S-1 1 d444600ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on December 5, 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

 

 

Taylor Morrison Home Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   1531   90-0907433

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

4900 N. Scottsdale Road, Suite 2000

Scottsdale, AZ 85251

(480) 840-8100

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

 

 

Darrell C. Sherman, Esq.

Vice President and General Counsel

4900 N. Scottsdale Road, Suite 2000

Scottsdale, AZ 85251

(480) 840-8100

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

 

 

Copies to:

 

John C. Kennedy, Esq.

Lawrence G. Wee, Esq.

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, NY 10019-6064

(212) 373-3000

 

Julie H. Jones, Esq.

Ropes & Gray LLP

The Prudential Tower

800 Boylston Street

Boston, MA 02199

(617) 951-7000

 

William J. Whelan III, Esq.

Joseph D. Zavaglia, Esq.

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, NY 10019-7475

(212) 474-1000

 

 

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 of 1933, 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.

 

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

 

 

 

 

Title Of Each Class Of

Securities To Be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)

  Amount Of
Registration Fee(2)

Class A common stock, par value $0.01 per share(3)

  $250,000,000   $34,100

 

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Calculated pursuant to Rule 457(o) of the Securities Act of 1933.
(3) Includes shares of Class A common stock which the underwriters have the right to purchase to cover over-allotments, if any.

 

 

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 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this 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 prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion)

Dated                      , 2013

             Shares

 

LOGO

Taylor Morrison Home Corporation

CLASS A COMMON STOCK

 

 

Taylor Morrison Home Corporation, which we refer to in this prospectus as “TMHC,” is offering              shares of its Class A common stock. This is our initial public offering and no public market exists for our shares. We anticipate that the initial public offering price will be between $         and $         per share.

We intend to apply to list the Class A common stock on a national securities exchange under the symbol “TMHC.”

 

 

Investing in the Class A common stock involves risks. See “Risk Factors” beginning on page 21.

PRICE $         PER SHARE

 

     Price to Public      Underwriting
Discounts and
Commissions
     Proceeds to
Company
 

Per Share

   $                    $                    $                

Total

   $                    $                    $                

TMHC has granted the underwriters the right to purchase an additional              shares of Class A common stock to cover over-allotments.

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.

The underwriters expect to deliver the shares of Class A common stock to purchasers on                     , 2013.

 

 

Joint Book-Running Managers

 

Credit Suisse   Citigroup

Zelman Partners LLC

Prospectus dated                     , 2013


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LOGO


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You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus or any free writing prospectus prepared by us or on our behalf. We are offering to sell, and seeking offers to buy, shares of Class A common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the Class A common stock.

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Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Trademarks

This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

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STATEMENT REGARDING INDUSTRY AND MARKET DATA

Any market or industry data contained in this prospectus is based on a variety of sources, including internal data and estimates, independent industry publications, government publications, reports by market research firms or other published independent sources. Industry publications and other published sources generally state that the information they contain has been obtained from third-party sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such information. Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions, and such information has not been verified by any independent sources. Accordingly, investors should not place significant reliance on such data and information.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding whether to invest in our Class A common stock. You should read this entire prospectus carefully, including the “Risk Factors” section and our consolidated financial statements and the notes to those statements included in this prospectus, before making an investment decision.

In this prospectus, unless otherwise indicated or the context otherwise requires, references to the “Company,” “we,” “us” and “our” refer (1) subsequent to the reorganization transactions described under “Organizational Structure” (referred to in this prospectus as the “Reorganization Transactions”), to TMHC and its consolidated subsidiaries, (2) prior to the consummation of this offering and the Reorganization Transactions and following the date of our acquisition by our principal equityholders (referred to in this prospectus as the “Acquisition”) in July 2011, to TMM Holdings Limited Partnership (“TMM” or the “Successor”) and its consolidated subsidiaries, and (3) prior to the Acquisition, to the North American business of Taylor Wimpey plc (the “Predecessor”). References to “Taylor Morrison Holdings” are to Taylor Morrison Holdings, Inc., the indirect parent company of our U.S. business. References to “Monarch Communities” are to Monarch Communities Inc., the indirect parent company of our Canadian business. See “—The Reorganization Transactions” and “Organizational Structure.”

Where we present information on a “pro forma” basis, such information gives pro forma effect to this offering, the Acquisition and Financing Transactions (as defined elsewhere in this “Prospectus Summary”) and the Reorganization Transactions in the manner described in this prospectus under “Unaudited Pro Forma Consolidated Financial Information.” References to the information or results of “unconsolidated joint ventures” refer to our proportionate share of unconsolidated homebuilding joint ventures in Canada. When we refer to average sales price of our homes the amounts referred to do not include our sales from our unconsolidated joint ventures. Amounts expressed in “$” or “dollars” refer to U.S. dollars.

Our Company

Upon completion of this offering, we will be the sixth largest public homebuilder in North America based on 2011 revenues as reported by Hanley Wood. Headquartered in Scottsdale, Arizona, we build single-family detached and attached homes and develop land, which includes lifestyle and master planned communities. We are proud of our legacy of more than 75 years in the homebuilding industry, having originally commenced homebuilding operations in 1936. We operate under our Taylor Morrison brand in the United States and under our Monarch brand in Canada.

Our business is organized into three geographic regions: East, West and Canada, which regions accounted for 46%, 36% and 18%, respectively, of our net sales orders (excluding unconsolidated joint ventures) for the nine months ended September 30, 2012. Our East region consists of our Houston, Austin, North Florida and West Florida divisions. Our West region consists of our Phoenix, Northern California, Southern California and Denver divisions. Our Canada region consists of our operations within the province of Ontario, primarily in the Greater Toronto Area (“GTA”) and also in Ottawa and Kitchener-Waterloo, and offers both single-family and high-rise communities.

In all of our markets, we build and sell a broad and innovative mix of homes across a wide range of price points. Our emphasis is on designing, building and selling homes to first- and second-time move-up buyers. We are well positioned in our markets with a top-10 market share (based on 2011 home closings as reported by Hanley Wood and Metrostudy and 2011 home sales as reported by Real Net Canada) in 13 of our 16 markets.

 

 

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We believe our business is distinguished by our:

 

   

strong historical financial performance and industry-leading margins;

 

   

strong balance sheet with significant liquidity available for growth;

 

   

attractively located land inventory carried at a low cost basis;

 

   

strong presence in historically high-growth homebuilding markets;

 

   

profitable Canadian business;

 

   

expertise in delivering “lifestyle” communities targeted at first- and second-time move-up buyers;

 

   

deep knowledge of our homebuyer customer base; and

 

   

reputation for quality and customer service.

During the nine months ended September 30, 2012, we closed 2,586 homes, consisting of 1,880 homes in the United States and 706 homes in Canada, including 204 homes in unconsolidated joint ventures, with an average sales price across North America of $347,000. During the same period, we generated $879.0 million in revenues, $81.8 million in net income and $125.1 million in Adjusted EBITDA (for a discussion of how we calculate Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see footnote 4 under the caption “—Summary Historical and Pro Forma Consolidated Financial and Other Information”). In the United States, for the nine months ended September 30, 2012, our sales orders increased approximately 47% as compared to the same period in 2011, and we averaged 3.0 sales per active selling community per month compared to an average of 1.7 sales per active selling community per month for the same period in 2011. As of September 30, 2012, we offered homes in 122 active selling communities and had a backlog of 4,205 homes sold but not closed, including 903 homes in unconsolidated joint ventures, with an associated backlog sales value of approximately $1.5 billion.

Our Industry

United States

The residential housing industry has historically been a significant contributor to economic activity in the United States. From 1970 to 2007, the residential housing sector represented an average of approximately 4.5% of U.S. annual gross domestic product and then declined to an average of 2.5% of U.S. annual GDP from 2008 to 2011. Similarly, total new home starts averaged 1.55 million per year from 1960 to 2007 and then declined to an average of 663,000 per year from 2008 to 2011.

Total New Home Starts

(in thousands)

 

LOGO

Source: U.S. Census Bureau

 

 

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We believe that a strong fundamental U.S. housing recovery is underway on a national basis, driven by consumers who are increasingly optimistic about their economic prospects and supported by several positive economic and demographic factors including:

 

   

improving employment growth;

 

   

increasing consumer confidence, bolstered by rising home values and improving household finances;

 

   

improving sentiment towards residential real estate ownership;

 

   

accelerating household formation;

 

   

significant declines in new and existing for-sale home inventory; and

 

   

record low interest rates supporting affordability and home ownership.

We believe that the improvement in the U.S. housing market is illustrated by a number of key benchmarks and statistics. According to the U.S. Census Bureau, building permits for privately owned homes in October 2012 were estimated at a seasonally adjusted annual rate of 866,000, representing an approximate 30% increase over the October 2011 estimate of 667,000. The increase in new building permits is consistent with an average of 30% and 48% year-over-year growth in new home orders and backlog reported by the top 10 public homebuilders (ranking based on 2011 revenues reported by Hanley Wood), respectively, based on the most recently reported quarterly data as of the date of this prospectus. In addition, home prices in the United States are generally increasing. According to the National Association of Realtors, U.S. median home prices improved on a year-over-year basis in 120 out of 149 Metropolitan Statistical Areas (“MSA”) in the third quarter of 2012. Based on data from the U.S. Census Bureau in October 2012, new home prices increased approximately 12% year-over-year.

Canada

The Canadian housing market has been more stable than the U.S. housing market over the last five years. The relative consistency of the Canadian housing market, particularly in Ontario where we operate, is principally a result of demand due to growth in employment and immigration. The Canadian housing market has also exhibited stable housing starts, a balanced sales-to-listings ratio and steady long-term growth in housing prices. In addition, Canadian home buying practices reflect a number of stabilizing structural, mortgage lending, legal and general market characteristics that have allowed the Canadian housing market to grow at a sustainable pace and to experience significantly lower mortgage default rates over the past decade, as compared to the United States.

Ontario represents approximately one-third of the total Canadian new home market, as measured by total housing starts, and benefits from positive demographic and economic growth trends. For example, the population and GDP of Ontario between 2008 and 2011 increased by approximately 4.4% and 9.5%, respectively. Ontario housing starts increased from 68,123 in 2007 to an estimated level of 77,600 in 2012, representing a compound annual growth rate (“CAGR”) of approximately 2.6%. Similarly, average home prices in Ontario increased from CAD$299,610 in 2007 to an estimated average price of CAD$386,000 in 2012, representing a CAGR of approximately 5.2%. With slowing job growth relative to the recent past, ongoing global economic uncertainty and increasing units under construction, it is anticipated that Ontario housing starts will moderate to approximately 65,000 and average home prices will remain flat at approximately CAD$386,400 in 2013, based on data from the Canada Mortgage and Housing Corporation (“CMHC”).

 

 

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Our Competitive Strengths

Our business is characterized by the following competitive strengths:

Strong historical financial performance with industry-leading margins

We have a profitable and efficient operating platform that positions us to take advantage of opportunities as the U.S. housing industry continues to recover. We are among a select few of our public homebuilding peers to be profitable in both 2010 and 2011. We generated net income of $90.6 million in 2010, $76.8 million in 2011 and $81.8 million for the nine months ended September 30, 2012. Our pre-tax income margin for the nine months ended September 30, 2012 was 9.3%, which was the highest among the top 10 public homebuilders for the last three completed fiscal quarters.

We believe that our management approach, which balances a decentralized local market expertise with a centralized executive management focus on maximizing efficiencies, will support our strong margins and further grow our profitability. Our operating platform is scalable, which we believe allows us to increase volume while at the same time improving profitability and driving shareholder returns.

During the recent housing downturn, we improved our margins by aligning our headcount to reflect local and national industry conditions, standardizing systems and processes across business units and reducing construction and procurement costs through standardized national, regional and local contracts.

Strong balance sheet with significant liquidity for growth

We are well positioned with a strong balance sheet and significant liquidity to support our ongoing operations and to take advantage of growth opportunities as the housing market continues to recover. At September 30, 2012, on a pro forma basis, we would have had $         million of unrestricted cash, approximately $120 million of availability under our $125 million senior secured revolving credit facility (the “Revolving Credit Facility”) and a strong net debt to net book capitalization of         % (or total debt to total book capitalization of         %). In addition, less than 20% of our outstanding debt matures before 2020.

The balance sheet carrying value of our entire inventory base was adjusted to fair market value as of the date of the Acquisition in July 2011. The purchase accounting adjustments resulted in a comprehensive revaluation of our entire land inventory near the bottom of the recent U.S. housing downturn. Giving effect to the Acquisition-related purchase accounting adjustments, the carrying value of our U.S. land inventory at the time of the Acquisition represented 52% of its original cost. We believe this reduced cost basis positions us to generate strong margins in the future. As of September 30, 2012, we have a fully reserved deferred tax asset, a portion of which (approximately $200 million) may reduce cash taxes payable in the future, subject to various federal and state carryforward limitations.

Attractively located land inventory carried at a low cost basis

We continue to benefit from a sizeable and well-located existing land inventory. As of September 30, 2012, we owned or controlled 34,965 lots, including unconsolidated joint venture lots, which equated to approximately 9.2 years of land supply based on our trailing twelve-month closings of 3,811 homes. Our land inventory reflects a balanced approach to investments, yielding a distribution of finished lots available for near-term homebuilding operation and strategic land positions to support future growth. Our significant land inventory allows us to be selective in identifying land acquisitions and favorably positions us against potential land shortages in markets that exhibit land supply constraints. In addition, some of our holdings represent multi-phase, master planned communities, which provide us with the opportunity to utilize our development expertise to add value through re-entitlements, repositioning and/or opportunistic land sales to third parties.

 

 

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Since January 1, 2009, we have spent approximately $915 million on new land purchases, acquiring 17,295 lots, of which 12,534 currently remain in our lot supply. We believe a substantial portion of our current land holdings was purchased at attractive prices at or near the low point of the market. Our local, long-standing relationships with prominent land sellers, brokers and investors and our deep knowledge of the local markets position us to be quick to market both to identify land and to gain access to decision makers. Our long-held reputation as a leading homebuilder and developer of land, combined with our balance sheet strength and our active opportunistic purchasing of land through the downturn, gives land brokers and sellers confidence that they can close transactions with us on a timely basis and with minimal execution risk.

Strong market position and local presence in high-growth homebuilding markets

Our strategically focused geographic footprint ideally positions us to participate in the current U.S. housing recovery. We currently operate exclusively in states benefitting from positive momentum in housing demand drivers, including nationally leading population and employment growth trends, migration patterns, housing affordability and desirable lifestyle and weather characteristics. The five states in which we operate accounted for 30% of the total 2010 U.S. population of 309 million and 34% of the 481,000 building permits issued for privately owned homes in the last twelve months.

Our land inventory is concentrated in markets that have experienced among the most significant improvement in home prices. We believe that our geographic footprint strategically positions us to capture the expected benefits of increasing home volumes and home prices as the U.S. housing recovery continues and demand for new homes increases.

 

Metropolitan Area

   Case-Shiller  Composite-20
year-over-year
Price Change
 

Phoenix, AZ

     +20.4

Denver, CO

     +6.7

Tampa, FL

     +6.0

San Francisco, CA

     +7.4

Los Angeles, CA

     +4.0

San Diego, CA

     +4.2

Aggregate Case-Shiller Composite-20

     +3.0

 

Source: S&P Case-Shiller published 11/27/2012

Note: Includes Taylor Morrison markets where Case-Shiller information is available

We are well positioned within our markets, with a top ten market share (based on 2011 home closings as reported by Hanley Wood and MetroStudy and 2011 home sales as reported by Real Net Canada) in 13 of our 16 markets. We believe that maintaining significant market share within our markets enables us to achieve economies of scale, differentiates us from most of our competitors and increases our access to land acquisition opportunities.

Profitable Monarch business in Ontario

We benefit from increased diversification through our presence in the Canadian housing market because of our Monarch business in Ontario. Monarch Corporation delivered its first home in 1936 and is a well-recognized and respected brand in Canada. Monarch Corporation has generated stable income and cash flow and has been profitable every year since 1941. Since 2008, the first full year after our U.S. and Canadian operations were combined, our Canada region has generated between 27% and 46% of our annual revenues and has played an important role in delivering growth, profitability and cash flow, which helped us withstand the recent downturn

 

 

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in the U.S. housing industry. As of September 30, 2012, Monarch Corporation had $845.9 million in backlog of homes sold and to be delivered in 2012 through 2016, including $317.9 million of unconsolidated joint venture backlog.

Monarch Corporation has six wholly owned and joint venture high-rise developments in the GTA that are expected to close and recognize revenue in 2013 and 2014, which have sold in excess of 95% of the aggregate number of homes offered. These high-rise developments are expected to recognize in excess of $350 million in total revenues, a portion of which we will recognize as joint venture income on an equity method basis.

Expertise in delivering lifestyle communities targeted at first- and second-time move-up buyers

We focus on developing lifestyle communities, which have many distinguishing attributes, including proximity to job centers, strong school systems and a variety of amenities. Within our communities, we offer award-winning designs through our single-family detached, single-family attached and high-rise condominium products. During the economic downturn, we maintained our core business strategy of focusing on first- and second-time move-up buyers, whereas we observed many homebuilders refocus their businesses on lower-priced homes. We believe our experience in the move-up market allows us to significantly expand our new home offerings at higher price points. We believe homebuyers at these higher price points are more likely to value and pay for the quality of lifestyle, construction and amenities for which we are known. While we primarily target move-up buyers, our portfolio also includes homes for entry-level, luxury and active adult buyers (55 years of age and over). We have the expertise and track record in designing and delivering lifestyle products and amenities that appeal to active adult buyers.

 

LOGO

Our captive mortgage company allows us to offer financing to our homebuyers and to more effectively convert backlog into closings

We directly originate, underwrite and fund mortgages for our homebuyers through our wholly owned mortgage lending company, Taylor Morrison Home Funding, LLC (“TMHF”). TMHF maintains a relationship with its correspondent lenders through which it utilizes its Principal Authorized Agent designation to mitigate the underwriting risk associated with its funding of mortgage loans. We believe TMHF provides a distinct and significant competitive advantage relative to homebuilders without captive mortgage units, since many of our buyers seek an integrated home buying experience. TMHF allows us to use mortgage finance as an additional sales tool, helps ensure and enhance the customer experience, prequalifies buyers earlier in the home buying

 

 

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process, provides us better visibility in converting our sales backlog into closings and is a source of incremental revenues and profitability. TMHF also outperforms a number of builder-affiliated mortgage companies, as evidenced by our leading capture rate and one of the lowest sales cancellation rates among our peers with mortgage units.

Highly experienced management team

We benefit from a strong and experienced management team that has demonstrated the ability to generate positive financial results and adapt to constantly changing market conditions. In addition to our corporate management team, our division presidents bring substantial industry knowledge and local market expertise, with an average of approximately 18 years of experience in the homebuilding industry. Our success in land acquisition and development is due in large part to the caliber of our local management teams, which are responsible for the planning, design, entitlements and eventual execution of the entire community. Unlike some of our homebuilding peers, we retained a core competency in land acquisition and development during the recent downturn, which positions us to more effectively identify and capitalize on land opportunities in the current market.

Our Growth Strategy

We have performed well through the unprecedented challenges of the recent economic downturn. We are well positioned for growth and increased profitability in an improving housing market through disciplined execution of the following elements of our growth strategy:

Drive revenue by opening new communities from existing land supply

Over the last few years we have strategically invested in new land in our core markets. Our land supply provides us with the opportunity to increase our community count on a net basis by approximately 20% in each of 2013 and 2014. A significant portion of our land supply was purchased at low points during the recent downturn in the housing cycle. These land purchases, coupled with the adjustment of our land cost basis to fair market value at the time of our Acquisition, are expected to result in continued revenue growth and strong gross margin performance from our U.S. communities.

Combine land acquisition and development expertise with homebuilding operations to maximize profitability

Our ability to identify, acquire and develop land in desirable locations and on favorable terms is critical to our success. We evaluate land opportunities based on how we expect they will contribute to overall corporate profitability and returns, rather than how they might drive volume on a regional or submarket basis. We continue to use our local relationships with prominent land sellers, brokers and investors to seek to obtain the “first look” at quality land opportunities. We will continue to allocate capital to pursue creative deal structures and other opportunities that may yield superior returns by utilizing our development expertise, efficiency and opportunistic mindset.

