424B4 1 d480129d424b4.htm 424B4 424B4
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Filed Pursuant to Rule 424(B)(4)
Registration No. 333-185269
Registration No. 333-187829

 

28,572,000 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 28,572,000 shares of its Class A common stock. This is our initial public offering and no public market exists for our shares. The initial public offering price is $22.00 per share.

We have been approved to list the Class A common stock on the New York Stock Exchange under the symbol “TMHC”.

 

 

After the completion of this offering, our Principal Equityholders (as defined in this prospectus) will own a majority of the combined voting power of our common stock, will have the ability to elect a majority of our board of directors and will have substantial influence over our governance.

Investing in the Class A common stock involves risks. See “Risk Factors” beginning on page 25.

PRICE $22.00 PER SHARE

 

     Price to Public      Underwriting
Discounts and
Commissions
     Proceeds to
Company(1)
 

Per Share

   $ 22.00       $ 1.32       $ 20.68   

Total

   $ 628,584,000       $ 37,715,040       $ 590,868,960   

 

  (1) We intend to use approximately $386.6 million of the proceeds plus $7.3 million of cash on hand to purchase a portion of the existing investments of the Principal Equityholders and other equityholders in our company.

TMHC has granted the underwriters the right to purchase an additional 4,285,800 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 April 12, 2013 (“T+2”).

 

 

 

Credit Suisse   Citigroup

 

Deutsche Bank Securities   Goldman, Sachs & Co.   J.P. Morgan   Zelman Partners LLC

 

 

 

HSBC   Wells Fargo Securities  

FBR

 

JMP Securities

Prospectus dated April 9, 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 May 4, 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.” References to “TPG Global” are to TPG Global, LLC, and references to “TPG” are to TPG Global and its affiliates. References to “Oaktree” are to investment funds managed by Oaktree Capital Management, L.P. or their respective subsidiaries that are invested in TMM prior to this offering. References to “JH” are to investment funds managed by JH Investments Inc. or its subsidiary that are invested in TMM prior to this offering and will be directly invested in New TMM (as defined elsewhere in this “Prospectus Summary”) or indirectly invested in New TMM through the TPG and Oaktree holding vehicles (as described elsewhere in this “Prospectus Summary”).

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. Unless otherwise indicated, 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 one of the largest public homebuilders in North America. 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 and Darling Homes brands 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%, 37% and 17%, respectively, of our net sales orders (excluding unconsolidated joint ventures) for the year ended December 31, 2012. Our East region consists of our Houston, Dallas, 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.

 

 

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Throughout our markets, we build and sell a broad mix of homes across diverse price points ranging from $120,000 to more than $1,000,000. 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 2012 home closings as reported by Hanley Wood and 2012 home sales as reported by Real Net Canada) in 15 of our 19 total markets.

As explained in greater detail in this prospectus summary, our management believes our business is distinguished by our:

 

   

strong historical financial performance and industry-leading margins;

 

   

solid balance sheet with sufficient liquidity with which to execute our growth plan;

 

   

significant land inventory, representing approximately eleven years of land supply based on our trailing twelve-month closings, carried at a low cost basis;

 

   

top-10 market share in historically high-growth homebuilding markets;

 

   

profitable Canadian business;

 

   

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

 

   

reputation for quality and customer service, based on customer surveys.

During the year ended December 31, 2012, we closed 4,014 homes, consisting of 2,933 homes in the United States and 1,081 homes in Canada, including 232 homes in unconsolidated joint ventures, with an average sales price across North America of $364,000. During the same period, we generated $1.4 billion in revenues, $430.8 million in net income and $228.8 million in Adjusted EBITDA (for a discussion of how we calculate Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see footnote 6 under the caption “—Summary Historical and Pro Forma Consolidated Financial and Other Information”). In the United States, for the year ended December 31, 2012, our sales orders increased approximately 45.8% as compared to 2011, and we averaged 2.9 sales per active selling community per month compared to an average of 1.7 sales per active selling community per month in 2011. As of December 31, 2012, we offered homes in 128 active selling communities and had a backlog of 4,112 homes sold but not closed, including 909 homes in unconsolidated joint ventures, with an associated backlog sales value of approximately $1.4 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 2012. Similarly, total new home starts averaged 1.55 million per year from 1960 to 2007 and then declined to an average of 687,000 per year from 2008 to 2012.

 

 

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Total New Home Starts

(in thousands)

 

LOGO

We believe that a 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 recent positive economic and demographic factors observed by our management 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 January 2013 were estimated at a seasonally adjusted annual rate of 925,000, representing an approximate 35% increase over the January 2012 estimate of 684,000. The increase in new building permits is consistent with an average of 37% and 58% year-over-year growth in new home orders and backlog, respectively, reported by the top 10 public homebuilders (ranking based on 2011 revenues reported by Hanley Wood), 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, with the strongest price increases in the last seven years occurring in the fourth quarter of 2012. According to the National Association of Realtors, U.S. median home prices improved on a year-over-year basis in 133 out of 152 Metropolitan Statistical Areas (“MSA”) in the fourth quarter of 2012. Based on data from the U.S. Census Bureau, new home prices increased approximately 10% year-over-year in the fourth quarter of 2012.

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. For instance, the Canadian housing market has 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.

 

 

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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, the Canada Mortgage and Housing Corporation (“CMHC”) projected in its First Quarter 2013 Housing Market Outlook for Ontario housing starts to moderate to approximately 60,800 in 2013 before modestly increasing to 62,900 in 2014 and for average home prices in Ontario to remain relatively flat at approximately CAD$382,200 in 2013 and CAD$390,000 in 2014.

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 scalable operating platform, which we believe positions us well to take advantage of the continued recovery we expect in the U.S. housing industry. We are among a select few of our public homebuilding peers to be profitable in each of 2010, 2011 and 2012. We generated net income of $90.6 million in 2010, $76.8 million in 2011 and $430.8 million in 2012. Our pre-tax income margin for the year ended December 31, 2012 was 11.9%, which was the highest among the top 10 largest publicly traded U.S. homebuilders for fiscal 2012, based on data from the public filings of those homebuilders.

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.

Solid balance sheet with sufficient liquidity for growth

We are well-positioned with a solid balance sheet and sufficient liquidity with which to service our debt obligations, support our ongoing operations and take advantage of growth opportunities as the expected recovery in the U.S. housing market continues. At December 31, 2012, on a pro forma basis, we would have had $836.3 million in outstanding indebtedness and a net debt-to-net book capitalization of 28.4% (or total debt-to-total book capitalization of 37.5%). Also at December 31, 2012, on a pro forma basis, we would have had $283.3 million of unrestricted cash and approximately $163.8 million of availability under our senior secured revolving credit facility (the “Revolving Credit Facility”). Less than 26% of our approximately $1.0 billion of currently 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.

 

 

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Significant land inventory carried at a low cost basis

We continue to benefit from a sizeable and well-located existing land inventory. As of December 31, 2012, we owned or controlled 43,987 lots, including unconsolidated joint venture lots, which equated to approximately eleven years of land supply based on our trailing twelve-month closings of 4,014 homes. Our land inventory reflects our balanced approach to investments, yielding a distribution of finished lots available for near-term homebuilding operations and strategic land positions to support future growth. Our significant land inventory allows us to be selective in identifying new land acquisition opportunities and 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.

Since January 1, 2009, we have spent approximately $1.0 billion on new land purchases, acquiring 25,532 lots, of which 21,334 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. We believe our local, well-established relationships with land sellers, brokers and investors and our knowledge of the local markets position us to be quick to market both to identify land and to gain access to such sellers, brokers and investors. We also believe that 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 focused geographic footprint positions us to participate in the expected recovery in the U.S. housing market. The U.S. housing market experienced a significant downturn from 2006 to 2011 but has recently shown signs of recovery. We currently operate exclusively in states benefiting 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 35% of the 514,200 building permits issued for privately owned homes in 2012.

 

 

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Our land inventory is concentrated in markets that have experienced significant improvement in home prices. We believe that our geographic footprint enables us to capture the benefits of expected increasing home volumes and home prices as the U.S. housing recovery continues and demand for new homes increases. The following table sets forth, for each of our U.S. markets, information relating to growth in median existing home price, projected growth in employment, projected growth in single-family permits, home affordability and our market ranking.

 

U.S. Market

   Median existing
home price 1-yr

growth rate as of 
Dec. 31, 2012
    Employment
growth
2012-2014
estimated CAGR
    Single-Family
permit growth
2012-2014
estimated CAGR
    Affordability
ratio (1)

as of
Dec. 31, 2012
    2012
Taylor Morrison
market share
ranking (2)
 

Austin

     5.3     3.8     30.1     70.2     6   

Dallas (3)

     6.2        3.0        40.3        79.6        16   

Denver

     6.2        2.4        57.5        66.4        9   

Fort Myers(4)

     15.7        3.2        70.0        83.2        10   

Houston (3)

     4.7        2.9        20.3        75.7        7   

Jacksonville

     0.3        1.9        46.9        84.0        8   

Naples(5)

     1.6        3.2        59.5        53.3        7   

Orange County

     2.3        2.1        55.5        47.3        4   

Orlando

     3.8        2.6        56.9        81.7        8   

Phoenix

     18.6        2.5        95.3        79.8        4   

Sacramento

     2.6        2.2        83.5        73.1        4   

San Diego

     0.9        2.2        70.7        49.0        14   

San Francisco

     4.8        2.2        54.1        33.6        11   

San Jose

     8.7        2.1        43.6        38.8        6   

Sarasota(5)

     9.7        2.5        55.8        73.6        6   

Tampa

     4.9        1.9        51.3        77.0        4   

 

          

TM markets average

     6.0 %      2.5 %      55.7 %      66.6 %      8   

US average

     3.1        2.0        52.9        68.8        N/A   

 

Source: Hanley Wood.

(1) The affordability ratio is the percentage of households that can afford the median-priced existing home. The calculation assumes a 20% down payment and a 30-year fixed rate mortgage at the Freddie Mac mortgage rate published just prior to period end and assumes that total monthly payments (including mortgage, property taxes and insurance) cannot exceed 30% of gross household income.
(2) Market rankings based on number of home closings between January 1, 2012 and December 31, 2012.
(3) Includes the historical business of Darling Homes for periods prior to its acquisition by us on December 31, 2012. See “—Recent Developments.”
(4) Based on Hanley Wood data as of November 30, 2012 (most recent publication for this market).
(5) Based on Hanley Wood data as of October 31, 2012 (most recent publication for this market).

We are well-positioned within our markets. As set forth in the table above, we have a top-ten market share in 13 of our 16 U.S. 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 since that time has become a recognized 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

 

 

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important role in delivering growth, profitability and cash flow, which helped us withstand the recent downturn in the U.S. housing industry. As of December 31, 2012, Monarch Corporation had $732.9 million in backlog of homes sold and to be delivered in 2013 through 2016, including $313.3 million of unconsolidated joint venture backlog.

Monarch Corporation has six wholly owned and joint venture high-rise developments in the GTA which are expected to close and recognize revenue in 2013 and 2014 and which have sold in excess of 95% of the aggregate number of the homes offered in those developments. 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 home 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 we believe 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 relationships with several 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 competitive advantage relative to homebuilders without captive mortgage units, since many of our buyers seek an integrated home buying experience. While we believe many other homebuilders with a captive mortgage company use a single lender, our multi-lender platform provides us with the ability to leverage a broad range of

 

 

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products and underwriting and pricing options for the benefit of our home buyers. Therefore, 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 process, provides us better visibility in converting our sales order backlog into closings and is a source of incremental revenues and profitability. TMHF outperforms a number of builder-affiliated mortgage companies, as evidenced by our industry-leading capture rate of 84% in 2012 (compared to an average of 73% among the top 13 public U.S. homebuilders, based on the most recent fiscal year data). TMHF also had one of the lowest sales cancellation rates among our publicly traded peers with mortgage units, which was 15% in 2012, compared to an average of 19% among the top 13 public U.S. homebuilders, based on the most recent fiscal year data.

Highly experienced management team

We benefit from an 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, our management team chose to retain 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 believe 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 50% in 2013 and approximately 30% in 2014. We also currently own or have an option to purchase over 95% of the land on which we expect to close homes during 2013 and 2014. A significant portion of our land supply was purchased at low price points during the recent downturn in the housing cycle. Although future downturns may occur, 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 land sellers, brokers and investors to seek to obtain the “first look” at quality land opportunities. We expect to continue to allocate capital to pursue creative deal structures and other opportunities with the goal of achieving 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, to enhance our margin performance and to control the timing of delivery of lots. Unlike many of our competitors, we believe we are able to increase the value of our land portfolio through the

 

 

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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 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 segmentation 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 website which provides innovative tools that are designed to enhance our customers’ home buying experience.

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. In order to deliver aspirational homes, we purchase well-located land and focus on developing attractive neighborhoods and communities 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, such as the 2009 award for “Best Customer Experience” by a large homebuilder in the United States by AVID Awards and Builder magazine’s “Builder’s Choice” Hall of Fame award in 2009.

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. For instance, in December 2012 we acquired the assets of Darling Interests, Inc., a Texas-based home builder. Darling builds homes under the Darling Homes brand for move-up buyers in approximately 24 communities in the Dallas-Fort Worth Metroplex and 20 communities in the Greater Houston Area markets. 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 cycles can be significant. We seek to maximize shareholder value over the long-term and therefore operate our business to mitigate risks from downturns in the market and to position ourselves to capitalize on upturns in the

 

 

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market: we seek to control costs, maintain a solid 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.

Risks Associated with our Business and Growth Strategy

While we have set forth our competitive strengths and our strategy above, the homebuilding industry is a competitive industry, and we face certain challenges. The homebuilding industry has historically been subject to significant volatility. We may be at a competitive disadvantage with regard to certain of our national competitors whose operations are more geographically diversified than ours, as these competitors may be better able to withstand any future regional downturn in the housing market. In addition, a number of our national competitors are larger than we are and may have greater financial and operational resources than we do. These factors may give our competitors an advantage in marketing their products, securing materials and labor at lower prices and allowing their homes to be delivered to customers more quickly and at more favorable prices. This competition could reduce our market share and limit our ability to expand our business as we have planned.

