are purchasing more undeveloped land and partially finished lots than in recent years.

 

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We exercise strict controls and believe we have a prudent strategy for company-wide cash management, including those related to cash outlays for land and inventory acquisition and development. We ended the third quarter with $45.2 million of cash and cash equivalents, a $35.1 million increase from December 31, 2011, primarily as a result of additional capital contributions of $66.0 million, a net increase in notes payable of $39.6 million and home sales revenue of $22.3 million for the nine months ended September 30, 2012, offset by land acquisitions and land development expenditures of $54.5 million, an increase in our home inventory under construction of $31.6 million and other expenditures of $6.7 million. We intend to generate cash from the sale of our inventory net of loan release payments on our notes payable, but we intend to redeploy the net cash generated from the sale of inventory to acquire and develop strategic and well-positioned lots that represent opportunities to generate desired margins, as well as for other operating purposes.

 

In addition to expanding our business in existing markets in California, we continue to look for opportunities to expand outside our existing markets. Accordingly, in October 2012 we announced our entry into the Denver, Colorado market. We expect to purchase our first lots in Colorado in December 2012, begin sales operations in the second quarter of 2013 and have our first deliveries in the third quarter of 2013. Entry into the Denver area offers us growth opportunities based on a number of positive factors, including a growing employment base, rising median incomes, and affordable cost of living. We are also looking at opportunities in other Southwestern markets to expand our footprint into new markets with positive growth potential and the ability to leverage our existing resources.

 

We intend to employ 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 access capital on the best terms available. 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. Our existing indebtedness is recourse to us and we anticipate that future indebtedness will likewise be recourse. As of September 30, 2012, we had approximately $86.0 million of aggregate loan commitments, of which $46.4 million was outstanding. Our aggregate loan commitments consist of a $20 million secured revolving credit facility, which provides financing for several real estate projects, two project-specific revolving loans and several other loan agreements related to the acquisition and development of lots and the construction of model homes and homes for sale. Our board of directors 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. As a means of sustaining our long-term financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized. However, our charter does not contain a limitation on the amount of debt we may incur and our board of directors may change our target debt levels at any time without the approval of our stockholders.

 

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

 

Secured Revolving Credit Facility

 

As of September 30, 2012, we were party to a secured revolving credit facility which has a maximum loan commitment of $20 million. Our secured revolving credit facility has an initial maturity date of April 19, 2014 and a final maturity date of April 19, 2015. We may borrow under our secured revolving credit facility in the ordinary course of business to fund our operations, including our land development and homebuilding activities. Interest on our secured revolving credit facility is paid monthly at a rate based on LIBOR or prime rate pricing, subject to a minimum interest rate floor of 5.5%. As of September 30, 2012, the outstanding principal balance was $7.1 million, the interest rate was 5.5% per annum and we had approximately $11.0 million of availability under our secured revolving credit facility.

 

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Secured Acquisition and Development Loans and Construction Loans

 

As of September 30, 2012, we were party to several secured acquisition and development loan agreements to purchase and develop land parcels. In addition, we were party to several secured construction loan agreements for the construction of our model and production homes. As of September 30, 2012, the total aggregate commitment of our acquisition and development loans and our construction loans was approximately $66.0 million, of which $39.3 million was outstanding. The acquisition and development loans will be repaid as lots are released from the loans based upon a specific release price, as defined in each respective loan agreement. Our construction loans will be repaid with proceeds from home sales based upon a specific release price, as defined in each respective loan agreement. These loans range in maturity between May 2013 and February 2015, including the six month extensions which are at our election (subject to certain conditions). Interest on the loans is paid monthly at a rate based on LIBOR or prime rate pricing, with interest rate floors ranging between 4.0% and 6.0%.

 

Covenant Compliance

 

Under our secured revolving credit facility, our acquisition and development loans and our construction loans, we are required to comply with certain financial covenants, including but not limited to those set forth in the table below:

 

Financial Covenant

   Actual at
September 30, 2012
     Covenant
Requirement at
September 30, 2012
 

Liquidity(1)

   $ 56,252,000       $ 5,000,000   

(Greater of $5.0 million or 10% of total liabilities)

     

Tangible Net Worth

   $ 104,444,000       $ 61,500,000   

(Not less than $47.0 million plus 50% of annual net income and 50% of additional future capital contributions after December 31, 2011)

     

Maximum Total Liabilities to Net Worth Ratio

     0.51         £1.5   

(Not in excess of 1.5:1.0)

     

 

(1)  

Liquidity is defined as cash on hand plus availability under our secured revolving credit facility.