We continue to combine our land development expertise with our homebuilding operations to increase the flexibility of our business and to enhance our margin performance and to control the timing of delivery of lots. Unlike many of our competitors, we are able to increase the value of our land portfolio through the zoning and engineering process by creating attractive land use plans and optimizing our use of land, which ultimately translates into greater opportunities to generate profits.

Focus our offerings on targeted customer groups

Our goal is to identify the preferences of our target customer and demographic groups and offer them innovative, high-quality homes that are efficient and profitable to build. To achieve this goal, we conduct extensive market research to determine preferences of our customer groups. We have identified seven consumer

 

 

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groups by focusing on particular lifestyle preferences, tastes and other attributes of our customer base. Our group classification includes four categories of couples or singles, such as our “Fancy Nesters” customers, and three categories of families, such as our “Parks and Prestige” customers.

Our approach to consumer group identification guides all of our operations from our initial land acquisition through our design, building, marketing and delivery of homes and our ongoing after-sales customer service. Among our peers, we believe we are at the forefront of directed-marketing strategies, as evidenced by our highly-trafficked internet site as well as our strategic partnership at the Innoventions dream home in the Disneyland Resort in California.

Build aspirational homes for our customers and deliver superior customer service

We develop communities and build homes in which our target customers aspire to live. The process of delivering aspirational homes begins with our careful purchase of well-located land and our focused attention to developing attractive neighborhoods with desirable lifestyle amenities. Our efforts culminate in the design and construction of thoughtfully detailed finished homes utilizing the highest construction standards.

We are committed to after-sales service that we believe can improve our brand recognition and encourage our customers to make referrals resulting in lower customer acquisition costs and increased home sales rates. Both the Taylor Morrison and Monarch brands have received numerous accolades and awards for quality, service and design by homebuilding industry trade groups and publications.

Selectively pursue acquisitions

Our company was formed through the combination of Taylor Woodrow and Morrison Homes in the United States, forming Taylor Morrison, and Monarch Corporation in Canada. We have successfully acquired and integrated homebuilding businesses in the past and intend to utilize our experience in integrating businesses as opportunities for acquisitions arise.

We selectively evaluate expansion opportunities in our existing markets as well as in new markets that exhibit positive long-term fundamentals. We believe that our success in integrating operations across both a wide range of geographic markets and product types demonstrates the scalable nature of our business model and provides us with the structure to support disciplined growth in existing and new markets.

Adhere to our core operating principles to drive consistent long-term performance

We recognize that the housing market is cyclical and home price movement between the peak and trough of the cycle can be significant. We seek to maximize shareholder value over the long-term. We operate our business to mitigate risks from downturns in the market and to position ourselves to capitalize on upturns in the market: we seek to control costs, maintain a strong balance sheet and ensure an overall strategic focus that is informed by national, regional and local market trends. This management approach also includes the following elements:

 

   

attracting and retaining top talent through a culture in which team members are encouraged to contribute to our success and are given the opportunity to recognize their full potential;

 

   

balancing decentralized local day-to-day decision-making responsibility with centralized corporate oversight;

 

   

ensuring all team members understand the organization’s strategy and the goals of the business and have the tools to contribute to our success;

 

   

centralizing management approval of all land acquisitions and dispositions under stringent underwriting requirements; and

 

   

maintaining a performance-based corporate culture committed to the highest standards of integrity, ethics and professionalism.

 

 

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The Reorganization Transactions

In the Reorganization Transactions, TMHC will, through a series of transactions, directly or indirectly acquire partnership interests in TMM with the net cash proceeds received in this offering and become or acquire control over the sole general partner of TMM. The existing holders of limited partnership interests in TMM, including our Principal Equityholders (as described below) and certain members of our management, will continue to hold directly or indirectly limited partnership interests in TMM and will be issued shares of TMHC’s Class B common stock. TMHC will control the business and affairs of TMM and its subsidiaries. TMHC will consolidate the financial results of TMM and its subsidiaries, and TMHC’s net income (loss) will be reduced by a noncontrolling interest expense to reflect the entitlement of the existing holders of partnership interests in TMM to a portion of TMM’s net income (loss). See “Organizational Structure” for further details.

In connection with the Reorganization Transactions, TMHC will amend and restate its certificate of incorporation to authorize the issuance of two classes of common stock, Class A common stock and Class B common stock. Shares of Class A common stock and Class B common stock, which we collectively refer to as “common stock,” will generally vote together as a single class on all matters submitted to stockholders. The Class B common stock will not entitle its holders to any of the economic rights (including rights to dividends and distributions upon liquidation) that will be provided to holders of Class A common stock. The voting power of the outstanding Class A common stock will be equal to the percentage of TMM partnership interests held directly or indirectly by TMHC, and the voting power of the outstanding Class B common stock will be equal to the remaining percentage of TMM partnership interests not held directly or indirectly by TMHC. Partnership interests held directly or indirectly by the existing TMM partners (along with a corresponding number of shares of Class B common stock) may be exchanged for shares of Class A common stock on a one-for-one equivalent basis, according to the terms of the Exchange Agreement to which TMHC and certain other partners of TMM will be a party upon completion of this offering.

Following the Reorganization Transactions, this offering and the application of the net proceeds therefrom, TMHC will hold directly or indirectly     % of the partnership interests in TMM and the Principal Equityholders and certain members of our management will hold directly or indirectly an aggregate of     % of the partnership interests in TMM (in each case based on the midpoint of the estimated public offering price range set forth on the cover page of this prospectus).

 

 

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Post-Reorganization Structure

The following chart summarizes our legal entity structure following the Reorganization Transactions, this offering and the application of the net proceeds from this offering (assuming an initial public offering price of $ per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus)). This chart is provided for illustrative purposes only and does not purport to represent all legal entities owned or controlled by us:

 

LOGO

See “Organizational Structure,” “Certain Relationships and Related Party Transactions” and “Description of Capital Stock” for more information on the Exchange Agreement and the rights associated with our common stock and the TMM partnership interests.

Our Principal Equityholders

In this prospectus, we refer to (i) the affiliates of TPG Global LLC (“TPG Global”) that are invested in TMM (the “TPG Entities”), (ii) Oaktree (as described below) and (iii) JH (as described below), collectively, as our “Principal Equityholders.” Following this offering, the Principal Equityholders will own a majority of the combined voting power of our common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the national securities exchange on which the shares of Class A common stock will be listed. See “Principal Stockholders.”

 

 

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TPG Global

TPG Global (together with its affiliates, “TPG”) is a leading global private investment firm founded in 1992 with $54.5 billion of assets under management as of September 30, 2012 and offices in San Francisco, Fort Worth, Austin, Beijing, Chongqing, Hong Kong, London, Luxembourg, Melbourne, Moscow, Mumbai, New York, Paris, São Paulo, Shanghai, Singapore and Tokyo. TPG has extensive experience with global public and private investments executed through leveraged buyouts, recapitalizations, spinouts, growth investments, joint ventures and restructurings.

Oaktree

Oaktree Capital Management, L.P. (“Oaktree Capital Management”) is a leading global investment management firm focused on alternative markets, with an estimated $81.0 billion in assets under management as of September 30, 2012. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate and listed equities. Oaktree was founded in 1995 by a group of principals who have worked together since the mid-1980s. Headquartered in Los Angeles, the firm has over 700 employees and offices in 13 cities worldwide. The investment funds managed by Oaktree Capital Management or their respective subsidiaries that are invested in TMM are referred to collectively in this prospectus as “Oaktree.”

JH Investments

JH Investments Inc. (“JH Investments”) is a Vancouver, Canada-based private company with investments in a wide variety of businesses including real estate development in Canada and the United States, an international resort development and consulting business operated through RePlay Resorts and an alternative energy business operated through Elemental Energy. The investment funds managed by JH Investments or their respective subsidiaries that are invested in TMM are referred to collectively in this prospectus as “JH.”

In connection with the Reorganization Transactions, we intend to enter into a stockholders agreement with certain of the existing limited partners of TMM. The stockholders agreement will contain provisions related to the composition of the Board of Directors of TMHC, the committees of the Board of Directors of TMHC and TMHC’s corporate governance. Under the stockholders agreement, the Principal Equityholders will be entitled to nominate a majority of the members of the Board of Directors of TMHC. The Principal Equityholders will agree in the stockholders agreement to vote for each other’s board nominees. See “Management—Board Structure” and “Certain Relationships and Related Transactions—Stockholders Agreement.”

Acquisition by the Principal Equityholders and Financing Transactions

Affiliates of the Principal Equityholders formed TMM in March 2011, and on July 13, 2011, TMM acquired Taylor Morrison Communities, Inc. (“TMC”) and Monarch Corporation (together with TMC, the “Operating Subsidiaries”) from Taylor Wimpey plc for aggregate cash consideration of approximately $1.2 billion. We refer to this transaction as the “Acquisition.” To fund a portion of the consideration for the Acquisition, the Principal Equityholders contributed an aggregate of $620.3 million in cash to TMM in exchange for the issuance to them of limited partner interests in TMM (the “Equity Contribution”).

Concurrently with the Equity Contribution and to finance the remaining portion of the consideration for the Acquisition, the Operating Subsidiaries entered into a $625.0 million senior unsecured credit facility with affiliates of TPG and Oaktree, consisting of a $500.0 million bridge loan facility and a $125.0 million incremental bridge loan facility (collectively, the “Sponsor Loan”). In August 2011, we repaid the $125.0 million incremental bridge loan facility. Concurrently with the Acquisition, the Operating Subsidiaries also entered into the Revolving Credit Facility with a syndicate of third party banks and financial institutions, with an aggregate

 

 

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committed principal amount of $75.0 million. On August 15, 2012, we utilized the $50.0 million incremental facility feature under the Revolving Credit Facility to increase the revolving credit commitments from $75.0 million to $125.0 million.

On April 13, 2012, TMC and Monarch Communities completed an offering of $550.0 million aggregate principal amount of 7.750% senior notes due 2020. We used a portion of the net proceeds from the offering of the senior notes to repay $350.0 million of the then outstanding Sponsor Loan. The affiliates of TPG and Oaktree who were lenders under the Sponsor Loan caused the then remaining $150.0 million of the Sponsor Loan to be acquired by a subsidiary of TMM, and the TPG Entities and Oaktree acquired an additional $150.0 million of limited partnership interests in TMM (the “Sponsor Loan Contribution”). On August 21, 2012, we completed the offering of $125.0 million aggregate principal amount of additional 7.750% senior notes due 2020 at an issue price of 105.5% plus accrued interest from and including April 13, 2012.

We refer to the Acquisition, the Sponsor Loan Contribution, the initial entry into the Revolving Credit Facility (and its subsequent amendment and extension), the two offerings of our senior notes and the use of proceeds from those transactions as the “Acquisition and Financing Transactions.”

Risks Associated with our Business

An investment in shares of our Class A common stock involves a high degree of risk. Below is a summary of certain key risk factors that you should consider in evaluating an investment in shares of our Class A common stock:

 

   

downturns or cyclical economic conditions affecting the markets in which our products are sold, including the housing and commercial construction markets;

 

   

competition in our industry;

 

   

access to, and the cost of, qualified labor may be affected by factors beyond our control;

 

   

our inability to source land at attractive prices;

 

   

increases in government regulation, impact fees and development charges; and

 

   

our ability to continue to comply with the covenants in our debt agreements and service our indebtedness.

This list is not exhaustive. Please read the full discussion of these risks and other risks described under the caption “Risk Factors” beginning on page 21 of this prospectus.

Corporate and Other Information

We have been building homes since 1936. The July 2007 merger between Taylor Woodrow and George Wimpey, two UK-based, publicly listed homebuilders, resulted in the formation of Taylor Wimpey plc, our former parent, and the subsequent integration of Taylor Woodrow and Morrison Homes in the United States, forming Taylor Morrison, and Monarch Corporation in Canada. TMHC was incorporated in Delaware in November 2012. Our principal executive offices are located at 4900 N. Scottsdale Road, Suite 2000, Scottsdale, Arizona 85251 and the telephone number is (480) 840-8100.

We also maintain internet sites at http://www.taylormorrison.com and http://www.monarchgroup.net. Our websites and the information contained in our websites or connected to our websites are not and will not be deemed to be incorporated into this prospectus or the registration statement of which this prospectus forms a part, and you should not consider such information part of this prospectus or rely on any such information in making your decision whether to purchase our Class A common stock.

 

 

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THE OFFERING

 

Issuer

Taylor Morrison Home Corporation.

 

Class A common stock offered

                     shares.

 

Class A common stock to be outstanding after this offering

                     shares.

 

Class B common stock to be outstanding after this offering

            shares. Each share of our Class B common stock will have one vote on all matters submitted to a vote of stockholders but will have no economic rights (including no rights to dividends or distributions upon liquidation). Shares of our Class B common stock will be issued in an amount proportionate to the percentage amount of partnership interests in TMM held by the limited partners of TMM (other than TMHC). The voting power of the outstanding Class B common stock will be equal to the percentage of TMM partnership interests held by the partners of TMM (other than TMHC). See “Description of Capital Stock.”

 

Voting rights

One vote per share; Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of stockholders. See “Description of Capital Stock.”

 

Exchange

Partnership interests in TMM (along with a corresponding number of shares of our Class B common stock) held by existing partners at the time of this offering (other than TMHC) may be exchanged for shares of our Class A common stock on a one-for-one equivalent basis, subject to customary exchange rate adjustments for stock splits, stock dividends and reclassifications. When a partnership interest and the corresponding share of our Class B common stock are exchanged by a partner of TMM for a share of Class A common stock, the corresponding share of our Class B common stock will be canceled.

 

Over-allotment option

We have granted to the underwriters an option to purchase up to             additional shares of Class A common stock from us at the initial public offering price (less underwriting discounts and commissions) to cover over-allotments, if any, for a period of 30 days from the date of this prospectus.

 

Use of proceeds

We estimate that the net proceeds from the sale of our Class A common stock in this offering, after deducting offering expenses and underwriting discounts and commissions, will be approximately $          million ($         million if the underwriters exercise their over-allotment option in full) based on an assumed initial public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). TMHC intends to use the net proceeds of this offering to acquire partnership interests in TMM. TMM intends to contribute such proceeds to its subsidiaries. TMM’s subsidiaries intend to use such proceeds for working capital and general corporate purposes, which may include the repayment or repurchase of indebtedness and to fund acquisitions.

 

 

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Dividend policy

We do not intend to pay dividends on our Class A common stock. We plan to retain any earnings for use in the operation of our business and to fund future growth.

 

Listing

We intend to apply to have our Class A common stock listed on a national securities exchange under the symbol “TMHC.”

 

Risk factors

Investing in our Class A common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 21 of this prospectus for a discussion of factors you should carefully consider before deciding to purchase shares of our Class A common stock.

Except as otherwise indicated, all information in this prospectus:

 

   

assumes no exercise of the underwriters’ option to purchase additional shares to cover over-allotments;

 

   

assumes             shares are issuable under options to purchase shares of Class A common stock or restricted stock units that may be granted in connection with this offering under the Taylor Morrison 2013 Omnibus Equity Incentive Plan (the “2013 Plan”);

 

   

assumes             shares of Class A common stock are reserved for issuance upon the exchange of partnership interests in TMM (along with the corresponding number of shares of our Class B common stock); and

 

   

assumes an initial public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus).

 

 

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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER INFORMATION

The summary combined financial information of TMM set forth below for each of the years in the two year period ended December 31, 2010 and the period from January 1, 2011 to July 12, 2011 has been derived from the audited combined financial statements of TMM’s predecessor, the North American business of Taylor Wimpey plc, which are included elsewhere in this prospectus. The summary consolidated financial information set forth below for the period from July 13, 2011 to December 31, 2011, and as of December 31, 2011, has been derived from the audited consolidated financial statements of TMM (the “successor”) included elsewhere in this prospectus. The predecessor period financial statements have been prepared using the historical cost basis of accounting that existed prior to the Acquisition in accordance with U.S. GAAP. The successor period financial statements for periods ending subsequent to July 13, 2011 (the date of the Acquisition) are also prepared in accordance with U.S. GAAP, although they reflect adjustments made as a result of the application of purchase accounting in connection with the Acquisition. As a result, the financial information for periods subsequent to the date of the Acquisition is not necessarily comparable to that for the predecessor periods or to the pro forma financial information presented below. The summary consolidated financial information set forth below for the period from July 13, 2011 to September 30, 2011 and the nine months ended September 30, 2012 has been derived from the unaudited condensed consolidated financial statements of the successor, included elsewhere in this prospectus. Our results for the nine months ended September 30, 2012 are not necessarily indicative of the results that can be expected for the full year or any future period.

The summary unaudited pro forma consolidated statement of operations data of TMHC for the fiscal year ended December 31, 2011 and the nine months ended September 30, 2012 present our consolidated results of operations giving pro forma effect to the Acquisition and Financing Transactions, the Reorganization Transactions, this offering and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transactions occurred on January 1, 2011. The summary unaudited pro forma consolidated balance sheet data of TMHC as of September 30, 2012 presents our consolidated financial position giving pro forma effect to the Reorganization Transactions, this offering and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transactions occurred on September 30, 2012.

The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the relevant transactions on the historical financial information of TMHC, TMM and its predecessor. The summary unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the consolidated results of operations or financial position of TMM or TMHC that would have occurred had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the Reorganization Transactions, this offering and the use of the estimated net proceeds from this offering as described under “Use of Proceeds” occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

The summary historical and pro forma consolidated financial information presented below does not purport to be indicative of results of future operations and should be read together with our consolidated financial statements and related notes and the information included elsewhere in this prospectus under the captions “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information” and “Capitalization.”