Below is a summary of certain key risk factors and a description of certain challenges we face in our business that you should consider in evaluating an investment in shares of our Class A common stock:

 

   

the U.S. housing market may not recover to the extent or on the timetable we expect;

 

   

downturns or cyclical economic conditions affecting the housing industry in the particular geographic markets in which we operate;

 

   

competition in our industry, which is significant;

 

   

failure to manage land acquisition strategies;

 

   

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

 

   

our inability to continue to source land at attractive prices;

 

   

increases in homebuyers’ financing costs;

 

   

increases in the cancellation rates of existing agreements of sale with our homebuyers;

 

   

increases in home warranty and construction defect claims made in the ordinary course of our business;

 

   

cost overruns in the land acquisition, development and construction processes;

 

   

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.

The above list is not exhaustive, and the additional risks and challenges we face are described under the caption “Risk Factors” beginning on page 25 of this prospectus. These risks and challenges or other unforeseen events could impair our ability to operate our business or inhibit our strategic plans.

 

 

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The Reorganization Transactions

Prior to this offering and the Reorganization Transactions, our business and operations were conducted by subsidiaries of TMM. In the Reorganization Transactions, the existing holders of limited partnership interests in TMM, including the Principal Equityholders (as described below) and certain members of our management and our board, will, through a series of transactions, contribute their limited partnership interests in TMM to a new limited partnership, TMM Holdings II Limited Partnership, formed under the laws of the Cayman Islands (“New TMM”), such that TMM and the general partner of TMM will become wholly-owned subsidiaries of New TMM. TMHC will, through a series of transactions, become the sole owner of the general partner of New TMM, and TMHC will use the net cash proceeds received in this offering to purchase common partnership units in New TMM (“New TMM Units”).

Immediately prior to the Reorganization Transactions, partnership interests in TMM were divided into three categories of units: Class A Units, Class J Units and Class M Units. The Principal Equityholders and certain members of our management and our board held all of the Class A Units. JH, one of the Principal Equityholders, held all of the Class J Units. Certain members of our management and our board held all of the Class M Units. Holders of the Class J Units and Class M Units were not entitled to receive distributions unless specified return thresholds were met and all capital contributed to TMM by holders of Class A Units has been returned. Class M Units were issued as long-term incentive compensation for members of our management and our board and were subject to time-vesting or performance-vesting.

In the Reorganization Transactions:

 

   

TPG and Oaktree will each form a holding vehicle;

 

   

Our Principal Equityholders and members of our management and our board will directly or indirectly exchange all of their respective Class A Units, Class J Units and performance-vesting Class M Units in TMM on a one-for-one basis for new equity interests of the TPG and Oaktree holding vehicles with terms that are substantially the same as the Class A Units (other than certain Class A Units exchanged by JH as described below), Class J Units (other than with respect to certain vesting conditions) and performance-vesting Class M Units in TMM surrendered for exchange;

 

   

JH will exchange a portion of its Class A Units in TMM for New TMM Units to be held by JH;

 

   

Members of our management and our board will exchange all of their time-vesting Class M Units in TMM for New TMM Units with vesting terms that are substantially the same as those of the Class M Units surrendered for exchange;

 

   

The vesting terms of the equity interests in the TPG and Oaktree holding vehicles and New TMM Units received by members of our management and our board will be identical to the current vesting terms of the Class M Units of TMM prior to their exchange. No equity interests in the TPG and Oaktree holding vehicles or New TMM Units held by members of our management and our board will vest as a result of the completion of this offering;

 

   

New TMM will directly or indirectly acquire all of the Class A Units, Class J Units and Class M Units outstanding prior to the Reorganization Transactions; and

 

   

The TPG and Oaktree holding vehicles will directly or indirectly acquire New TMM Units.

Immediately following the consummation of the Reorganization Transactions, the limited partners of New TMM will consist of TMHC, the TPG and Oaktree holding vehicles, JH and certain members of our management and our board. The number of New TMM Units issued to each of the TPG and Oaktree holding

 

 

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vehicles, JH and members of our management and our board as described above will be determined based on a hypothetical cash distribution by TMM of our pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM, the initial public offering price and the price per share paid by the underwriters for shares of our Class A common stock in this offering.

For example, based on the initial public offering price of $22.00 per share, for a holder of time-vesting Class M Units, our pre-IPO valuation would be $2,529.3 million (calculated using the price paid per share by the underwriters in this offering of $20.68). Based on these facts, a member of management who would be entitled to receive $200,000 in respect of such manager’s time-vesting Class M Units in a hypothetical distribution of the pre-IPO value of TMM would receive 9,091 New TMM Units in the Reorganization Transactions (determined by dividing $200,000 by the initial public offering price per share in this offering).

The TPG and Oaktree holding vehicles, JH and members of our management and our board will also be issued a number of shares of TMHC’s Class B common stock equal to the number of New TMM Units that each will receive.

Following the Reorganization Transactions, this offering and the application of the net proceeds therefrom, TMHC will hold 23.4% of the New TMM Units, the TPG and Oaktree holding vehicles will each hold an aggregate of 37.4% of the New TMM Units, JH will hold 0.5% of the New TMM Units and members of our management and our board will directly hold an aggregate of 1.3% of the New TMM Units.

TMHC will control the sole general partner of New TMM, which will control TMM. TMHC will directly or indirectly control the business and affairs of New TMM, TMM and its subsidiaries. TMHC will consolidate the financial results of New TMM, TMM and its subsidiaries, and TMHC’s net income (loss) will be reduced by a noncontrolling interest expense to reflect the entitlement of the holders of New TMM Units (other than TMHC) to a portion of New 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 total voting power of the outstanding Class A common stock will be proportional to the percentage of New TMM Units held by TMHC, and the total voting power of the outstanding Class B common stock will be equal to the remaining percentage of New TMM Units not held by TMHC. New TMM Units held by the TPG and Oaktree holding vehicles, JH and certain members of our management and our board described above together with a corresponding number of Class B shares of common stock of TMHC may be exchanged for shares of Class A common stock of TMHC on a one-for-one basis, subject to certain adjustments and according to the terms of the Exchange Agreement to which TMHC, New TMM, the TPG and Oaktree holding vehicles, JH and certain members of our management and our board will be a party upon completion of this offering.

 

 

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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. 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 New TMM Units.

 

 

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Our Principal Equityholders

In this prospectus, we refer to (i) the affiliates of TPG that are invested in TMM prior to this offering, (ii) Oaktree and (iii) JH, collectively, as our “Principal Equityholders.” Following the Reorganization Transactions and this offering, the Principal Equityholders, through the TPG and Oaktree holding vehicles, will own a majority of the combined voting power of our common stock and will be parties to a stockholders agreement pursuant to which they agree to vote for each other’s nominees to the TMHC board of directors. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange on which the shares of Class A common stock will be listed. See “Principal Stockholders.”

TPG

TPG is a leading global private investment firm founded in 1992 with $54.7 billion of assets under management as of December 31, 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 $77.1 billion in assets under management as of December 31, 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.

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.

In connection with the Reorganization Transactions, we intend to enter into a stockholders agreement with the TPG and Oaktree holding vehicles and JH. 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 (including requiring that certain actions and significant business decisions be approved by directors nominated by TPG and Oaktree). Under the stockholders agreement, the TPG and Oaktree holding vehicles will be entitled to nominate a majority of the members of the Board of Directors of TMHC and will agree to vote for each other’s board nominees. The TPG and Oaktree holding vehicles, JH and TMHC will also enter into governance agreements with each of Taylor Morrison Holdings and Monarch Communities. See “Management—Board Structure” and “Certain Relationships and Related Transactions—Stockholders Agreement” and “—Governance Agreements.”

 

 

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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 Woodrow Holdings (USA), Inc. (now known as Taylor Morrison Communities, Inc. or “TMC”) and Monarch Corporation (together with TMC, the “Operating Subsidiaries”) from Taylor Wimpey plc for aggregate cash consideration of approximately $1.2 billion. TMC is currently held indirectly by TMM via Taylor Morrison Holdings. 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 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 December 27, 2012, we further amended the Revolving Credit Facility to provide for $225.0 million in aggregate revolving credit commitments.

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 affiliates of TPG 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 an additional $125.0 million aggregate principal amount of 7.750% senior notes due 2020 at an issue price of 105.5%.

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.”

Recent Developments

Selected 2013 Operations Data

Data for the First Two Months of 2013

Based on currently available information, we believe our U.S. net sales orders for the two months ended February 28, 2013 totaled 888 homes, representing a 71% increase as compared to 519 homes in the same period in 2012. Our Canadian net sales orders for the two months ended February 28, 2013 totaled 88 (including 9 homes in unconsolidated joint ventures) homes, representing a 39% decline as compared to 145 homes (including 42 homes in unconsolidated joint ventures) in the same period in 2012. We believe our total net sales orders totaled 976 homes for the two months ended February 28, 2013, representing a 47% increase as compared to 664 homes in the same period in 2012. We estimate that we had 498 home closings in the United States for the two months ended February 28, 2013, an 84% increase over the 270 home closings in same period in 2012, and 539 home closings on a total basis, a 40% increase over the 385 home closings in same period in 2012. Our home closings in Canada for the two months ended February 28, 2013 decreased 64% to 41 (including two homes in unconsolidated joint ventures) over the 115 home closings (including seven homes in unconsolidated joint ventures) in same period in 2012.

 

 

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Also based on currently available information, we believe that our U.S. backlog of homes sold but not closed as of February 28, 2013 increased by 128% to 2,254 homes as compared to our U.S. backlog of 990 homes sold but not closed as of February 29, 2012. Our Canadian backlog as of February 28, 2013 decreased by 7% from a backlog of 2,468 homes (including 1,029 homes in unconsolidated joint ventures) as of February 29, 2012 to a backlog of 2,293 (including 914 homes in unconsolidated joint ventures). We believe our total backlog was 4,547 homes as of February 28, 2013, a 31% increase over our total backlog of 3,458 homes as of February 29, 2012. We believe that the sales value of our U.S. backlog increased by 157% to $896.0 million, that the sales value of our Canadian backlog decreased by 7% to $735.5 million (including $307.2 million in unconsolidated joint ventures) and that the sales value of our total backlog increased by 43% to $1.6 billion, in each case as of February 28, 2013 compared to February 29, 2012. We believe the decline in net sales orders, backlog and closings in Canada are temporary and the result of limited Monarch product availability in 2012 in our single-family communities as well as a reduction in our active high-rise developments in their prime selling phases available to the market. The GTA has also seen a moderation in sales activity compared to the prior periods.

Data for the First Quarter of 2013

We expect net sales orders, including our share of unconsolidated joint ventures sales orders, to have increased approximately 46%, to 1,697 in the first quarter of 2013 as compared to 1,161 in the first quarter of 2012. We expect net sales orders in our U.S. operations to have increased approximately 68% for the first quarter of 2013, partially offset by a 38% sales order decline in our Canadian operations. We expect our overall monthly absorption pace to have been 3.3 net sales orders per community, including our share of unconsolidated joint ventures, in the first quarter of 2013 compared to 3.0 for the first quarter of 2012.

We expect our closings, including our share of unconsolidated joint ventures closings, to have increased approximately 58% in the first quarter of 2013 compared to the corresponding period in 2012, to 1,040. We expect closings in our U.S. operations to have increased 96% while closings in our Canadian operations are expected to have declined 33%, in each case in the 2013 first quarter compared to the 2012 first quarter.

We anticipate sales order backlog of homes under contract to have increased approximately 30% to 4,767 homes, including homes in unconsolidated joint ventures, with a sales value of $1.8 billion at March 31, 2013 compared to a sales value of $1.2 billion as of March 31, 2012. Sales order backlog of homes in the U.S. operations increased 151% to a sales value of $998.3 million while our Canadian operations declined 9% to a sales value $753.2 million. The average sales price in backlog for our U.S. operations is expected to have increased to $398,000 from $332,000 while the average sales price in backlog for our Canadian operations was relatively flat at $333,000.

The preliminary financial and other data set forth in this section has been prepared by, and is the responsibility of, our management. The foregoing information and estimates have not been compiled or examined by our independent auditors nor have our independent auditors performed any procedures with respect to this information or expressed any opinion or any form of assurance on such information. In addition, the foregoing information and estimates are subject to revision as we prepare our financial statements and other disclosures as of and for the three months ending March 31, 2013, including all disclosures required by U.S. GAAP. Because we have not completed our normal quarterly closing and review procedures for the three months ending March 31, 2013, and subsequent events may occur that require material adjustments to these results, the final results and other disclosures for the three months ending March 31, 2013 may differ materially from these estimates. These estimates should not be viewed as a substitute for full financial statements prepared in accordance with U.S. GAAP or as a measure of performance. In addition, these estimated results of operations and other data for the two months ended February 28, 2013 are not necessarily indicative of the results to be achieved for the full quarter ending March 31, 2013 or any future period. See “Special Note Regarding Forward-looking Statements.”

 

 

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Acquisition of Darling Homes

On December 31, 2012, Taylor Morrison, Inc., through its subsidiary Darling Homes of Texas, LLC, acquired the assets of Darling Interests, Inc. (“Darling”), a Texas-based homebuilder. Darling builds homes under the Darling Homes brand for move-up buyers in approximately 24 communities in the Dallas-Fort Worth Metroplex and 20 communities in the Greater Houston Area markets. Darling is a well-established builder whose products complement our existing product lines in Texas. We believe the acquisition of Darling has given us a strong presence in the Dallas homebuilding market and will expand our current operations in Houston.

The consideration for the acquisition of the Darling assets included an initial cash payment of $115.0 million, which is subject to post-closing adjustment under certain circumstances. A portion of this amount was financed by $50.0 million of borrowings under our Revolving Credit Facility. Approximately $26.0 million of additional consideration for the acquisition was financed by the sellers. Subsequent payments of up to an aggregate of $50.0 million, plus 5% of any cumulative EBIT (or earnings before interest and taxes) attributable to the acquired assets above $229.5 million over the four year period following December 31, 2012, may be made to the sellers pursuant to an earn-out arrangement. Darling generated revenues of $181.9 million and $261.4 million, and closed 409 and 624 homes, for the years ended December 31, 2011 and 2012, respectively.

Amendment to Revolving Credit Facility

In connection with this offering, we intend to amend and restate the Revolving Credit Facility in order to convert the Revolving Credit Facility into an unsecured facility and increase the aggregate amount of commitments under the Revolving Credit Facility to $400.0 million, of which $200.0 million would be available for letters of credit. We also expect the amendment will permit us to increase the Revolving Credit Facility by up to an additional $200.0 million through an incremental facility. We expect that the amended and restated Revolving Credit Facility will permit us to borrow up to the full commitment amount under the Revolving Credit Facility unless the capitalization ratio as of the most recently ended fiscal quarter exceeds 0.55 to 1.00, in which case borrowing availability under the Revolving Credit Facility will be measured by reference to a borrowing base formula to be calculated quarterly. The amendment will also extend the maturity date of the facility to March 2017. The amended and restated Revolving Credit Facility may include certain financial and restrictive covenants similar to those currently in place, including covenants to maintain net worth and capitalization ratios and to restrict distributions and the incurrence of liens. See “Description of Certain Indebtedness—Revolving Credit Facility.” There can be no assurance that we will successfully amend and restate the Revolving Credit Facility on these terms or at all.