 

As of September 30, 2012 and 2011, we were in compliance with all of these financial covenants.

 

We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. The ratio of debt-to-capital and the ratio of net debt-to-capital are calculated as follows (dollars in thousands):

 

     At September 30,
2012
    At December 31,
2011
 

Notes payable

   $ 46,436      $ 6,873   

Common units subject to redemption(1)

     37,000          

Members’ equity

     105,590        82,491   
  

 

 

   

 

 

 

Total capital

   $ 189,026      $ 89,364   
  

 

 

   

 

 

 

Ratio of debt-to-capital(2)

     24.6     7.7

Notes Payable

   $ 46,436      $ 6,873   

Less: cash and cash equivalents

     (45,242     (10,164
  

 

 

   

 

 

 

Net debt

     1,194          

Common units subject to redemption(1)

     37,000          

Members’ equity

     105,590        82,491   
  

 

 

   

 

 

 

Total capital

   $ 143,784      $ 82,491   
  

 

 

   

 

 

 

Ratio of net debt-to-capital(3)

     0.8     N/A   
  

 

 

   

 

 

 

 

 

 

(1)   

During the period ended September 30, 2012, the Starwood Fund made an additional capital contribution to TPH LLC in the amount of $37 million, representing the contribution of the remainder of its $150 million

 

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equity commitment to TPH LLC, in exchange for additional common units. As of September 30, 2012, we were required to return this $37 million capital contribution (or a lesser amount specified by the Starwood Fund) to the Starwood Fund if this offering were not to close by February 28, 2013, or if this offering were to terminate prior to that time. In November 2012, we obtained written approval from the Starwood Fund, pursuant to an amendment of the operating agreement of TPH LLC, to remove the redemption feature of the $37 million of common units.

 

(2)   

The ratio of debt-to-capital is computed as the quotient obtained by dividing notes payable by the sum of total notes payable plus members’ equity.

 

(3)   

The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is notes payable less cash and cash equivalents) by the sum of net debt plus members’ equity. 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. See the table above reconciling this non-GAAP financial measure to the ratio of debt-to-capital.

 

Cash Flows—Nine Months Ended September 30, 2012 to Nine Months Ended September 30, 2011

 

For the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, the comparison of cash flows is as follows:

 

   

Net cash used in operating activities increased to $69.4 million in the 2012 period from a use of $62.7 million in the 2011 period. The change was primarily a result of (i) an increase in real estate inventories of $66.4 million in the 2012 period compared to an increase of $61.6 million in the 2011 period, primarily driven by the increase in land, land development and homes under construction, offset by the increase in home closings in the 2012 period as compared to the 2011 period and (ii) a consolidated net loss of $3.9 million in the 2012 period compared to a consolidated net loss of $3.1 million in the 2011 period.

 

   

Net cash used in investing activities was $102,000 in the 2012 period as compared to $156,000 in the 2011 period. The change was a result of less fixed assets purchased in the 2012 period.

 

   

Net cash provided by financing activities increased to $104.5 million in the 2012 period from $58.3 million in the 2011 period. The change was primarily a result of (i) an increase in net borrowings on notes payable of $39.5 million in the 2012 period as compared to a net decrease in notes payable of $3.5 million in the 2011 period, (ii) an increase in capital contributions from members of $29.0 million offset by a financial advisory fee payment of $1.0 million in the 2012 period compared to $64.0 million in capital contributions offset by a financial advisory fee payment of $2.2 million in the 2011 period and (iii) an increase of $37.0 million in capital contributions in exchange for the issuance of common units subject to redemption in the 2012 period with no comparable in the 2011 period. (In November 2012, we obtained written approval from the Starwood Fund, pursuant to an amendment of the operating agreement of TPH LLC, to remove the redemption feature of the $37.0 million of common units.)

 

As of September 30, 2012, our cash balance was $45.2 million. We believe we have sufficient cash and sources of financing for at least twelve months.

 

Cash Flows—Year Ended December 31, 2011 Compared to the Period from September 24, 2010 through December 31, 2010

 

For the year ended December 31, 2011 as compared to the period from September 24, 2010 through December 31, 2010, the comparison of cash flows is as follows:

 

   

Net cash used in operating activities increased to $66.4 million in the 2011 period from a use of $4.1 million in the 2010 period. The change was primarily a result of (i) an increase in real estate inventories of $67.9 million in the 2011 period compared to an increase of $2.5 million in the 2010 period