 

 

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    Predecessor          Successor     TMHC  
   

Year Ended
December 31,

   

January 1
to
July 12,

        

July 13 to
December 31,

   

July 13 to
September 30,

   

Nine Months
Ended
September 30,

   

Pro Forma
Year
Ended
December 31,

   

Pro Forma
Nine Months
Ended
September 30,

 
($ in thousands, except per                   
share amounts)   2009     2010     2011          2011     2011     2012     2011     2012  

Statement of Operations Data:

                   

Home closings revenue

  $ 1,224,082      $ 1,273,160      $ 600,069          $ 731,216      $ 299,163      $ 829,221      $ 1,331,285      $ 829,221   

Land closings revenue

    24,967        12,116        13,639            10,657        6,177        36,102        24,296        36,102   

Financial services revenue

    13,415        12,591        6,027            8,579        3,384        13,705        14,606        13,705   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,262,464        1,297,867        619,735            750,452        308,724        879,028        1,370,187        879,028   

Cost of home closings

    1,003,694        1,003,172        474,534            591,891        239,740        663,656        1,043,842        660,058   

Cost of land closings

    17,001        6,028        7,133            8,583        5,477        27,881        15,716        27,881   

Inventory impairments

    78,241        4,054        —              —          —          —          —          —     

Financial services expenses

    6,269        7,246        3,818            4,495        2,071        7,667        8,313        7,667   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating gross margin

    157,259        277,367        134,250            145,483        61,436        179,824        302,316        183,422   

Sales, commissions, and other marketing costs

    100,534        85,141        40,126            36,316        14,342        52,230        76,442        52,230   

General and administrative expenses

    71,300        66,232        35,743            32,883        15,251        41,091        66,304        37,347   

Equity in net income of unconsolidated entities

    (347     (5,319     (2,803         (5,247     (488     (11,497     (8,050     (11,497

Interest expense (income)—net

    20,732        40,238        941            (3,867     —          —          (1,493     —     

Other income

    (24,465     (10,842     (11,783         (1,245     —          (1,655     (13,028     (1,655

Other expense

    25,725        13,193        1,125            3,553        66        —          4,678        —     

Loss on extinguishment of debt

    —          —          —              —          —          7,853        —          7,853   

Transaction expenses

    —          —          —              39,442        38,278        —          —          —     

Indemnification loss (gain)

    —          —          —              12,850        (1,104     13,063        —          —     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (36,220     88,724        70,901            30,798        (4,909     78,739        177,463        99,144   

Income tax (benefit) expense

    (35,396     (1,878     20,881            4,031        8,500        (3,090     40,065        (507
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (824     90,602        50,020            26,767        (13,409     81,829        137,398        99,651   

Net (income) attributable to noncontrolling interests(1)

    (5,138     (3,235     (4,122         (1,178     (866     (72    
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to owners

  $ (5,962   $ 87,367      $ 45,898          $ 25,589      $ (14,275   $ 81,757      $                   $                
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average number of Class A common shares outstanding

    —          —          —                   

Basic net income (loss) per share applicable to Class A common stock

    —          —          —                   

Diluted weighted average number of Class A common shares outstanding

    —          —          —                   

Diluted net income (loss) per share applicable to Class A common stock

    —          —          —                   

 

 

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    Predecessor          Successor     TMHC  
   

Year Ended
December 31,

   

January 1
to
July 12,

        

July 13 to
December 31,

   

July 13 to
September 30,

   

Nine Months
Ended
September 30,

   

Pro Forma
Year
Ended
December 31,

   

Pro Forma
Nine Months
Ended
September 30,

 
($ in thousands, except per                   
share amounts)   2009     2010     2011          2011     2011     2012     2011     2012  
 

Other Financial Data:

                   

Interest incurred(2)

  $ 87,684      $ 85,720      $ 23,077          $ 37,546      $ 17,846      $ 46,132      $ 34,618      $ 37,164   

Depreciation and amortization

    2,917        3,242        1,655            2,564        1,149        4,595        4,219        3,093   

Adjusted home closings gross margin(3)

    265,152        309,683        144,500            148,856        60,696        183,491        293,356        183,491   

Adjusted home closings gross margin percentage

    21.7     24.3     24.1         20.4     20.3     22.1     22.0     22.1

Adjusted EBITDA(4)

  $ 121,160      $ 179,013      $ 92,919          $ 94,253      $ 35,209      $ 125,087      $ 187,142      $ 125,712   

Adjusted EBITDA margin(4)

    9.2     13.5     14.3         12.4     11.48     14.2     13.6     14.8
 

Operating Data (including unconsolidated joint ventures)(5):

                   

Average active selling communities

    172        149        151            140        148        122        140        122   

Net sales orders(6)

    5,215        3,690        2,094            1,941        1,056        3,615        4,035        3,615   

U.S. closings (units)

    3,347        2,570        1,045            1,282        483        1,880        2,327        1,880   

Canada closings (units)

    1,408        1,570        798            795        370        707        1,593        707   

U.S. average sales price of homes delivered

  $ 253      $ 274      $ 308          $ 304      $ 295      $ 324      $ 306      $ 324   

Canada average sales price of homes delivered

  $ 311      $ 364      $ 349          $ 465      $ 424      $ 410      $ 389      $ 410   

U.S. backlog at end of period (units)

    764        503        882            740        944        1,747        740        1,747   

Canada backlog at end of period (units)

    2,452        2,253        2,126            2,225        2,266        2,459        2,225        2,459   

U.S. backlog at end of period (value)

  $ 234,600      $ 170,503      $ 311,977          $ 259,392      $ 325,855      $ 626,287      $ 259,392      $ 626,287   

Canada backlog at end of period (value)

  $ 739,510      $ 760,498      $ 842,704          $ 723,133      $ 803,904      $ 845,896      $ 723,133      $ 845,896   

Balance Sheet Data:

 

     TMM      TMHC
($ in thousands)    As of
September 30,
2012

(Actual)
     As of
September 30,
2012
(Pro Forma)
     (unaudited)      (unaudited)

Cash and cash equivalents, excluding restricted cash

   $ 412,779      

Real estate inventory

     1,275,763      

Total assets

     2,156,299      

Total debt

     798,161      

Total equity (including noncontrolling interests)

     869,447      

 

(1) Represents ownership interests in noncontrolled units owned by third parties and, on a pro forma basis only, the interests of the partners of TMM (other than TMHC) in a share of TMM’s net income (loss).
(2) Interest incurred is interest accrued on debt, whether or not paid and whether or not capitalized. Interest incurred includes debt issuance costs, modification fees and waiver fees. Interest incurred is generally capitalized to inventory but is expensed when assets that qualify for interest capitalization no longer exceed debt.

 

 

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(3) Adjusted home closings gross margin is a non-GAAP financial measure used by management and our local divisions in evaluating operating performance and in making strategic decisions regarding sales pricing, construction and development pace, product mix and other operating decisions. For a full description of adjusted home closings gross margin, the reasons management believes adjusted home closings gross margin is useful to investors and the limitations associated with adjusted home closings gross margin, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures—Adjusted Home Closings Gross Margin.”

The following table sets forth a reconciliation of adjusted home closings gross margin to home closings gross margin, which is the U.S. GAAP financial measure that management believes to be most directly comparable:

 

     Predecessor    

 

  Successor     TMHC  
    

Year Ended

December 31,

    January 1  to
July 12,
2011
         July 13 to

December 31,
2011
    July 13 to

September 30,
2011
    Nine  Months

Ended

September  30,
2012
    Pro Forma  Year
Ended
December 31,
2011
    Pro Forma
Nine Months

Ended
September 30,
2012
 
($ in thousands)    2009     2010                   

Home closings revenue

   $ 1,224,082      $ 1,273,160      $ 600,069          $ 731,216      $ 299,163      $ 829,221      $ 1,331,285      $ 829,221   

Cost of home closings and impairments(a)

     1,075,290        1,005,178        474,534            591,891        239,740        663,656        1,043,842        660,058   
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home closings gross margin

     148,792        267,982        125,535            139,325        59,423        165,565        287,443        169,163   

Add:

                    

Impairments

     71,595        2,006        —              —          —          —          —          —     

Capitalized interest amortization

     44,765        39,695        18,965            9,531        1,273        17,926        5,913        14,328   
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted home closings gross margin

   $ 265,152      $ 309,683      $ 144,500          $ 148,856      $ 60,696      $ 183,491      $ 293,356      $ 183,491   
  

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home closings gross margin as a percentage of home closings revenue

     12.2     21.0     20.9         19.1     19.9     20.0     21.6     20.4

Adjusted home closings gross margin as a percentage of home closings revenues

     21.7     24.3     24.1         20.4     20.3     22.1     22.0     22.1

 

  (a) Includes impairments attributable to write-downs of operating communities and interest amortized through cost of home closings.

 

(4) EBITDA and Adjusted EBITDA are non-GAAP financial measures used by management and our local divisions in evaluating operating performance and in making strategic decisions regarding sales pricing, construction and development pace, product mix and other operating decisions. For a full description of EBITDA and Adjusted EBITDA, the reasons management believes these EBITDA-based measures are useful to investors and the limitations associated with these EBITDA-based measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures—Adjusted EBITDA.”

 

 

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The following table reconciles Adjusted EBITDA to net income (loss):

 

    Predecessor          Successor     TMHC  
   

Year Ended

December 31,

    January 1  to
July 12,
2011
        

July 13 to

December 31,

   

July 13 to

September 30,

   

Nine Months

Ended

September 30,

   

Pro Forma

Year Ended

December 31,

   

Pro Forma

Nine Months

Ended

September 30,

 
    2009     2010         2011     2011     2012     2011     2012  

Net income (loss)

  $ (824   $ 90,602      $ 50,020          $ 26,797        (13,409   $ 81,829      $ 137,398      $ 92,163   

Interest expense, net

    20,732        40,238        941            (3,867     (548     —          (1,493     —     

Amortization of capitalized interest(a)

    47,091        39,860        19,422            10,114        1,273        19,220        6,953        15,622   

Income tax expense (benefit)

    (35,396     (1,878     20,881            4,031        8,500        (3,090     40,065        (507

Depreciation and amortization

    2,917        3,242        1,655            2,564        1,149        4,595        4,219        3,093   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    34,520        172,064        92,919            39,639        (3,035     102,554        187,142        110,371   

Management fees(b)

    2,430        2,517        —              2,322        1,070        3,744        —          —     

Land inventory impairments(c)

    75,439        2,529        —              —          —          —          —          —     

Lot option write-offs(d)

    2,802        1,525        —              —          —          —          —          —     

Non-cash compensation expense(e)

    60        170        —              —          —          —          —          —     

Severance and restructuring charges(f)

    1,730        —          —              —          —          —          —          —     

Royalties paid to parent(g)

    4,179        208        —              —          —          —          —          —     

Early extinguishment of debt

    —          —          —              —          —          7,853        —          7,853   

Transaction-related expenses and indemnification loss(h)

    —          —          —              52,292        37,174        10,936        —          —     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 121,160      $ 179,013      $ 92,919          $ 94,253      $ 35,209      $ 125,087      $ 187,142      $ 118,224   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Represents the interest amortized through cost of home and land closings.
  (b) Represents management fees for the provision of certain legal, administrative and other related back-office functions paid to Taylor Wimpey plc prior to the consummation of the Acquisition and management fees paid to our Principal Equityholders following the consummation of the Acquisition. In connection with this offering, the management services agreements will be terminated. For further information, see “Certain Relationships and Related Party Transactions—Management Services Agreement.”
  (c) Represents impairments expensed through cost of home and land closings in connection with fair market value write-downs from cost basis.
  (d) Represents amounts expensed through cost of sales in connection with unexercised land option contracts.
  (e) Represents expenses incurred in connection with employee stock options linked to the stock of Taylor Wimpey plc, in connection with compensation arrangements in place prior to the consummation of the Acquisition.
  (f) Represents amounts accrued in connection with the 2007 merger of our predecessors Taylor Woodrow and Morrison Homes.
  (g) Represents royalties paid to Taylor Wimpey plc for certain U.S. and Canadian intellectual property rights, which include trademarks, logos, and domain names which we acquired in October 2009 and September 2010, respectively.
  (h) Represents $39.4 million of fees and expenses incurred by TMM in connection with the Acquisition and the reversal of a receivable from Taylor Wimpey plc due to the resolution of an uncertain tax position of $12.8 million and $13.1 million during the period from July 13, 2011 to December 31, 2011 and the nine month period ended September 30, 2012, respectively.

 

(5)

The substantial majority of our unconsolidated joint ventures are in Canada, but we also have investments in unconsolidated joint ventures in the United States, although none of these joint ventures in the United States are actively involved in homebuilding. Our proportionate share of net

 

 

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  income in such U.S. unconsolidated joint ventures was $1.4 million for the year ended December 31, 2011 and $0.9 million for the nine months ended September 30, 2012. In this prospectus, references to “unconsolidated joint ventures” refer to our proportionate share of unconsolidated homebuilding joint ventures in Canada. Management believes that home and land closings, including our proportionate share of joint venture closings and the revenue-based measures associated therewith, are appropriate metrics to measure our performance. Management and our local divisions use these measures in evaluating the operating performance of each community and in making strategic decisions regarding sales pricing, construction and development pace, product mix, and other daily operating decisions. We believe they are relevant and useful measures to investors for evaluating our performance. Although other companies in the homebuilding industry report similar information, their methods used may differ. We urge investors to understand the methods used by other companies in the homebuilding industry to calculate home and land closings and associated revenues and any adjustments to such amounts, before comparing our measures to that of such other companies.
(6) Includes unconsolidated joint ventures.

 

 

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RISK FACTORS

An investment in our Class A common stock involves a high degree of risk. You should carefully consider the following risks and all of the other information set forth in this prospectus before deciding whether to invest in our Class A common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our Class A common stock would likely decline due to any of these risks, and you may lose all or part of your investment.

Risks related to our industry and our business

Our business is cyclical and is significantly affected by changes in general and local economic conditions.

Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in:

 

   

short- and long-term interest rates;

 

   

the availability and cost of financing for homebuyers;

 

   

consumer confidence generally and the confidence of potential homebuyers in particular;

 

   

the ability of existing homeowners to sell their existing homes at prices that are acceptable to them;

 

   

U.S., Canadian and global financial system and credit markets, including stock market and credit market volatility;

 

   

private and federal mortgage financing programs and federal, state and provincial regulation of lending practices;

 

   

federal, state and provincial income tax provisions, including provisions for the deduction of mortgage interest payments;

 

   

housing demand from population growth and demographic changes (including immigration levels and trends in urban and suburban migration);

 

   

demand from overseas buyers for our homes (particularly in our GTA market), which may fluctuate according to economic circumstances in overseas markets;

 

   

the supply of available new or existing homes and other housing alternatives, such as apartments and other residential rental property;

 

   

employment levels and job and personal income growth and household debt-to-income levels;

 

   

real estate taxes; and

 

   

the supply of developable land in our markets in the United States and Canada.

Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular regions or localities in which we operate. During the recent downturn, unfavorable changes in many of the above factors negatively affected all of the markets we serve, although to a more limited extent in Canada than in the United States. Economic conditions in all our markets continue to be characterized by levels of uncertainty. Any deterioration in economic conditions or continuation of uncertain economic conditions would have a material adverse effect on our business.

Adverse changes in economic conditions can cause demand and prices for our homes to diminish or cause us to take longer to build our homes and make it more costly for us to do so. We may not be able to recover these increased costs by raising prices because of weak market conditions and because the price of each home we sell is usually set several months before the home is delivered, as many customers sign their home purchase contracts before construction begins. The potential difficulties described above could impact our customers’ ability to obtain suitable financing and cause some homebuyers to cancel or refuse to honor their home purchase contracts altogether.

 

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The homebuilding industry in the United States has recently undergone a significant downturn, and the likelihood of a full recovery is uncertain in the current state of the economy. A slowdown in our business in the United States or a downturn in Ontario, Canada could have additional adverse effects on our operating results and financial condition.

In connection with the recent downturn in the U.S. housing market, we incurred a substantial loss, after impairments, in our U.S. operations during 2008 and 2009. Although the U.S. housing market continues to recover, we cannot predict the extent of further recovery or its timing. In addition, while the market for single-family homes and high-rise condominiums in Canada remained relatively stable during the U.S. downturn, the housing market in parts of Canada has lately shown signs of weakening. With slowing job growth relative to the recent past, ongoing global economic uncertainty and increasing units under construction, it is anticipated that Ontario housing starts will moderate and average home prices will remain relatively flat in 2013. A significant weakening of the Ontario housing market could adversely affect our business.

Though we have taken steps to alleviate the impact of these conditions on our business, given the downturn in the homebuilding industry over the past several years and global economic uncertainty, there can be no guarantee that steps taken by us will continue to be effective, and to the extent the current economic environment does not improve or any improvement takes place over an extended period of time, our business, financial condition and results of operations may be adversely affected.

In the past we have incurred losses and may have difficulty maintaining profitability in the future.

Although we generated net income of $81.8 million in the first nine months of 2012, $76.8 million in 2011 (arithmetically combined historical results of the predecessor and successor) and $90.6 million in 2010, we had net losses attributable to owners of approximately $0.8 million and $396.5 million in 2009 and 2008, respectively. Even if we maintain profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis going forward. If our revenue grows more slowly than we anticipate, or if our operating expenses exceed our expectations and cannot be adjusted accordingly, our business will be harmed. See “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more complete description of our historical losses.

Changes to foreign currency exchange rates could adversely affect our earnings and net asset value.

We have businesses with exposure to foreign currency exchange risk in Canada. Changes in the $U.S.-$CAD exchange rate will affect the value of our reported earnings and the value of our assets and liabilities denominated in foreign currencies. For example, an increase in the value of the U.S. dollar compared to the Canadian dollar would reduce our Canadian dollar-denominated revenue when reported in U.S. dollars, our functional reporting currency. Our business, financial condition and operating results may be adversely affected by such exchange rate fluctuations.

An inability to obtain additional performance, payment and completion surety bonds and letters of credit could limit our future growth.

We are often required to provide performance, payment and completion surety bonds or letters of credit to secure the completion of our construction contracts, development agreements and other arrangements. We have obtained facilities to provide the required volume of performance, payment and completion surety bonds and letters of credit for our expected growth in the medium term; however, unexpected growth may require additional facilities. We may also be required to renew or amend our existing facilities. Our ability to obtain additional performance, payment and completion surety bonds and letters of credit primarily depends on our credit rating, capitalization, working capital, past performance, management expertise and certain external factors, including the capacity of the markets for such bonds. Performance, payment and completion surety bond and letter of credit providers consider these factors in addition to our performance and claims record and provider-specific underwriting standards, which may change from time to time.

 

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If our performance record or our providers’ requirements or policies change, if we cannot obtain the necessary consent from our lenders, or if the market’s capacity to provide performance, payment and completion bonds or letters of credit is not sufficient for any unexpected growth and we are unable to renew or amend our existing facilities on favorable terms or at all, we could be unable to obtain additional performance, payment and completion surety bonds or letters of credit from other sources when required, which could have a material adverse effect on our business, financial condition and results of operations.

Higher cancellation rates of existing agreements of sale may have an adverse effect on our business.

Our backlog reflects sales contracts with our homebuyers for homes that have not yet been delivered. We have received a deposit from a homebuyer for each home reflected in our backlog, and generally we have the right, subject to certain exceptions, to retain the deposit if the homebuyer fails to comply with his or her obligations under the sales contract, including as a result of state and local law, the homebuyer’s inability to sell his or her current home or the homebuyer’s inability to make additional deposits required prior to the closing date. In addition, in our Canadian markets we have the right to retain the deposits and pursue the homebuyer for damages or specific performance in the event of a homebuyer’s breach of the purchase and sale agreement. However, in the United States, if prices for new homes decline, if competitors increase their use of sales incentives, if interest rates increase, if the availability of mortgage financing diminishes or if there is a downturn in local or regional economies or in the national economy, U.S. homebuyers may terminate their existing home purchase contracts with us in order to negotiate for a lower price or because they cannot, or will not, complete the purchase.

Compared to the prevailing cancellation rates in the United States, our experience has been that cancellations in Canada are less common due to differences in the Canadian economy and the laws of Ontario, which make it more difficult for purchasers to cancel their contracts. Although our cancellation rates for our homebuyers in the United States are now closer to long-term historical averages, cancellation rates may rise in the future. If uncertain economic conditions in the United States and Canada continue, if mortgage financing becomes less available or if current homeowners find it difficult to sell their current homes, more homebuyers may cancel their sales contracts with us.

In cases of cancellation, we remarket the home and usually retain any deposits we are permitted to retain. Nevertheless, the deposits may not cover the additional costs involved in remarketing the home and carrying higher inventory. Significant numbers of cancellations could adversely affect our business, financial condition and results of operations.

The homebuilding industry is highly competitive and, if our competitors are more successful or offer better value to our customers, our business could decline.

We operate in a very competitive environment which is characterized by competition from a number of other homebuilders in each market in which we operate. We compete with large national and regional homebuilding companies and with smaller local homebuilders for land, financing, raw materials and skilled management and labor resources. We also compete with the resale, or “previously owned,” home market which has increased significantly due to the large number of homes that have been foreclosed on or could be foreclosed on due to the recent economic downturn. Increased competition could cause us to increase our selling incentives and reduce our prices. An oversupply of homes available for sale and the heavy discounting of home prices by some of our competitors have adversely affected demand for our homes and the results of our operations in the past and could do so again in the future. If we are unable to compete effectively in our markets, our business could decline disproportionately to our competitors, and our results of operations and financial condition could be adversely affected.

If homebuyers are not able to obtain suitable financing, our results of operations may decline.

A substantial majority of our homebuyers finance their home purchases through lenders that provide mortgage financing. The availability of mortgage credit remains constrained in the United States, due in part to

 

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lower mortgage valuations on properties, various regulatory changes and lower risk appetite by lenders, with many lenders requiring increased levels of financial qualification, lending lower multiples of income and requiring greater deposits. Investors and first-time homebuyers are generally more affected by the availability of financing than other potential homebuyers. These buyers are a key source of our demand. A limited availability of home mortgage financing may adversely affect the volume of our home sales and the sales prices we achieve in the United States.