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, http://www.darlinghomes.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

28,572,000 shares.

 

Class A common stock to be outstanding after this offering and use of proceeds therefrom

28,572,000 shares.

 

Class B common stock to be outstanding after this offering and use of proceeds therefrom

93,736,964 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 to the TPG and Oaktree holding vehicles, JH and certain members of our management and our board in an amount equal to the number of New TMM Units held by these holding vehicles, JH and certain members of our management and our board. The aggregate voting power of the outstanding Class B common stock will be equal to the aggregate percentage of New TMM Units held by the TPG and Oaktree holding vehicles, JH and certain members of our management and our board. 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

New TMM Units (along with a corresponding number of shares of our Class B common stock) held by the TPG and Oaktree holding vehicles, JH and certain members of our management and our board may be exchanged at any time for shares of our Class A common stock on a one-for-one basis, subject to customary exchange rate adjustments for stock splits, stock dividends and reclassifications. When a New TMM Unit and the corresponding share of our Class B common stock are exchanged by a limited partner of New 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 4,285,800 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 before the payment of expenses will be approximately $590.9 million ($679.5 million if the underwriters exercise their over-allotment option in full). TMHC will use

 

 

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$204.3 million of the net proceeds of this offering to acquire New TMM Units from New TMM. New TMM will contribute such net proceeds to its subsidiaries. New TMM’s subsidiaries intend to use such proceeds to redeem $189.6 million aggregate principal amount of our senior notes. TMHC intends to use the remaining $386.6 million of proceeds from this offering, together with $7.3 million of cash on hand, to purchase New TMM Units from the TPG and Oaktree holding vehicles, JH and certain members of our management. To the extent that the underwriters’ over-allotment option is exercised, the additional net proceeds will be used to purchase additional New TMM Units from the TPG and Oaktree holding vehicles. We will use cash on hand to pay the estimated $10.0 million of expenses in connection with this offering. For additional information, see “Use of Proceeds.”

 

  Following this offering, in accordance with our growth strategy, we intend to opportunistically raise up to an additional $500.0 million of debt capital, subject to market and other conditions. We intend to use any proceeds from such debt financing for working capital and general corporate purposes.

 

Dividend policy

We do not intend to pay dividends on our Class A common stock or to make distributions from New TMM to its limited partners (other than to TMHC to fund its operations). We plan to retain any earnings for use in the operation of our business and to fund future growth.

 

Listing

We have been approved to list our Class A common stock on the New York Stock 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 25 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 7,956,955 shares are issuable under options to purchase shares of Class A common stock, restricted stock units or other similar awards, including those that may be granted in connection with this offering, under the Taylor Morrison 2013 Omnibus Equity Incentive Plan (the “2013 Plan”);

 

   

assumes 93,736,964 shares of Class A common stock are reserved for issuance upon the exchange of New TMM Units (along with the corresponding number of shares of our Class B common stock); and

 

   

reflects the initial public offering price of $22.00 per share.

 

 

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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 the year 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 as of and for the year ended December 31, 2012 and 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 unaudited pro forma consolidated statement of operations data of TMHC for the fiscal year ended December 31, 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, 2012. The summary unaudited pro forma consolidated balance sheet data of TMHC as of December 31, 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 December 31, 2012. At the consummation of this offering, in connection with the Reorganization Transactions, we estimate we will record a one-time, non-cash charge that is estimated to be $79.0 million (based on the initial public offering price and other factors) in respect of the modification of the Class J Units in TMM resulting from the termination of the JHI Partnership Services Agreement (the “Services Agreement”) between JH and TMM and the direct or indirect exchange (on a one-for-one basis) of the Class J Units for units having substantially equivalent performance vesting and distribution terms in the TPG and Oaktree holding vehicles. The charge is reflected on our unaudited pro forma consolidated balance sheet and is offset in the noncontrolling interest of TMHC. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Comparability of Results—Exchange of Class J Units in TMM.”

In accordance with our growth strategy, following this offering, we expect to opportunistically raise up to an additional $500.0 million of debt capital, subject to market and other conditions. We intend to use any remaining proceeds from this offering and proceeds from such debt financing for working capital and general corporate purposes. Our unaudited pro forma consolidated financial information does not give effect to any such debt financing.

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.

 

 

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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.”

 

    TMHC     Successor          Predecessor  
   

Pro Forma
Year
Ended
December 31,

   

Year
Ended
December 31,

   

July 13 to
December 31,

        

January 1
to

July 12,

   

Year Ended
December 31,

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

Statement of Operations Data:

             

Home closings revenue

  $ 1,369,452      $ 1,369,452      $ 731,216          $ 600,069      $ 1,273,160   

Land closings revenue

    44,408        44,408        10,657            13,639        12,116   

Financial services revenue

    21,861        21,861        8,579            6,027        12,591   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total revenues

    1,435,721        1,435,721        750,452            619,735        1,297,867   

Cost of home closings(1)

    1,072,409        1,077,525        591,891            474,534        1,003,172   

Cost of land closings

    35,884        35,884        8,583            7,133        6,028   

Inventory impairments

    —          —          —              —          4,054   

Financial services expenses

    11,266        11,266        4,495            3,818        7,246   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Gross margin

    316,162        311,046        145,483            134,250        277,367   

Sales, commissions, and other marketing costs

    80,907        80,907        36,316            40,126        85,141   

General and administrative expenses

    64,123        60,444        32,883            35,743        66,232   

Equity in net income of unconsolidated entities

    (22,964     (22,964     (5,247         (2,803     (5,319

Interest expense (income)—net

    (2,446     (2,446     (3,867         941        40,238   

Other income

    (1,644     (1,644     (1,245         (11,783     (10,842

Other expense

    5,211        5,311        3,553            1,125        13,193   

Loss on extinguishment of debt

    11,176        7,853        —              —          —     

Transaction expenses

    —          —          39,442            —          —     

Indemnification loss (gain)

    —          13,034        12,850            —          —     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Income (loss) before income taxes

    181,799        170,551        30,798            70,901        88,724   

Income tax (benefit) expense

    (252,924     (260,297     4,031            20,881        (1,878
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss)

    434,723        430,848        26,767            50,020        90,602   

Net (income) attributable to noncontrolling interests(2)

    (330,372     (28     (1,178         (4,122     (3,235
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss) attributable to owners

  $ 104,351      $ 430,820      $ 25,589          $ 45,898      $ 87,367   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Basic weighted average number of Class A common shares outstanding

    28,572                —          —     

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

  $ 3.65                —          —     

Diluted weighted average number of Class A common shares outstanding

    122,309                —          —     

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

  $ 3.55                —          —     

Basic weighted average number of Class A Units outstanding(3)

      723,181        620,646            —          —     

Basic net income (loss) per unit applicable to Class A Units

    $ 0.60      $ 0.04            —          —     

Diluted weighted average number of Class A Units outstanding

      723,181        620,646            —          —     

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

    $ 0.60      $ 0.04            —          —     

 

 

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    TMHC     Successor          Predecessor  
   

Pro Forma
Year
Ended
December 31,

   

Year
Ended
December 31,

   

July 13 to
December 31,

        

January 1
to

July 12,

   

Year Ended
December 31,

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

Other Financial Data:

             

Interest incurred(4)

  $ 47,288      $ 62,468      $ 37,605          $ 23,077      $ 85,720   

Depreciation and amortization

    4,370        4,370        2,564            1,655        3,242   

Adjusted home closings gross margin(5)

    322,243        320,684        148,847            144,572        307,193   

Adjusted home closings gross margin %

    23.5     23.4     20.4         24.1     24.1

Adjusted EBITDA(6)

  $ 228,778      $ 228,778      $ 94,223          $ 92,919      $ 176,523   

Adjusted EBITDA margin %(6)

    15.9     15.9     12.6         15.0     13.6
 

Operating Data:

             

Average active selling communities

    122        122        140            151        149   
 

Net sales orders (units)

    4,482        4,482        1,953            2,031        3,347   

Net sales orders - unconsolidated Canadian joint ventures (units)(7)

    360        361        82            63        343   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Combined net sales orders (units)

    4,842        4,843        2,035            2,094        3,690   
 

U.S. closings (units)

    2,933        2,933        1,282            1,045        2,570   

Canada closings (units)

    849        849        741            797        1,567   

Canada closings (units) - unconsolidated joint ventures(7)

    232        232        54            1        3   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Combined closings (units)

    4,014        4,014        2,077            1,843        4,140   
 

U.S. average sales price of homes delivered

  $ 336      $ 336      $ 304          $ 308      $ 274   

Canada average sales price of homes delivered

  $ 451      $ 451      $ 460          $ 349      $ 364   

Canada average sales price of homes delivered - unconsolidated joint ventures(7)

  $ 391      $ 391      $ 527          $ 290      $ 593   

Combined average sales price of homes delivered

  $ 364      $ 364      $ 366          $ 326      $ 308   
 

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

    1,864        1,864        740            882        503   

Canada backlog at end of period (units)

    1,339        1,339        1,444            1,345        1,562   

Canada backlog at end of period (units) - unconsolidated joint ventures(7)

    909        909        781            781        691   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Combined backlog at end of period (units)

    4,112        4,112        2,965            3,008        2,756   
 

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

  $ 716,033      $ 716,033      $ 259,392          $ 311,977      $ 170,503   

Canada backlog value at end of period (value)

  $ 419,607      $ 419,607      $ 473,675          $ 546,104      $ 542,783   

Canada backlog value at end of period (value) - unconsolidated joint ventures(7)

  $ 313,294      $ 313,294      $ 249,458          $ 262,385      $ 217,715   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Combined backlog at end of period (value)

  $ 1,448,934      $ 1,448,934      $ 982,525          $ 1,120,466      $ 931,001   

Balance Sheet Data:

 

    TMM     TMHC  
($ in thousands)   As of
December 31,
2012

(Actual)
    As of
December 31,
2012
(Pro Forma)
 
          (unaudited)  

Cash and cash equivalents, excluding restricted cash

  $ 300,567        283,255   

Real estate inventory

    1,633,050        1,633,050   

Total assets

    2,756,815        2,734,320   

Senior notes, loans payable, revolving credit facility borrowings and other borrowings

    947,509        755,969   

Mortgage company debt

    80,360        80,360   

Total debt

    1,027,869        836,329   

Total equity (including noncontrolling interests)

    1,223,333        1,392,247   

 

(1) Does not reflect a pro forma adjustment for the decrease in capitalized interest due to the redemption of some of our senior notes using the proceeds of this offering because the amount of such redemption is not known at this time.
(2) 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).
(3) Represents Class A partnership interests in TMM.

 

 

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(4) 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.
(5) 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:

 

    TMHC     Successor         Predecessor  
    Pro  Forma
Year

Ended
December 31,
2012
    Year
Ended
December 31,
2012
    July 13 to
December 31,
2011
         January 1  to
July 12,
2011
    Year Ended

December 31,
2010
 
($ in thousands)               

Home closings revenue

  $ 1,369,452      $ 1,369,452      $ 731,216          $ 600,069      $ 1,273,160   

Home closings cost of revenue and impairments(a)

    1,072,409        1,077,525        591,891            474,534        1,005,178   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Home closings gross margin

    297,043        291,927        139,325            125,535        267,982   

Add:

             

Impairments

    —          —          —              —          2,006   

Capitalized interest amortization

    25,200        28,757        9,531            18,965        37,205   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted home closings gross margin

  $ 322,243      $ 320,684      $ 148,856          $ 144,500      $ 307,193   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Home closings gross margin %

    21.7     21.3     19.1         20.9     21.0

Adjusted home closings gross margin %

    23.5     23.4     20.4         24.1     24.1

 

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

 

(6) 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.”

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

 

    TMHC     Successor          Predecessor  
   

Pro Forma

Year

Ended

December 31,

   

Year

Ended

December 31,

   

July 13 to

December 31,

         January 1  to
July 12,
2011
   

Year Ended

December 31,

 
    2012     2012     2011         2010  

Net income

  $ 434,723      $ 430,848      $ 26,767          $ 50,020      $ 90,602   

Interest (income) expense, net

    (2,446     (2,446     (3,867         941        40,238   

Amortization of capitalized interest(a)

    25,200        30,316        10,114            19,422        37,370   

Income tax expense (benefit)

    (252,924     (260,297     4,031            20,881        (1,878

Depreciation and amortization

    4,370        4,370        2,564            1,655        3,242   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

EBITDA

    208,924        202,791        39,609            92,919        169,574   

Management fees(b)

    5,000        5,000        2,322            —          2,517   

Land inventory impairments(c)

    —          —          —              —          2,529   

Lot option write-offs(d)

    —          —          —              —          1,525   

Non-cash compensation charge(e)

    3,678        —          —              —          170   

Royalties paid to parent(f)

    —          —          —              —          208   

Early extinguishment of debt(g)

    11,176        7,853        —              —          —     

Transaction-related expenses and indemnification loss(h)

    —          13,134        52,292            —          —     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

  $ 228,778      $ 228,778      $ 94,223          $ 92,919      $ 176,523   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

 

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  (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 Agreements.”
  (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 during the year ended December 31, 2010 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. In the pro forma year ended December 31, 2012, represents non-cash compensation expense related to the vesting of equity awards, including stock options and shares of restricted stock, granted to certain members of management in connection with this offering. See Note (g) to our Unaudited Pro Forma Consolidated Statement of Operations For Year Ended December 31, 2012 under “Unaudited Pro Forma Consolidated Financial Information.”
  (f) 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.
  (g) Represents the write-off of $7.9 million of unamortized deferred financing costs in the year ended December 31, 2012 related to the retirement of the Sponsor Loan. The pro forma amount represents the historical write-off of unamortized deferred financing costs in the year ended December 31, 2012, together with a pro forma write-off of an additional $5.3 million of unamortized deferred financing costs related to the retirement of $189.6 million aggregate principal amount of senior notes with a portion of the proceeds from this offering, net of the recognition of $11.9 million of premium from the redemption of senior notes that were issued on August 21, 2012.
  (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 during the period from July 13, 2011 to December 31, 2011. Reflects the elimination of $0.1 million of historical costs related to the Acquisition that were paid during the year ended December 31, 2012 and the reversal of a receivable related to a tax indemnity from our former parent, Taylor Wimpey plc in the year ended December 31, 2012.