During the last four fiscal years, the mortgage lending industry in the United States has experienced significant instability, beginning with increased defaults on subprime loans and other nonconforming loans and compounded by expectations of increasing interest payments requirements and further defaults. This in turn resulted in a decline in the market value of many mortgage loans and related securities. Lenders, regulators and others questioned the adequacy of lending standards and other credit requirements for several loan products and programs offered in recent years. Credit requirements have tightened, and investor demand for mortgage loans and mortgage-backed securities has declined. The deterioration in credit quality during the downturn had caused almost all lenders to stop offering subprime mortgages and most other loan products that were not eligible for sale to Fannie Mae or Freddie Mac or loans that did not meet FHA and Veterans Administration requirements. Fewer loan products, tighter loan qualifications and a reduced willingness of lenders to make loans may continue to make it more difficult for certain buyers to finance the purchase of our homes. These factors may reduce the pool of qualified homebuyers and make it more difficult to sell to first-time and move-up buyers who have historically made up a substantial part of our customers. Reductions in demand adversely affected our business and financial results during the downturn, and the duration and severity of some of their effects remain uncertain. The liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry has been very important to the housing market. These entities have required substantial injections of capital from the federal government and may require additional government support in the future. Several federal government officials have proposed changing the nature of the relationship between Fannie Mae and Freddie Mac and the federal government and even nationalizing or eliminating these entities entirely. If Fannie Mae and Freddie Mac were dissolved or if the federal government determined to stop providing liquidity support to the mortgage market, there would be a reduction in the availability of the financing provided by these institutions. Any such reduction would likely have an adverse effect on interest rates, mortgage availability and our sales of new homes. The FHA insures mortgage loans that generally have lower loan payment requirements and qualification standards compared to conventional guidelines, and as a result, continue to be a particularly important source for financing the sale of our homes. In recent years, lenders have taken a more conservative view of FHA guidelines causing significant tightening of borrower eligibility for approval. Availability of condominium financing and minimum credit score benchmarks has reduced opportunity for those purchasers. In the near future, further restrictions are expected on FHA-insured loans, including limitations on seller-paid closing costs and concessions. This or any other restriction may negatively affect the availability or affordability of FHA financing, which could adversely affect our ability to sell homes in the United States. In addition, changes in federal and provincial regulatory and fiscal policies aimed at aiding the homebuying market (including a repeal of the home mortgage interest tax deduction) may also negatively affect potential homebuyers’ ability to purchase homes.

In each of our markets, decreases in the availability of credit and increases in the cost of credit adversely affect the ability of homebuyers to obtain or service mortgage debt. Even if potential homebuyers do not themselves need mortgage financing, where potential homebuyers must sell their existing homes in order to buy a new home, increases in mortgage costs, lack of availability of mortgages and/or regulatory changes could prevent the buyers of potential homebuyers’ existing homes from obtaining a mortgage, which would result in our potential customers’ inability to buy a new home. Similar risks apply to those buyers who are awaiting delivery of their homes and are currently in backlog. The success of homebuilders depends on the ability of potential homebuyers to obtain mortgages for the purchase of homes. If our customers (or potential buyers of our customers’ existing homes) cannot obtain suitable financing, our sales and results of operations could be adversely affected.

 

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Any increase in unemployment or underemployment may lead to an increase in the number of loan delinquencies and property repossessions and have an adverse impact on us.

In the United States, the unemployment rate was 7.9% as of October 2012 according to the U.S. Bureau of Labor Statistics. People who are not employed or are underemployed or are concerned about the loss of their jobs are less likely to purchase new homes, may be forced to try to sell the homes they own and may face difficulties in making required mortgage payments. Therefore, any increase in unemployment or underemployment may lead to an increase in the number of loan delinquencies and property repossessions and have an adverse impact on us both by reducing demand for the homes we build and by increasing the supply of homes for sale.

Increases in taxes, government fees or interest rates could prevent potential customers from buying our homes and adversely affect our business or financial results.

Significant expenses of owning a home, including mortgage interest and real estate taxes, generally are deductible expenses for an individual’s U.S. federal, and in some cases, state income taxes, subject to various limitations under current tax law and policy. Mortgage interest and real estate taxes are not deductible for an individual’s federal or provincial income taxes in Canada. If the U.S. federal government or a state government changes its income tax laws, as has been discussed from time to time, to eliminate, limit or substantially modify these income tax deductions, the after-tax cost of owning a new home would increase for many of our potential customers. The resulting loss or reduction of homeowner tax deductions, if such tax law changes were enacted without offsetting provisions, or any other increase in any taxes affecting homeowners, would adversely impact demand for and sales prices of new homes.

Increases in property tax rates by local governmental authorities, as experienced in response to reduced federal, state and provincial funding, can adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes. Fees imposed on developers to fund schools, open spaces, road improvements, and/or provide low and moderate income housing, could increase our costs and have an adverse effect on our operations. In addition, increases in sales taxes (such as the Ontario harmonized sales tax initiative implemented in July 2010 by the Government of Ontario combining the 5% Canadian federal goods and services tax and the 8% Ontario provincial sales tax with certain abatement, rebate and transition rules for new housing) could adversely affect our potential customers who may consider those costs in determining whether to make a new home purchase and decide, as a result, not to purchase one of our homes.

In addition, increases in interest rates as a result of changes to U.S. and Canadian monetary policies could significantly increase the costs of owning a home, which in turn would adversely impact demand for and sales prices of homes and the ability of potential customers to obtain financing and adversely affect our business, financial condition and operating results.

Inflation could adversely affect our business and financial results, particularly in a period of oversupply of homes.

Inflation can adversely affect us by increasing costs of land, materials and labor. In the event of an increase in inflation, we may seek to increase the sales prices of homes in order to maintain satisfactory margins. However, an oversupply of homes relative to demand and home prices being set several months before homes are delivered may make any such increase difficult or impossible. In addition, inflation is often accompanied by higher interest rates, which historically had a negative impact on housing demand. In such an environment, we may not be able to raise home prices sufficiently to keep up with the rate of inflation and our margins could decrease. Moreover, the cost of capital increases as a result of inflation and the purchasing power of our cash resources declines. Current or future efforts by the government to stimulate the economy may increase the risk of significant inflation and its adverse impact on our business or financial results.

 

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Our quarterly operating results may fluctuate because of the seasonal nature of our business and other factors.

Our quarterly operating results generally fluctuate by season and also because of the uneven delivery schedule of certain of our products and communities, such as high-rise condominiums in the GTA.

Historically, a larger percentage of our agreements of sale in the United States have been entered into in the winter and spring. Weather-related problems, typically in the fall, late winter and early spring, may delay starts or closings and increase costs and thus reduce profitability. Seasonal natural disasters such as hurricanes, tornadoes, floods and fires could cause delays in the completion of, or increase the cost of, developing one or more of our communities, causing an adverse effect on our sales and revenues.

In many cases, we may not be able to recapture increased costs by raising prices because we set our prices up to 12 months in advance of delivery upon signing the home sales contract. In the case of high-rise condominium sales, purchase agreements are signed up to three years in advance of delivery. In addition, deliveries may be staggered over different periods of the year and may be concentrated in particular quarters. Our quarterly operating results may fluctuate because of these factors.

Negative publicity may affect our stock price and business performance.

Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. Our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. Adverse publicity or negative commentary on social media outlets, such as blogs, websites or newsletters, could hurt both our stock price and actual operating results, as consumers might avoid brands that receive bad press or negative reviews.

Homebuilding is subject to home warranty and construction defect claims in the ordinary course of business that can be significant.

As a homebuilder, we are subject to home warranty and construction defect claims arising in the ordinary course of business. There can be no assurance that any developments we undertake will be free from defects once completed. Construction defects may occur on projects and developments and may arise during a significant period of time after completion. Defects arising on a development attributable to us may lead to significant contractual or other liabilities.

As a consequence, we maintain products and completed operations excess liability insurance, obtain indemnities and certificates of insurance from subcontractors generally covering claims related to damages resulting from faulty workmanship and materials, and create warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the risks associated with the types of homes built. Although we actively monitor our insurance reserves and coverage, because of the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements and our reserves will be adequate to address all of our warranty and construction defect claims in the future. In addition, contractual indemnities can be difficult to enforce. We may also be responsible for applicable self-insured retentions and some types of claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by and the availability of products and completed operations excess liability insurance for construction defects is currently limited and costly. This coverage may be further restricted or become more costly in the future.

In 2005 and 2006, we discontinued requiring insurance policies from most of our contractors in California and instead adopted an Owner Controlled Insurance Plan (“OCIP”) for general liability exposures of most subcontractors, as a result of the inability of subcontractors to procure acceptable insurance coverage to meet our requirements. Under the OCIP, subcontractors are effectively insured by us. We have assigned risk retentions and bid deductions to our subcontractors based on their risk category. These deductions are used to fund future liabilities.

 

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As a recent example of construction defect claims, in 2009 we confirmed the presence of defective Chinese-made drywall in several Florida communities, primarily in West Florida, which were generally delivered between May 2006 and November 2007. If we identify more homes with defective Chinese-made drywall or other defects than we currently have estimated, we may be required to increase our warranty and claims reserves in the future, which could adversely affect our business, financial condition and operating results. See “Business—Insurance and Legal Proceedings.”

Unexpected expenditures attributable to defects or previously unknown sub-surface conditions arising on a development project may have a material adverse effect on our business, financial condition and operating results. In addition, severe or widespread incidents of defects giving rise to unexpected levels of expenditure, to the extent not covered by insurance or redress against sub-contractors, may adversely affect our business, financial condition and operating results.

Our reliance on contractors can expose us to various liability risks.

We rely on contractors in order to perform the construction of our homes, and in many cases, to select and obtain raw materials. We are exposed to various risks as a result of our reliance on these contractors and their respective subcontractors and suppliers, including, as described above, the possibility of defects in our homes due to improper practices or materials used by contractors, which may require us to comply with our warranty obligations and/or bring a claim under an insurance policy. Several other homebuilders have received inquiries from regulatory agencies concerning whether homebuilders using contractors are deemed to be employers of the employees of such contractors under certain circumstances. Although contractors are independent of the homebuilders that contract with them under normal management practices and the terms of trade contracts and subcontracts within the homebuilding industry, if regulatory agencies reclassify the employees of contractors as employees of homebuilders, homebuilders using contractors could be responsible for wage, hour and other employment-related liabilities of their contractors. In the event that a regulatory agency reclassified the employees of our contractors as our own employees, we could be responsible for wage, hour and other employment-related liabilities of our contractors.

Failure to manage land acquisitions and development and construction processes could result in significant cost overruns or errors in valuing sites.

We own and purchase a large number of sites each year and are therefore dependent on our ability to process a very large number of transactions (which include, among other things, evaluating the site purchase, designing the layout of the development, sourcing materials and sub-contractors and managing contractual commitments) efficiently and accurately. Errors by employees, failure to comply with regulatory requirements and conduct of business rules, failings or inadequacies in internal control processes, equipment failures, natural disasters or the failure of external systems, including those of our suppliers or counterparties, could result in operational losses that could adversely affect our business, financial condition and operating results and our relationships with our customers.

If land and lots are not available at competitive prices, our sales and results of operations could be adversely affected.

Our long-term profitability depends in large part on the price at which we are able to obtain suitable land and lots for the development of our communities. Increases in the price (or decreases in the availability) of suitable land and lots could adversely affect our profitability. Moreover, changes in the general availability of desirable land, competition for available land and lots, limited availability of financing to acquire land and lots, zoning regulations that limit housing density, environmental requirements and other market conditions may hurt our ability to obtain land and lots for new communities at prices that will allow us to be profitable. If the supply of land and lots that are appropriate for development of our communities becomes more limited because of these factors, or for any other reason, the cost of land and lots could increase and the number of homes that we are able to build and sell could be reduced, which could adversely affect our results of operations and financial condition.

 

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If the market value of our land inventory decreases, our results of operations could be adversely affected by impairments and write-downs.

The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. There is an inherent risk that the value of the land owned by us may decline after purchase. The valuation of property is inherently subjective and based on the individual characteristics of each property. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably. In addition, our deposits for lots controlled under option or similar contracts may be put at risk. Factors such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainty. Moreover, all valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality. If housing demand decreases below what we anticipated when we acquired our inventory, our profitability may be adversely affected and we may not be able to recover our costs when we sell and build houses.

Due to economic conditions in the United States in recent years, including increased amounts of home and land inventory that entered certain U.S. markets from foreclosure sales or short sales, the market value of our land and home inventory was negatively impacted prior to the Acquisition. Write-downs and impairments have had an adverse effect (and any further write-downs may also have an adverse effect) on our business, financial condition and operating results. In 2011, and for the nine months ended September 30, 2012, we recorded no inventory impairments (compared to $4.1 million in 2010 and $78.2 million in 2009), and the carrying value of all of our land was adjusted to its fair market value as of the date of the Acquisition. We regularly review the value of our land holdings and continue to review our holdings on a periodic basis. Further material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial condition.

Risks associated with our land inventory could adversely affect our business or financial results.

Risks inherent in controlling or purchasing, holding and developing land for new home construction are substantial. In certain circumstances, a grant of entitlements or development agreement with respect to a particular parcel of land may include restrictions on the transfer of such entitlements to a buyer of such land, which may increase our exposure to decreases in the price of such entitled land by restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing community or market. In recent periods of market weakness, we have sold homes and land for lower margins or at a loss and we have recorded significant inventory impairment charges, and such conditions may recur.

If we experience shortages in labor supply, increased labor costs or labor disruptions, there could be delays or increased costs in developing our communities or building homes, which could adversely affect our operating results.

We require a qualified labor force to develop our communities. Access to qualified labor may be affected by circumstances beyond our control, including:

 

   

work stoppages resulting from labor disputes;

 

   

shortages of qualified trades people, such as carpenters, roofers, electricians and plumbers, especially in our key markets in the southwest United States;

 

   

changes in laws relating to union organizing activity;

 

   

changes in immigration laws and trends in labor force migration; and

 

   

increases in sub-contractor and professional services costs.

 

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Any of these circumstances could give rise to delays in the start or completion of, or could increase the cost of, developing one or more of our communities and building homes. We may not be able to recover these increased costs by raising our home prices because the price for each home is typically set months prior to its delivery pursuant to sales contracts with our homebuyers. In such circumstances, our operating results could be adversely affected. Additionally, market and competitive forces may also limit our ability to raise the sales prices of our homes.

Failure to recruit, retain and develop highly skilled, competent people at all levels, including finding suitable subcontractors, may have a material adverse effect on our standards of service.

Key employees, including management team members, are fundamental to our ability to obtain, generate and manage opportunities. Key employees working in the homebuilding and construction industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not lost when they leave the business through retirement, redundancy or otherwise may adversely affect the standards of our service and may have an adverse impact on our business, financial conditions and operating results. In addition, we do not maintain key person insurance in respect of any member of our senior management team. The loss of any of our management members or key personnel could adversely impact our business, financial condition and operating results. See “Management.”

The vast majority of our work carried out on site is performed by subcontractors. The difficult operating environment over the last six years in the United States has resulted in the failure of some subcontractors’ businesses and may result in further failures. In addition, reduced levels of homebuilding in the United States have led to some skilled tradesmen leaving the industry to take jobs in other sectors. If subcontractors are not able to recruit sufficient numbers of skilled employees, our development and construction activities may suffer from delays and quality issues, which would also lead to reduced levels of customer satisfaction.

During the recent downturn, we had to reduce our number of employees, which may have resulted in a loss of knowledge that could be detrimental to our business and our ability to manage future business opportunities. Our margins, and accordingly our business, financial conditions and operating results, may be adversely affected.

Government regulations and legal challenges may delay the start or completion of our communities, increase our expenses or limit our homebuilding or other activities, which could have a negative impact on our results of operations.

The approval of numerous governmental authorities must be obtained in connection with our development activities, and these governmental authorities often have broad discretion in exercising their approval authority. We incur substantial costs related to compliance with legal and regulatory requirements. Any increase in legal and regulatory requirements may cause us to incur substantial additional costs, or in some cases cause us to determine that the property is not feasible for development. Various local, provincial, state and federal statutes, ordinances, rules and regulations concerning building, health and safety, environment, zoning, sales and similar matters apply to and/or affect the housing industry.

Municipalities may restrict or place moratoriums on the availability of utilities, such as water and sewer taps. If municipalities in which we operate take such actions, it could have an adverse effect on our business by causing delays, increasing our costs or limiting our ability to operate in those municipalities.

Certain states, cities and counties in which we operate have in the past approved, or approved for inclusion on their ballot, various “slow growth” or “no growth” initiatives and other ballot measures that could negatively impact the availability of land and building opportunities within those localities. A similar initiative in Ontario, Canada known as “smart growth” could also negatively impact our Canadian operations. Approval of, or expansion of, slow, no or smart growth measures would reduce our ability to open new home communities and to build and sell homes in the affected markets, including with respect to land we may already own, and would create additional costs and administration requirements, which in turn could harm our future sales, margins and earnings.

 

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Governmental regulation affects not only construction activities but also sales activities, mortgage lending activities and other dealings with consumers. In addition, it is possible that some form of expanded energy efficiency legislation may be passed by the U.S. Congress or federal agencies and certain state and provincial legislatures, which may, despite being phased in over time, significantly increase our costs of building homes and the sale price to our buyers, and adversely affect our sales volumes. We may be required to apply for additional approvals or modify our existing approvals because of changes in local circumstances or applicable law. Further, we may experience delays and increased expenses as a result of legal challenges to our proposed communities, whether brought by governmental authorities or private parties.

Our financial services business may be adversely affected by changes in governmental regulation and other risks associated with acting as a mortgage lender.

Prior to January 1, 2011, TMHF operated as a mortgage broker, limiting TMHF’s exposure to employee or third party fraud in the origination and processing of loan applications submitted to wholesale lending groups, and reducing repurchase risk from previously closed loans. Since January 1, 2011, in response to new legislation and in order to operate competitively in the market, TMHF transitioned to full lender status. This change results in TMHF having the ability to originate, underwrite and fund mortgage transactions through correspondent lending relationships. While we intend for the loans that we originate to typically be held for no more than 20 days before being sold on the secondary market, if we are unable to sell loans into the secondary mortgage market or directly to large secondary market loan purchasers such as Fannie Mae and Freddie Mac, TMHF would bear the risk of being a long-term investor in these originated loans. Mortgage lending is also subject to credit risks associated with the borrowers to whom the loans are extended and an increase in default rates could have a material and adverse effect on our business. Being required to hold loans on a long-term basis would also negatively affect our liquidity and could require us to use additional capital resources to finance the loans that we are extending. In addition, although mortgage lenders under the mortgage warehouse facilities we currently use to finance our lending operations normally purchase our mortgages within 20 days of origination, if there is a default under these warehouse facilities we would be required to fund the mortgages then in the pipeline. In such case, amounts available under our Revolving Credit Facility and cash from operations may not be sufficient to allow us to provide financing required by our business during these times.

An obligation to commit our own funds to long-term investments in mortgage loans could, among other things, delay the time when we recognize revenues from home sales on our statements of operations. If, due to higher costs, reduced liquidity, heightened risk retention obligations and/or new operating restrictions or regulatory reforms related to or arising from compliance with new U.S. federal laws and regulations, residential consumer loan putback demands or internal or external reviews of its residential consumer mortgage loan foreclosure processes, or other factors or business decisions, TMHF could be unable to make loan products available to our homebuyers, and home sales and mortgage services results of operations may be adversely affected.

In addition, changes in governmental regulation with respect to mortgage lenders could adversely affect the financial results of this portion of our business. Our mortgage lending operations are subject to numerous federal, state and local laws and regulations. There have been numerous proposed changes in these regulations as a result of the housing downturn. For example, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted. Among other things, this legislation provides for a number of new requirements relating to residential 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, retention of credit risk, prohibition of certain tying arrangements and remedies for borrowers in foreclosure proceedings. The effect of such provisions on TMHF and our mortgage lending business will depend on the rules that are ultimately enacted. In addition, we cannot predict whether similar changes to, or new enactments of, statutes and regulations pertinent to our mortgage lending business will occur in the future. Any such changes or new enactments could adversely affect our financial condition and results of operations.