 

(7) 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 income in such U.S. unconsolidated joint ventures was $1.4 million for the year ended December 31, 2011 and $1.2 million for the year ended December 31, 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.

 

 

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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 substantial losses, 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, the GTA has seen a moderation in sales activity compared to prior periods and it is anticipated that Ontario housing starts could continue to 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 $430.8 million in 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 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. As a result, the price of our Class A common stock may decline, and you may lose a portion of your investment. 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

 

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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.

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 and result in a decline in the value of our Class A common stock.

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. As a result, our financial condition may deteriorate and you may lose a portion of your investment.

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

 

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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 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

 

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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, the price of our Class A common stock may decline and you could lose a portion of your investment.

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 7.7% as of February 2013, 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. As a result, the price of our Class A common stock and the value of your investment may decline.

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.

 

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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.

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 business performance and could affect our stock price.

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 operating results, as consumers might avoid brands that receive bad press or negative reviews. Negative publicity may result in a decrease in operating results that could lead to a decline in the price of our Class A common stock and cause you to lose all or a portion of your investment.

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,

 

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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.

As an 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.

 

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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 and lead to a decline in the price of our Class A common stock and the value of your investment.

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. We recorded no inventory impairments in 2011 or 2012 (compared to $4.1 million in 2010). In 2011, 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. The recording of a significant inventory impairment could negatively affect our reported earnings per share and negatively impact the market perception of our business, leading to a decline in the price of our Class A common stock.

 

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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.

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

 

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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. The Ontario smart growth initiatives were implemented in 2005 pursuant to the “Places to Grow Act” and the “Greenbelt Act”. The legislation is designed to minimize urban sprawl, promote population density increases in cities and towns and protect the agricultural land and natural systems that surround the GTA, extending from Niagara Falls to Oshawa, Ontario, bordering Lake Ontario. The effect of the legislation is to restrict development on approximately 1.8 million acres of land. These measures may 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 create additional costs and administration requirements, which in turn may harm our future sales, margins and earnings. A further expansion of these measures or the adoption of new slow-growth, no-growth, “smart-growth” or other similar programs could exacerbate such risks. The above risks could have a material, adverse effect on our business and results of operations in Canada, and as a result, the price of the Class A common stock could be negatively affected.

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 which may 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.

 

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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 changes and 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 and the market perception of our business, which could lead to a decline in the price of our common stock.

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 December 31, 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 March 2014. 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

 

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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 and may result in a decline in the price of our Class A common stock. 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;

 

   

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

 

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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 December 31, 2012, Monarch Corporation’s total recourse exposure under its guarantees of joint venture debt was approximately $140.4 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 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

 

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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 and could lead to a decline in the price of our Class A common stock.

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 December 31, 2012, we had recorded a deficit of $13.2 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.

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

 

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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 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 December 31, 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.

 

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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.” The filing or threat of filing of a major class action lawsuit against us could lead to a decline in the price of our Class A common stock.

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.

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.

Several of the markets in which we operate have historically been subject to utility and resource shortages, including significant changes to the availability of electricity and water. Austin and Denver in particular have at times been affected by such shortages. 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 have also experienced material fluctuations in utility and resource costs across our markets, and we may incur additional costs and may not be able to complete construction on a timely basis if such fluctuations arise. Our lumber inventory is particularly sensitive to these shortages. Furthermore, these shortages and rate fluctuations may adversely affect the regional economies in which we operate, which may reduce demand for our homes and negatively affect our business and results of operations.

 

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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 December 31, 2012, we had $164.4 million of debt maturing in the next 12 months. In addition, our credit facilities related to our Canadian operations (under which we had CAD $113.6 million of outstanding letters of credit as of December 31, 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.

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 December 31, 2012, the total principal amount of our debt (including $80.4 million of indebtedness of TMHF) was $1.0 billion. In addition, in accordance with our growth strategy, following this offering, we intend to opportunistically raise up to an additional $500.0 million of debt capital to help fund the growth of our business, subject to market and other conditions, but such debt capital may not be available to us on a timely basis at reasonable rates or at all. 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.

 

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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.

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 amended and restated Revolving Credit Facility is expected to include certain financial and restrictive covenants similar to those currently in place, including covenants to maintain net worth and capitalization ratios and to restrict distributions and the incurrence of liens. See “Description of Certain Indebtedness—Revolving Credit Facility.”

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

 

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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 2012, we made capital expenditures for land, development and construction of $1.0 billion and $1.5 billion, respectively.

In accordance with our growth strategy, following this offering, we expect to opportunistically raise up to an additional $500.0 million of debt capital to help fund the growth of our business, subject to market and other conditions, but such debt capital may not be available to us on a timely basis at reasonable rates or at all.

During the next 12 months, we otherwise 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.

Risks related to our structure and organization

TMHC’s only asset after the completion of this offering will be its interest in New TMM, and accordingly it will be dependent upon distributions from New TMM to pay dividends, if any, taxes and other expenses. New TMM is a holding company with no operations of its own and, in turn, relies on distributions from TMM and 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 New TMM Units. TMHC will have no independent means of generating revenue. TMHC intends to cause New 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 New 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, New TMM has no direct operations and derives all of its cash flow from TMM and its subsidiaries. Because the operations of TMHC’s business are conducted through subsidiaries of TMM, New TMM is dependent on those entities for dividends and other payments to generate the funds necessary to meet the financial obligations of New TMM. Legal and contractual restrictions in the Revolving Credit Facility, the senior notes and other debt agreements governing current and future

 

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indebtedness of New TMM’s subsidiaries, as well as the financial condition and operating requirements of New TMM’s subsidiaries, may limit TMHC’s ability to obtain cash from New TMM’s subsidiaries. The earnings from, or other available assets of, New 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, the Principal Equityholders, via the TPG and Oaktree holding vehicles, 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 our 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.

Pursuant to the stockholders agreement that we expect to enter into with the TPG and Oaktree holding vehicles and JH, certain of our actions will require the approval of the directors nominated by the TPG and Oaktree holding vehicles. Specifically, the approval of a director nominated by the TPG holding vehicle, so long as it owns at least 50% of TMHC’s common stock held by it at the closing of this offering (and the application of net proceeds), and the approval of a director nominated by the Oaktree holding vehicle, so long as it owns at least 50% of TMHC’s common stock held by it following this offering (and the application of net proceeds), must be obtained before we are permitted to take any of the following actions:

 

   

any change of control of TMHC;

 

   

acquisitions or dispositions by TMHC or any of its subsidiaries of assets (including land) valued at more than $50.0 million;

 

   

incurrence by TMHC or any of its subsidiaries of any indebtedness in an aggregate amount in excess of $50.0 million or the making of any loan in excess of $50.0 million;

 

   

issuance of any equity securities of TMHC, subject to limited exceptions (which include issuances pursuant to approved compensation plans);

 

   

hiring and termination of our Chief Executive Officer; and

 

   

certain changes to the size of our Board of Directors.

See “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

Section 203 of the Delaware General Corporation Law may affect the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations or acquisitions of additional

 

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shares, for a period of three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder” is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. We have elected in our amended and restated certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law. Nevertheless, our amended and restated certificate of incorporation will contain provisions that have the same effect as Section 203 of the Delaware General Corporation Law, except that they provide that the TPG and Oaktree holding vehicles and their respective affiliates and transferees will not be deemed to be “interested stockholders,” regardless of the percentage of our voting stock owned by them, and accordingly will not be subject to such restrictions.

In addition, because the Principal Equityholders hold their economic interest in our business through New TMM, but not through TMHC, the public company, these existing owners may have conflicting interests with holders of shares of our Class A common stock.

As a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange, 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 New York Stock Exchange 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 the TPG and Oaktree holding vehicles 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 the New York Stock Exchange 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 New York Stock Exchange 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 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.

 

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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 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 and cause you to lose all or a portion of your investment.

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 122,308,964 shares of outstanding Class A common stock on a fully diluted basis, assuming that all the New TMM Units 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 TPG and Oaktree holding vehicles, JH and certain members of our management and our board will beneficially own an aggregate of 76.6% of the outstanding partnership interests in New TMM and 93,736,964 shares of our Class B common stock (or 73.1% of New TMM

 

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Units and 89,451,164 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 New TMM (other than TMHC) will be able to exchange their New TMM Units (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 basis. Shares of our Class A common stock issuable to the limited partners of New TMM upon an exchange of New TMM Units as described above would be considered “restricted securities,” as that term is defined in Rule 144 under the Securities Act, unless the exchange is registered under the Securities Act. We and certain of the existing holders of New TMM Units 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 New TMM Units 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 New TMM Units 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 7,956,955 shares of our Class A common stock reserved for issuance under our 2013 Plan and we will enter into a new registration rights agreement with the TPG and Oaktree holding vehicles, JH and certain members of our management and our board. See the information under the heading “Shares Eligible for Future Sale” and “Certain Relationships and Related Party Transactions—Registration Rights Agreement” 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 the New York Stock Exchange. 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

 

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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 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 which could cause you to lose all or a portion of your investment. 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 TPG and Oaktree holding vehicles holding a majority of the voting power of TMHC following this offering, our amended and restated certificate of incorporation and our bylaws contain certain provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable, including the following, some of which may only become effective when the TPG and Oaktree holding vehicles no longer beneficially own shares representing 50% or more of the combined voting power of our common stock (the “Triggering Event”):

 

   

the division of our board of directors into three classes and the election of each class for three-year terms;

 

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the sole ability of the board of directors to fill a vacancy created by the expansion of the board of directors;

 

   

advance notice requirements for stockholder proposals and director nominations;

 

   

after the Triggering Event, limitations on the ability of stockholders to call special meetings and to take action by written consent;

 

   

after the Triggering Event, in certain cases, the approval of holders of at least three-fourths of the shares entitled to vote generally on the making, alteration, amendment or repeal of our certificate of incorporation or bylaws will be required to adopt, amend or repeal our bylaws, or amend or repeal certain provisions of our certificate of incorporation;

 

   

after the Triggering Event, the required approval of holders of at least three-fourths of the shares entitled to vote at an election of the directors to remove directors, which removal may only be for cause; and

 

   

the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used, among other things, to institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.

Section 203 of the Delaware General Corporation Law may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder.” We have elected in our amended and restated certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law. Nevertheless, our amended and restated certificate of incorporation will contain provisions that have the same effect as Section 203 of the Delaware General Corporation Law, except that they provide that the TPG and Oaktree holding vehicles and their respective affiliates and transferees will not be deemed to be “interested stockholders,” and accordingly will not be subject to such restrictions.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in the acquisition. For more information, please see the section titled “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 and cause you to lose all or a portion of your investment.

 

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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 partners of TMM immediately prior to the Reorganization Transactions were the Principal Equityholders and certain members of our management and our board.

The following chart summarizes our legal entity structure immediately prior to the Reorganization Transactions described below. This chart is provided for illustrative purposes only and does not purport to represent all legal entities owned or controlled by TMM:

 

LOGO

The Reorganization Transactions

In the Reorganization Transactions, the existing holders of limited partnership interests in TMM including the Principal Equityholders and certain members of our management and our board will, through a series of transactions, contribute their limited partnership interests in TMM to New TMM, a new limited partnership formed under the laws of the Cayman Islands, such that TMM and the general partner of TMM will become wholly-owned subsidiaries of New TMM. TMHC will, through a series of transactions, become the sole owner of the general partner of New TMM, and TMHC will use the net cash proceeds received in this offering to purchase New TMM Units.

Immediately prior to the Reorganization Transactions, partnership interests in TMM were divided into three categories of units: Class A Units, Class J Units and Class M Units. The Principal Equityholders and certain members of our management and our board held all of the Class A Units. JH, one of the Principal Equityholders, held all of the Class J Units. Certain members of our management and our board held all of the Class M Units.

 

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Holders of the Class J Units and Class M Units were not entitled to receive distributions unless specified return thresholds were met and all capital contributed to TMM by holders of Class A Units has been returned. Class M Units were issued as long-term incentive compensation for members of our management and our board and were subject to time-vesting or performance-vesting.

In the Reorganization Transactions:

 

   

TPG and Oaktree will each form a holding vehicle;

 

   

Our Principal Equityholders and members of our management and our board will directly or indirectly exchange all of their respective Class A Units (other than certain Class A Units exchanged by JH as described below), Class J Units and performance-vesting Class M Units in TMM on a one-for-one basis for new equity interests of the TPG and Oaktree holding vehicles with terms that are substantially the same as the Class A Units, Class J Units (other than with respect to certain vesting conditions) and performance-vesting Class M Units in TMM surrendered for exchange;

 

   

JH will exchange a portion of its Class A Units in TMM for New TMM Units to be held by JH;

 

   

Members of our management and our board will exchange all of their time-vesting Class M Units in TMM for New TMM Units with vesting terms that are substantially the same as those of the Class M Units surrendered for exchange;

 

   

The vesting terms of the equity interests in the TPG and Oaktree holding vehicles and New TMM Units received by members of our management and our board will be identical to the current vesting terms of the Class M Units of TMM prior to their exchange. No equity interests in the TPG and Oaktree holding vehicles or New TMM Units held by members of our management and our board will vest as a result of the completion of this offering;

 

   

The vesting terms of the Class J Unit equivalents in the TPG and Oaktree holding vehicles received by JH will be substantially identical to the current vesting terms of the Class J Units of TMM prior to the exchange, except that there will no longer be any time-based vesting conditions;

 

   

New TMM will directly or indirectly acquire all of the Class A Units, Class J Units and Class M Units outstanding prior to the Reorganization Transactions; and

 

   

The TPG and Oaktree holding vehicles will directly or indirectly acquire New TMM Units.

Immediately following the consummation of the Reorganization Transactions, the limited partners of New TMM will consist of TMHC, the TPG and Oaktree holding vehicles, JH and certain members of our management and our board. The number of New TMM Units issued to each of the TPG and Oaktree holding vehicles and members of our management and our board as described above will be determined based on a hypothetical cash distribution by TMM of our pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM, the initial public offering price and the price per share paid by the underwriters for shares of our Class A common stock in this offering.

For example, based on the initial public offering price of $22.00 per share, for a holder of time-vesting Class M Units, our pre-IPO valuation would be $2,529.3 million (calculated using the price paid per share by the underwriters in this offering of $20.68). Based on these facts, a member of management who would be entitled to receive $200,000 in respect of such manager’s time-vesting Class M Units in a hypothetical distribution of the pre-IPO value of TMM would receive 9,091 New TMM Units in the Reorganization Transactions (determined by dividing $200,000 by the initial public offering price per share in this offering).

The TPG and Oaktree holding vehicles, JH and members of our management and our board will also be issued a number of shares of TMHC’s Class B common stock equal to the number of New TMM Units that each vehicle and members of management will receive. Following the consummation of the Reorganization Transactions, TMHC, the TPG and Oaktree holding vehicles, JH and certain members of our management and our board will all hold the same class of New TMM Units.

 

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At the consummation of this offering, in connection with the Reorganization Transactions, we estimate we will record a one-time, non-cash charge that is estimated to be $79.0 million (based on the initial public offering price and other factors) in respect of the modification of the Class J Units in TMM resulting from the termination of the Services Agreement between JH and TMM and the direct or indirect exchange (on a one-for-one basis) of the Class J Units for units having substantially equivalent performance vesting and distribution terms in the TPG and Oaktree holding vehicles. The charge is reflected on our unaudited pro forma consolidated balance sheet and is offset in the noncontrolling interest of TMHC. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Comparability of Results—Exchange of Class J Units in TMM.”

Immediately after the consummation of the Reorganization Transactions and this offering, the only asset of TMHC will be its direct or indirect interest in New TMM, TMM and its subsidiaries. Each share of TMHC Class A common stock will correspond to an economic interest held by TMHC in New TMM, whereas the shares of TMHC Class B common stock will only have voting rights in TMHC and will have no economic rights of any kind. Shares of TMHC Class B common stock will be initially owned solely by the TPG and Oaktree holding vehicles, JH and certain members of our management and our board and cannot be transferred except in connection with an exchange or transfer of a New TMM Unit. 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 New TMM, TMM and its subsidiaries. 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 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 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 holders of Class A common stock will have. The aggregate voting power of the outstanding Class B common stock will be equal to the aggregate percentage of New TMM Units not held by TMHC.

In connection with this offering, the TPG and Oaktree holding vehicles, JH and certain members of our management and our board will enter into the Exchange Agreement under which, from time to time, the TPG and Oaktree holding vehicles and certain members of our management and our board will have the right to exchange their New TMM Units (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 basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. See “Certain Relationships and Related Party Transactions—Exchange Agreement.”

For a description of the vesting and other terms applicable to the exchange of TMM Units in the Reorganization Transactions as described above see “Compensation Discussion and Analysis—Looking Ahead: Post-IPO Compensation—Exchange of Class M Units.”

In addition, as a part of the Reorganization Transactions, we will, among other things, amend and restate the limited partnership agreement governing TMM, enter into a stockholders agreement with the TPG and Oaktree holding vehicles and JH and enter into a new registration rights agreement with the TPG and Oaktree holding vehicles, JH and certain members of our management and our board. 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.

The following chart summarizes our legal entity structure following the Reorganization Transactions, this offering and the application of the net proceeds from this offering. This chart is provided for illustrative purposes only and does not purport to represent all legal entities owned or controlled by us:

 

LOGO

 

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Upon the consummation of this offering, TMHC intends to use the net proceeds from this offering to acquire New TMM Units from New TMM and from the TPG and Oaktree holding vehicles, JH and certain members of our management as further described under “Use of Proceeds” and “Certain Relationships and Related Party Transactions.”

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

 

   

TMHC will control the sole general partner of New TMM, which will control New TMM, and will hold directly or indirectly 23.4% of the outstanding New TMM Units (26.9% if the underwriters exercise their over-allotment option in full). TMHC will consolidate the financial results of New TMM, TMM and its subsidiaries and TMHC’s net income (loss) will be reduced by a noncontrolling interest expense to reflect the portion of New TMM’s net income (loss) to which TMHC is not entitled;

 

   

the TPG holding vehicle will hold an aggregate of 45,738,523 shares of TMHC’s Class B common stock and an aggregate of 45,738,523 New TMM Units, or 37.4% of the outstanding equity interests in New TMM, representing 37.4% of the combined voting power in TMHC and economic interests in New TMM (or 35.6% if the underwriters exercise their over-allotment option in full);

 

   

the Oaktree holding vehicle will hold an aggregate of 45,738,523 shares of TMHC’s Class B common stock and an aggregate of 45,738,523 New TMM Units, or 37.4% of the outstanding equity interests in New TMM, representing 37.4% of the combined voting power in TMHC and economic interests in New TMM (or 35.6% if the underwriters exercise their over-allotment option in full);

 

   

JH will hold an aggregate of 604,449 shares of TMHC’s Class B common stock and an aggregate of 604,449 New TMM Units, or 0.5% of the outstanding equity interests in New TMM, representing 0.5% of the combined voting power in TMHC and economic interests in New TMM (or 0.5% if the underwriters exercise their over-allotment option in full);

 

   

certain members of our management and our board will hold directly an aggregate of 1,655,469 shares of TMHC’s Class B common stock and an aggregate of 1,655,469 New TMM Units, or 1.3% of the outstanding equity interests in New TMM, representing 1.3% of the combined voting power in TMHC and economic interests in New TMM (or 1.3% if the underwriters exercise their over-allotment option in full);

 

   

TMHC’s public stockholders will collectively hold 28,572,000 shares of TMHC’s Class A common stock (or 32,857,800 shares if the underwriters exercise their over-allotment option in full), representing 23.4% of the combined voting power and economic interest in TMHC (or 26.9% if the underwriters exercise their over-allotment option in full); and

 

   

the New TMM Units held by the TPG and Oaktree holding vehicles, JH and certain members of our management and our board (together with the corresponding shares of our Class B common stock) may be exchanged for shares of TMHC’s Class A common stock on a one-for-one basis. The exchange of New TMM Units for shares of our Class A common stock will not, in and of itself, affect the aggregate voting power of the TPG and Oaktree holding vehicles, JH and certain members of our management and our board since the votes represented by the exchanged shares of our Class B common stock will be replaced with the votes represented by the shares of Class A common stock for which New TMM Units are exchanged.

In addition, in connection with this offering, 1,223,000 non-qualified stock options and 191,959 restricted stock units will be granted to certain members of management and our board. Of these grants, an aggregate of 802,500 non-qualified stock options and 116,980 restricted stock units will be granted to our named executive officers and an aggregate of 420,500 non-qualified stock options and 65,478 restricted stock units will be granted to other members of our management. An aggregate of 9,501 restricted stock units will be granted to two of our directors. See “Compensation Discussion and Analysis—Looking Ahead: Post-IPO Compensation.”

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of 28,572,000 shares of Class A common stock by us in this offering will be approximately $590.9 million after deducting $37.7 million of underwriting discounts and commissions. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $679.5 million.

TMHC will use $204.3 million of the net proceeds of this offering to acquire New TMM Units from New TMM (at a price equal to the price paid by the underwriters for shares of our Class A common stock in this offering). New TMM will contribute such net proceeds to its subsidiaries. New TMM’s subsidiaries intend to use such proceeds to redeem $189.6 million aggregate principal amount of our senior notes (at a purchase price equal to 103.875% of their principal amount, plus accrued and unpaid interest of $7.3 million through the date of redemption, assuming a redemption date of April 12, 2013). TMHC intends to use the remaining approximately $386.6 million of the proceeds from this offering, together with $7.3 million of cash on hand to purchase New TMM Units (at a price equal to the price paid by the underwriters for shares of our Class A common stock in this offering) held by the TPG and Oaktree holding vehicles, JH and certain members of our management. We expect that the purchase of the New TMM Units from certain members of our management will be consummated at closing of this offering and the purchase of New TMM Units from the TPG and Oaktree holding vehicles and JH will be consummated promptly following this offering, but in no event prior to April 15, 2013. Unless otherwise expressly set forth herein, any disclosures set forth herein relating to our post-offering capital structure, our post-offering shareholders (and their holdings) or similar matters assume the successful completion of these purchases from management, the TPG and Oaktree holding vehicles and JH. To the extent that the underwriters’ over-allotment option is exercised, the additional net proceeds will be used to purchase additional New TMM Units from the TPG and Oaktree holding vehicles (at a price equal to the price paid by the underwriters for shares of our Class A common stock in this offering). We will use cash on hand to pay the estimated $10.0 million of expenses in connection with this offering.

Following this offering, in accordance with our growth strategy, we intend to opportunistically raise up to $500.0 million of debt capital, subject to market and other conditions. We intend to use proceeds from such debt financing for working capital and general corporate purposes. See “Certain Relationships and Related Party Transactions.”

Prior to the application of the proceeds described above, TMHC, New TMM and TMM and its subsidiaries may hold any net proceeds in cash or invest them in short-term securities or investments.

 

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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 or to make distributions from New TMM to its limited partners (other than to TMHC to fund its operations). 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 December 31, 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 “Unaudited Pro Forma Consolidated Financial Information.”

In accordance with our growth strategy, following this offering, we expect to opportunistically raise up to an additional $500.0 million of debt capital, subject to market and other conditions. We intend to use any proceeds from such debt financing for working capital and general corporate purposes. At the closing of this offering, we will also be terminating the management services agreement with TPG and Oaktree, and in connection with the termination, we will be paying a termination fee of $30.0 million in cash, split equally between TPG and Oaktree. Our pro forma capitalization does not give effect to any such debt financing, termination fee payment or the possible amendment and restatement of our Revolving Credit Facility.

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.

 

     December 31, 2012  
(in thousands, except per share amounts)    TMM
Actual
     TMHC
Pro Forma
 

Cash and cash equivalents

   $ 300,567       $ 283,255   
  

 

 

    

 

 

 

Revolving Credit Facility(1)

   $ 50,000       $ 50,000   

Loans payable and other borrowings(2)

     215,968         215,968   

Senior Notes(3)

     681,541         490,001   

Mortgage company debt(4)

     80,360         80,360   
  

 

 

    

 

 

 

Total debt(5)

     1,027,869         836,329   
  

 

 

    

 

 

 

Owners’ Equity

     1,196,685         (42,910

Class A common stock, $0.00001 par value per share

     —           —     

Class B common stock, $0.00001 par value per share

     —           —     

Additional paid-in capital

        663,509   

Noncontrolling interest

     26,648         771,648   
  

 

 

    

 

 

 

Total stockholders’ equity

     1,223,333         1,392,247   
  

 

 

    

 

 

 

Total capitalization

   $ 2,251,202       $ 2,228,576   
  

 

 

    

 

 

 

 

  (1) At December 31, 2012 the Revolving Credit Facility provided TMC and Monarch Corporation with revolving borrowing capacity up to $225.0 million. The Revolving Credit Facility matures in July 2016. Drawings under this facility will be used for working capital and general corporate purposes. As of December 31, 2012, there was $50.0 million in outstanding borrowings under the Revolving Credit Facility, and there was $11.2 million in outstanding letters of credit. In connection with this offering, we intend to amend the Revolving Credit Facility to increase the revolving borrowing capacity from $225.0 million to $400.0 million on an unsecured basis. The amendment is expected to include a $200.0 million incremental facility feature which would allow us to increase the borrowing capacity to $600.0 million, subject to compliance with certain financial covenants. See “Description of Certain Indebtedness.”
  (2) Loans payable and other borrowings as of December 31, 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 December 31, 2012, $114.4 million of the loans were scheduled to be repaid in the next 12 months. The interest rate on $131.9 million of the loans ranged from 1.0% to 8.0% and $84.0 million of the loans were non-interest bearing.
  (3) Reflects the carrying value of $550.0 million aggregate principal amount of 7.750% senior notes due 2020 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.
  (4) Reflects debt of TMHF, our wholly owned mortgage subsidiary. TMHF is separately capitalized and its obligations are non-recourse to TMHC, New TMM, TMM or any of our homebuilding entities.
  (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”). The TD Facility provides for borrowings and letters of credit up to an aggregate amount of CAD $102.6 million, and CAD $102.6 million in letters of credit were outstanding as of December 31, 2012. The HSBC Facility provided for letters of credit up to an aggregate amount of CAD $11.0 million, and the facility was fully drawn as of December 31, 2012. The TD Facility and the HSBC Facility are scheduled to expire on June 30, 2013.

 

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DILUTION

The pro forma net tangible book value of TMHC as of December 31, 2012 would have been $1.2 billion or $10.55 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 $1.2 billion, total assets (excluding intangible assets) less total liabilities, by the aggregate number of shares of Class A common stock outstanding after giving effect to the Reorganization Transactions (including the issuance of an aggregate of 112,784,964 New TMM Units and shares of Class B common stock) and assuming that all of the holders of New TMM Units (other than TMHC) exchanged their New TMM Units (along with the corresponding number of shares of Class B common stock) for shares of Class A common stock. After giving effect to the Reorganization Transactions, the sale of the 28,572,000 shares of Class A common stock in this offering, at an initial public offering price of $22.00 per share, and the receipt and application of the net proceeds, including the purchase of 19,048,000 New TMM Units and shares of Class B common stock from the existing equityholders by TMHC for approximately $419.1 million, TMHC pro forma net tangible book value at December 31, 2012 would have been $1.4 billion or $11.11 per share assuming that all of the holders of New TMM Units (other than TMHC) exchanged their New TMM Units (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 equityholders of $0.56 per share and an immediate dilution to new investors of $9.89 per share. The following table illustrates this per share dilution:

 

Initial public offering price

  

   $ 22.00   

Pro forma net tangible book value per share as of December 31, 2012 (1)

   $ 10.55      

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

     0.56      

Pro forma net tangible book value per share after offering (2)

  

     11.11   
     

 

 

 

Dilution per share to new investors

  

   $ 9.89   
     

 

 

 

 

(1) Reflects 112,784,964 outstanding shares, consisting of 93,736,964 New TMM Units and shares of Class B common stock to be held by the existing equityholders immediately prior to this offering and 19,048,000 New TMM Units and shares of Class B common stock to be held by the existing equityholders immediately prior to this offering and to be purchased by TMHC using a portion of the net proceeds from this offering.

 

(2) Reflects 122,308,964 outstanding shares, consisting of 28,572,000 shares of Class A common stock issued in this offering and 93,736,964 New TMM Units and shares of Class B common stock. Does not reflect 19,048,000 New TMM Units and shares of Class B common stock which will be purchased by TMHC from the existing equityholders using a portion of the net proceeds from this offering.