 

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The prices of our mortgages could be adversely affected if we lose any of our important commercial relationships.

TMHF has longstanding relationships with members of the lender community from which its borrowers benefit. TMHF plans to continue with these relationships and use the correspondent lender platform as a part of its operational plan. If our relationship with any one or more of those banks deteriorates or if one or more of those banks decide to renegotiate or terminate existing agreements, we may be required to increase the price of our products, or modify the range of products we offer, which could cause us to lose customers who may choose other providers based solely on the price or fees, which could adversely affect our financial condition and results of operations.

We may not be able to use certain deferred tax assets, which may result in our having to pay substantial taxes.

We have significant deferred tax assets, including net operating losses in the United States that could be used to offset earnings and reduce the amount of taxes we are required to pay. Our ability to use net operating losses to offset earnings is dependent on a number of factors, including applicable rules relating to the permitted carry back period for offsetting certain net operating losses against prior period earnings. We are currently under examination by various taxing jurisdictions with respect to our carry back of net operating losses in our historical tax returns and have appealed Internal Revenue Service determinations that we may not carry back certain net operating losses. Income tax payable on our consolidated balance sheet at September 30, 2012 includes reserves of $8.7 million and $74.8 million related to this issue for tax years 2009 and 2008, respectively. An IRS appeal is ongoing for the 2009 and 2008 TMC and subsidiaries tax return. We are also currently under examination on our 2006 and 2007 California legacy Taylor Woodrow returns. The outcomes of the remaining examinations are not yet determinable. The statute of limitations for these examinations remains open with various expiration dates, the latest of which is December 2013. Our former parent, Taylor Wimpey plc, has agreed to indemnify TMM for amounts payable in respect of these additional taxes. However, if Taylor Wimpey plc defaults on its indemnification obligation and we are unable to collect under the posted letter of credit, if we fail to obtain a favorable determination on appeal from the IRS with respect to our ability to carry back certain net operating losses, and if the result of the IRS or California examinations is also that we are not entitled to carry back certain net operating losses, we may be required to pay additional taxes, which may adversely affect our liquidity.

Raw materials and building supply shortages and price fluctuations could delay or increase the cost of home construction and adversely affect our operating results.

The homebuilding industry has, from time to time, experienced raw material shortages and been adversely affected by volatility in global commodity prices. In particular, shortages and fluctuations in the price of concrete, drywall, lumber or other important raw materials could result in delays in the start or completion of, or increase the cost of, developing one or more of our residential communities.

In addition, the cost of petroleum products, which are used both to deliver our materials and to transport workers to our job sites, fluctuates and may be subject to increased volatility as a result of geopolitical events or accidents such as the Deepwater Horizon accident in the Gulf of Mexico. Changes in such costs could also result in higher prices for any product utilizing petrochemicals. These cost increases may have an adverse effect on our operating margin and results of operations. Furthermore, any such cost increase may adversely affect the regional economies in which we operate and reduce demand for our homes.

The geographic concentration of our operations subjects us to an increased risk of loss of revenue or decreases in the market value of our land and homes in these regions from factors which may affect any of these regions.

Our operations are concentrated in Ontario, Canada and California, Colorado, Arizona, Texas and Florida. Some or all of these regions could be affected by:

 

   

severe weather;

 

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natural disasters;

 

   

shortages in the availability or increased costs in obtaining land, equipment, labor or building supplies;

 

   

changes to the population growth rates and therefore the demand for homes in these regions; and

 

   

changes in the regulatory and fiscal environment.

Due to the concentrated nature of our operations, negative factors affecting one or a number of these geographic regions at the same time could result in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of operations.

Changes to the population growth rates in certain of the markets in which we operate could affect the demand for homes in these regions.

Slower rates of population growth or population declines in our key markets, especially as compared to the high population growth rates in prior years, could affect the demand for housing, causing home prices in these markets to fall, and adversely affect our business, financial condition and operating results.

We participate in certain unconsolidated joint ventures where we may be adversely impacted by the failure of the unconsolidated joint venture or the other partners in the unconsolidated joint venture to fulfill their obligations.

We have investments in and commitments to certain unconsolidated joint ventures with unrelated strategic partners to acquire and develop land and, in some cases, build and deliver homes. To finance these activities, our unconsolidated joint ventures often obtain loans from third-party lenders that are secured by the unconsolidated joint venture’s assets. In certain instances, we and the other partners in an unconsolidated joint venture provide guarantees and indemnities to lenders with respect to the unconsolidated joint venture’s debt, which may be triggered under certain conditions when the unconsolidated joint venture fails to fulfill its obligations under its loan agreements.

In Canada, we have consistently used joint ventures as a means of acquiring land. Where we do not have a controlling interest in these unconsolidated joint ventures, we depend heavily on the other partners in each unconsolidated joint venture to both cooperate and make mutually acceptable decisions regarding the conduct of the business and affairs of the unconsolidated joint venture and ensure that they, and the unconsolidated joint venture, fulfill their respective obligations to us and to third parties. If the other partners in our unconsolidated joint ventures do not provide such cooperation or fulfill these obligations due to their financial condition, strategic business interests (which may be contrary to ours), or otherwise, we may be required to spend additional resources (including payments under the guarantees we have provided to the unconsolidated joint ventures’ lenders) and suffer losses, each of which could be significant. Moreover, our ability to recoup such expenditures and losses by exercising remedies against such partners may be limited due to potential legal defenses they may have, their respective financial condition and other circumstances. In addition, certain joint ventures relating to our Canadian operations have change of control consent requirements that may have the effect of delaying, deferring or preventing a change of control of such joint ventures. Furthermore, the termination of a joint venture may also give rise to lawsuits and legal costs.

In certain instances, Monarch Corporation and the other partners in a joint venture provide guarantees and indemnities to lenders with respect to the unconsolidated joint venture’s debt, which may be triggered under certain conditions when the joint venture fails to fulfill its obligations under its loan agreements. As of September 30, 2012, Monarch Corporation’s total recourse exposure under its guarantees of joint venture debt was approximately $168.9 million. To the extent any or all of our joint ventures default on obligations secured by the assets of such joint venture or guaranteed by Monarch Corporation, the assets of our joint ventures could be forfeited to our joint ventures’ third party lenders, and Monarch Corporation could be liable to such third party lenders to the full extent of its guarantees and, in the case of secured guarantees, to the extent of the assets of

 

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Monarch Corporation that secure the applicable guarantee. Any such default by our joint ventures could cause significant losses, with a resulting adverse effect on our financial condition and results of operations. Recent market conditions have required us to provide a greater number of such guarantees and we expect this trend to continue.

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

As a part of our business strategy, we may make acquisitions, or significant investments in, and/or disposals of businesses. Any future acquisitions, investments and/or disposals would be accompanied by risks such as:

 

   

difficulties in assimilating the operations and personnel of acquired companies or businesses;

 

   

diversion of our management’s attention from ongoing business concerns;

 

   

our potential inability to maximize our financial and strategic position through the successful incorporation or disposition of operations;

 

   

maintenance of uniform standards, controls, procedures and policies; and

 

   

impairment of existing relationships with employees, contractors, suppliers and customers as a result of the integration of new management personnel and cost-saving initiatives.

We cannot guarantee that we will be able to successfully integrate any company or business that we might acquire in the future, and our failure to do so could harm our current business.

In addition, we may not realize the anticipated benefits of these transactions and there may be other unanticipated or unidentified effects. While we would seek protection, for example, through warranties and indemnities in the case of acquisitions, significant liabilities may not be identified in due diligence or come to light after the expiry of warranty or indemnity periods. Additionally, while we would seek to limit our ongoing exposure, for example, through liability caps and period limits on warranties and indemnities in the case of disposals, some warranties and indemnities may give rise to unexpected and significant liabilities. Any claims arising in the future may adversely affect our business, financial condition and operating results.

We have defined benefit and defined contribution pension schemes to which we may be required to increase our contributions to fund deficits.

We provide retirement benefits for former and certain of our current employees through a number of defined benefit and defined contribution pension schemes. Certain of these plans are no longer available to new employees, though in Canada we retain a defined contribution plan. As of September 30, 2012, we had recorded a deficit of $9.1 million in our defined benefit pension plans. This deficit may increase, and we may be required to increase contributions to our plans in the future, which may materially and adversely affect our liquidity and financial condition.

A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.

Building sites are inherently dangerous, and operating in the homebuilding industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with relevant regulatory agencies or governmental authorities, and our ability to win new business, which in turn could have a material adverse effect on our business, financial condition and operating results.

 

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Ownership, leasing or occupation of land and the use of hazardous materials carries potential environmental risks and liabilities.

We are subject to a variety of local, state and federal statutes, rules and regulations concerning land use and the protection of health and the environment, including those governing discharge of pollutants to water and air, including asbestos, the handling of hazardous materials and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation or remediation of hazardous or toxic substances located on, under or in a property currently or formerly owned, leased or occupied by us, whether or not we caused or knew of the pollution. The costs of any required removal, investigation or remediation of such substances or the costs of defending against environmental claims may be substantial. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect our ability to sell the land or to borrow using the land as security. Environmental impacts from historical activities have been identified at some of the projects we have developed in the past and additional projects may be located on land that may have been contaminated by previous use. Although we are not aware of any projects requiring material remediation activities by us as a result of historical contamination, no assurances can be given that material claims or liabilities relating to such developments will not arise in the future.

The particular impact and requirements of environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions and the present and former use of the site. We expect that increasingly stringent requirements may be imposed on homebuilders in the future. Environmental laws may result in delays, cause us to implement time consuming and expensive compliance programs and prohibit or severely restrict development in certain environmentally sensitive regions or areas, such as wetlands. We also may not identify all of these concerns during any pre-development review of project sites. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials, such as lumber. Furthermore, we could incur substantial costs, including cleanup costs, fines, penalties and other sanctions and damages from third-party claims for property damage or personal injury, as a result of our failure to comply with, or liabilities under, applicable environmental laws and regulations. In addition, we are subject to third-party challenges, such as by environmental groups, under environmental laws and regulations to the permits and other approvals required for our projects and operations. These matters could adversely affect our business, financial condition and operating results.

We may be liable for claims for damages as a result of use of hazardous materials.

As a homebuilding business with a wide variety of historic homebuilding and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials, including building materials which in the future become known or are suspected to be hazardous. Any such claims may adversely affect our business, financial condition and operating results. Insurance coverage for such claims may be limited or non-existent.

We may suffer uninsured losses or suffer material losses in excess of insurance limits.

We could suffer physical damage to property and liabilities resulting in losses that may not be fully compensated by insurance. In addition, certain types of risks, such as personal injury claims, may be, or may become in the future, either uninsurable or not economically insurable, or may not be currently or in the future covered by our insurance policies. Should an uninsured loss or a loss in excess of insured limits occur, we could sustain financial loss or lose capital invested in the affected property as well as anticipated future income from that property. In addition, we could be liable to repair damage or meet liabilities caused by uninsured risks. We may be liable for any debt or other financial obligations related to affected property. Material losses or liabilities in excess of insurance proceeds may occur in the future.

In the United States, the coverage offered and the availability of general liability insurance for construction defects is currently limited and is costly. As a result, an increasing number of our subcontractors in the United States may be unable to obtain insurance, particularly in California where we have instituted an OCIP, under

 

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which subcontractors are effectively insured by us. If we cannot effectively recover construction defect liabilities and costs of defense from our subcontractors or their insurers, or if we have self-insured, we may suffer losses. Coverage may be further restricted and become even more costly. Such circumstances could adversely affect our business, financial condition and operating results.

We may face substantial damages or be enjoined from pursuing important activities as a result of existing or future litigation, arbitration or other claims.

In our homebuilding activities, we are exposed to potentially significant litigation, including breach of contract, contractual disputes and disputes relating to defective title, property misdescription or construction defects, including use of defective materials (including Chinese-made drywall).

For example, we engage subcontractors to construct of our homes, and in many cases, to obtain the necessary building materials. Between 2008 and 2011, we confirmed the presence of defective Chinese-made drywall in a number of Florida homes, primarily delivered during our 2006 and 2007 fiscal years. As of September 30, 2012, we had accrued an amount that our management believes to be a reasonable reserve for losses that may be related to this matter, including repair costs. We continue to inspect additional homes in order to determine whether they also contain the defective Chinese-made drywall. The outcome of these on-going inspections may require us to increase our warranty and claims reserves in the future, which could adversely affect our business, financial condition and operating results. Currently, the amount of additional liability, if any, is not reasonably estimable.

Although we have established warranty, claim and litigation reserves that we believe are adequate, due to the uncertainty inherent in litigation, legal proceedings may result in the award of substantial damages against us beyond our reserves. Furthermore, plaintiffs may in certain of these legal proceedings seek class action status with potential class sizes that vary from case to case. Class action lawsuits can be costly to defend, and if we were to lose any certified class action suit, it could result in substantial liability for us. In addition, we are subject to potential lawsuits, arbitration proceedings and other claims in connection with our business. See “Business—Insurance and Legal Proceedings.”

With respect to certain general liability exposures, including construction defect, Chinese-made drywall and related claims and product liability claims, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve estimation process requires us to exercise significant judgment due to the complex nature of these exposures, with each exposure often exhibiting unique circumstances. Furthermore, once claims are asserted for construction defects, it is difficult to determine the extent to which the assertion of these claims will expand geographically. As a result, our insurance policies may not be available or adequate to cover any liability for damages, the cost of repairs, and/or the expense of litigation surrounding current claims, and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors. Should such a situation arise, it may have a material adverse effect on our business, financial condition and operating results.

Poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or results of operations to decline.

Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents and subsequent actions by these residents could adversely affect sales or our reputation. In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or to modify our community development plans, which could adversely affect our results of operations.

 

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We are dependent on certain members of our management and key personnel.

Our business involves complex operations and therefore demands a management team and employee workforce that is knowledgeable and expert in many areas necessary for our operations. Investors in our Class A common stock must rely to a significant extent upon the ability, expertise, judgment and discretion of our management and key personnel. Our performance and success are dependent, in part, upon key members of our management and personnel, and their loss or departure could be detrimental to our future success. Further, the process of attracting and retaining suitable replacements for key personnel whose services we may lose would result in transition costs and would divert the attention of other members of our senior management from our existing operations. In addition, we do not maintain key person insurance in respect of any members of our senior management team. The loss of any of our management members or key personnel could adversely impact our business, financial condition and operating results. See “Management.”

Utility and resource shortages or rate fluctuations could have an adverse effect on our operations.

Certain areas in which we operate have historically been subject to utility and resource shortages, including significant changes to the availability of electricity and water. These areas have also experienced material fluctuations in utility and resource costs. Shortages of natural resources in our markets, particularly of water, may make it more difficult for us to obtain regulatory approval of new developments. We may incur additional costs and may not be able to complete construction on a timely basis if such shortages and utility rate fluctuations arise. Furthermore, these shortages and rate fluctuations may adversely affect the regional economies in which we operate, which may reduce demand for our homes.

If we are unable to develop our communities successfully or within expected timeframes, our results of operations could be adversely affected.

Before a community generates any revenues, time and material expenditures are required to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities, model homes and sales facilities. A decline in our ability to develop and market our communities successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.

Constriction of the capital markets could limit our ability to access capital and increase our costs of capital.

We fund our operations from cash from operations, capital markets financings and borrowings under our Revolving Credit Facility. Volatile economic conditions and the constriction of the capital markets could reduce the sources of liquidity available to us and increase our costs of capital. Our Canadian operations rely on separate banking facilities for liquidity and to a lesser extent on our Revolving Credit Facility. If the size or availability of these banking facilities is reduced in the future, it would have an adverse effect on our liquidity and operations.

As of September 30, 2012, we had $29.9 million of debt maturing in the next 12 months. In addition, our credit facilities related to our Canadian operations (under which we had CAD $89.8 million of outstanding letters of credit as of September 30, 2012) are scheduled to expire on June 30, 2013. If we fail to renew these facilities, we will be required to obtain replacement facilities with other lenders to support our operations. We believe we can meet our other capital requirements with our existing cash resources and future cash flows and, if required, other sources of financing that we anticipate will be available to us. However, we can provide no assurance that we will continue to be able to do so, particularly if industry or economic conditions deteriorate. The future effects on our business, liquidity and financial results of these conditions could be adverse, both in the ways described above and in other ways that we do not currently foresee.

 

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Our substantial debt could adversely affect our business, financial condition or results of operations and prevent us from fulfilling our debt-related obligations.

We have a substantial amount of debt. As of September 30, 2012, the total principal amount of our debt (which does not include $35.9 million of indebtedness of TMHF) is $791.4 million. Our substantial debt could have important consequences for the holders of our common stock, including:

 

   

making it more difficult for us to satisfy our obligations with respect to our debt or to our trade or other creditors;

 

   

increasing our vulnerability to adverse economic or industry conditions;

 

   

limiting our ability to obtain additional financing to fund capital expenditures and acquisitions, particularly when the availability of financing in the capital markets is limited;

 

   

requiring a substantial portion of our cash flows from operations and the proceeds of this offering for the payment of interest on our debt and reducing our ability to use our cash flows and the proceeds of this offering to fund working capital, capital expenditures, acquisitions and general corporate requirements;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

 

   

placing us at a competitive disadvantage to less leveraged competitors.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us through capital markets financings or under our Revolving Credit Facility or otherwise in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, on or before its maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. In addition, we may incur additional indebtedness in order to finance our operations or to repay existing indebtedness. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional debt or equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms or at all, or on terms that would be advantageous to our stockholders or on terms that would not require us to breach the terms and conditions of our existing or future debt agreements.

Restrictive covenants in the indenture governing the senior notes and the agreements governing our Revolving Credit Facility and other indebtedness may restrict our ability to pursue our business strategies.

The indenture governing our senior notes and the agreement governing our Revolving Credit Facility limit our ability, and the terms of any future indebtedness may limit our ability, among other things, to:

 

   

incur or guarantee additional indebtedness;

 

   

make certain investments;

 

   

pay dividends or make distributions on our capital stock;

 

   

sell assets, including capital stock of restricted subsidiaries;

 

   

agree to payment restrictions affecting our restricted subsidiaries;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into transactions with our affiliates;

 

   

incur liens; and

 

   

designate any of our subsidiaries as unrestricted subsidiaries.

 

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The Revolving Credit Facility contains certain “springing” financial covenants based on (a) consolidated total debt and consolidated adjusted tangible net worth requiring TMM and its subsidiaries to maintain a certain maximum capitalization ratio and (b) consolidated EBITDA requiring TMM and its subsidiaries to maintain a certain minimum interest coverage ratio. The Revolving Credit Facility also contains customary restrictive covenants, including limitations on incurrence of indebtedness and liens, the payment of dividends and other distributions, asset dispositions, investments, sale and leasebacks and limitations on debt payments and amendments.

The restrictions contained in the indenture governing our senior notes and the agreement governing our Revolving Credit Facility could also limit our ability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans.

Monarch Corporation is party to credit facilities with The Toronto-Dominion Bank and with HSBC Bank Canada. These facilities also contain restrictive covenants, including a maximum debt to equity ratio, minimum consolidated net equity, limitations on dividends and maintenance of a minimum interest coverage ratio. A breach of any of these restrictive covenants or our inability to comply with the applicable financial covenants could result in a default under the agreements governing our Revolving Credit Facility, the TD Facility and the HSBC Facility, which could allow for the acceleration of the debt under the agreements. If the indebtedness under our Revolving Credit Facility, the TD Facility, the HSBC Facility and the senior notes were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness. See “Description of Certain Indebtedness.”

We may require additional capital in the future and may not be able to secure adequate funds on terms acceptable to us.

The expansion and development of our business may require significant capital, which we may be unable to obtain, to fund our capital expenditures and operating expenses, including working capital needs. During 2011 and for the nine months ended September 30, 2012, we made capital expenditures for land, development and construction of $1.0 billion and $963.8 million, respectively.