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

 

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The following table sets forth, on a pro forma basis, as of December 31, 2012, the number of shares of Class A common stock purchased from TMHC, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing equityholders and by the new investors, at an initial public offering price of $22.00 per share, before deducting estimated underwriting discounts and commissions and offering expenses payable by us after giving effect to the Reorganization Transactions, this offering and the receipt and application of the net proceeds of this offering and assuming that all of the holders of New TMM Units (other than TMHC) exchanged their New TMM Units (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(1)

     93,736,964         76.6   $ 644,978,090         51.8   $ 6.88   

New investors(2)

     28,572,000         23.4        628,584,000         48.2        22.00   
  

 

 

      

 

 

      

Total

     122,308,964         100   $ 1,273,562,090         100     10.18   
  

 

 

      

 

 

      

 

(1) Reflects approximately $776.0 million of consideration paid by existing equityholders for TMM Units, net of $131.1 million of consideration paid in respect of TMM Units that will be directly or indirectly exchanged for the 19,048,000 New TMM Units and associated shares of Class B common stock that will be acquired using a portion of the proceeds of this offering. The $776.0 million of consideration paid consists of (i) a contribution by the Principal Equityholders and certain members of management of $623.6 million in July 2011 in connection with the Acquisition, (ii) a $150.0 million contribution by the Principal Equityholders in respect of the Sponsor Loan Contribution in April 2012, (iii) a $0.5 million additional investment by certain members of management in April 2012 and (iv) a $1.9 million investment by members of the board of directors in April 2012.

 

(2) Includes 19,048,000 shares of Class A common stock sold whose proceeds are being used to purchase New TMM Units from the TPG and Oaktree holding vehicles, JH and certain members of management as described in note (1) above.

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

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 statement of operations data for the fiscal year ended December 31, 2012 presents 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, 2012.

The unaudited pro forma consolidated balance sheet data as of December 31, 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 December 31, 2012.

At the consummation of this offering, in connection with the Reorganization Transactions, we estimate we will record a one-time, non-cash charge that is estimated to be $79.0 million (based on the initial public offering price and other factors) in respect of the modification of the Class J Units in TMM resulting from the termination of the Services Agreement between JH and TMM and the direct or indirect exchange (on a one-for-one basis) of the Class J Units for units having substantially equivalent performance vesting and distribution terms in the TPG and Oaktree holding vehicles. The charge is reflected on our unaudited pro forma consolidated balance sheet and is offset in the noncontrolling interest of TMHC. For more information, see the notes to our Unaudited Pro Forma Condensed Consolidated Balance Sheet included herein.

In accordance with our growth strategy, following this offering, we expect to opportunistically raise up to an additional $500.0 million of debt capital, subject to market and other conditions. We intend to use any remaining proceeds from this offering and such debt financing for working capital and general corporate purposes. Our unaudited pro forma consolidated financial information does not give effect to any such debt financing or additional senior notes redemption transactions. At the closing of this offering, we will be terminating the management services agreement with TPG and Oaktree, and in connection with the termination, we will be paying a termination fee of $30.0 million in cash to TPG and Oaktree, which is calculated based on the present value of the annual $3.5 million management fee under that agreement during the remaining term of the agreement (which expires on July 11, 2021). Our unaudited pro forma consolidated financial information does not reflect the payment of such termination fee because it is non-recurring.

For purposes of the unaudited pro forma consolidated financial information, we have assumed that 28,572,000 shares of Class A common stock will be issued by TMHC at a price per share equal to the initial public offering price, and as a result, immediately following the completion of this offering, the ownership percentage represented by New TMM Units not held by TMHC will be 76.6%, and the net income attributable to New TMM Units not held by TMHC will accordingly represent 76.6% of our net income. If the underwriters’ over-allotment option is exercised in full, the ownership percentage represented by New TMM Units not held by TMHC will be 73.1%; and the net income attributable to New TMM Units not held by TMHC will accordingly represent 73.1% of our net income.

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

Year Ended December 31, 2012

(Unaudited)

(in thousands, except share data)

 

     TMM
Year Ended
December 31,
2012
    Pro forma
Adjustments for
the Financing
Transactions

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

Home closings revenue

   $ 1,369,452      $ —        $ —        $ 1,369,452   

Land closings revenue

     44,408        —          —          44,408   

Financial services revenue

     21,861        —          —          21,861   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,435,721        —          —        $ 1,435,721   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of home closings

     1,077,525        (43 )(b)      (5,073 )(f)      1,072,409   

Cost of land closings

     35,884        —          —          35,884   

Financial services expenses

     11,266        —          —          11,266   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     1,124,675        (43     (5,073     1,119,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     311,046        43        5,073        316,162   

Sales, commissions, and other marketing costs

     80,907        —          —          80,907   

General and administrative expenses

     60,444  (a)      —          3,678  (g)      64,123   

Equity in net earnings of unconsolidated entities

     (22,964     —          —          (22,964

Other expense

     1,121        —          —          1,121   

Loss on extinguishment of debt

     7,853        —          3,323  (h)      11,176   

Transaction expenses

     100        (100 )(c)      —          —     

Indemnification (income) expense

     13,034        (13,034 )(d)      —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     170,551        13,177        (1,929     181,799   

Income tax provision (benefit)

     (260,297     4,612  (e)      2,761  (i)      (252,924
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     430,848        8,565        (4,690     434,723   

Less net income attributable to noncontrolling interests

     (28     —          (330,344 )(j)      (330,372
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Taylor Morrison Home Corporation

   $ 430,820      $ 8,565      $ (335,034   $ 104,351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average number of Class A common shares outstanding

     —          —          —          28,572   

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

     —          —          —        $ 3.65   

Diluted weighted average number of Class A common shares outstanding

     —          —          —          122,309   

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

     —          —          —        $ 3.55   

 

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Notes to Unaudited Pro Forma Consolidated Statement of Operations for Year Ended December 31, 2012

 

(a) General and administrative expenses include approximately $5.0 million of management fees paid to the Principal Equityholders for general corporate and administrative expenses during the period pursuant to management services agreements. Effective as of the completion of this offering, the management services agreements will be terminated, and the fees will no longer be charged, although the charge for such fees has not been eliminated by any pro forma adjustment.

 

(b) Represents adjustments related to the elimination of the amortization of capitalized interest (including amortization of debt discount and deferred financing fees) included in cost of home closings that was attributable to our historical debt financing arrangements in effect during the period presented. These historical debt financing arrangements included (i) $500.0 million borrowed on July 13, 2011 under the bridge loan facility under our Sponsor Loan, which bore interest at a stated rate of 13.0% per annum and was retired on April 13, 2012, (ii) $550.0 million of senior notes issued at par on April 13, 2012, which bear interest at a rate of 7.75% per annum, (iii) $125.0 million of senior notes issued on August 21, 2012 at a price equal to 105.5% of their principal amount, which also bear interest at a rate of 7.75% per annum and (iv) our Revolving Credit Facility, whose commitments were increased from $75.0 million to $225.0 million in December 2012.

 

     Also reflects adjustments to give pro forma effect to the following financing transactions (the “New Financing Transactions”), as if such financing transactions had occurred on January 1, 2012: (i) the incurrence of $550.0 million of senior notes issued at par, bearing interest at a rate of 7.75% per annum, (ii) the incurrence of $125.0 million of senior notes issued at a price equal to 105.5% of their principal amount, also bearing interest at a rate of 7.75% per annum and (iii) the increase in our Revolving Credit Facility from $75.0 million to $225.0 million (with $50.0 million drawn thereunder during the period presented).

($ in thousands)

 

Elimination of historical capitalized interest amortization included in cost of home closings related to our historical debt financing arrangements

   $ 30,316   

Adjustment reflecting capitalized interest amortization included in cost of home closings related to the New Financing Transactions as if they had occurred on January 1, 2012

     30,273   
  

 

 

 

Net adjustment to capitalized interest amortization included in cost of home closings

   $ (43
  

 

 

 

 

(c) Represents the elimination of $0.1 million of historical costs related to the Acquisition that were paid during the year ended December 31, 2012.

 

(d) Reflects the reversal of a receivable related to a tax indemnity from our former parent, Taylor Wimpey plc, in respect of certain matters that have been settled. The indemnity was provided in connection with 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 a blended rate of 35% for the respective statutory tax rates of the jurisdiction where the respective adjustment relates.

 

(f) Reflects the elimination of historical capitalized interest expense and amortization of financing fees included in cost of home closings related to $189.6 million aggregate principal amount of senior notes to be redeemed (at a purchase price equal to 103.875% of their principal amount, plus accrued and unpaid interest through the date of redemption, assuming a redemption date of April 12, 2013) using a portion of the proceeds from this offering, based on the redemption of 28.1% of the $550.0 million aggregate principal amount of senior notes issued on April 13, 2012 and the same percentage of the $125.0 million aggregate principal amount of senior notes issued on August 21, 2012, as if such redemption had occurred on January 1, 2012.

 

(g)

In connection with this offering, 1,223,000 non-qualified stock options and 191,959 restricted stock units will be granted to certain members of management and our board. Of these grants, an aggregate of 802,500

 

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  non-qualified stock options and 116,980 restricted stock units will be granted to our named executive officers and an aggregate of 420,500 non-qualified stock options and 65,478 restricted stock units will be granted to other members of our management. An aggregate of 9,501 restricted stock units will be granted to two of our directors. The non-qualified stock options vest over a five year period. Fair value was estimated using the Black-Scholes-Merton option pricing model. We estimated the inputs for the option pricing model as follows:

 

   

The grant price and market value for these non-qualified stock options was assumed to be $22.00, the initial public offering price.

 

   

Volatility and expected term assumptions were estimated using an average of volatility and expected term measures disclosed by seven publicly traded homebuilders. We assumed the volatility to be 55.55% and the expected term to be 5.20 years.

 

   

We selected a U.S. Treasury bond rate of 1.01% consistent with the expected term assumption.

 

   

As we do not plan to pay dividends, a dividend rate of zero was assumed.

The total estimated fair value was $13.1 million, and $2.6 million of the adjustment represents the amount amortized to expense during one year. The restricted stock units vest ratably over four years. The fair value was determined by multiplying $22.00, by the 191,959 restricted stock units issued, resulting in an aggregate fair value of $4.2 million, and $1.1 million of the adjustment represents the amount amortized to general and administrative expense during one year. Combining the year one amortization amounts for the non-qualified stock options and the restricted stock units results in a $3.7 million total adjustment.

 

(h) Reflects the write-off of $5.3 million of unamortized deferred financing costs related to the $189.6 million of senior notes being retired with a portion of the proceeds of this offering, net of $1.9 million of premium recognized as a result of the retirement, at a price equal to 103.875% of their principal amount (plus accrued and unpaid interest to the date of redemption, assuming a redemption date of April 12, 2013), of 28.1% of the senior notes that were issued on August 21, 2012 at a price of 105.5% of their principal amount.

 

(i) Records the amount of incremental tax expense on the 20% of New TMM profits (which are pushed-up to TMHC on a pro forma basis) that do not qualify for the dividends received deduction under the Internal Revenue Code of 1986, as amended. The amount of tax is based on the 23.4% ownership percentage of TMHC in New TMM.

 

     The amount of tax on U.S. profits is calculated as follows: (i) 35.0% statutory rate times (ii) 20% of profits not qualifying for the deduction times (iii) 23.4% TMHC pro forma ownership percentage in New TMM, yielding additional tax of $1.4 million.

 

     The amount of tax on Canadian profits is calculated as follows: (i) 35.0% U.S. statutory rate minus 26.0% Canadian statutory rate times (ii) 23.4% TMHC pro forma ownership percentage in New TMM, yielding additional tax of $2.1 million.

 

(j) Eliminates net income attributable to the direct or indirect holders of New TMM Units (other than TMHC), assuming such holders retain 76.6% ownership after this offering, which would be adjusted from the consolidated financials under ASC Topic 810.

 

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Taylor Morrison Home Corporation

Pro Forma Condensed Consolidated Balance Sheet

December 31, 2012

(Unaudited)

(in thousands)

 

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

ASSETS

          

ASSETS:

          

Cash and cash equivalents

  $ 35      $ 300,567      $ —          (17,347) (c)     $ 283,255   

Restricted cash

    —          13,683        —          —           13,683   

Real estate inventory

    —          1,633,050        —          —           1,633,050   

Land deposits

    —          28,724        —          —           28,724   

Loan receivables—net

    —          48,685        —          —           48,685   

Mortgage receivables

    —          84,963        —          —           84,963   

Tax indemnification receivable

    —          107,638        —          —           107,638   

Other receivables—net

    —          48,951        —          —           48,951   

Prepaid expenses and other assets—net

    72        101,427        —          (5,254 )(d)       96,245   

Investment in unconsolidated entities

    —          74,465        —          —           74,465   

Property and equipment—net

    —          6,423        —          —           6,423   

Deferred tax assets—net

    —          274,757        —          —           274,757   

Intangible assets—net

    —          33,480        —          —           33,480   

Income taxes receivable

    —          —          —          —           —     
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL

  $ 107      $ 2,756,813      $ —        $ (22,602    $ 2,734,320   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

LIABILITIES AND EQUITY

          

LIABILITIES:

          

Accounts payable

  $   —        $ 98,647        —          —         $ 98,647   

Accrued expenses and other liabilities

    106        213,413        —          (7,347 )(e)       206,172   

Income taxes payable

    —          111,513        4,612  (a)      2,761  (f)       118,886   

Deferred tax liabilities—net

    —          —          —          —           —     

Customer deposits

    —          82,038        —          —           82,038   

Mortgage borrowings

    —          80,360        —          —           80,360   

Net payable to Taylor Wimpey plc

    —          —          —          —           —     

Loans payable and other borrowings

    —          265,968        —          —           265,968   

Long-term debt

    —          681,541        —          (191,540 )(e)       490,001   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total liabilities

  $ 106      $ 1,533,480      $ 4,612      $ (196,126    $ 1,342,073   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

COMMITMENTS AND CONTINGENCIES EQUITY:

          

Net owners’ equity

  $ —        $ 1,231,050      $ (13,177 )(b)      (1,217,873 )(g)       —     

Capital stock

    0        —            0  (h)       0   

Additional paid-in capital

    1        —            663,508  (i)       663,509   

Retained earnings

    —          —          8,565  (a)      (17,110 )(j)       (8,545

Accumulated other comprehensive loss

    —          (34,365     —          —           (34,365
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total owners’ equity

    1        1,196,685        (4,612     (571,475      620,599   

Noncontrolling interests

    —          26,648          744,999  (k)       771,648   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total equity

    —          1,223,333        (4,612     173,524         1,392,247   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

TOTAL

  $ 107      $ 2,756,813      $ —        $ (22,602    $ 2,734,320   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

(a) Reflects a $4.6 million increase in income taxes payable and an $8.6 million increase in retained earnings due to the $13.0 million reduction in pro forma income before income taxes due to the reversal of a receivable related to a tax indemnity from our former parent, Taylor Wimpey plc, in respect of certain matters that have since been settled (see note (d) to the unaudited pro forma condensed statement of operations). The indemnity was provided in connection with the Acquisition for certain unsettled tax liabilities that existed on the date of the Acquisition.
(b) Represents the balance sheet effects of the pro forma adjustments to income before income taxes described in notes (b), (c) and (d) to the unaudited pro forma condensed statement of operations.
(c) Reflects TMHC’s receipt and application of the proceeds from this offering after the issuance of 28,572,000 shares of Class A common stock at a price of $22.00 per share, with sources and uses of the proceeds as follows:

Sources:

 

   

$628.6 million gross cash proceeds to TMHC from the offering of Class A common stock; and

 

   

$17.3 million in cash from a dividend by TMM.

Uses:

 

   

TMHC will use $37.7 million to pay underwriting discounts and commissions;

 

   

TMHC will use $393.9 million to purchase New TMM Units from the TPG and Oaktree holding vehicles, JH and certain members of our management (see note (k) below); and

 

   

TMHC will use $204.3 million to purchase New TMM Units from New TMM, whereupon New TMM will contribute such proceeds to subsidiaries of TMM, which will use $204.3 million of such contributed proceeds to redeem $189.6 million aggregate principal amount of the senior notes (at a purchase price equal to 103.875% of their principal amount, plus accrued and unpaid interest of $7.3 million through the date of redemption, assuming a redemption date of April 12, 2013); and

 

   

TMHC will use $10.0 million to pay professional fees and expenses relating to this offering.

 

(d) Reflects the write-off of $5.3 million of unamortized debt issuance costs related to the $189.6 million of senior notes being redeemed with a portion of the proceeds of this offering.
(e) Reflects (i) the redemption of $189.6 million aggregate principal amount of senior notes (at a purchase price equal to 103.875% of their principal amount, plus accrued and unpaid interest through the date of redemption of $7.3 million, assuming a redemption date of April 12, 2013) using a portion of the proceeds from this offering, based on the redemption of 28.1% of the $550.0 million aggregate principal amount of senior notes issued on April 13, 2012 and the same percentage of the $125.0 million aggregate principal amount of senior notes issued on August 21, 2012, as if such redemption had occurred on December 31, 2012, (ii) the write-off of $5.3 million of unamortized deferred financing costs related to the redeemed senior notes and (iii) the payment of $37.7 million of fees and expenses in connection with this offering (including underwriting discounts and commissions) and (iv) recognition of $1.9 million of premium from the redemption, at a price equal to 103.875% of their principal amount (plus accrued and unpaid interest to the date of redemption), of 28.1% of the senior notes that were issued on August 21, 2012 at a price of 105.5% of their principal amount.
(f) Records the amount of incremental tax liability from pro forma adjustments related to this offering, as described in note (i) to the unaudited pro forma condensed statement of operations.
(g)

Reflects the elimination of the Principal Equityholders’ ownership under ASC Topic 810 for consolidation in TMHC’s financial statements.

 

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(h) Reflects the effect on capital stock relating to the issuance of 28,572,000 shares of Class A common stock, par value $0.00001 per share, in this offering.
(i) Reflects the effects on additional paid-in capital relating to the following ($ in thousands):

 

Gross proceeds of this offering

   $ 628,584   

Payment of underwriting discounts with respect to this offering

     (37,715

Allocation of equity related to the non-cash charge relating to the exchange of Class J Units of TMM for Class J Units of the TPG and Oaktree holding vehicles(1)

     78,961   

Effect on addition paid in capital related to the vesting of 1.223 million options to purchase Class A common stock at the offering price granted to certain members of management in connection with this offering

     2,622   

Reflects the vesting of a portion of the 191,354 shares of restricted Class A common stock to be awarded to certain members of management at the closing of this offering

     1,056   

Deemed distribution from TMM to pay estimated professional fees and expenses of TMHC with respect to this offering

     (10,000
  

 

 

 

Net adjustment to additional paid-in capital

   $ 663,508   
  

 

 

 

 

  (1) In connection with the Acquisition, in July 2011, JH received an aggregate of 60,531,998 Class J Units in TMM (made up of J-1 Units, J-2 Units and J-3 Units). Class J Units were issued in consideration of JH’s service to TMM and are subject to both time and performance-based vesting conditions. At the completion of the Acquisition, TMM and JH entered into the Services Agreement.

 

       Satisfaction of the time-vesting condition requires the Services Agreement to be in effect as of the date each annual installment vests. The service conditions set forth in the Services Agreement lapse after a period of five years.

 

       Class J Units issued in the Acquisition satisfy performance-based vesting conditions once TPG and Oaktree have achieved certain specified threshold rates of return on their Class A Units in TMM and those returns have been realized in cash. Holders of vested J-1 Units, J-2 Units and J-3 Units would generally be entitled to participate in TMM distributions once the relevant sponsor, TPG or Oaktree, has realized an internal rate of return (in cash or in kind) on its initial capital contribution of 10%, 15%, or 15% plus a 1.0x, 1.0x or 2.0x return of capital, respectively. Because achievement of the performance-based vesting conditions, meaning the requirement to realize in cash the return on capital of TPG and Oaktree at the applicable thresholds set forth in the next paragraph, was not probable over any prior period, the Company determined that no expense for the value of the Class J Units was required to be recorded in its financial statements for any period prior to the occurrence of the Reorganization Transactions.

 

       In the Reorganization Transactions, the TMM Class J Units tied to TPG’s returns will be exchanged for Class J Units of the TPG holding vehicle, and the TMM Class J Units tied to Oaktree’s returns will be exchanged for Class J Units of the Oaktree holding vehicle, in each case with substantially equivalent performance vesting and distribution terms but no future service conditions. Following this offering, J-1 Units, J-2 Units and J-3 Units will generally vest when the applicable sponsor, TPG or Oaktree, has achieved an internal rate of return (in cash) on its aggregate capital contribution of 10%, 15%, or 15% plus a 1.0x, 1.0x or 2.0x return of capital, respectively.

 

       No Class J Units will be part of the equity structure of TMHC or New TMM following the Reorganization Transactions and this offering. The Services Agreement will be terminated and will not be replaced. The termination of the Services Agreement in connection with the exchange is a modification of the Class J Units under ASC Topic 718-20-35-3, requiring the recognition of a non-cash charge in our statement of operations, which we estimate to be approximately $79.0 million.

 

      

The non-cash charge will be non-recurring and will be recorded as an expense and as an offset in the non-controlling interests of TMHC. The amount of the charge represents the fair value of the Class J Units on the date of modification. The fair value of the Class J Units at the date of modification is

 

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  estimated using a Black-Scholes model with the following key assumptions: (1) volatility of 40%, based on a comparable peer set of companies, which includes Standard Pacific Group, Lennar Corp, Ryland Group Inc, KB Home, PulteGroup Inc., Hovnanian Enterprises Inc., Beazer Homes USA Inc, Meritage Homes Corporation, M/I Homes Inc, and DR Horton Inc.; (2) a risk free rate of 0.4%, based on US Treasuries with a like term; (3) an expected life of three years; (4) a 20% discount for lack of marketability to account for the illiquidity of the Class J Units in TMM and the Class J Units in the TPG and Oaktree holding vehicles being issued in exchange as well as the impact of the performance conditions (the requirement to realize the return on capital of TPG and Oaktree at the applicable thresholds) still to be met as of the date of the modification, based on both quantitative and qualitative factors; and (5) a hypothetical cash distribution by TMM of TMM’s pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM based on the price per share paid by the underwriters for shares of TMHC’s Class A common stock in this offering on the assumption that the performance conditions applicable to the Class J Units in TMM (the requirement to realize the return on capital of TPG and Oaktree at the applicable thresholds) have been met as of the date of this offering.

 

(j) Reflects the effects on retained earnings relating to the following ($ in thousands):

 

Write-off of deferred financing fees related to the redemption of $189.6 million of senior notes with a portion of the proceeds from this offering

   $ (5,254

Premium on redemption of $189.6 million of senior notes at 103.875%

     (7,347

Recognition of premium associated with the portion of the redeemed senior notes that were issued at a premium to par in August 2012

     1,931   

Effect on retained earnings related to the vesting of 1.223 million options to purchase Class A common stock granted to certain members of management in connection with this offering at the offering price

     (2,622

Effect on retained earnings related to the vesting of a portion of the 191,354 shares of restricted Class A common stock to be awarded to certain members of management at the closing of this offering

     (1,056

Effect on retained earnings related to incremental tax liability from pro forma adjustments related to this offering, as described in note (i) to the unaudited pro forma condensed statement of operations

     (2,189
  

 

 

 

Net adjustment to retained earnings

   $ (16,537
  

 

 

 

 

(k) Reflects the issuance of 28,572,000 shares of Class A common stock in this offering to the public and the use of $204.3 million of the net proceeds of this offering to acquire New TMM Units from New TMM in exchange for a 23.4% interest in New TMM. The following sets forth the reduction in the noncontrolling interest recorded for the sale of TMM units:

 

($ in thousands)       

Noncontrolling interest prior to sale

   $ 1,217,873   

Non-cash charge relating to the exchange of Class J Units of TMM for Class J Units of the TPG and Oaktree holding vehicles(1)

     (78,961

Sales of New TMM Units

     (393,913
  

 

 

 

Remaining noncontrolling interest of Principal Equityholders

   $ 744,999   
  

 

 

 

 

  (1) See Note (1) to Note (i), above.

 

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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 the year 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, 2008 and 2009, and the financial data as of December 31, 2008, 2009 and 2010 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 2008 was prepared by our predecessor and has not been subject to a review or audit.

The selected consolidated financial information set forth below for the period from July 13, 2011 to December 31, 2011, and the year ended December 31, 2012 and as of December 31, 2011 and 2012, 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 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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    Successor          Predecessor      
    Year
Ended
December 31,
    July 13 to
December 31,
         January 1
to July 12,
    Year Ended
December 31,
($ in thousands)   2012     2011          2011     2010     2009     2008      
                                              

Statement of Operations Data:

                 

Home closings revenue

  $ 1,369,452      $ 731,216          $ 600,069      $ 1,273,160      $ 1,224,082        1,679,503     

Land closings revenue

    44,408        10,657            13,639        12,116        24,967        65,123     

Financial services revenue

    21,861        8,579            6,027        12,591        13,415        —       
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

Total revenues

    1,435,721        750,452            619,735        1,297,867        1,262,464        1,744,626     

Cost of home closings

    1,077,525        591,891            474,534        1,003,172        1,003,694        1,430,276     

Cost of land closings

    35,884        8,583            7,133        6,028        17,001        79,530     

Inventory impairments

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

Financial services expenses

    11,266        4,495            3,818        7,246        6,269       
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

Operating gross margin

    311,046        145,483            134,250        277,367        157,259        (196,071  

Sales, commissions, and other marketing costs

    80,907        36,316            40,126        85,141        100,534        136,730     

General and administrative expenses

    60,444        32,883            35,743        66,232        71,300        101,664     

Equity in net income of unconsolidated entities

    (22,964     (5,247         (2,803     (5,319     (347     (2,739  

Interest expense (income)—net

    (2,446     (3,867         941        40,238        20,732        22,614     

Other income

    (1,644     (1,245         (11,783     (10,842     (24,465     (55,633  

Other expense

    5,311        3,553            1,125        13,193        25,725        41,364     

Loss on extinguishment of debt

    7,853        —              —          —          —          —       

Transaction expenses

    —          39,442            —          —          —          —       

Indemnification loss

    13,034        12,850            —          —          —          —       
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

Income (loss) before income taxes

    170,551        30,798            70,901        88,724        (36,220     (439,511  

Income tax (benefit) expense

    (260,297     4,031            20,881        (1,878     (35,396     (42,999  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

Net income (loss)

    430,848        26,767            50,020        90,602        (824     (396,512  

Net (income) attributable to noncontrolling interests

    (28     (1,178         (4,122     (3,235     (5,138     (7,976  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

Net income (loss) attributable to owners

  $ 430,820      $ 25,589          $ 45,898      $ 87,367      $ (5,962   $ (404,488  
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

($ in thousands)    2012      2011      2010      2009      2008  
                                    

Balance Sheet Data (at period end):

              

Cash and cash equivalents, excluding restricted cash

   $ 300,567       $ 279,322       $ 165,415       $ 189,032       $ 237,267   

Land inventory

     1,633,050         1,003,482         1,073,953         979,562         1,072,147   

Total assets

     2,756,813         1,671,067         1,527,321         1,500,473         1,562,868   

Total debt

     1,027,869         599,750         605,768         925,863         1,048,535   

Total equity

     1,223,333         628,565         465,531         103,773         68,944   

 

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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 years in the three-year period ended December 31, 2012.

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 one of the largest public homebuilders in North America. 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 and Darling Homes brands 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%, 37% and 17%, respectively, of our net sales orders (excluding unconsolidated joint ventures) for the year ended December 31, 2012. Our East region consists of our Houston, Austin, Dallas, North Florida and West Florida divisions. Because we added our Dallas operations through the acquisition of the assets of Darling on December 31, 2012, the historical results of operations presented in this section do not reflect the historical results of Darling for the periods discussed. 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 2012 home closings as reported by Hanley Wood and 2012 home sales as reported by Real Net Canada) in 15 of our 19 total markets.

During the year ended December 31, 2012, we closed 4,014 homes, comprised of 2,933 homes in the United States and 1,081 in Canada, including 232 homes in unconsolidated joint ventures, with an average sales price across North America of $364,000. During the same period, we generated $1.4 billion in revenues, $430.8 million

 

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in net income and $228.8 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 year ended December 31, 2012, our sales orders increased approximately 45.8% as compared to 2011, and we averaged 3.1 sales per active selling community per month compared to an average of 2.5 sales per active selling community per month for the same period in 2011. As of December 31, 2012, we offered homes in 129 active selling communities, including seven in unconsolidated joint ventures and had a backlog of 4,112 homes sold but not closed, including 909 homes in unconsolidated joint ventures, with an associated backlog sales value of approximately $1.4 billion, including $313.3 million in unconsolidated joint ventures.