During the next 12 months, we expect to meet our cash requirements with existing cash and cash equivalents, cash flow from operations (including sales of our homes and land) and borrowings under our Revolving Credit Facility. We may fail to generate sufficient cash flow from the sales of our homes and land to meet our cash requirements. Further, our capital requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities.

To a large extent, our cash flow generation ability is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. As a result, we may need to refinance all or a portion of our debt, on or before its maturity, or obtain additional equity or debt financing. We cannot assure you that we will be able to do so on favorable terms, if at all. Any inability to generate sufficient cash flow, refinance our debt or incur additional debt on favorable terms could adversely affect our financial condition and could cause us to be unable to service our debt and may delay or prevent the expansion of our business.

 

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Risks related to our structure and organization

TMHC’s only asset after the completion of this offering will be its interest in TMM, and accordingly it will be dependent upon distributions from TMM to pay dividends, if any, taxes and other expenses. TMM is a holding company with no operations of its own and, in turn, relies on distributions from its operating subsidiaries.

Following the completion of the Reorganization Transactions and this offering, TMHC will be a holding company and will have no assets other than its ownership, directly or indirectly, of TMM partnership interests. TMHC will have no independent means of generating revenue. THMC intends to cause TMM to make distributions to its partners in an amount sufficient to cover all applicable taxes payable and dividends, if any, declared by TMHC. To the extent that TMHC needs funds, and TMM is restricted from making such distributions under applicable law or regulation, or is otherwise unable to provide such funds, it could materially and adversely affect TMHC’s liquidity and financial condition. In addition, TMM has no direct operations and derives all of its cash flow from its subsidiaries. Because the operations of TMHC’s business are conducted through subsidiaries of TMM, TMM is dependent on those entities for dividends and other payments to generate the funds necessary to meet the financial obligations of TMM. Legal and contractual restrictions in the Senior Secured Revolving Credit Facility, the senior notes and other debt agreements governing current and future indebtedness of TMM’s subsidiaries, as well as the financial condition and operating requirements of TMM’s subsidiaries, may limit TMHC’s ability to obtain cash from TMM’s subsidiaries. The earnings from, or other available assets of, TMM’s subsidiaries may not be sufficient to pay dividends or make distributions or loans to TMHC to enable TMHC to pay any dividends on the Class A common stock, taxes and other expenses.

The Principal Equityholders have substantial influence over our business, and their interests may differ from our interests or those of our other stockholders.

Following this offering, our Principal Equityholders will continue to hold a majority of the combined voting power of TMHC. Due to their ownership, our Principal Equityholders have the power to control us and our subsidiaries, including the power to:

 

   

elect a majority of our directors and appoint our executive officers, set our management policies and exercise overall control over our company and subsidiaries;

 

   

agree to sell or otherwise transfer a controlling stake in our company; and

 

   

determine the outcome of substantially all actions requiring stockholder approval, including transactions with related parties, corporate reorganizations, acquisitions and dispositions of assets, and dividends.

The interests of our Principal Equityholders may differ from our interests or those of our other stockholders and the concentration of control in our Principal Equityholders will limit other stockholders’ ability to influence corporate matters. The concentration of ownership and voting power of our Principal Equityholders may also delay, defer or even prevent an acquisition by a third party or other change of control of our company and may make some transactions more difficult or impossible without the support of our Principal Equityholders, even if such events are in the best interests of our other stockholders. The concentration of voting power among the Principal Equityholders may have an adverse effect on the price of our Class A common stock. Our company may take actions that our other stockholders do not view as beneficial, which may adversely affect our results of operations and financial condition and cause the value of your investment to decline.

In addition, because the Principal Equityholders hold their ownership interest in our business directly or indirectly through TMM, rather than through TMHC, the public company, these existing owners may have conflicting interests with holders of shares of our Class A common stock.

 

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As a “controlled company” within the meaning of the corporate governance rules of the national securities exchanges, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. As a result, holders of our Class A common stock may not have the same degree of protection as that afforded to stockholders of companies that are subject to all of the corporate governance requirements of these exchanges.

Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules of the national securities exchanges as a result of the ownership position and voting rights of our Principal Equityholders upon completion of this offering. A “controlled company” is a company of which more than 50% of the voting power is held by an individual, group or another company. More than 50% of our voting power will be held by our Principal Equityholders and certain members of our management after completion of this offering. As a controlled company, we are entitled to elect, and we intend to elect, not to comply with certain corporate governance rules of national securities exchanges that would otherwise require the Board of Directors to have a majority of independent directors and our compensation and nominating and governance committees to be comprised entirely of independent directors, have written charters addressing such committee’s purpose and responsibilities and perform an annual evaluation of such committee. Accordingly, holders of our Class A common stock will not have the same protection afforded to stockholders of companies that are subject to all of the corporate governance requirements of the national securities exchanges and the ability of our independent directors to influence our business policies and affairs may be reduced.

TMHC’s directors who have relationships with the Principal Equityholders may have conflicts of interest with respect to matters involving our company.

Following this offering, the substantial majority of TMHC’s directors will be affiliated with the Principal Equityholders. These persons will have fiduciary duties to TMHC and in addition will have duties to the Principal Equityholders. In addition, TMHC’s amended and restated certificate of incorporation will provide that no officer or director of TMHC who is also an officer, director, employee or other affiliate of the Principal Equityholders or an officer, director or employee of an affiliate of the Principal Equityholders will be liable to TMHC or its stockholders for breach of any fiduciary duty by reason of the fact that any such individual directs a corporate opportunity to the Principal Equityholders or their affiliates instead of TMHC, or does not communicate information regarding a corporate opportunity to TMHC that such person or affiliate has directed to the Principal Equityholders or their affiliates. As a result, such circumstances may entail real or apparent conflicts of interest with respect to matters affecting both TMHC and the Principal Equityholders, whose interests, in some circumstances, may be adverse to those of TMHC. In addition, as a result of the Principal Equityholders’ indirect ownership interest, conflicts of interest could arise with respect to transactions involving business dealings between TMHC and the Principal Equityholders or their affiliates, including potential business transactions, potential acquisitions of businesses or properties, the issuance of additional securities, the payment of dividends by TMHC and other matters.

Risks related to this offering

There is no existing market for our Class A common stock so the share price for our Class A common stock may fluctuate significantly.

Prior to this offering, there has been no public market for our Class A common stock. We cannot provide assurance that an active trading market will develop upon completion of this offering or, if it does develop, that it will be sustained. The initial public offering price of our Class A common stock will be determined by negotiation among us and the representatives of the underwriters and may not be representative of the price that will prevail in the open market after this offering. See “Underwriting” for a discussion of the factors that were considered in determining the initial public offering price.

The market price of our Class A common stock after this offering may be significantly affected by factors such as quarterly variations in our results of operations, changes in government regulations, the announcement of new contracts by us or our competitors, general market conditions specific to the homebuilding industry, changes

 

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in general economic conditions, volatility in the financial markets, differences between our actual financial and operating results and those expected by investors and analysts and changes in analysts’ recommendations or projections. These fluctuations may adversely affect the market price of our Class A common stock.

These and other factors may lower the market price of our Class A common stock, regardless of our actual operating performance. As a result, our Class A common stock may trade at prices significantly below the public offering price.

Furthermore, in recent years the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. Hence, the price of our Class A common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce the price of our Class A common stock and materially affect the value of your investment.

We have broad discretion to use the offering proceeds and our investment of those proceeds may not yield a favorable return.

Our management has broad discretion to spend the proceeds from this offering in ways with which you may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns. This could harm our business and could cause the price of our Class A common stock to decline.

A substantial portion of our total outstanding shares may be sold into the market at any time. This could cause the market price of our Class A common stock to drop significantly, even if our business is doing well.

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. After the consummation of this offering, we will have              shares of outstanding Class A common stock on a fully diluted basis, assuming that all the TMM partnership interests outstanding (and the corresponding shares of Class B common stock) after giving effect to the Reorganization Transactions and this offering described under “Organizational Structure,” excluding those held by TMHC, are exchanged into shares of our Class A common stock.

In addition, upon consummation of this offering, the Principal Equityholders and certain members of our management will own, directly or indirectly, an aggregate of     % of the outstanding partnership interests in TMM and              shares of our Class B common stock (or     % of TMM’s outstanding partnership interests and              shares of our Class B common stock if the underwriters exercise their over-allotment option in full). Pursuant to the terms of the Exchange Agreement, the limited partners of TMM (other than TMHC) will be able to exchange their direct or indirect TMM partnership interests (along with the corresponding number of shares of our Class B common stock) for shares of our Class A common stock on a one-for-one equivalent basis. Shares of our Class A common stock issuable to the limited partners of TMM upon an exchange of TMM partnership interests as described above would be considered “restricted securities,” as that term is defined in Rule 144 under the Securities Act. We and each of the existing holders of partnership interests of TMM who is a party to the Exchange Agreement will also agree with the underwriters not to sell, otherwise dispose of or hedge any Class A common stock or securities convertible or exchangeable for shares of Class A common stock, including the partnership interests of TMM and the Class B common stock, subject to specified exceptions, during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus, except with the prior written consent of the representatives of the underwriters. After the expiration of the 180-day lock-up period, the shares of Class A common stock issuable upon exchange of TMM partnership interests will be eligible for resale from time to time, subject to certain contractual restrictions and the requirements of the Securities Act.

We intend to file a registration statement under the Securities Act registering              shares of our Class A common stock reserved for issuance under our 2013 Plan and we will enter into an amended and restated

 

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registration rights agreement. See the information under the heading “Shares Eligible for Future Sale” and “Certain Relationships and Related Party Transactions” for a more detailed description of the shares of Class A common stock that will be available for future sale upon completion of this offering.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act and related rules implemented or to be implemented by the SEC and national securities exchanges. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing and the costs we incur for such purposes may strain our resources. We expect these rules and regulations to increase our legal and financial compliance costs, divert management’s attention to ensuring compliance and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. We have hired a number of people to assist with the enhanced requirements of being a public company but still need to hire more people for that purpose. In addition, these laws and regulations could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, these laws and regulations could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action.

Failure to establish and maintain effective internal control over financial reporting could have an adverse effect on our business, operating results and stock price.

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. To date, we have not identified any material deficiencies related to our internal control over financial reporting or disclosure controls and procedures, although we have not conducted an audit of our controls. If we are unable to maintain adequate internal controls, our business and operating results could be harmed. We are also beginning to evaluate how to document and test our internal control procedures to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules of the SEC, which require, among other things, our management to assess annually the effectiveness of our internal control over financial reporting and our independent registered public accounting firm to issue a report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2014. During the course of this documentation and testing, we may identify deficiencies that we may be unable to remedy before the requisite deadline for those reports. Our auditors have not conducted an audit of our internal control over financial reporting. Any failure to remediate material deficiencies noted by us or our independent registered public accounting firm or to implement required new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. If our management or our independent registered public accounting firm were to conclude in their reports that our internal control over financial reporting was not effective, investors could lose confidence in our reported financial information, and the trading price of our Class A common stock could drop significantly. Failure to comply with Section 404 of the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC, the Financial Industry Regulatory Authority or other regulatory authorities.

If you purchase shares of our Class A common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our Class A common stock is substantially higher than the net tangible book value per share of our Class A common stock. Therefore, if you purchase shares of our Class A common

 

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stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our Class A common stock and the net tangible book value per share of our Class A common stock after this offering. See “Dilution.”

If we raise additional capital through the issuance of new equity securities at a price lower than the initial public offering price, you will incur additional dilution.

If we raise additional capital through the issuance of new equity securities at a lower price than the initial public offering price, you will be subject to additional dilution. If we are unable to access the public markets in the future, or if our performance or prospects decreases, we may need to consummate a private placement or public offering of our Class A common stock at a lower price than the initial public offering price. In addition, any new securities may have rights, preferences or privileges senior to those securities held by you.

We do not expect to pay any cash dividends in the foreseeable future.

We intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our Class A common stock may be your sole source of gain for the foreseeable future.

Provisions in our charter and bylaws and provisions of Delaware law may delay or prevent our acquisition by a third party, which might diminish the value of our Class A common stock. Provisions in our debt agreements may also require an acquirer to refinance our outstanding indebtedness if a change of control occurs.

In addition to the Principal Equityholders’ holding a majority of the voting power of TMHC following this offering, our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions which could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions will include a classified board of directors and limitations on actions by our stockholders. In addition, our board of directors will have the right to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquirer. Our amended and restated certificate of incorporation will also impose some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock other than the Principal Equityholders. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price because of these protective measures and efforts by stockholders to change the direction or management of the company may be unsuccessful. See “Description of Capital Stock.”

Under our Revolving Credit Facility, a change of control would be an event of default, which would therefore require a third party acquirer to obtain a facility to refinance any outstanding indebtedness under the Revolving Credit Facility. Under the indenture governing our senior notes, if a change of control were to occur, we would be required to make an offer to repurchase the senior notes at a price equal to 101% of their principal amount. These change of control provisions in our existing debt agreements may also delay or diminish the value of an acquisition by a third party.

If securities analysts do not publish research or reports about our company, or if they issue unfavorable commentary about us or our industry or downgrade our Class A common stock, the price of our Class A common stock could decline.

The trading market for our Class A common stock will depend in part on the research and reports that third-party securities analysts publish about our company and our industry. One or more analysts could downgrade our Class A common stock or issue other negative commentary about our company or our industry. In addition, we may be unable or slow to attract research coverage. Alternatively, if one or more of these analysts cease coverage of our company, we could lose visibility in the market. As a result of one or more of these factors, the trading price of our Class A common stock could decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “projects,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, the industry in which we operate and potential acquisitions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this prospectus.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity and the development of the industry in which we operate are consistent with the forward looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause our results to vary from expectations include, but are not limited to:

 

   

cyclicality in our business and adverse changes in general economic or business conditions outside of our control;

 

   

a prolongation or worsening of the recent significant downturn in the U.S. or a significant decline in the market for new single-family homes or condominiums in Ontario, Canada;

 

   

the potential difficulty in maintaining profitability in the future;

 

   

fluctuations in exchange rates between the U.S. dollar and the Canadian dollar;

 

   

an inability on our part to obtain performance bonds or letters of credit necessary to carry on our operations;

 

   

higher cancellation rates of agreements of sale pertaining to our homes;

 

   

competition in the homebuilding industry;

 

   

constriction of the credit markets and the resulting inability of our customers to secure financing to purchase our homes;

 

   

an increase in unemployment;

 

   

increases in taxes or government fees;

 

   

increased homeownership costs due to government regulation;

 

   

our inability to pass along the effects of inflation or increased costs to our customers;

 

   

the seasonal nature of our business;

 

   

negative publicity;

 

   

an unexpected increase in home warranty or construction defect claims, including with respect to Chinese-made drywall;

 

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various liability issues related to our reliance or contractors;

 

   

failure in our financial and commercial controls or systems;

 

   

changes in the availability of suitable land on which to build;

 

   

declines in the market value of our land and inventory;

 

   

risks associated with our real estate and lot inventory;

 

   

shortages in labor supply, increased labor costs or labor disruptions;

 

   

the failure to recruit, retain and develop highly skilled, competent personnel and our dependence on certain members of our management and key personnel;

 

   

the effects of government regulation or legal challenges on our development and other activities;

 

   

changes in governmental regulation and other risks associated with acting as a mortgage lender;

 

   

the loss of any of our important commercial relationships;

 

   

an inability to use certain deferred tax assets;

 

   

shortages in raw materials and building supply and price fluctuations;

 

   

the concentration of our operations in California, Colorado, Arizona, Texas, Florida and Ontario, Canada, including adverse weather conditions;

 

   

changes to the population growth rates in our markets;

 

   

risks related to conducting business through joint ventures;

 

   

costs associated with the future growth or expansion of our operations or acquisitions or disposals of our divisions;

 

   

U.S. defined benefit pension schemes, which may require increased contributions;

 

   

a major health and safety incident;

 

   

potential environmental risks and liabilities associated with the ownership, leasing or occupation of land;

 

   

potential claims for damages as a result of hazardous materials;

 

   

uninsured losses or losses in excess of insurance limits;

 

   

existing or future litigation, arbitration or other claims;

 

   

poor relations with the residents of our communities;

 

   

utility and resource shortages or rate fluctuations;

 

   

an inability to develop our communities successfully or within expected time frames;

 

   

any future inability on our part to secure the capital required to fund our business;

 

   

issues relating to our substantial debt;

 

   

an inability to pursue certain business strategies because of restricted covenants in the agreements governing our indebtedness; and

 

   

other risks and uncertainties inherent in our business.

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. We urge you to read this entire prospectus carefully, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry”

 

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and “Business,” for a more complete discussion of the factors that could affect our future performance and the industry in which we operate. In light of these risks, uncertainties and assumptions, the forward-looking events described in this prospectus may not occur.

We undertake no obligation, and do not expect, to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this prospectus.

 

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ORGANIZATIONAL STRUCTURE

Structure Prior to the Reorganization Transactions

Our business is conducted by wholly owned subsidiaries of TMM. All of the issued and outstanding capital stock of the Operating Subsidiaries and their subsidiaries is directly or indirectly owned by TMM. The limited partnership interests in TMM are currently owned by the TPG Entities, Oaktree and JH as well as certain members of our management.

The Reorganization Transactions

In the Reorganization Transactions, TMHC will, through a series of transactions, directly or indirectly acquire partnership interests in TMM with the net cash proceeds received in this offering and become or acquire control over the sole general partner of TMM. The existing holders of limited partnership interests in TMM, including the Principal Equityholders and certain members of our management, will continue to hold directly or indirectly limited partnership interests in TMM and will be issued shares of TMHC Class B common stock. Immediately after the consummation of the Reorganization Transactions and this offering, the only asset of TMHC will be its direct or indirect interest in TMM. Each share of TMHC Class A common stock will correspond to an economic interest in our direct or indirect interest in TMM, whereas the shares of TMHC Class B common stock will only have voting rights in TMHC and will have no economic interest in TMHC or its direct or indirect interest in TMM. Shares of TMHC Class B common stock will be initially owned, directly or indirectly, solely by the existing holders of TMM limited partnership interests and cannot be transferred except in connection with an exchange or transfer of a TMM partnership interest. We do not intend to list the Class B common stock on any stock exchange.

TMHC was incorporated as a Delaware corporation in November 2012. TMHC has not engaged in any business or other activities, except for certain aspects of the Reorganization Transactions, and following the Reorganization Transactions will have no assets other than its direct or indirect interest in TMM. Following this offering, TMM’s subsidiaries will continue to operate the historical business of our company.

TMHC is currently authorized to issue a single class of common stock. In connection with the Reorganization Transactions, TMHC will amend and restate the certificate of incorporation to authorize the issuance of two classes of common stock, Class A common stock and Class B common stock. Shares of common stock will generally vote together as a single class on all matters submitted to stockholders. The Class B common stock will not entitle its holders to any of the economic rights (including rights to dividends and distributions upon liquidation) that will be provided to holders of Class A common stock. The voting power of the outstanding Class B common stock will be equal to the percentage of TMM partnership interests not held directly or indirectly by TMHC.

In connection with the closing of this offering, certain of the existing holders of limited partnership interests in TMM will enter into the Exchange Agreement under which, from time to time, they (or certain transferees) will have the right to exchange their direct or indirect partnership interests in TMM (along with a corresponding number of shares of TMHC Class B common stock) for shares of TMHC Class A common stock on a one-for-one equivalent basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. See “Certain Relationships and Related Party Transactions—Exchange Agreement.”

In addition, as a part of the Reorganization Transactions, we expect to, among other things, amend and restate the partnership agreement governing TMM, enter into a stockholders agreement with the Principal Equityholders and the other partners of TMM and enter into an amended and restated registration rights agreement with the Principal Equityholders and the other partners of TMM. See “Certain Relationships and Related Party Transactions.”

 

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Effect of the Reorganization Transactions and this Offering

The Reorganization Transactions are intended to create a holding company that will facilitate public ownership of, and investment in, our company.

Upon completion of the Reorganizations Transactions described above, this offering and the application of the net proceeds from this offering:

 

   

TMHC will be or control the sole general partner of TMM, will control TMM and will hold directly or indirectly     % of the outstanding partnership interests in TMM (    % if the underwriters exercise their over-allotment option in full). TMHC will consolidate the financial results of TMM and its subsidiaries and TMHC’s net income (loss) will be reduced by a noncontrolling interest expense to reflect the portion of TMM’s net income (loss) to which TMHC is not entitled;

 

   

the TPG Entities, Oaktree and JH and certain members of management will hold directly or indirectly an aggregate of     % of the outstanding partnership interests in TMM and              shares of TMHC’s Class B common stock (or     % of the partnership interests and              shares of TMHC’s Class B common stock if the underwriters exercise their over-allotment option in full), representing     % of the combined voting power in TMHC and     % of the economic interest in TMM (    % if the underwriters exercise their over-allotment option in full); and

 

   

TMHC’s public stockholders will collectively hold             shares of TMHC’s Class A common stock (or             shares if the underwriters exercise their over-allotment option in full), representing         % of the combined voting power and economic interest in TMHC (or         % if the underwriters exercise their over-allotment option in full).

Upon the consummation of this offering, TMHC will contribute the net proceeds received by TMHC directly or indirectly to TMM. TMM will then use such proceeds as further described under “Use of Proceeds” and “Certain Relationships and Related Party Transactions.”

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of          shares of Class A common stock by us in this offering will be approximately $         million after deducting estimated offering expenses payable by us of $         million and $         million of underwriting discounts and commissions and assuming an initial public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $         million.

TMHC intends to use the net proceeds of this offering to acquire partnership interests in TMM. TMM intends to contribute such proceeds to its subsidiaries. TMM’s subsidiaries intend to use such proceeds for working capital and general corporate purposes, which may include the repayment or repurchase of indebtedness and future acquisitions.

Our subsidiaries have broad discretion as to the application of the proceeds to be used for working capital and general corporate purposes. Prior to the application of the proceeds, our subsidiaries may hold any net proceeds in cash or invest them in short term securities or investments. You will not have an opportunity to evaluate the economic, financial or other information on which our subsidiaries base decisions regarding the use of these proceeds.

A $1.00 increase (decrease) in the assumed public offering price of $         per share of common stock would increase (decrease) our expected net proceeds 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 discounts and commissions and estimated offering expenses payable by us.

 

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DIVIDEND POLICY

We currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” TMHC has not previously declared or paid any cash dividends on its common stock.

Any future determination as to our dividend policy will be made at the discretion of the Board of Directors of TMHC and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements, including those governing the Revolving Credit Facility and the senior notes, that limit our ability to pay dividends to stockholders and other factors the Board of Directors of TMHC deems relevant. For further information, see “Description of Certain Indebtedness—Revolving Credit Facility” and “Description of Certain Indebtedness—Senior Notes.”

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2012:

 

   

on an actual basis, for TMM; and

 

   

on a pro forma basis with respect to TMHC, giving effect to the Reorganization Transactions as well as this offering and the use of proceeds of this offering as described under “Use of Proceeds.”

This table should be read in conjunction with “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     September 30, 2012  
(in thousands, except per share amounts)    TMM
Actual
     TMHC
Pro Forma(1)
 

Cash and cash equivalents

   $ 412,779       $                
  

 

 

    

 

 

 

Revolving Credit Facility(2)

   $ —         $     

Loans payable and other borrowings(3)

     116,397      

7.750% Senior Notes due 2020(4)

     681,764      
  

 

 

    

 

 

 

Total debt(5)

     798,161      
  

 

 

    

 

 

 

Owners’ Equity

     861,754      

Class A common stock, $0.01 par value per share,             shares authorized on a pro forma basis

     —        

Class B common stock, $0.00001 par value per share,             shares authorized on a pro forma basis

     —        

Additional paid-in capital

     

Noncontrolling interest

     7,693      
  

 

 

    

 

 

 

Total stockholders’ equity

     869,447      
  

 

 

    

 

 

 

Total capitalization

   $ 1,667,608       $     
  

 

 

    

 

 

 

 

  (1) A $1.00 decrease or increase in the assumed initial public offering price would result in approximately a $         million decrease or increase in the pro forma amounts of each of (i) cash and cash equivalents, (ii) additional paid-in capital, (iii) total stockholders’ equity, and (iv) total capitalization, assuming the total number of shares offered by us remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
  (2) The Revolving Credit Facility currently provides TMC and Monarch Corporation with revolving borrowing capacity up to $125.0 million and matures in July 2016. Drawings under this facility will be used for working capital and general corporate purposes. As of September 30, 2012, there were no outstanding borrowings under the Revolving Credit Facility, and there was $5.4 million in outstanding letters of credit. See “Description of Certain Indebtedness.”
  (3) Other long-term debt as of September 30, 2012 consists of project-level debt due to various land sellers and municipalities, and is generally secured by the land that was acquired. Principal payments generally coincide with corresponding project lot sales or a principal reduction schedule. As of September 30, 2012, $29.9 million of the loans were scheduled to be repaid in the next 12 months. The interest rate on $50.5 million of the loans ranged from 4.0% to 8.0% and $65.5 million of the loans were non-interest bearing.
  (4) Reflects the carrying value of $550.0 million aggregate principal amount of senior notes issued at par on April 13, 2012 and $125.0 million aggregate principal amount of additional senior notes issued at a price of 105.5% of their principal amount on August 21, 2011.
  (5) Total debt does not include letters of credit issued under the Revolving Credit Facility, the TD Facility and the HSBC Facility (as defined in “Description of Certain Indebtedness”) and $35.9 million of indebtedness of TMHF. The TD Facility provides for borrowings and letters of credit up to an aggregate amount of CAD $100.0 million, and CAD $64.2 million in letters of credit were outstanding as of September 30, 2012. Prior to its extension in November 2012, the HSBC Facility provided for letters of credit up to an aggregate amount of CAD $25.6 million, and the facility was fully drawn as of September 30, 2012. The TD Facility and the HSBC Facility are scheduled to expire on June 30, 2013. In connection with the extension of the HSBC Facility in November 2012, the availability under the facility was reduced to $24.2 million, and the facility remains fully drawn. In addition, total indebtedness does not include indebtedness of our mortgage finance subsidiary TMHF. We exclude the debt of TMHF because it is separately capitalized and its obligations are not guaranteed by TMM or any of our homebuilding entities. Total indebtedness also does not include indebtedness of unconsolidated joint ventures. See “Description of Certain Indebtedness.”

 

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DILUTION

The pro forma net tangible book value of TMHC as of September 30, 2012 would have been $         or $         per share of Class A common stock. Pro forma net tangible book value per share is determined by dividing TMHC’s pro forma tangible net worth of             , total assets less total liabilities, by the aggregate number of shares of Class A common stock outstanding assuming that all of the existing holders of TMM partnership interests exchanged their direct or indirect TMM partnership interests (along with the corresponding number of shares of Class B common stock) for shares of Class A common stock, in each case, after giving effect to the Reorganization Transactions described under “Organizational Structure.” After giving effect to the sale of the              shares of Class A common stock in this offering, at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus), and the receipt and application of the net proceeds as described under “Use of Proceeds,” TMHC pro forma net tangible book value at September 30, 2012 would have been $         or $         per share assuming that all of the existing holders of TMM partnership interests exchanged their direct or indirect TMM partnership interests (along with the corresponding number of shares of Class B common stock) for shares of Class A common stock. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $         per share and an immediate dilution to new investors of $         per share. The following table illustrates this per share dilution:

 

Assumed initial public offering price

      $                

Pro forma net tangible book value per share as of September 30, 2012

   $                   

Increase in pro forma net tangible book value per share attributable to new investors

     

Pro forma net tangible book value per share after offering

     
     

 

 

 

Dilution per share to new investors

      $     
     

 

 

 

Dilution is determined by subtracting pro forma net tangible book value per share after the offering from the initial public offering price per share.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our pro forma net tangible book value after this offering by $         and the dilution per share to new investors by $        , in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering.

The following table sets forth, on a pro forma basis, as of September 30, 2012, the number of shares of Class A common stock purchased from TMHC (assuming the conversion of all of the Principal Equityholders’ direct or indirect limited partnership interests in TMM into Class A common stock), the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, at an assumed initial public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus), before deducting estimated underwriting discounts and commissions and offering expenses payable by us assuming that all of the existing holders of TMM partnership interests exchanged their direct or indirect TMM partnership interests (along with the corresponding number of shares of Class B common stock) for shares of our Class A common stock:

 

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

Existing equityholders

               $                            

New investors

            
  

 

    

 

 

      

 

Total

        100   $                      100  
  

 

    

 

 

      

 

To the extent the underwriters’ over-allotment option is exercised, there will be further dilution to new investors.

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $         per share of Class A common stock (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors in this offering by $         and would increase (decrease) the average price per share paid by new investors by $        , assuming the number of Class A common stock offered, as set forth on the cover page of this prospectus, remains the same and without deducting the estimated underwriting discounts and offering expenses payable by us in connection with this offering.

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma consolidated statements of operations data for the fiscal year ended December 31, 2011 and the nine months ended September 30, 2012 present TMHC’s consolidated results of operations giving pro forma effect to the Acquisition and Financing Transactions, the Reorganization Transactions, this offering and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transactions occurred on January 1, 2011.

The unaudited pro forma consolidated balance sheet data as of September 30, 2012 presents our consolidated financial position giving pro forma effect to the Reorganization Transactions, this offering and the use of the estimated net proceeds from this offering as described under “Use of Proceeds,” as if such transactions occurred on September 30, 2012.

For purposes of the unaudited pro forma consolidated financial information, we have assumed that          shares of Class A common stock will be issued by TMHC (which reflects no exercise of the underwriters’ over-allotment option) at a price per share equal to the midpoint of the estimated offering price range set forth on the cover of this prospectus, and as a result, immediately following the completion of this offering, the ownership percentage represented by TMM partnership interests not held directly or indirectly by TMHC will be         %, and the net income attributable to TMM partnership interests not held directly or indirectly by TMHC will accordingly represent         % of our net income. If the underwriters’ over-allotment option is exercised in full, the ownership percentage represented by TMM partnership interests not held directly or indirectly by TMHC will be         %; and the net income attributable to TMM partnership interests not held directly or indirectly by TMHC will accordingly represent         % of our net income. If the assumed offering price increases by $1.00 per share to $            , the ownership percentage represented by TMM partnership interests not held directly or indirectly by TMHC will decrease to         % (        % if the underwriters’ over-allotment option is exercised in full). If the assumed offering price decreases by $1.00 per share to $            , the ownership percentage represented by TMM partnership interests not held directly or indirectly by TMHC will increase to         % (        % if the underwriters’ over-allotment option is exercised in full).

The unaudited pro forma consolidated financial information should be read in conjunction with the sections of this prospectus captioned “Organizational Structure,” “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma consolidated statements of operations and unaudited pro forma consolidated balance sheet.

The unaudited pro forma consolidated financial information is included for information purposes only and does not purport to reflect the results of operations or financial position of TMHC that would have occurred had we operated as a public company during the periods presented. The unaudited pro forma consolidated financial information does not purport to be indicative of our results of operations or financial position had the Acquisition and Financing Transactions, the Reorganization Transaction and this offering occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations of financial position for any future period or date.

 

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Taylor Morrison Home Corporation

Pro Forma Condensed Statement of Operations

Nine Months Ended September 30, 2012

(Unaudited)

(in thousands, except share data)

 

     TMM
January 1, 2012 to
September 30,
2012
    Pro forma
Adjustments for
the Acquisition
and Financing
Transactions

and the
Reorganization
Transactions
    Pro Forma
Adjustments
for this
Offering
    TMHC
Pro
Forma
 
          

Home closings revenue

   $ 829,221      $ —        $                    $ 829,221   

Land closings revenue

     36,102        —            36,102   

Financial services revenue

     13,705        —            13,705   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     879,028        —          $ 879,028   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of home closings

     663,656        (3,598 )(a)        660,058   

Cost of land closings

     27,881        —            27,881   

Financial services expenses

     7,667        —            7,667   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     699,204        (3,598       695,606   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     179,824        3,598          183,422   

Sales, commissions, and other marketing costs

     52,230        —            52,230   

General and administrative expenses

     41,091        (3,744 )(b)        37,347   

Equity in net earnings of unconsolidated entities

     (11,497     —            (11,497

Other income

     (1,655     —            (1,655

Loss on extinguishment of debt

     7,853        —            7,853   

Transaction expenses

     —          —            —     

Indemnification (income) expense

     13,063        (13,063 )(d)        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     78,739        12,917          99,144   

Income tax provision (benefit)

     (3,090     2,583  (e)        (507
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     81,829        10,334          99,651   

Less net income attributable to noncontrolling interests

     (72            (f)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Taylor Morrison Home Corporation

   $ 81,757      $        $        $     
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average number of Class A common shares outstanding

     —           

Basic net income (loss) per share applicable to Class A common stock(g)

     —           

Diluted weighted average number of Class A common shares outstanding

     —           

Diluted net income (loss) per share applicable to Class A common stock(g)

     —           

 

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Taylor Morrison Home Corporation

Pro Forma Consolidated Statement of Operations

Year Ended December 31, 2011

(Unaudited)

(in thousands, except share data)

 

    Predecessor           Successor     TMHC  
    North American
Business of Taylor
Wimpey plc
Combined
January 1, 2011
to July 12, 2011
          TMM
July 13, 2011 to
December 31,
2011
    Pro forma
Adjustments
for the
Acquisition
and Financing
Transactions

and the
Reorganization
Transactions
    Pro forma
Adjustments
for this
Offering
    Pro forma  

Home closings revenue

  $ 600,069         $ 731,216      $ —        $                       $ 1,331,285   

Land closings revenue

    13,639             10,657        —            24,296   

Financial services revenue

    6,027             8,579        —            14,606   
 

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    619,735             750,452        —            1,370,187   
 

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Cost of home closings

    474,534             591,891        (22,583 )(a)        1,043,842   

Cost of land closings

    7,133             8,583        —            15,716   

Financial services expenses

    3,818             4,495        —            8,313   
 

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    485,485             604,969        (22,583       1,067,871   
 

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    134,250             145,483        22,583          302,316   

Sales, commissions, and other marketing costs

    40,126             36,316        —            76,442   

General and administrative expenses

    35,743             32,883        (2,322 )(b)        66,304   

Equity in net earnings of unconsolidated entities

    (2,803          (5,247     —            (8,050

Interest expense (income)—net

    941             (3,867     1,433 (a)        (1,493

Other income

    (11,783          (1,245     —            (13,028

Other expense

    1,125             3,553        —            4,678   

Transaction expenses

    —               39,442        (39,442 )(c)        —     

Indemnification loss

    —               12,850        (12,850 )(d)        —     
 

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    70,901             30,798        75,764          177,463   

Income tax expense

    20,881             4,031        15,153 (e)        40,065   
 

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    50,020             26,767        60,611          137,398   

Less net income attributable to noncontrolling interests

    (4,122          (1,178                (f)   
 

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Taylor Morrison Home Corporation

  $ 45,898           $ 25,589      $        $        $     
 

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average number of Class A common shares outstanding

    —               —           

Basic net income (loss) per share applicable to Class A common stock(g)

    —               —           

Diluted weighted average number of Class A common shares outstanding

    —               —           

Diluted net income (loss) per share applicable to Class A common stock(g)

    —               —           

 

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Notes to Unaudited Pro Forma Consolidated Statements of Operations ($ in thousands)

 

(a) Eliminates the historical interest expense and amortization of previously capitalized interest attributable to the $500.0 million Sponsor Loan, including amortization of debt discount and premium and deferred financing fees, net, and reflects the pro forma interest expense and amortization of deferred financing fees related to those offerings. The pro forma impact is based on the issuance of $550.0 million aggregate principal amount of senior notes at par and $125.0 million of additional senior notes at a price of 105.5% of principal less issuance related fees and expenses, in each case with a stated interest rate of 7.75% per annum and a term of approximately eight years. A portion of the proceeds from the offering of the senior notes was used to retire a portion of the Sponsor Loan.
(b) Represents a decrease of approximately $2.3 million for the year ended December 31, 2011 and $3.7 million for the nine months ended September 30, 2012 of general and administrative expenses to reflect the removal of management fees to affiliates of our Principal Equityholders for general corporate and administrative expenses in the successor period. In connection with this offering, the management services agreement will be terminated. Also represents a decrease in depreciation and amortization, based on estimates of fair values and useful lives as part of the purchase price allocation for the Acquisition. The unaudited pro forma consolidated statement of operations reflects amortization of certain identifiable intangible assets and other assets based on their new basis as reflected in the purchase price allocation for the Acquisition. Depreciable and amortizable assets have been depreciated and amortized on a straight-line basis in the unaudited pro forma consolidated statement of operation.
(c) Reflects the elimination of $39.4 million of transaction costs, which included accounting, investment banking, legal and other costs recognized in connection with the Acquisition.
(d) Reflects the reversal of the receivable related to a tax indemnity from our former parent, Taylor Wimpey plc, in respect of certain matters that have since been settled. The indemnity was provided as part of the Acquisition for certain tax liabilities that existed on the date of the Acquisition.
(e) Reflects the income tax effect of the pro forma adjustments, calculated using the respective statutory tax rates of the jurisdiction where the respective adjustment relates.
(f) Eliminates net income attributable to the direct or indirect holders of partnership interests in TMM (other than TMHC).
(g) Our shares of Class B common stock do not share in our earnings and are therefore not included in net income (loss) available per share.

 

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Taylor Morrison Home Corporation

Pro Forma Condensed Consolidated Balance Sheet

September 30, 2012

(Unaudited)

(in thousands)

 

    TMHC     TMM     Pro Forma
Adjustments for the
Acquisition and
Financing Transactions
and the Reorganization
Transactions
    Pro Forma
Adjustments
for this
Offering
    TMHC  
    Historical     Historical         Pro Forma  

ASSETS

         

ASSETS:

         

Cash and cash equivalents

  $ 1      $ 412,779      $               (a)      $                    

Restricted cash

    —          2,955        —            2,955   

Real estate inventory

    —          1,275,763        —            1,275,763   

Land deposits

    —          11,927        —            11,927   

Loan receivables—net

    —          62,946        —            62,946   

Mortgage receivables

    —          38,884        —            38,884   

Tax indemnification receivable

    —          113,316        —            113,316   

Other receivables—net

    —          46,805        —            46,805   

Prepaid expenses and other assets—net

    —          94,967        —            94,967   

Investment in unconsolidated entities

    —          77,987        —            77,987   

Property and equipment—net

    —          5,995        —            5,995   

Deferred tax assets—net

    —          2,809        —            2,809   

Intangible assets—net

    —          9,166        —            9,166   

Income taxes receivable

    —          —          —            —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

  $ 1      $ 2,156,299      $                   $        $     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

         

LIABILITIES:

         

Accounts payable

  $   —        $ 88,887        —          $ 88,887   

Accrued expenses and other liabilities

    —          167,830        —            167,830   

Income taxes payable

    —          111,531        —            111,531   

Deferred tax liabilities—net

    —          —          —            —     

Customer deposits

    —          84,553        —            84,553   

Mortgage borrowings

    —          35,890        —            35,890   

Net payable to Taylor Wimpey plc

    —          —          —            —     

Loans payable and other borrowings

    —          116,397        —            116,397   

Long-term debt

    —          681,764        —            681,764   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ —        $ 1,286,852      $ —        $        $ 1,286,852   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES EQUITY:

         

Net owners’ equity

  $ —        $ 881,676      $ (881,676 )(b)           (b)      —     

Capital stock

    —          —                 (c)   

Additional paid-in capital

    1        —                 (d)   

Retained earnings

    —          —          —            —     

Accumulated other comprehensive loss

    —          (19,922     —         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total owners’ equity

    1        861,754         

Noncontrolling interests

    —          7,693         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    —          869,447         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL

  $ 1      $ 2,156,299      $                   $        $                
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet ($ in thousands)

 

(a) Reflects the receipt of the net proceeds from this offering and any termination fee payable to terminate the management services agreement. See “Certain Relationships and Related Party Transactions—Management Services Agreements.”
(b) Reflects the noncontrolling interests of the limited partners of TMM (other than TMHC) after completion of the Reorganization Transactions and this offering.
(c) Reflects the issuance of             shares of Class A common stock in this offering.
(d) Reflects the additional paid-in capital from the issuance of      shares of             our Class A common stock in this offering, net of transaction costs.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected combined financial information of TMM set forth below as of December 31, 2010 and for each of the years in the two year period ended December 31, 2010 and the period from January 1, 2011 to July 12, 2011 has been derived from the audited combined financial statements of TMM’s predecessor, the North American business of Taylor Wimpey plc (our “predecessor”), which are included elsewhere in this prospectus. The statement of operations for the years ended December 31, 2007 and 2008, and the financial data as of December 31, 2007, 2008 and 2009 have been derived from the historical financial statements of our predecessor, in each case, which are not included in this prospectus. This predecessor financial information for 2007 and 2008 was prepared by our predecessor and has not been subject to a review or audit. The 2007 period financial statements were created from data within our accounting systems currently used by TMM under the policies and practices during that time.