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 $1.3 billion in revenues, $71.5 million in net income and $187.1 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, including $249.5 million in unconsolidated joint ventures.

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 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.

Strategy

Because the housing market is cyclical, and home price movement between the peak and trough of the cycle can be significant, we seek to adhere to our core operating principles through these cycles to drive consistent long-term performance.

Based on our current land position, we expect to drive revenue by opening new communities from our existing land supply. Our land supply provides us with the opportunity to increase our community count on a net basis by approximately 50% in 2013 and 30% in 2014. We also currently own or have an option to purchase over 95% of the land on which we expect to close homes during 2013 and 2014. We expect that most of the communities we will open during the next twelve months will be in our Phoenix, West Florida and Houston markets in response to increased demand by consumers in those markets.

Because a significant portion of our land supply was purchased at low price points during the recent downturn in the housing cycle and because our entire land inventory was adjusted to fair market value at the time of the Acquisition, we expect to continue our revenue growth and strong gross margin performance in our U.S. communities.

 

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Our approach to land supply management in our East and West regions has historically been to acquire land that has attractive characteristics, including good access to schools, shopping, recreation and transportation facilities. In connection with our overall land inventory management process, our management team reviews these considerations, as well as other financial metrics, in order to decide the highest and best use of our land assets. Historically, land dispositions have not had a material effect on our overall results of operations, but may impact overall margins.

We intend to maintain a consistent approach to land positioning within our regions, markets and communities in the foreseeable future in an effort to concentrate a greater amount of our land inventory in areas that have the attractive characteristics referred to above. We also intend to continue to combine our land development expertise with our homebuilding operations to increase the flexibility of our business, to enhance our margin performance and to control the timing of delivery of lots.

Over the next twelve months our goal is to further focus our offerings on targeted customer groups. We aim 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 intend to continue our market research to determine preferences of our customer groups.

We will also seek to grow through selective acquisitions in both existing markets and new markets that exhibit positive long-term fundamentals. For example, on December 31, 2012 we acquired Darling, a Texas- based homebuilder, which gives us a presence in the Dallas market and expands our presence in the Houston market. See “Summary—Recent Developments.” In connection with our growth strategy over the near term, we intend to opportunistically access the debt and equity capital markets. For instance, following this offering, we expect to opportunistically raise up to an additional $500.0 million of debt capital to help fund the growth of our business, subject to market and other conditions. We would expect to use the proceeds of any such financing for general corporate purposes and to fund future growth.

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 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. In connection with this offering, we intend to amend our Revolving Credit Facility to increase the revolving credit commitments from $225.0 million to $400.0 million on an unsecured basis. The amendment is expected to include a $200.0 million incremental facility feature which would allow us to increase the aggregate credit commitments to $600.0 million, subject to compliance with certain financial covenants. See “—Overview of Capital Resources and Liquidity” and “Description of Certain Indebtedness—Revolving Credit Facility.”

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

 

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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 contributed or transferred to a subsidiary of 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. The cost of home closings and the cost of land closings were the only line items directly impacted in any material respect by the purchase accounting adjustments described below (although the effects of such adjustments are carried through to the items below such line items in our statement of operations). For purposes of this prospectus, however, we believe that it is most meaningful to present our 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. For the successor period from July 13, 2011 to December 31, 2011, such adjustments increased our cost of home closings by $38.9 million and our cost of land closings by $0.9 million. For the successor year ended December 31, 2012, such adjustments increased our cost of home closings by $6.9 million and decreased our cost of land closings by $1.6 million.

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.

Recent Developments

On December 31, 2012, Taylor Morrison, Inc., through its subsidiary Darling Homes of Texas, LLC, acquired the assets of Darling, a Texas-based homebuilder. Darling builds homes under the Darling Homes brand for move-up buyers in approximately 24 communities in the Dallas-Fort Worth Metroplex and 20 communities

 

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in the Greater Houston Area markets. Darling is a well-established builder whose products complement our existing product lines in Texas. We believe the acquisition of Darling has given us a strong presence in the Dallas homebuilding market and will expand our current operations in Houston.

The consideration for the acquisition of the Darling assets included an initial cash payment of $115.0 million, which is subject to post-closing adjustment under certain circumstances. A portion of this amount was financed by $50.0 million of borrowings under our Revolving Credit Facility. Approximately $26.0 million of additional consideration for the acquisition was financed by the sellers. In connection with the preliminary purchase price allocation for the acquisition, we recorded $15.5 million of goodwill and $9.1 million of intangible assets with finite useful lives, consisting of $1.3 million with respect to a trade name, $4.7 million of lot option contracts and land supplier relationships, $0.2 million of favorable leases and $2.9 million of non-compete covenants. Additionally, we incurred $1.8 million of transaction costs which were recorded as other expense. The purchase price allocation for the Darling acquisition is subject to change. Darling operates as part of our East region, so the goodwill recorded as part of the Darling acquisition has been recorded in the East region.

In connection with this offering, we intend to amend and restate the Revolving Credit Facility in order to convert the Revolving Credit Facility into an unsecured facility and increase the aggregate amount of commitments under the Revolving Credit Facility to $400.0 million, of which $200.0 million would be available for letters of credit. We also expect the amendment will permit us to increase the Revolving Credit Facility by up to an additional $200.0 million through an incremental facility. We expect that the amended and restated Revolving Credit Facility will permit us to borrow up to the full commitment amount under the Revolving Credit Facility unless the capitalization ratio as of the most recently ended fiscal quarter exceeds 0.55 to 1.00, in which case borrowing availability under the Revolving Credit Facility will be measured by reference to a borrowing base formula to be calculated quarterly. The amendment will also extend the maturity date of the facility to March 2017. The amended and restated Revolving Credit Facility may include certain financial and restrictive covenants similar to those currently in place, including covenants to maintain net worth and capitalization ratios and to restrict distributions and the incurrence of liens. See “Description of Certain Indebtedness—Revolving Credit Facility.” There can be no assurance that we will successfully amend and restate the Revolving Credit Facility on these terms or at all.

Based on currently available information, we believe our U.S. net sales orders for the two months ended February 28, 2013 totaled 888 homes, representing a 71% increase as compared to 519 homes in the same period in 2012. Our Canadian net sales orders for the two months ended February 28, 2013 totaled 88 (including 9 homes in unconsolidated joint ventures) homes, representing a 39% decline as compared to 145 homes (including 42 homes in unconsolidated joint ventures) in the same period in 2012. We believe our total net sales orders totaled 976 homes for the two months ended February 28, 2013, representing a 47% increase as compared to 664 homes in the same period in 2012. We estimate that we had 498 home closings in the United States for the two months ended February 28, 2013, an 84% increase over the 270 home closings in same period in 2012, and 539 home closings on a total basis, a 40% increase over the 385 home closings in same period in 2012. Our home closings in Canada for the two months ended February 28, 2013 decreased 64% to 41 (including two homes in unconsolidated joint ventures) over the 115 home closings (including seven homes in unconsolidated joint ventures) in same period in 2012.

Also based on currently available information, we believe that our U.S. backlog of homes sold but not closed as of February 28, 2013 increased by 128% to 2,254 homes as compared to our U.S. backlog of 990 homes sold but not closed as of February 29, 2012. Our Canadian backlog as of February 28, 2013 decreased by 7% from a backlog of 2,468 homes (including 1,029 homes in unconsolidated joint ventures) as of February 29, 2012 to a backlog of 2,293 (including 914 homes in unconsolidated joint ventures). We believe our total backlog was 4,547 homes as of February 28, 2013, a 31% increase over our total backlog of 3,458 homes as of February 29, 2012. We believe that the sales value of our U.S. backlog increased by 157% to $896.0 million, that the sale value of our Canadian backlog decreased by 7% to $735.5 million (including $307.2 million in

 

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unconsolidated joint ventures) and that the sales value of our total backlog increased by 43% to $1.6 billion, in each case as of February 28, 2013 compared to February 29, 2012. We believe the decline in net sales orders, backlog and closings in Canada are temporary and the result of limited Monarch product availability in 2012 in our single-family communities as well as a reduction in our active high-rise developments in their prime selling phases available to the market. The GTA has also seen a moderation in sales activity compared to the prior periods.

We expect net sales orders, including our share of unconsolidated joint ventures sales orders, to have increased approximately 46%, to 1,697 in the first quarter of 2013 as compared to 1,161 in the first quarter of 2012. We expect net sales orders in our U.S. operations to have increased approximately 68% for the first quarter of 2013, partially offset by a 38% sales order decline in our Canadian operations. We expect our overall monthly absorption pace to have been 3.3 net sales orders per community, including our share of unconsolidated joint ventures, in the first quarter of 2013 compared to 3.0 for the first quarter of 2012.

We expect our closings, including our share of unconsolidated joint ventures closings, to have increased approximately 58% in the first quarter of 2013 compared to the corresponding period in 2012, to 1,040. We expect closings in our U.S. operations to have increased 96% while closings in our Canadian operations are expected to have declined 33%, in each case in the 2013 first quarter compared to the 2012 first quarter.

We anticipate sales order backlog of homes under contract to have increased approximately 30% to 4,767 homes, including homes in unconsolidated joint ventures, with a sales value of $1.8 billion at March 31, 2013 compared to a sales value of $1.2 billion as of March 31, 2012. Sales order backlog of homes in the U.S. operations increased 151% to a sales value of $998.3 million while our Canadian operations declined 9% to a sales value $753.2 million. The average sales price in backlog for our U.S. operations is expected to have increased to $398,000 from $332,000 while the average sales price in backlog for our Canadian operations was relatively flat at $333,000.

The preliminary financial and other data set forth in this section has been prepared by, and is the responsibility of, our management. The foregoing information and estimates have not been compiled or examined by our independent auditors nor have our independent auditors performed any procedures with respect to this information or expressed any opinion or any form of assurance on such information. In addition, the foregoing information and estimates are subject to revision as we prepare our financial statements and other disclosures as of and for the three months ending March 31, 2013, including all disclosures required by U.S. GAAP. Because we have not completed our normal quarterly closing and review procedures for the three months ending March 31, 2013, and subsequent events may occur that require material adjustments to these results, the final results and other disclosures for the three months ending March 31, 2013 may differ materially from these estimates. These estimates should not be viewed as a substitute for full financial statements prepared in accordance with U.S. GAAP or as a measure of performance. In addition, estimated results of operations and other data for the first two months ended February 28, 2013 are not necessarily indicative of the results to be achieved for the full quarter ending March 31, 2013 any future period. See “Special Note Regarding Forward-looking Statements.”

Exchange of Class J Units in TMM

In connection with the Acquisition, in July 2011, JH received an aggregate of 60,531,998 Class J Units in TMM (made up of J-1 Units, J-2 Units and J-3 Units). Class J Units were issued in consideration of JH’s service to TMM and are subject to both time and performance-based vesting conditions. At the completion of the Acquisition, TMM and JH entered into the Services Agreement.

Satisfaction of the time-vesting condition requires the Services Agreement to be in effect as of the date each annual installment vests. The service conditions set forth in the Services Agreement lapse after a period of five years.

 

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Class J Units issued in the Acquisition satisfy performance-based vesting conditions once TPG and Oaktree have achieved certain specified threshold rates of return on their Class A Units in TMM and those returns have been realized in cash. Holders of vested J-1 Units, J-2 Units and J-3 Units would generally be entitled to participate in TMM distributions once the relevant sponsor, TPG or Oaktree, has realized an internal rate of return (in cash or in kind) on its initial capital contribution of 10%, 15%, or 15% plus a 1.0x, 1.0x or 2.0x return of capital, respectively. Because achievement of the performance-based vesting conditions, meaning the requirement to realize in cash the return on capital of TPG and Oaktree at the applicable thresholds set forth in the next paragraph, was not probable over any prior period, the Company determined that no expense for the value of the Class J Units was required to be recorded in its financial statements for any period prior to the occurrence of the Reorganization Transactions.

In the Reorganization Transactions, the TMM Class J Units tied to TPG’s returns will be exchanged for Class J Units of the TPG holding vehicle, and the TMM Class J Units tied to Oaktree’s returns will be exchanged for Class J Units of the Oaktree holding vehicle, in each case with substantially equivalent performance vesting and distribution terms but no future service conditions. Following this offering, J-1 Units, J-2 Units and J-3 Units will generally vest when the applicable sponsor, TPG or Oaktree, has achieved an internal rate of return (in cash) on its aggregate capital contribution of 10%, 15%, or 15% plus a 1.0x, 1.0x or 2.0x return of capital, respectively.

No Class J Units will be part of the equity structure of TMHC or New TMM following the Reorganization Transactions and this offering. The Services Agreement will be terminated and will not be replaced. The termination of the Services Agreement in connection with the exchange is a modification of the Class J Units under ASC Topic 718-20-35-3, requiring the recognition of a non-cash charge in our statement of operations, which we estimate to be approximately $79.0 million.

The non-cash charge will be non-recurring and will be recorded as an expense and as an offset in the non-controlling interests of TMHC. The amount of the charge represents the fair value of the Class J Units on the date of modification. The fair value of the Class J Units at the date of modification is estimated using a Black-Scholes model with the following key assumptions: (1) volatility of 40%, based on a comparable peer set of companies, which includes Standard Pacific Group, Lennar Corp, Ryland Group Inc, KB Home, PulteGroup Inc., Hovnanian Enterprises Inc., Beazer Homes USA Inc, Meritage Homes Corporation, M/I Homes Inc, and DR Horton Inc.; (2) a risk free rate of 0.4%, based on US Treasuries with a like term; (3) an expected life of three years; (4) a 20% discount for lack of marketability to account for the illiquidity of the Class J Units in TMM and the Class J Units in the TPG and Oaktree holding vehicles being issued in exchange as well as the impact of the performance conditions (the requirement to realize the return on capital of TPG and Oaktree at the applicable thresholds) still to be met as of the date of the modification, based on both quantitative and qualitative factors; and (5) a hypothetical cash distribution by TMM of TMM’s pre-IPO value to the holders of Class A Units, Class J Units and Class M Units of TMM based on the price per share paid by the underwriters for shares of TMHC’s Class A common stock in this offering on the assumption that the performance conditions applicable to the Class J Units in TMM (the requirement to realize the return on capital of TPG and Oaktree at the applicable thresholds) have been met as of the date of this offering.

Non-GAAP Measures

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,” “Adjusted EBITDA” and the results of “unconsolidated joint ventures.”

Results of unconsolidated joint ventures

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