The selected consolidated financial information set forth below for the period from July 13, 2011 to December 31, 2011, and as of December 31, 2011, has been derived from the audited consolidated financial statements of TMM (the “successor”) included elsewhere in this prospectus. The predecessor period financial statements have been prepared using the historical cost basis of accounting that existed prior to the Acquisition in accordance with U.S. GAAP. The successor period financial statements for periods ending subsequent to July 13, 2011 (the date of the Acquisition) are also prepared in accordance with U.S. GAAP, although they reflect adjustments made as a result of the application of purchase accounting in connection with the Acquisition. As a result, the financial information for periods subsequent to the date of the Acquisition is not necessarily comparable to that for the predecessor periods presented below. In addition, the historical financial information of TMM will not necessarily be comparable to the financial information of TMHC following the Reorganization Transactions and this offering.

The selected consolidated financial information set forth below for the period from July 13, 2011 to September 30, 2011 and the nine months ended September 30, 2012 has been derived from the unaudited condensed consolidated financial statements of the successor, included elsewhere in this prospectus. Our results for the nine months ended September 30, 2012 are not necessarily indicative of the results that can be expected for the full year or any future period.

The selected consolidated financial information should be read in conjunction with the sections of this prospectus captioned “Organizational Structure,” “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

 

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    Predecessor          Successor  
    Year Ended
December 31,
    January 1
to July 12,
         July 13 to
December 31,
    July 13 to
September 30,
    Nine Months
Ended
September 30,
 
($ in thousands)   2007     2008     2009     2010     2011          2011     2011     2012  
    (unaudited)                                              (unaudited)  

Statement of Operations Data:

                   

Home closings revenue

  $ 1,860,515        1,679,503      $ 1,224,082      $ 1,273,160      $ 600,069          $ 731,216      $ 299,163      $ 829,221   

Land closings revenue

    77,121        65,123        24,967        12,116        13,639            10,657        6,177        36,102   

Financial services revenue

    —          —          13,415        12,591        6,027            8,579        3,384        13,705   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Total revenues

    1,937,636        1,744,626        1,262,464        1,297,867        619,735            750,452        308,724        879,028   

Cost of home closings

    1,604,867        1,430,276        1,003,694        1,003,172        474,534            591,891        239,740        663,656   

Cost of land closings

    29,959        79,530        17,001        6,028        7,133            8,583        5,477        27,881   

Inventory impairments

    517,487        430,891        78,241        4,054        —              —          —          —     

Financial services expenses

        6,269        7,246        3,818            4,495        2,071        7,667   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Operating gross margin

    (214,677     (196,071     157,259        277,367        134,250            145,483        61,436        179,824   

Sales, commissions, and other marketing costs

    138,270        136,730        100,534        85,141        40,126            36,316        14,342        52,230   

General and administrative expenses

    132,919        101,664        71,300        66,232        35,743            32,883        15,251        41,091   

Equity in net income of unconsolidated entities

    (11,644     (2,739     (347     (5,319     (2,803         (5,247     (488     (11,497

Interest expense (income)—net

    1,479        22,614        20,732        40,238        941            (3,867     —          —     

Other income

    (49,536     (55,633     (24,465     (10,842     (11,783         (1,245     —          (1,655

Other expense

    84,913        41,364        25,725        13,193        1,125            3,553        66        —     

Loss on extinguishment of debt

    —          —          —          —          —              —          —          7,853   

Transaction expenses

    23,192       —          —          —          —              39,442        38,278        —     

Indemnification loss

    —          —          —          —          —              12,850        (1,104     13,063   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (534,271     (439,511     (36,220     88,724        70,901            30,798        (4,909     78,739   

Income tax (benefit) expense

    97,430        (42,999     (35,396     (1,878     20,881            4,031        8,500        (3,090
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net income (loss)

    (631,700     (396,512     (824     90,602        50,020            26,767        (13,409     81,829   

Net (income) attributable to noncontrolling interests

    (11,526     (7,976     (5,138     (3,235     (4,122         (1,178     (866     (72
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to owners

  $ (643,226   $ (404,488   $ (5,962   $ 87,367      $ 45,898          $ 25,589      $ (14,275   $ 81,757   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

 

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($ in thousands)    2007      2008      2009      2010      2011      September 30,
2012
(unaudited)
 
     (unaudited)                                     

Balance Sheet Data (at period end):

                 

Cash and cash equivalents, excluding restricted cash

   $ 145,411       $ 237,267       $ 189,032       $ 165,415       $ 279,322       $ 412,779   

Land inventory

     1,809,935         1,072,147         979,562         1,073,953         1,003,482         1,275,763   

Total assets

     2,292,059         1,562,868         1,500,473         1,527,321         1,671,067         2,156,299   

Total debt

     1,281,894         1,048,535         925,863         601,126         567,020         798,161   

Total equity

     519,184         68,944         103,773         465,531         628,565         869,447   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of our financial condition and results of operations covers the nine months ended September 30, 2012 and September 30, 2011 and the years in the three-year period ended December 31, 2011.

The discussion and analysis of historical periods prior to July 12, 2011 do not reflect the significant impact of the Acquisition and Financing Transactions. You should read the following discussion together with the financial statements, including the unaudited pro forma consolidated financial information and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements whenever they appear in this prospectus. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and elsewhere in this prospectus. You should read “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

In addition, all of the historical financial data presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” do not give effect to the Reorganization Transactions and therefore may not be representative of our financial condition for periods following the Reorganization Transactions and this offering. You should read “Prospectus Summary—Summary Historical And Pro Forma Consolidated Financial And Other Information,” “Unaudited Pro Forma Consolidated Financial Information” and “Selected Consolidated Financial Data.”

References to the information or results of “unconsolidated joint ventures” refer to our proportionate share of unconsolidated homebuilding joint ventures in Canada.

Business Overview

Upon completion of this offering, we will be the sixth largest public homebuilder in North America based on 2011 revenues as reported by Hanley Wood. Headquartered in Scottsdale, Arizona, we build single-family detached and attached homes and develop land, which includes lifestyle and master planned communities. We are proud of our legacy of more than 75 years in the homebuilding industry, having originally commenced homebuilding operations in 1936. We operate under our Taylor Morrison brand in the United States and under our Monarch brand in Canada.

Our business is organized into three geographic regions: East, West and Canada, which regions accounted for 46%, 36% and 18%, respectively, of our net sales orders (excluding unconsolidated joint ventures) for the nine months ended September 30, 2012. Our East region consists of our Houston, Austin, North Florida and West Florida divisions. Our West region consists of our Phoenix, Northern California, Southern California and Denver divisions. Our Canada region consists of our operations within the province of Ontario, primarily in the GTA and also in Ottawa and Kitchener-Waterloo, and offers both single-family and high-rise communities.

In all of our markets, we build and sell a broad and innovative mix of homes across a wide range of price points. Our emphasis is on designing, building and selling homes to move-up buyers. We are well positioned in our markets with a top-10 market share (based on 2011 home closings as reported by Hanley Wood and Metrostudy and 2011 home sales as reported by Real Net Canada) in 13 of our 16 markets.

During the nine months ended September 30, 2012, we closed 2,586 homes, comprised of 1,880 homes in the United States and 706 in Canada, including 204 homes in unconsolidated joint ventures, with an average sales price across North America of $347,000. During the same period, we generated $879.0 million in revenues,

 

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$81.8 million in net income and $125.1 million in Adjusted EBITDA (for a discussion of how we calculate Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income attributable to owners, see footnote 4 in “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Information”). In the United States, for the nine months ended September 30, 2012, our sales orders increased approximately 47% as compared to the same period in 2011, and we averaged 3.0 sales per active selling community per month compared to an average of 1.7 sales per active selling community per month for the same period in 2011. As of September 30, 2012, we offered homes in 122 active selling communities and had a backlog of 4,205 homes sold but not closed, including 903 homes in unconsolidated joint ventures, with an associated backlog sales value of approximately $1.5 billion.

In 2011, we closed 3,920 units, comprised of 2,327 units in the United States and 1,593 units in Canada, including 55 units in unconsolidated joint ventures, with a Company-wide average sales price of $347,000. During the same period, we generated $1.4 billion in revenues, $76.8 million in net income and $187.2 million in Adjusted EBITDA, in each case based on the arithmetically combined predecessor/successor periods. As of December 31, 2011, we offered homes in 135 active selling communities and had a backlog of 2,965 homes sold but not closed, including 781 in unconsolidated joint ventures, with an associated backlog sales value of approximately $982.5 million.

We generate revenue primarily through sales of detached and attached homes and condominium units as well as through sales of land and the operations of our mortgage subsidiary, TMHF. We recognize revenue on detached and attached homes when the homes are completed and delivered to the buyers. We recognize revenue on the majority of our high-rise condominiums at the time of occupancy. We also recognize revenue when buyer deposits are forfeited.

Our primary costs are the acquisition of land in various stages of development and the construction costs of the homes and condominiums we sell (including capitalized interest, real estate taxes and related development costs). Home construction costs are accumulated and charged to cost of sales based on the construction cost of the home being sold. Land acquisition, development, interest, taxes, overhead and condominium construction costs are allocated to homes and units using methods that approximate the relative sales value.

Unlike most of our public homebuilding peers, as of the date of the Acquisition in July 2011, the balance sheet carrying value of our entire U.S. and Canadian inventory was adjusted to fair market value. Giving effect to the Acquisition-related purchase accounting adjustments and previous impairments, the carrying value of our U.S. inventory represented 52% of its original cost. We believe the combination of disciplined inventory valuation, coupled with recent high-quality land acquisitions, results in a cost basis in land that will contribute to our continued profitability and strong margins.

Factors Affecting Comparability of Results

You should read this Management’s Discussion and Analysis of our Financial Condition and Results of Operations in conjunction with our historical consolidated financial statements included elsewhere in this prospectus. Below are the period-to-period comparisons of our historical results and the analysis of our financial condition. In addition to the impact of the matters discussed in “Risk Factors,” our future results could differ materially from our historical results due to a variety of factors, including the following:

Liquidity

As a result of the Acquisition, our former parent Taylor Wimpey plc no longer provides financing support for our operations. We therefore rely on our ability to finance our operations by generating operating cash flows, borrowing under our Revolving Credit Facility and our existing Canadian credit facilities or accessing the debt and equity capital markets. We also rely on our independent ability to obtain performance, payment and completion surety bonds, and letters of credit to finance our projects. We believe that we can fund our current

 

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and foreseeable liquidity needs from the cash generated from operations and borrowings under our Revolving Credit Facility and our existing Canadian letter of credit facilities. See “—Overview of Capital Resources and Liquidity.”

The Acquisition and Financing Transactions and Basis of Presentation

On July 13, 2011, TMM and its subsidiaries acquired 100% of the issued share capital of TMC and Monarch Corporation for aggregate cash consideration of approximately $1.2 billion. The Acquisition has been accounted for as a purchase under ASC Topic 805, “Business Combinations.” As a result of the change in ownership, our historical financial data for periods prior to the July 13, 2011 Acquisition (the predecessor periods) are derived from the historical financial statements of our predecessor, the North American business of Taylor Wimpey plc, which financial statements have been prepared using the historical cost basis of accounting that existed prior to the Acquisition. Our financial statements for periods from and after the July 13, 2011 Acquisition (the successor period) are derived from the financial statements of TMM, which already reflect adjustments made as a result of the application of purchase accounting in connection with the Acquisition. Therefore, the financial information for the predecessor periods is not comparable with that for the successor period.

In connection with the Acquisition, we incurred indebtedness, including $625.0 million of borrowings under the Sponsor Loan, $125.0 million of which was repaid through working capital in August 2011 pursuant to our recapitalization plan, $350.0 million of which was refinanced by the offering of the senior notes and $150.0 million of which was retired by the lenders and was contributed or transferred to a subsidiary of TMM in return for additional equity in TMM. We also have the ability to borrow under our Revolving Credit Facility and Canadian letter of credit facilities from time to time as warranted by business needs. Since we operated largely as a stand-alone company prior to the Acquisition, we have not incurred significant incremental general and administrative expenses as a result of the separation from Taylor Wimpey plc. Additional cost savings within the organization may be achieved in the future. However, we cannot accurately predict, and there can be no assurances as to, the extent of any such savings.

Certain results for 2011 are presented to reflect the arithmetically combined historical results from the predecessor period from January 1, 2011 to July 12, 2011 and the successor period from July 13, 2011 to December 31, 2011. This presentation may yield results that are not directly comparable on a period-to-period basis with those in predecessor periods because of differences in accounting basis due to the change of ownership resulting from the Acquisition. For purposes of this prospectus, however, we believe that it is most meaningful to present its results of operations for 2011 in this manner. The combined historical results for 2011 are not necessarily indicative of what the results for the period would have been had the Acquisition actually occurred as of January 1, 2011.

Home closings and land sales that occurred during the predecessor period do not reflect any purchase accounting adjustments to costs of home closings and costs of land closings, while home closings and land sales occurring during the successor period do reflect such purchase accounting adjustments to the cost of home closings and cost of land closings. The carrying values of home and land inventory were both increased and decreased in adjusting their carrying values to fair market value as of the closing of the Acquisition through the application of purchase accounting. Such adjustments may result in higher or lower costs of home and land closings in the successor period and future periods as compared to the predecessor period. The unaudited pro forma consolidated statement of operations does not make any purchase accounting adjustments to the cost of home closings and cost of land closings for transactions that occurred prior to the date of the Acquisition and as a result the unaudited pro forma consolidated statement of operations data for the year ended December 31, 2011 will not be fully comparable with either predecessor or successor periods.

You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the information provided in “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Information,” “Unaudited Pro Forma Consolidated Financial Information” and our historical consolidated financial statements included in this prospectus.

 

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Non-GAAP Measures

Certain results for 2011 are presented to reflect the arithmetically combined historical results from the predecessor period from January 1, 2011 to July 12, 2011 and the successor period from July 13, 2011 to December 31, 2011. This presentation may yield results that are not directly comparable on a period-to-period basis with those in predecessor periods because of differences in accounting basis due to the change of ownership resulting from the Acquisition. For purposes of this prospectus, however, we believe that it is most meaningful to present its results of operations for 2011 in this manner. The combined historical results for 2011 are not necessarily indicative of what the results for the period would have been had the Acquisition actually occurred as of January 1, 2011.

In addition to the results reported in accordance with U.S. GAAP, we have provided information in this prospectus relating to “adjusted home closings gross margin,” “EBITDA” and “Adjusted EBITDA.” References to the information or results of “unconsolidated joint ventures” refer to our proportionate share of unconsolidated joint ventures in Canada and are included as non-GAAP measures because they are accounted for under the equity method.

Adjusted home closings gross margin

We calculate adjusted home closings gross margin from U.S. GAAP home closings gross margin by adding impairment charges attributable to the write-down of operating communities and the amortization of capitalized interest through cost of home closings. We believe this measure is relevant and useful to investors for evaluating our performance. This measure is considered a non-GAAP financial measure and should be considered in addition to, rather than as a substitute for, the comparable U.S. GAAP financial measure as measure of our operating performance. Although other companies in the homebuilding industry report similar information, the methods used may differ. We urge investors to understand the methods used by other companies in the homebuilding industry to calculate gross margins and any adjustments to such amounts before comparing our measures to that of such other companies.

Adjusted EBITDA

Adjusted EBITDA measures performance by adjusting net income (loss) to exclude interest, income taxes, depreciation and amortization (“EBITDA”), management fees for certain legal, administrative and other related back-office functions paid prior to the Acquisition to Taylor Wimpey plc, our former parent, and management fees to our Principal Equityholders following the Acquisition, land inventory impairments, lot option write-offs related to non-exercised lot options, stock option expenses related to stock options linked to the stock of Taylor Wimpey plc, non-cash compensation expenses, the reversal of the 2007 severance and restructuring accrual related to the merger of our predecessor companies (Taylor Woodrow and Morrison Homes), royalties for certain intellectual property rights paid to Taylor Wimpey plc prior to the Acquisition, expenses related to the early extinguishment of debt and transaction fees, expenses and indemnification losses related to the Acquisition. Management believes that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted EBITDA provides an indicator of general economic performance that is not affected by fluctuations in interest rates or effective tax rates, or levels of depreciation or amortization. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. Furthermore, the agreements governing our indebtedness contain covenants and other tests based on metrics similar to Adjusted EBITDA. Other companies may define Adjusted EBITDA differently and, as a result, our measure of Adjusted EBITDA may not be directly comparable to Adjusted EBITDA of other companies. Although we use Adjusted EBITDA as a financial measure to assess the performance of our business, the use of Adjusted EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with U.S. GAAP as a measure of performance. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an indication that

 

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our future results will be unaffected by unusual or nonrecurring items. Our EBITDA-based measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

 

   

they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments, including for the purchase of land;

 

   

they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and our EBITDA-based measures do not reflect any cash requirements for such replacements or improvements;

 

   

they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;

 

   

they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

 

   

they do not reflect limitations on our costs related to transferring earnings from our subsidiaries to us; and

 

   

other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, our EBITDA-based measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using our EBITDA-based measures along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. These U.S. GAAP measurements include operating income (loss), net income (loss), cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in our EBITDA-based measures.

Our EBITDA-based measures are not intended as alternatives to net income (loss) as indicators of our operating performance, as alternatives to any other measure of performance in conformity with U.S. GAAP or as alternatives to cash flow provided by operating activities as measures of liquidity. You should therefore not place undue reliance on our EBITDA-based measures or ratios calculated using those measures. Our U.S. GAAP-based measures can be found in our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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Table of Contents

Results of Operations

The following table sets forth our results of operations for the periods indicated:

 

    Predecessor          Successor     TMHC  
    Year Ended
December 31,
    January 1
to
July 12,

2011
         July 13 to
December 31,

2011
    July 13 to
September 30,

2011
    Nine Months
Ended
September 30,

2012
    Pro Forma
Nine Months
Ended
September 30,

2012
    Pro Forma
Year Ended
December 31,

2011
 
(in thousands)   2009     2010                   
                                       (unaudited)     (unaudited)     (unaudited)  

Statement of Operations Data:

                   

Home closings revenue

  $ 1,224,082      $ 1,273,160      $ 600,069          $ 731,216      $ 299,163      $ 829,221      $ 829,221      $ 1,331,285   

Land closings revenue

    24,967        12,116        13,639            10,657        6,177        36,102        36,102        24,296   

Financial services revenue

    13,415        12,591        6,027            8,579        3,384        13,705        13,705        14,606   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,262,464        1,297,867        619,735            750,452        308,724        879,028        879,028        1,370,187   

Cost of home closings

    1,003,694        1,003,172        474,534            591,891        239,740        663,656        660,058        1,043,842   

Cost of land closings

    17,001        6,028        7,133            8,583        5,477        27,881        27,881        15,716   

Inventory impairments

    78,241        4,054        —              —          —          —          —          —     

Financial services expenses

    6,269        7,246        3,818